Bird's Eye View: Inside GEICO & The Insurance War

0:00Geico Gecko has been the mascot for Geico since 1999. Interesting. So 27 years. So it was created by the Martin Agency during a Screen Actors Guild strike. The CGI animated Gold Dust Day Gecko was designed to capitalize on the mispronunciation of the company's name. I love that. I'm so curious, like, how much is that mascot worth for the color? This show is sponsored by Liquid IV. As we finally transition out of the indoor hibernation and start spending more time outside, staying hydrated is huge. For me, spring means I finally get to get back out on the water and spend long hours fishing. But those long, sun-drenched days require better hydration to actually enjoy them to their fullest.

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4:10Get premium investing guidance for beginners. Your path to financial freedom starts now. Start now. All right, folks. Welcome to Investing for Beginners podcast. Welcome back to another episode of Bird's Eye Views. Today, we're going to break down the company Geico. So the little green gecko is the company that we're going to talk about today. So with that, let's turn it over to Andrew and let's start talking about Geico. So why are we talking about GEICO? If you are not familiar with Warren Buffett, probably the greatest investor that we've ever seen to date, GEICO was one of his best stock picks and a fully owned company of Berkshire Hathaway now and just gushed free cash flow for the company that Buffett's been able to do some pretty decent things with, buy Apple stock, and that's done very well for shareholders too.

5:13Fantastic business, long history, great competitive advantages. I think a company every investor should be at least moderately familiar with. I would 100 % agree. I mean, Geico has really, even before he invested in it, it had a huge impact on what has happened at Berkshire Hathaway and his views on insurance and how he viewed the insurance industry and what really drove he and Charlie to build the Berkshire Hathaway model that they did. And the success that has spun, not spun off, but has influenced other companies like Markel, for example, and Allegheny, which is an insurance business that they bought recently.

5:58So all these companies kind of modeled their business model after what Buffett was doing. So it had a huge, huge impact on the investing world and the returns that Berkshire Hathaway shareholders were able to get. So maybe let's start and talk a little bit about some of the history of GEICO. So I think the first thing we'll talk about is it was founded way back in 1936. So this was a Depression-era company that was created. And GEICO stands for Government Employee Insurance Company. So the company was originally set up as a way for government employees to get insurance via mail. And so that is kind of how they started.

6:41It was only selling to federal employees and military officers at the time. And so that is how GEICO started. It's a little bit like, oh gosh, what's the Grok commercials for the military insurance? Oh, like AARP? Yeah, yeah, yeah, that kind of stuff. So it was kind of, I think, an early model for that. So the big, I guess, differentiator for Geico early on wasn't the insurance. It was actually the distribution. So they skipped agents and they skipped commissions and they passed savings directly on to customers. And that was a model that they've retained to today, and it remains one of their core competitive advantages today compared to others like Progressive and Allstate, for example.

7:28But the big turning point in our world, if you will, was 1951. And this is when Warren Buffett went from New York City down to Washington, D.C. to go to the headquarters of GEICO. and so this is kind of the story he went to the building on a saturday and the doors were locked he couldn't get in he banged on the door and he was 20 years old banging on the door and a janitor came and opened the door and warren said i came all the way from new york i want to learn about insurance is there anybody here i can talk to and sure enough uh the janitor said yes there's one person in the building i'll take you to him and it was laurimer davidson who was later become the CEO of Geico.

8:12And he spent four hours talking to Buffett about insurance, how the business worked, how the different financials worked, how they were able to generate sales, what to look for, all those things. And it inspired Buffett so much that he ended up putting 50 % of his net worth into the stock at the time. And so it became a big deal for him. This was also a really big deal because Ben Graham, who was Warren Buffett's mentor, also invested in GEICO and is actually his largest investment. He bought almost 50 % of the company in 1948. He spent around$700 ,000 to buy almost 50 % of the business. And that ended up becoming the driving force for his investment success.

