To complement the commitment to low-cost insurance, GEICO stressed customer service. For instance, in 1941, after a hailstorm damaged cars across town, Goodwin arranged with local shops to work overtime on repairs and got suppliers to expedite shipping of roof tops and window glass.3 GEICO customers appreciated getting their cars back in service before neighbors insured with competitors.4
Goodwin’s business model was simple: low-cost insurance, sold without agents, to targeted risk pools that were given quality customer service. First-year results were promising: 3,754 policies written, $103,700 in premiums, and a staff of twelve.5 Underwriting results (the difference between premiums written and policy claims paid) were negative early on but soon swung to a small underwriting profit. Despite the adversity of the Great Depression and the displacement of World War II, the “thrifty” business model was vindicated as GEICO grew steadily in policies, premiums, and profits.
In 1948, Rhea’s family sold its stake in GEICO to several private investors. Helping the Goodwins to locate these new investors was their friend, banker and GEICO senior officer Lorimer (“Davy”) Davidson. Among others, Davidson placed a large block of stock with Graham-Newman, whose named partner, Benjamin Graham, became GEICO’s chairman.
Graham-Newman’s GEICO position represented a large portion of the firm’s assets. The investment concentration departed from Graham’s usual preference to diversify. But then, federal authorities ruled that an investment company such as Graham-Newman could not own such a large stake in an insurance company. So the firm distributed its GECIO shares to its partners to hold directly. At that point, the shares were held by so many people that federal law required them to be registered with the Securities and Exchange Commission, which made GEICO a public company.6
A few years later, Buffett was enrolled in Graham’s investment class at Columbia Business School, located on the university’s main campus in the Morningside Heights neighborhood of Manhattan. Graham’s biography listed his position as chairman of GEICO, a company Buffett had never heard of in an industry he knew nothing about. Eager to learn more, Buffett decided to visit the company’s Washington headquarters.
On a cold Saturday in January 1951, Buffett boarded the 6:30 A.M. “Morning Congressional” train of the Pennsylvania Railroad from New York.7 Arriving in Washington four hours later, he found the GEICO building, then at 14th and L Streets Northwest, was closed.8 But the young Buffett caught the attention of a custodian, who indicated there was someone working on the top floor. It was Davidson. Buffett told Davidson he was Graham’s student, and Davidson went on to spend four hours explaining the company and the industry to Buffett.
Buffett’s key takeaway: “GEICO’s method of selling—direct marketing—gave it a wide cost advantage over competitors that sold through agents, a form of distribution so ingrained in the business of these insurers that it was impossible for them to give it up.”9 Inspired by his chat with Davidson, Buffett studied GEICO and the insurance industry carefully. He then wrote a report about GEICO for “The Security I Like Best” column in the Commercial and Financial Chronicle, a widely read trade publication.10 Putting his money where his writing was, Buffett bought 350 shares of GEICO stock during 1951 at a cost of $10,282, representing half his net worth. (The next year, Buffett sold his GEICO shares for $15,259. That taught a lesson about buy-and-hold: by 1995, that stake was worth more than $1 million.)
Throughout the 1950s, Leo Goodwin continued to build GEICO, emphasizing its goal to keep costs at an absolute minimum. However, the goal of low costs was not merely to increase profits. In fact, Goodwin insisted on passing along most of the savings to customers in the form of lower premiums. That, in turn, attracted more customers. Greater total premium volume and, ultimately, profit, resulted, as did deepening customer loyalty across a widening base.
By the end of the decade, GEICO had more than seven hundred thousand policies and wrote $65 million in premiums.11 Goodwin retired in 1958, handing the reins to Davidson, who sustained GEICO’s unique business model, continuing its tradition of thrift, increasing volume by keeping premiums low. By 1965, insurance premiums tallied $150 million and earnings doubled to $13 million.12
In the 1970s, after Davidson retired and the Goodwins passed away, the GEICO story took a different turn. Growth in premium volume became more important than cost management or underwriting quality, and policies were written or renewed with little regard to relevant information such as policyholder accident histories.13 In 1973, the company opened eligibility to all, regardless of employment, believing that technology and statistical modeling enabled screening more effectively than occupational groupings. Yet the company lacked the requisite computer systems to aggregate or analyze the data.14 Policies and premium volume soared.