"Panic reigned, and you know it was just terrible. I'm glad I wasn't here. It must have been a very, very traumatic scene."
That's how John J. Byrne, chairman of Government Employees Insurance Co., describes what happened in the executive suite of his company early in 1976, before Byrne was associated in any way with the national automobile insurance company that has its headquarters here.
At the time, Geico was a very sick corporation but few persons outside top management of the company or its competitors were aware that insolvency was just months away, a crash that would have had the biggest adverse impact on America's business system since Penn Central Railroad failed in mid-1970.
Byrne was safely established as executive vice president of the Travelers Corp., the nation's second largest diversified financial firm. He was on top of the Gieco crisis, however, because it was becoming "a national emergency," he later would recall.
In particular, Travelers and a few other large Geico competitors were concerned that a failure by the Washington firm would end up costing the competitors a bundle.
In February 1976, Byrne recalls, officers of six or seven firms sat down at an industry meeting and raised the Geico question. "We didn't have an authority or anything, the insolvency laws really are aimed strictly at how you protect the policyholder once an insolvency happens," Byrne told reporters for The Washington Post one year ago this weekend, in an interview never before made public, about the hectic year of 1976.
"And after this meeting, my chairman turned to me and said, 'Jack, you stay on top of that and put a team together for it,' because we figured $27 million was (our cost) of a Gieco failure," he said.
Byrne picked a team of a half dozen Travelers lawyers, actuaries and an investment man, and began a detailed study of the competitor's problems. They had their first report in 48 hours and traveled by plane to Vermont, where Byrne was sking, to offer their findings. Four other large insurance companies followed a similar approach and one company went to D.C. Superintendent of Insurance Maxmilian Wallach to tell him what happening, that the Geico competitors were willing to "help."
Subsequently, a secret meeting was held (Wallach first got Justice Department blessing) and it was only the first of many. At all of the sessions, there was a clear message: Geico was in trouble, it needed new capital and it was headed for collapse without some assistance from its competitors.
It was at one these meetings in April 1976, the Geico's former management made a critical mistake. "Instead of saying, 'Can you help us,' which was the only attitude that would have worked, they said, 'Well, maybe or maybe not we'll accept your help, let's see if it's as good a deal as we can get somewhere else'."
At that point, the competitors zipped up their briefcases and walked away from the Geico crisis. They told Wallach:" 'Forget it, we'll pay the $27 million and down the tubes they go, we'll get rid of a good competitor'," Byrne said, in recalling the reaction of Travelers.
But Geico remains in business today. Moreover, for 1977, the insurance company is expected to roll up a record level of profits. While Geico's business volume has continued a slow decline - an erosion that has surprised Byrne - the company today is recovering its health.
If the Geico story of recent years could be dramatized, it would have to be called "The Miracle on Wall Street." There would be a cast of thousands but a few stars would dominate the stage.
Byrne would have to be cast as the hero, a man who accepted the challenge of taking over leadership of a failing company on May 5, 1976, who saw the firm continue to decline toward insolvency in his first months on the job, but who has survived to tell a story of success 18 months later.
In the background, as he was always during the real life drama of Geico, would be the D.C. Insurance Superintendent, Wallach. This unsung hero, working with a small staff in an agency of a government starved for funds, had the authority and will power to sink Gieco at a moment's notice. He almost did.
There would be actors representing Geico competitors, the fraternity of auto insurance industry companies in which the Washington company was regarded as a maverick. Geico had few close friends in the business because of its history of aloofness and a method of sales that differed from most auto insurers, one without a traditional commission system and independent agents. But many of these firms agreed to assume some Gieco policy liabilities or to purchase some Geico stock, a crucial element in the Washington firm's survival.
Bit parts be played by representatives of America's leading stock brokerage and investment banking firms, all of whom turned their backs on Byrne when he walked up and down Wall Street, trying to convince them that he had a workable plan for reviving the once-glamorous Geico.
All, that is, but Salomon Brothers, which plays a special role in the drama as the one firm anxious to take the risk of selling $75 million of Geico preferred stock, a deal that was completed one year ago last Friday.
And there would be the actors from Geico's executive suite itself, top officers who were dumped when their inadequate perception of what was happening became apparent. Chief among these men were former chairman Norman L. Gidden and former president Ralph C. Peck, who were sacked by a committee of Geico directors shortly after the insurance industry meeting mentioned above.
Finally, there were the stockholders. Many of these person, including a large concentration of individuals in the metropolitan area, had sustained enormous paper losses as Geico's stock price ago, 80 per cent of the shares were purchased by the same stockholders.
Meantime, in the audience would be the people who would suffer, including these stockholders, accustomed to handsome growth and dividends but suddenly cut off from both in 1975 and 1976; customers used to discount rates who saw their premium prices boosted sharply and their policies canceled; employees who would lose their jobs at worst (about 2,600 did) and not receive any pay increases, at best; the general public, which would end up paying for a Geico failure in the form of higher auto insurance rates for all.
Although the failure never occurred, any company that so closely courts tragedy is bound to suffer in the process. Today, Byrne and his associates at Geico headquarters in Chevy Chase are trying, slowly, to pick up the pieces of previous success. They have much good news to report, such as a resumption of a cash dividend on common stock of 12 cents a share annually (small, but it's a "start," Byrne said), increasing profitability, and some rate reductions for auto insurance customers, and pay boosts for many of the 5,400 employees remaining.