8:57Even though he was a cigar butt investor, I think I read earlier today that the profits that he made from Ben Graham, the profits he made from his Geico investment out did every other investment he did in cigar butts in his entire investing career. And so that's how, yeah, it's insane. So had a huge, huge impact on the returns for Ben Graham. It also had obviously a huge impact on Buffett because Ben Graham would have already owned the company when Buffett would have gone to visit the company. So the last little tidbit I'll throw out there about the company, 1996 is when Buffett actually bought the entirety of Berkshire Hathaway.

9:39So he bought the remaining 50%. And he spent about$2.3 billion, give or take. But an interesting tidbit, in the 1970s, he invested money into GEICO to save it from bankruptcy. They were actually on, I remember reading, somebody else wrote about the 1972 letter. and they were talking about Geico. Geico was on the ropes. And they were losing money. Their premiums were down. Their revenues were down. They were on a big-time struggle bus. And Buffett came to the rescue and gave them a cash infusion. And they turned around the business and they were able to save the business. And then 20-some years later, he ended up buying the whole thing.

10:21That is one of the coolest stock market stories that you will hear. he bet his net worth on it came back, saved it both him and his mentor made a bunch of money on it and then it goes full circle and now it's a Berkshire company right, yeah, it's kind of nuts when you think about how his life is entwined in what's happened with Geico and what kind of impact it had on Berkshire as well as his investment returns as well as his helping how many countless millions of people save money on insurance by helping this company continue to succeed and survive through some hard times. And I think that probably gets overlooked.

11:10I frankly probably didn't think about it much either, honestly. but it had an economic impact on the fortunes of other Americans for a very long time and continues to do so today. So that little green gecko that we all see in the commercials, if you didn't know this already, if you haven't picked up on that, this is a company Warren Buffett owns. And sometimes if you kind of think about the commercials that they do and the sarcasm or the kind of the offbeat humor that the little green gecko has that kind of mirrors Buffett's voice or tone of voice. That is a good point. That is very true. Yeah.

11:50I wonder how long that Gecko has been around. I mean, not Gecko, the Gecko. That's a really good question. I do not know the answer to that. Google can be our friend. It can be, yeah. After a quick Google search, the Gecko Gecko Gordon Gecko, the Gecko Gecko, has been the mascot for Geico since 1999. Interesting. So 27 years. So it was created by the Martin Agency during a Screen Actors Guild strike. The CGI animated Gold Dust Day Gecko was designed to capitalize on the mispronunciation of the company's name. I love that. I'm so curious, how much is that mascot worth for the company? You know, like, okay, they didn't buy all the high-flying tech stocks in 1999, but they did create perhaps one of the most valuable mascots that is in the business world today.

12:49Yeah, yeah, exactly. So it says here is that when they created the Gecko, it was not intended to be a long-term mascot, but rather a one-off gag to address people confusing Gecko with Gecko.

13:05oh so here's even more interesting so uh the the voice was originally uh played or voiced by kelsey grammar who if you aren't familiar with him he was the one of the actors in the cheers movie he played fraser and he was also in the in the show fraser so he was uh he was a fairly popular actor in these, I guess, late 70s, early 80s. Did he have that Australian accent or no? No. Maybe he is. I've always seen him in shows acting as an American. So maybe in real life he does have that Australian accent. But no, he's never portrayed that that I remember anyway. I can't imagine the gecko being any other way than the current voice actor.

13:52Yeah, exactly. Yeah, exactly. So before we talk about the company, I think we probably should break down some, I guess, KPIs or metrics that are involved with insurance. If you've never really looked at insurance companies before, if you open up a 10K for a company like Progressive or Allstate or even Berkshire Hathaway and look at their insurance segments, you're going to see a bunch of strange looking terms. It's not as simple as this is the revenue, these are the costs. It involves some different terminology that we'll try to explain a little bit here for you. We do have a really great website, einvestingforbeginners.com.

14:37And there's some articles on there that dive deeper into these metrics. So if this is something you're really curious about, that would be a soft plug for you to go read some of our articles. But the first one I want to talk about is the combined ratio. So this is the holy grail of ratios when you talk about insurance companies. And this is the way that you can tell whether a company is doing a good job of generating profit from the underwriting of the premiums or the policies that they write. And so a good way to look at this is anything under 100 % is bonus. Good job. You're doing the right thing.

