The Government Employees Insurance Company (GEICO) is the second largest auto insurance company in the United States. It also acts as an agent for property and umbrella coverage. You’re likely familiar with its commercials, with mascots ranging from a caveman to a gecko. It spent $1.6 billion on advertising in 2019 alone.
You may have GEICO insurance, but can you buy GEICO stock?
The company was founded in 1936 by the Goodwins, a couple who wanted to bring auto insurance to government employees. Goodwin was a civilian who rose as high as he could in USAA’s military hierarchy; he moved to Washington D.C. with his wife and incorporated.
By 1949, GEICO went public, where it attracted the attention of Wall Street’s most famous investor – the Oracle of Omaha. So, does Berkshire Hathaway own GEICO?
Buffett Meets GEICO: How the Story Began
Warren Buffett was only a Columbia University graduate student when he declared GEICO his favorite security in 1951. He wanted to understand the insurance business, so he walked into the GEICO office and spoke to Lorimer Davidson, who would soon become the company’s CEO.
Davidson explained insurance underwriting and GEICO’s competitive advantages to Buffett. Unlike traditional insurance companies that sell through agencies, GEICO underwrites its own automotive policies and sells direct to consumer. This works especially well with government employees.
That’s when he bought his first share in the insurance company, investing half of his net worth at the time.
He earned a 50 percent return and reinvested in cheaper stocks that all underperformed the insurance business. This laid the foundation for what would become Buffett’s successful investment strategy focused almost entirely on cash-generating businesses.
Buffett continued investing in GEICO through the years, coming back to it in the 1970s. He owned 50 percent by the time he finally bought the company outright in 1995.
Why Did Berkshire Buy GEICO?
Despite its competitive advantage, GEICO nearly went bankrupt in 1976. Davidson had long retired, and new leadership failed to understand loss ratios and inflation. This caused a series of investment mistakes that drove the company into debt.
By this point, Berkshire Hathaway was led by Buffett and already converted away from textiles into investments. The first insurance companies Berkshire invested in were National Indemnity Company and GEICO.
He did it because he understood the business and needed the cash to keep Berkshire afloat while he pivoted the company from a money pit into the cash cow we know today. These purchases are at the core of Berkshire’s modern business, as insurance still accounts for over 25 percent of total Berkshire Hathaway revenues.
Although he bought Berkshire out of spite and a personal vendetta, Buffett bought insurance through it because he believed in the industry.
Does Berkshire Hathaway Own GEICO?
Buffett wanted to buy GEICO long before he did. When he initially invested, his shares were worth around $3 per share. He initially invested $4.1 million in common shares and another $19.4 million in convertible preferred stock, making him the largest shareholder. He also installed the company’s CEO while he controlled it.
The move worked, and GEICO was restored to former glory through the 1980s and 1990s, buying back stock to give Buffett half the company.
By the time he bought the other half of the company, he had spent $2.3 billion, or $70 per share.
And Berkshire did it in an all-cash deal. Berkshire stock was already the most pricey on Wall Street, trading for $18,700 per share. A Geico shareholder would have needed to own 268 shares to get one complete share of Berkshire, and fractional shares couldn’t be issued at the time.
This led to Berkshire buying 100 percent control of the company without needing to split shares or dilute current Berkshire investors. The company already received a ton of cash from Disney to buy its stake in ABC, so Berkshire management decided purchasing GEICO outright was the way to go.
It did turn out to be one of his most successful investments ever, worth around $50 billion, versus his initial $2.34 billion investment to buy the company.
Can You Buy Shares In GEICO?
You can’t buy shares directly in GEICO. It’s a wholly owned subsidiary of Berkshire Hathaway. The only way to participate in GEICO is to get a policy and invest in Berkshire Hathaway stock.
GEICO is one of the main sources of Berkshire’s cash flows, and these profits were inevitably reinvested into the company, used to acquire more companies, and spent on stock buybacks. With GEICO at its foundation, Berkshire Hathaway is now one of the ten biggest companies by revenues ever.
But the original incarnation of Berkshire as a textile company was a mis-step, and insurance in the guise of GEICO was always Buffett’s true love. By investing in one, you’re now investing in all of it, thanks to the Oracle of Omaha.
How Much GEICO Stock Does Berkshire Own?
Berkshire Hathaway owns 100 percent of GEICO, and had enjoyed massive spoils as a result. The initial $45.7 million stake soon became 50 percent of the company, and in 1995 he valued the other half at $2.3 billion+, valuing the company at $4.7 billion.
That gave Buffett a 5,136 percent gain on investing in GEICO.
And it’s still profitable today. GEICO’s competitive advantage was shown during the pandemic when it earned $2.1 billion in the second quarter alone. Widespread global lockdowns put fewer cars on the roads, leading to fewer accidents. Because of this, Berkshire had plenty of cash on hand to go on another acquisition spree.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.