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Notes From Tony Nicely's Talk, Part 1

First part of former Geico CEO's presentation at the Berkshire System Summit

May 14, 2019 | About:

Previously, I shared my notes from Don Wurster’s talk at Bob Miles’ Berkshire System Summit. During his speech, Wurster spoke very highly of Geico’s Tony Nicely, saying he really exemplifies the culture at Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B). It was a real pleasure and honor for me to listen to Nicely’s talk. I took extensive notes and will share them in over the next few days.

Background information

Olza M. Nicely, also known as Tony, was the executive chairman of Government Employees Insurance Company Inc. (Geico) from 1993 to 2018 and its CEO from 1992 to 2018. He served as president of Geico from 1989 and as its executive vice president from 1987 to 1989 and senior vice president from 1985 to 1987.

How do you define the Berkshire System?

One thing Nicely learned early on about the system is that it doesn’t change. Warren Buffett (Trades, Portfolio) is the same person. Lorimer Davidson introduced Buffett to the concept of float and how insurance works, but his system of managing hasn’t changed whether it’s a public company or a private company, a large company or a small one.

Buffett is so easy to work with, such a cheerleader and a great mentor. If you listen carefully, you’ll notice he gives a lot of great advice.

The difference between being a public company and being a part of the Berkshire family

It’s quite a wonderful difference. One of the best things that ever happened to Geico was when Buffett decided he would like to acquire the rest of the company that he didn’t already own for Berkshire Hathaway. He initially made a significant investment in Geico during the darkest days in the middle 1976 and kept adding to the investment.

Buffett also called Lou Simpson (Trades, Portfolio) and Sam Butler to see if they were interested in having Geico 100% owned by Berkshire Hathaway. Buffett then called Nicely in 1995 and asked him to think about whether it made sense for Berkshire to acquire Geico, saying he only wanted to do it if Nicely thought it was a good idea.

In 1995, Nicely had been CEO for two years. He realized that by being a public company, Geico could never do what would be possible if it were a private company. Simpson and Nicely weren’t interested in short-term and quarterly results, so only when investors insisted on coming in and seeing the company's numbers did they agree to talk to outside investors.

As a result, Nicely told Buffett it made a lot of sense for Geico to be part of the Berkshire family. He had only two concerns. One would be the fiduciary duties of the CEO and the rest of the directors and that the minority shareholders would get a fair price. The other concern was to come up with something to replace Geico’s employee stock ownership program.

Subsequently, Berkshire came up with a profit-sharing program for Geico in which anybody who had been with the company for more than a year would be able to share the profit based on two things that can be tracked easily – unit growth and profits on all businesses more than one year old.

Even when Geico was a public company, Nicely said he always resisted meeting with the press any more than he had to. Today, he only speaks for educational purposes outside of Berkshire Hathaway.

Brand recognition

Back in the days GEICO never disclosed more than what was required to be disclosed. Since insurance is an extremely competitive business, the company would like to be stealthy.

Back in the late 1980s or early 1990s, Nicely and Buffett were driving and played the game of words of association. Buffett said “hamburgers” and Nicely said “McDonald's.” Then Buffett said “chewing gum” and Nicely said “Wrigly's.” And then Buffett said, “Wouldn’t it be nice if someday if someone says car insurance and the response is Geico?”

In 1993 and early 1994, there was a study of Geico’s name or brand recognition and they found it was about 3% to 4%. Today, most people have heard of Geico.

Why hasn’t GEICO expanded into other lines of the insurance business or other countries?

The financial collapse of Geico in 1975 and 1976 was a serious blow to the business. It took the company almost two decades to rebound from the low and regain associates and customers.

What Nicely has learned is that if you can do something really significant that’s worth doing and better than anybody else, chances are you are going to gain more economic value for both the consumers and the people associated with it than trying to do multiple things. There are few companies that have proven they can do any one thing better than anybody else, let alone multiple things.

That’s why Geico hasn’t expanded to other countries. It has looked at the U.K, Germany, Canada, China and South America, but the U.S still offers more potential for the next few billion-dollar investments than any other regions at the moment. Last year, the company moved up to a little over 13% of the market share, so there’s still a lot of room to grow in the U.S. Today, the market is almost $250 billion because of inflation, the cost of liabilities, the cost of medical payments and the cost of automobile repair. The severity of an accident will continue to grow. What will happen to the number of automobiles on the road is still in question, but right now it is still growing.

Geico stayed away from life insurance. It got into the life insurance business twice, but the return was not very good. So it sold the business twice. Geico also doesn’t do health insurance as it tries to stay inside of its circle of competency.

The hardest thing about managing Geico

Laying people off, through no fault of their own, during the financial collapse because most of those people had been with Geico for a long time. Also letting down the shareholders back when it was a public company.

How involved is Buffett with Geico?

Perhaps due to Buffett’s love of the insurance business, he probably has more contact with Geico than any other subsidiaryy. Every year, Geico holds an annual review and planning session for the future. Buffett has attended all the meetings since 1996 and has only missed two meetings. He also started to bring more directors to the Geico meeting.

What metrics were considered in terms of succession plan?

Bill Roberts is the current CEO of Geico. He’s been involved with the company in all departments and with all the associates. He’s knowledgeable about the business. Roberts continues to grow within the organization as well. It was Buffett's decision on who to appoint as the new CEO, but Nicely suggested Roberts.

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About the author:

A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

Rating: 5.0/5 (9 votes)



The Science of Hitting
The Science of Hitting - 1 year ago    Report SPAM

Thanks for sharing - and nice to see you back writing Grahamites!

Grahamites - 1 year ago    Report SPAM

Science - You are welcome:) It's good to be back after a while

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