15:20You're making an underwriting profit. Anything over 100 % means you're losing on insurance that you're writing. So it makes the company rely on an investment income to survive. So the combined ratio has two different parts to it. You have an expense ratio and you have a loss ratio. The loss ratio refers to the percentages of premiums that you pay out in claims. So if you see a number that says 71%, by the way, Berkshire Hathaway lists all these numbers out for you in their 10K so you can see what they are for GEICO as well as their other insurance segments so they make it easy. You don't have to go through a lot of heavy math or lots of accounting to figure these out.

16:00But basically, if you see a number that says 71%, that means 71 cents, a very dollar, went to the repairs or the medical or whatever their claim is for us as a customer is coming to GEICO to redeem. The expense ratio, which is the other part of this ratio, is basically the cost of doing business. So marketing, sales, the gecko, paying for the advertising, that kind of stuff. And so this part of the ratio for the combined ratio, this is the expense ratio is Geico's secret sauce. And we'll talk about this with the other companies. But theirs is lower than competitors. And this is one of the ways that they help save us as customers money is because they don't have a lot of the middlemen and they have lower costs to run their business.

16:53and so they can pass that savings on to us as consumers. So when we go buy car insurance, that's why sometimes Geico will be less than Allstate, for example. So the other two that I'll throw out there would be net premiums written. So this is the total amount of customers that we have promised, that have promised to pay for new policies. So every new person that they sign up to get a Geico insurance policy for their car has a net premium that they agree to pay$50 a month or$50 a year or whatever it is. And then that amount is written in there. And then the earned is the portion that belongs to the company after a certain amount of time expires or goes by.

17:37That money is held now by Geico. See, I'm even doing it. So that money is being held by the insurance company, and that's their air quote profits. And that belongs to the business and that's the revenue of the business. So those are some, I guess, other metrics that you want to look at when you're looking at a company like Geico or Allstate or Progressive or any other insurance business. They'll change a little bit. We're talking about property and casualty today. But if you're looking at life insurance or health insurance, some of these will change a little bit. You won't find a combined ratio, for example, in health insurance.

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20:52It's available for our Value Spotlight members. If you want to see the thesis, we're doing a 60 % discount for now, but I'm pulling the deal once the stock hits$45. Check it out at einvestingforbeginners.com slash 60. at the risk of oversimplifying. And this mental model kind of works with banks as well. But you can think of it like the reason why, from my understanding, why a combined ratio is so important is you can kind of turn that faucet on and off to collect customers. I could go out and basically take in any customer I want and just generate all this premium. But if you're signing up all the customers who are in a car accident every other weekend, it's not going to be great for you.

21:43So even if revenue goes up, your profits are not going up. And that's an interesting phenomenon that you don't see in a consumer business, for example. Pepsi can't just turn on the profit. They can't just turn on the sales lever. They have to go out and do things and try to attract. Whereas with insurance, if you take enough risk or in finance, if you're a bank and you take on enough loan default risk, you can really turn that faucet on. But that could come back and bite you, which is why if you're looking for sustainable long-term businesses, you want to look at ratios like Dave mentioned, combined ratio, net premiums, written, earned, all of those metrics are very important.

22:25Yes. Yeah, they're very, very important. And with insurance more so because it really comes down to a simple arithmetic. Can you profitably write premiums or insurance policies that will make you money, protect the people that are buying the insurance policy from you, protect them, but also make you profit and attract enough customers? And if you think about car insurance, for example, when I worked in the banking world, one of the things that the bank always was encouraging us to do was talk to our customers regularly about car insurance. Because one of the things that we offered was the ability to, I guess, shop your car insurance around.

23:13And one of the things that they were always talking about was encouraging people to do it on an annual basis. So every time your policy was going to renew is look at what your options were and see what you could find. And there's a lot of the companies, it is not a race to the bottom. That's not the right way to put it. But there's certainly a lot of competition for trying to find the best price that you can offer people for insurance. And what we're talking about today specifically is more related to car insurance, but this could apply to health insurance or life insurance or home insurance or insurance you get for your apartment, renter's insurance.

