GEICO’s business model is more than merely being the low-cost producer in a commodity market. Its budget consciousness influences incentives for employees and treatment of customers. All employees receive generous incentive-based profit sharing. Payouts are based on two equally weighted factors: growth in policies in force and profits on seasoned policies (excluding first-year policies, which are not profitable in a direct-sales business given marketing and initiation costs).25 The payouts can be large, having added from 17 to 32 percent of base salary.26 So a salaried employee earning a base of $75,000 can readily yield herself a six-figure income.
GEICO’s budget consciousness is a commitment to its customers’ budgets. For example, GEICO caps its underwriting profit at 4 percent.27 If premiums exceed expenses and claims by a greater magnitude, GEICO does not pocket the profits but reduces premiums. This is not altruism. The strategy attracts more customers, which increases aggregate profits, even when the underwriting profit percentage is capped.
GEICO’s tagline—“save 15 percent or more off car insurance”—highlights its thrift-based business model. Under Nicely’s leadership, GEICO has been aggressive in getting the word out. Its advertising budget, a discretionary commitment, grew from $33 million in 1995 to $800 million in 2009. This may sound extravagant, but consider what it buys: during that period, GEICO’s market share grew from a stagnant 2.5 percent in 1995 to 10 percent today.28 The payoff in market share translated into more premiums, float, and profit, all of which tripled during that period. The increase in advertising budget also catapulted GEICO’s mascot, the gecko, to fame. The gecko debuted in company ads in 2000 and has even toured in a national gecko exhibit at several zoos to promote wildlife conservation.
GEICO has been like rocket fuel propelling Berkshire’s prosperity. During Berkshire’s ownership, GEICO has moved from a minor player in the national auto insurance market to second by market share—with substantial room for growth ahead. Preserving GEICO should be essential to whoever owns or runs Berkshire Hathaway. The permanence GEICO has with Berkshire is why in 2010, at age ninety-five, Lorimar Davidson made a video recording saying how happy he was that his beloved GEICO would forever reside with Berkshire.29
GEICO’s commitment to handling customer claims is unwavering. It prides itself on receiving the fewest customer complaints filed with insurance regulators.30 GEICO intends to keep the promises it makes—earnestness is a characteristic of any top insurance company and a sacred vow at Berkshire’s. The importance of being earnest in the insurance field is most salient, however, not in short-term/low-stakes settings such as car insurance, but in the long-term/large-stakes settings handled by GEICO’s sister insurance companies, National Indemnity and Gen Re, which have increasingly added strength to Berkshire’s financial fortress.
Berkshire’s earnestness is captured in the business-minded creed at National Indemnity Company (NICO), founded in 1940 by Jack Ringwalt and his brother Arthur.31 As insurance agents, they were surprised when two Omaha cab companies could not obtain insurance. So they went into the insurance business to provide it. The Ringwalts—whose father and uncle were also Omaha insurance agents—built NICO on one bedrock principle: “There is no such thing as a bad risk; there are only bad rates.”32 Translation: we can make any promise, so long as we are paid enough in premiums to be able to cover it if called upon to do so. The company still follows this principle today.33
The Ringwalts’ creed led them to underwrite risks other insurers would not. Jack Ringwalt explained in his witty memoirs that this was the best way to make money, particularly in his case, because his competitors “had more friends, more education, more determination, and more personality than I.”34 Starting with unusual auto risks, National Indemnity expanded to write insurance for hole-in-one contests, lion tamers, and radio station treasure hunts.35 The Ringwalts carefully calculated the odds and took risks only if they could get the right rate.
In 1967, Jack Ringwalt wanted to sell NICO but continue to run the business. Through a mutual friend, Buffett learned of this interest and Ringwalt’s likely asking price. When the two met, Buffett agreed without hesitation on the price Ringwalt named. Ringwalt made his reasons for selling clear: “If I don’t sell the company, my executor will, and I’d rather pick the home for it.”36
NICO stresses that an insurance policy is merely a promise, and that while promises vary in quality, its promises are the highest quality. In an insurer, earnestness requires achieving financial strength sufficient to meet its promises. True, insurers make promises in contracts whose breach prompts lawsuits and regulatory scrutiny. But neither guarantees performance, some insurers get reputations for “slow pay” or “bounced claims,”37 and the risk of overpromising into insolvency is real.38