'Shy' man turns Geico into money machine Buffett sings praises of Louis Simpson

THE BALTIMORE SUN

In an article in Sunday's editions of The Sun, Geico Corp.'s policy on what type of drivers it insures was reported incorrectly. In fact, Geico insures preferred risk drivers as well as standard and non-standard drivers.

The Sun regrets the error.

For just four almost throwaway sentences, they produced a remarkable worldwide glare of publicity.

But the paragraph was written by the world's richest man, Warren Buffett, about Louis A. Simpson, co-president of Geico Corp. of Chevy Chase.

A simple nugget of praise convinced much of the financial world that the 65-year-old chairman of Berkshire Hathaway Corp. might be using his closely watched annual report to hint at who will succeed him.

"Lou takes the same conservative, concentrated approach to investments that we do at Berkshire," wrote Mr. Buffett, whose annual pronouncements are about the only glimpse into a company whose executives rarely grant interviews.

"His presence on the scene assures that Berkshire would have an extraordinary professional immediately available to handle its investments if something were to happen to [Vice Chairman Charles Munger] and me."

And so the spotlight turned full force on Geico and Mr. Simpson, 59, who prefers to stay in the wings and declined to be interviewed.

Mr. Munger tamped the fuss by telling Business Week that Berkshire didn't mean to make a succession announcement "in some crazy, indirect way."

But the episode focused Wall Street anew on the record Mr. Simpson has built since Mr. Buffett hired him to run Geico's investments in 1979.

Most of Geico's $4 billion portfolio is in government bonds, but most of Mr. Simpson's reputation stems from his work with stocks.

Since 1980, Mr. Simpson's stock picks have earned an average of 22.7 percent a year -- numbers that make pros whistle in admiration.

Most struggle to keep up with the market: The average diversified stock mutual fund has gained 12.9 percent a year over the same period, according to Lipper Analytical Services Inc. of Summit, N.J.

The Standard & Poor's 500-stock index has climbed 15.7 percent a year.

Mr. Simpson's work is not quite Buffettian -- in only three years since 1965 have Berkshire's returns been less than 11 percent, and Berkshire once made 32 percent in a year when the stock market fell -- but Warren Buffett is a rare person.

"Lou is low-key. He's not what you would call charismatic; Warren Buffett is," said Merrill Lynch & Co. insurance analyst A. Michael Frinquelli.

"Warren Buffett is not what you would call shy. Lou Simpson is almost shy. Lou is a nonthreatening guy, but razor-sharp. The mind is always working."

Mr. Simpson joined Geico as it was recovering from life-threatening reversals during the mid-1970s.

The company had bet disastrously wrong on its pricing policies, and had taken on far more high-risk drivers than it could handle at premiums too low to break even on their business.

But Mr. Buffett liked Geico for the same reasons that led him to start buying its stock as a student -- especially its direct marketing system, which lets Geico sell without agents and their hefty commissions.

Instead, the company uses a cheaper force of operators and sells most of its insurance over the phone.

So the Nebraskan bought heavily at the bottom.

He piled up about half of Geico's stock at an average cost of only $1.33 a share, which had him sitting on a $2.3 billion gain by the time Berkshire bought the rest of Geico this year.

The cost of the other half, coincidentally, was about $2.3 billion.

Mr. Buffett hired a new chief executive in 1976 and helped lead the company toward its present policy of offering very cheap insurance to the lowest-risk drivers -- and rates to everyone else so high that they repel drivers likely to cost Geico money.

Three years later, he and Geico CEO Jack Byrne brought on Lou Simpson.

"They liked the way he thought about the stock market and investing in general," said Robert G. Hagstrom, a Philadelphia money manager who wrote a 1994 best seller about Mr. Buffett's career.

"He's a very concentrated, buy-and-hold investor, which is what Warren Buffett has done."

Mr. Simpson had had time to refine his approach.

Educated at Princeton, with a background in top positions at two money-management firms, he was a stranger to the insurance business.

But he wasn't being hired to run that: That job now belongs to Geico Co-president Olza M. "Tony" Nicely.