23:52So all those things could certainly apply. And one of the things to keep in mind when you think about – like when you visualize the gecko, you think about a discount. and another one that's really popular right now, I don't know about the financials. I frankly don't even know if it's a public company, but the shack led commercials for the general, you know, with that cartoon commercial general, you know, they're always promoting super cheap rates for car insurance. And progressive, you know, they don't necessarily offer, they don't project like being a discount, I guess, insurance company, but they certainly don't shy away from they're trying to give you the best price.

24:39Whereas Allstate, it always feels like they're more, air quote, premium insurance. And so that's at least when you look at the marketing for those companies, that's kind of how it feels if you look at the hierarchy of the businesses. And what's interesting is if you look at the hierarchy of those businesses and think about how they present themselves to the public via their marketing, if you look at their financials, those kind of bear out in that way. So we were talking a lot about, let's talk a little bit about the combined ratio. For example, if we look at a company like Geico for the last three or four years, their combined ratio has ranged from 2022, which was the worst at 105%, to 2024, the last fiscal year was 81.5%.

25:29And so that's much, much lower. But the trick is with Geico, Todd Combs, who has since left the company, Buffett and Munger put him in charge of turning Geico around because after 2022, they're like, we can't continue this way because they're such a profit maker for the business. If they're losing money, then that really hurts Berkshire and other areas along the way. Keeping in mind that of the revenue that the insurance segments make for Berkshire Hathaway, Geico is give or take$43,$44 billion a year, and they do about$105 billion somewhere in that range. So it's not quite half, but it's a big, big chunk.

26:15And so if they're not profitable, that's definitely going to have an impact on the financials for Berkshire Hathaway. So they put Todd Combs in charge. And one of the things that he did, well, several things he did, but one of them was he doubled down on the tech to make sure that they were doing a good job with the tech. They had fallen behind in the telemetry things, you know, the little dongles that all these companies give us now to track our driving and our habits and everything. That really started with Progressive and Allstate. Those two were definitely way ahead of Geico. Geico was behind the eight ball on that, and they dragged their feet a lot, and Buffett was admitting that freely, as was Ajit Jain, who runs the insurance segments.

27:01Also, he raised the prices on the premiums, so they started charging more for their policies. And so instead of attracting more customers, they went to make more profit. And so their ratio kind of switched a little bit. Their expense ratio dropped, but only because they were writing more expensive policies. And so instead of trying to attract more people, Geico kind of switched to a smaller business as opposed to a bigger business. But that's how he tried to do it. Now, the last quarter, which was Q3 of 2025, their combined ratio was 84.3%, which is still pretty awesome. but one of the things that happened is their expense ratio started to take up it went from about 10 in 2024 to almost 13 in 2025 and mainly because they started they turned on the gecko again uh during the period where they were struggling they basically turned off the gecko they stopped advertising so that's one of the ways that they reduced their costs was they turned off the gecko and now they've turned the gecko back on and i could attest to that i think i remember watching a football game this Saturday and seeing half a dozen gecko commercials.

28:20He's back. They've released him from his cage. They had him caged up. Poor guy. He was just waiting to be unleashed and now he has him. Yeah. But Todd Combs was very instrumental in turning the business around. um this is anecdotal um and i i didn't i haven't looked at it uh to to verify this but our friend brett schaefer mentioned this on the x machine a while back when todd combs left there was a lot of hullabaloo about him leaving apparently he was not well liked or well regarded by the employees at geico and i'm not sure if that was because he was aggressive or if he was maybe not the nicest person.

29:08I'm not sure. But there was some, you know, there was some commentary from former employees or employees, current employees that, you know, thank God he's gone kind of thing. So it will be interesting to see how Geico does going forward. Ajit Jain admitted in the last annual meeting that they had that the 81.5 % combined ratio that they generated in 2024 for was not sustainable and that their target was in the 92 to 95%. That's what they've done historically. And that's, that's what they're going to be shooting for again going forward. So it'd be interesting to watch and see kind of how that all plays out coming, going forward.