GEICO Pulls Through

Death, it seemed, was imminent. But the patient hung on, battling bankruptcy from week to week. Now, after drastic surgery and some extensive aid from competitors, it is clear that Government Employees Insurance Co., the ailing former wonder child of the industry (TIME, July 19), will live. The latest signs of viability: after losing $124 million in 1975 and $40 million in the first six months of 1976, GEICO turned a small profit in the third quarter; it expects more black ink in the last three months. The company has sold a $75 million issue of preferred stock, mostly to its present shareholders, with surprising ease, giving it a desperately needed injection of new capital. And the price of its common stock has more than doubled, from $2 a share in July to $5 now.

To be sure, GEICO is emerging from its ordeal much smaller and poorer than in 1974, when it was the nation's fifth largest auto insurer, collecting premium income of $660 million--and when its stock sold as high as $61 a share. The company had reached that eminence by doing away with agents and selling policies directly to customers at premium rates as much as 25% below those charged by other insurers. The strategy worked because for a long time GEICO restricted its customers to employees of federal, state and local governments, and later to professional people--two low-risk groups. But then, in heedless pursuit of further growth, GEICO let down the bars, writing policies for just about anybody, and it failed to set aside adequate reserves to cover claims that were inflated by the rocketing cost of auto parts and medical care. By last summer, its losses had mounted so high that Maximilian Wallach, insurance superintendent for the District of Columbia, where GEICO has its headquarters, set a deadline for moving to have the company declared bankrupt.

At the same time, however, Wallach was acting to save GEICO. He cajoled 27 other insurers into buying about a fourth of GEICO's existing auto policies (the insurers had a self-interested motive for agreeing: if GEICO had gone bust, they would have been assessed to help pay claims against its policyholders). That provided time, and cash, for GEICO's new chairman, John J. Byrne, 45, who had been hired from Travelers Insurance Corp. in May, to begin an overhaul.

Shrinking Process. Byrne began a series of cuts that, he says, have left him "very, very sobered by my realization of the awesome costs we had to pay." He fired more than 1,500 employees, reducing the staff to fewer than 6,400, and closed 23 sales offices. Those moves have reduced expenses 20%; Byrne vows to cut them further by 10%. Byrne has also secured, state by state, permission for premium-rate increases averaging 38%. Further, the company, which once operated in 25 states, has stopped servicing unprofitable areas. GEICO pulled out of New Jersey, which once accounted for 10% of its business, when the state refused to allow a premium increase; it has also stopped writing new policies in Connecticut, Hawaii, Iowa, New Hampshire, New Mexico and Utah.

Though these steps have hauled GEICO back into the black, and the $75 million sale of preferred stock has rebuilt its depleted reserves, the company is likely to go on shrinking for a while. GEICO is still losing policyholders it wants to keep; some are failing to renew because they distrust the company's finances, others because they will not accept the stiff premium increases. GEICO sells homeowners' insurance as well as auto policies--and some mortgage lenders are demanding that householders switch to richer insurers as their GEICO policies expire. Counting the policies already taken over by other insurers, says Byrne, "well probably lose 1 million" of the 3 million policyholders that GEICO had at its peak. But, he adds, "the arterial bleeding at least has stopped. We're sound again." GEICO remaining policyholders, and the people who have claims against them, can breathe a bit easier; what would have been the insurance industry's most colossal failure ever has been averted--barely.

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