That allows Mr. Simpson to work out of California, near his San Diego home. His job is to turn a just better than break-even insurance business into a profit machine.

He has never talked much about his approach in public. Geico's annual reports give few insights into his thinking. But clues are evident in Securities and Exchange Commission filings.

First, like Mr. Buffett, Mr. Simpson makes very large bets on a very small number of companies.

Geico had $1.1 billion in stocks as of Dec. 31. In 10 stocks, to be precise.

Berkshire Hathaway had $22 billion in stocks at year-end, with $19 billion-plus in seven stocks.

Mr. Hagstrom said a $1 billion stock fund would normally have investments in 100 different companies, as managers look for safety in diversification.

"As Lou would say, he doesn't get many good ideas," Mr. Frinquelli said. "Both Buffett and Simpson would tell you you're better off in stocks than bonds.

"Think long-term: Neither of these guys are traders. [And] you're able to know more about three or four names than 500."

Second, both Mr. Simpson and Mr. Buffett bet on fast-growing companies but mostly eschew new industries and start-ups. They look for people who are doing old tricks better than their peers.

There is little high technology in Geico's portfolio, and lots of familiar brand names. Just like Berkshire Hathaway.

At year-end, Berkshire had $19 million in Coca-Cola, Capital Cities/ABC, American Express, Federal Home Loan Mortgage Corp. (better known as Freddie Mac), Gillette, Geico and the California bank Wells Fargo, and $2.7 billion in all its other stocks combined. Berkshire became a major holder of Disney after it merged with Cap Cities early this year.

Geico owned shares of Nike Inc., Mattel Inc., Manpower Inc., two regional banks, a medical laboratory firm, York International Corp., the Burlington Northern Santa Fe railroad, Freddie Mac and a small chunk of Berkshire Hathaway.

"It's a rifle shot instead of buckshot," said Myron Picoult, an pTC insurance analyst at First Manhattan Corp. "When it works, it works very, very well. When it doesn't, hopefully you've protected yourself."

Only once has the approach failed Mr. Simpson in recent years, and it points up the biggest difference between the Geico executive and Mr. Buffett.

Berkshire is known for mentoring executives of companies it invests in and sticking with them through the nastiest downturns.

But Mr. Simpson reacted very differently to his one recent disappointment.

In 1993, the only recent year in which Mr. Simpson's stocks underperformed the market, he made hundreds of millions of dollars' worth of shifts.

Out went Reebok International Ltd., which fell from $38.50 to $30 late that year.

Out went Philip Morris, which dropped to $55 from $77.

Banished was California supermarket Vons Co. Inc., which traded at $26 in January and $16 in December.

Shares of the parent company of the National Enquirer were shed like so much trash for paparazzi to sift.

In came the banks. In came Nike. Up threefold went the holding in Mattel.

Other than the toymaker, none of them was in the portfolio at the end of 1993, said David L. Anderson, a Geico executive who was investor relations chief before Berkshire completed the takeover.

Geico's biggest current plays are Freddie Mac and Mattel, representing just over $600 million in stock value.

A Mattel executive describes Geico as patient and supportive, willing to ride out short-term profit swings, but independent of management and ready to ferret out information about Mattel from the toymaker's customers and competitors.

"They don't get at all concerned about the quarters," Mattel assistant treasurer and investor relations director Mike Salop said.

"Their team is more active in research than any I'm familiar with. They travel the world and kick the tires."

Pub Date: 3/31/96

Geico's portfolio

Equity holdings as of 12/31/95:

Company .................................... Value (millions)

Berkshire Hathaway ......................... $43.8

Burlington Northern ........................ 46.8

Fed. Home Loan Mtge. ....................... 329.1

First Bank System .......................... 94.3

First Interstate Bancorp ................... 20.5

Laboratory Corp. of Am. .................... 45.2*

Manpower ................................... 104.1

Mattel ..................................... 251.4

Nike ....................................... 163.6

York International ......................... 23.6

*inc. $771,588 in warrants Source: SEC filing

CORRECTION
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