Meeting With CEO Tony Nicely, GEICO
May 16, 2005, 2:30 p.m. – 4:00 p.m.
Notes Prepared by Professor David Kass
(dkass@rhsmith.umd.edu)
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”.
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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
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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.