Meeting with CEO Tony Nicely, GEICO

Meeting With CEO Tony Nicely, GEICO May 16, 2005, 2:30 p.m. – 4:00 p.m.

Notes Prepared by Professor David Kass ([email protected])

As preparation for the May 23, 2005 University of Maryland student visit to meet with Warren Buffett, CEO of Berkshire Hathaway, five students and myself met with Tony Nicely, CEO of GEICO (owned by Berkshire Hathaway) on May 16. The purpose of this meeting was to gain insights into Warren Buffett, learn more about insurance and the working relationship between these two executives, and provide the students with general advice on how to succeed both on a professional and personal level.

Tony, who has been CEO of GEICO since 1993, began by mentioning that he does not serve on any boards of directors of public companies, since they take too much time. (He does, however, serve on two nonprofit boards of directors.) He avoids participating in conferences, not only because they are time consuming, but also because he might inadvertently give away some of GEICO’s secrets (competitive advantages).

In response to our questions, Tony referred to Warren as a perfect boss who possesses super intelligence and wisdom. He can perform calculations in his head faster than others can using a calculator or computer. Warren lets his companies and CEO’s do their own thing. Warren is always upbeat and can be reached on a direct line at the office or at home at almost any hour. Warren frequently answers his own phone, and never takes more than a few hours to return Tony’s phone calls. Among Warren’s greatest attributes are honesty and integrity. He is also warm and witty.

With respect to automobile insurance, Warren initially did not consider GEICO to be a permanent holding in his portfolio because of the risk imposed by regulator and consumer involvement. But he now probably does consider GEICO to be a permanent holding.

Tony then described his early years at GEICO, as well as his rapid rise through the ranks. He started at GEICO in 1961, at the age of 18, as a clerk. In 1972 he became the company’s youngest elected officer as Assistant Vice President (in charge of underwriting sales and service). In 1976, however, GEICO was on the verge of bankruptcy, as a result of unwise policies of expansion (high risk drivers), lack of cost controls, and inadequate pricing. He then stated that the most important possession any company or person can have is their reputation. Once a reputation is lost, it cannot be regained. GEICO lost its reputation in 1976. The company lost about half of its customers and was forced to layoff half of its employees. Tony hates laying off people, especially those he has known for years and who were doing very good work. The company was saved by a new CEO, Jack Byrne, who “performed miracles”. 2

The best way to provide job security to his employees is to add more customers. There are economies of scale in the provision of automobile insurance. GEICO has been growing in recent years, and now has a 6% market share in the U.S. Since automobile insurance is a mature market that grows at only 1 ½ percent per year, future growth must come from taking customers away from its competitors. International growth will be even more difficult because of rate regulation in other countries.

People buy automobile insurance for three reasons:

(1) State laws require the purchase. (This is the only purchase required by state law.)

(2) Automobile loans. (The consumer needs to show proof of insurance in order to receive an automobile loan.

(3) Fear (Fear of not being able to cover repair costs after an accident as well as the fear of being sued.

GEICO competes by offering the lowest prices and the best service. Until recent years, the company was very conservative and did not advertise. It obtained new customers through word of mouth. Tony realized that for GEICO to grow, it had to be “branded”. Advertising expenditures have increased dramatically over the past ten years, and the company has adopted the “gecko” (lizard) as its symbol (gecko and GEICO are similar in pronunciation and many of the 25% of the population who had heard of GEICO before this advertising campaign frequently mispronounced its name.) Since the “gecko” has been added, GEICO’s growth rate has increased substantially. Also, GEICO in its earlier years sold insurance primarily to preferred risk drivers. In recent years GEICO has offered automobile insurance to virtually everyone, but charging appropriately high premiums to higher risk drivers.

GEICO cuts costs wherever possible (similar to Warren at Berkshire Hathaway). Its corporate headquarters is decades old (and looks it). Tony has an old desk in his office. (A new desk would not increase his productivity.) When he has a meeting downtown, he takes Metro (from Friendship Heights). When he needs to drive to a business meeting, he uses the company car – a 1995 Chevrolet.

With respect to other items of interest:

--GEICO is not doing its job properly if it does not “love its customers most” (relative to the competition).

--GEICO exited the homeowners insurance business because it was unprofitable.

--GEICO (Lou Simpson) invests much of the “float” (funds available for investment) that it generates. Those funds that Lou Simpson feels he cannot invest 3 appropriately, as well as funds targeted for fixed income investments, are sent to Omaha for Warren to invest.

Tony loves GEICO, his family, and the people around him. He has four rules that he recommends for everyone to follow: (1) Never be questioned for lack of integrity or poor intentions. (2) Work harder than anyone else (Take pride in being the best). (3) Teamwork and people are important in moving up in your career. (4) Be lucky. (Tony considers himself to have been extremely lucky in his career and life.)

Finally, in addition to Warren, other business leaders Tony admires include Michael Dell and Sam Walton.