Wall Street analysts generally have been bullish on Geico and the firm's over-the-counter stock has been volatile all year, heavily traded and increasing in value gradually but steadily. Friday night, Geico closed at $8 a share bid, up 60 per cent from the 1977 low of $5 and well above a low of less than $3 a share in 1976. It's a far distance from over $60, where Geico traded in 1972, but getting closer to the 1976 high of $12 a share before record losses were reported and the Geico drama started.
"The forces are already at work which can provide a formidable renaissance of earnings recovery and recoupment in financial strength for Geico," the investment firm of Loeh Rhoades & Co. said recently.
Added Merrill Lynch, Pierce, Fenner & Smith: "Geico is now financially sound and becoming stronger." And, Smith Barney Harris Upham & Co.: "Geico continues a major comeback."
In interviews last week, Byrne and several associates answered reporters' questions about how the recovery took place and where the once troubled firm is headed.
Generally, Byrne said, he hasn't been surprised. The gains of 1977 were about as projected earlier in the year, and he recalled the company's annual meeting, where the potential for record profits this year first was revealed (made possible, in part, by tax benefits related to prior losses).
In fact, the Geico said, before agreeing to take his current position, he hired his own accountants and spent several days at the Madison Hotel with them, assessing the firm's future prospects. With the single major exception of policyholders, the figures put together back in early 1976 have proved accurate.
Take earnings, for example. On a 12-month basis, Geico net income has increased steadily over the past four quarters. For the 12 months ended last Dec. 31, Geico had a loss of $26.3 million. But in the 12 months ended March 31, profits were $9.5 million; for the 12 months ended June 30, $37.2 million; and for the 12 months ended Sept. 30, $49.9 million.
Geico's previous record annual earnings were $32 million, in 1972, so it is obvious that the company will have a new high to report after Dec. 31, although Byrne refuses to make estimates.
Profits from underwriting auto insurance remain unsatisfactory for Geico, with a loss for the year to date of more than $6 million, reflecting in part the time lag between installation of higher rates and the date by which policies of all customers involved have been renewed with the new prices. In the third quarter, however, Geico had a pretax underwriting gain of $8.8 million compared with year-earlier losses of $7.3 million. Other profits come from investments.
A major problem remaining is marketing. Byrne had hoped to start adding to Geico's customer base this year, following a period during which the firm either cancelled drivers considered not so good risks as prime customers or lost business due to higher rates and bad publicity.
The number of policyholders has declined from 2.6 million in early 1976 to 1.58 million at the end of the third quarter. Byrne had moved quickly to bring about some of this business loss, to make his firm small enough to manage with reduced resources. But he had projected that the low point would be 1.7 million customers - after which slow growth would resume.
"This is a very, very delicate balance we're trying to hit," he said last week. What happened was a mistake in judgment about "how long it takes to fill up the pipeline" after all marketing and advertising for new business was halted by Geico late in 1975.
For example, Geico stopped issuing "leave record cards" to federal employees, who had used them for years to chart annual vacation time. Not until last February was marketing talked about again.
In the meantime, Geico took the unprecedented step of withdrawing entirely from the State of New Jersey after failure to win a rate rise. That has resulted in a loss of 250,000 customers and, in 1977 alone, Geico has suffered an underwriting loss in that state of $12 million on customers' policies that had not yet expired. If Geico had not withdrawn, the 1977 loss would have been more than $40 million in that state, Byrne added.
Finally, Geico suffered from adverse pubiclity about its financial woes. In particular, Byrne said Geico was hurt in the metropolitan area of Washington, where the company "has our oldest, most precious group of assets," some 450,000 policyholders with the "best accident rates."
In California, where Geico has a big business, surveys showed almost no perception of any trouble for Geico, Byrne said. And there was little press coverage there, he added.
"But Geico's piece of the Virginia-Maryland-D.C.market, the best book of business we have," was affected by news media coverage, primarily stories in The Washington Post, Byrne said his surveys showed.
Braced with extensive advertising in this market and elsewhere, including broadcast spots featuring Benny Goodman, Byrne said Geico is about to half the decline in customers. He noted that new business for Geico began to pick up slowly in the first quarter of this year and has been expanding since. At the same time, the level of customers electing not to renew policies hit a normal level of about 2 per cent last March.
He showed a graph from "Jack's Book of Charts," resting on his office desk, pointing out that all inquiries about Geico policies and rates also began to pick up early this year and that the number of new policies generally trails such growth in inquiries. Thus, he concluded, the net number of Geico policyholders should begin to grow in the next few months.
Byrne also revealed:
Geico expects to issue through private placement in mid-December up to $25 million of nonconvertible senior preferred stock. The offer, to be handed by Salomon Brothers, is designed to increase Geico's surplus for protection of policyholders. The final amount could be $15 million, $20 million or the full $25 million.
In the third quarter, the total amount of Geico policies reinsured by competing firms under last year's industry rescue effort was dropped to 19.02 per cent from the original 25.36 per cent. By the next annual meeting on April 18, Byrne said he hopes to announce a plan to eliminate the reinsurance entirely by the end of 1978 - compared with the industry "treaty" goal of 1980-1981.
Company officers are at work on a business plan for 1978 that includes an increase in revenues of more than 8 per cent and a gain of up to 6 per cent in total polices (up 2 per cent to 3 per cent in auto lines and up 6 per cent in other plans, such as homeowners).
Geico expects to offer some new lines of insurance as part of a diversification plan.