He wanted to understand the insurance business, so he went to the GEICO office and spoke with Lorimer Davidson, who would soon become the company's CEO. For Buffett, Geico's decision represents a return to his roots as an investor, expanding a stake he acquired in 1951 at age 20, when he invested 70% of his net worth in the insurance company. Government Employees Insurance Company (GEICO) is the second largest auto insurance company in the United States. We will talk about how Warren Buffett's mentor, Benjamin Graham, bought GEICO and saw it become his best investment (surpassing all others combined).
Warren Buffett was just a graduate student at Columbia University when he stated that GEICO was his favorite security guard in 1951. But Berkshire's original incarnation as a textile company was a mistake, and insurance disguised as GEICO was always Buffett's true love. In 1996, it acquired the remaining outstanding shares of GEICO that Berkshire no longer owned, and the insurance company became a Berkshire subsidiary. Recently, Geico has focused on the increasingly profitable auto insurance business, bypassing sales agents in favor of sales over the phone, saving up to 15% in fees. Unlike traditional insurance companies that sell through agencies, GEICO underwrites its own automotive policies and sells them directly to the consumer.
By reducing marketing expenses by eliminating sales agents and reducing paid claims by insuring safer drivers, GEICO achieved industry-leading expense rates and profit margins.