Exhibit 13
GEICO
Corporation
Annual Report
1994
Front Cover
Table of Contents
1) Financial Highlights
2) Letter to Shareholders
6) Selected Financial Data
8) Corporate Citizenship
10) Safety
12) Service
14) Business Segments
17) Management's Discussion and Analysis
27) Financial Statements
46) Directors and Officers
GEICO Corporation
One GEICO Plaza
Washington, D.C. 20076-0001
Telephone (301) 986-3000
GEICO Corporation (the Corporation) is principally an insurance organization
whose affiliates are personal lines property and casualty insurers. The
largest subsidiary, Government Employees Insurance Company (GEICO), is
engaged in writing preferred-risk private passenger automobile insurance for
government employees and military personnel and also writes homeowners and
other lines of insurance for all qualified applicants. GEICO General
Insurance Company (GGIC), a subsidiary of GEICO, writes private passenger
automobile insurance for preferred-risk applicants other than government
employees and military personnel.
GEICO Indemnity Company (GI), a subsidiary of the Corporation,
writes standard-risk private passenger automobile and motorcycle insurance.
GEICO Casualty Company, a subsidiary of GI, writes nonstandard-risk private
passenger automobile insurance.
Criterion Life Insurance Company, a subsidiary of GEICO, writes
structured settlement annuities for its property and casualty affiliates.
Government Employees Financial Corporation (GEFCO), a subsidiary of GEICO,
engages in secured consumer and business lending and loan servicing.
Resolute Reinsurance Company, a subsidiary of Resolute Group, Inc.,
in turn a subsidiary of the Corporation, wrote property and casualty
reinsurance in the domestic and international markets until late 1987 when
the Company suspended writing new and renewal reinsurance.
The Corporation and its subsidiaries are sometimes referred to as
"the Company" in this report.
Inside front cover
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(In thousands, except per share data) 1994 1993 1992
<S> <C> <C> <C>
Premiums $2,476,276 $2,283,488 $2,084,502
Net investment income (pretax) $201,790 $201,851 $201,526
Net investment income (aftertax) $173,092 $165,053 $165,388
Realized gains (pretax) $12,898 $120,584 $98,535
Realized gains (aftertax) $9,904 $81,292 $60,693
Net income $207,764 $273,678 $172,773
Weighted average shares 69,992 71,417 72,387
Net income per share $2.97 $3.83 $2.39
Realized gains per share (aftertax) $.14 $1.14 $.84
Dividends paid per common share $1.00 $.680 $.600
Assets $4,998,105 $4,831,440 $4,525,091
Shareholders' equity $1,445,941 $1,534,579 $1,292,511
Common shares outstanding 68,291 70,834 71,184
Book value per share $21.17 $21.66 $18.16
Return on equity (three-year rolling) 16.4% 18.7% 19.4%
Property and casualty policyholders'
surplus $1,039,930 $916,943 $968,286
FINANCIAL HIGHLIGHTS
<S> <C> <C>
(In thousands, except per share data) 1991 1990
Premiums $1,888,368 $1,692,518
Net investment income (pretax) $191,226 $177,087
Net investment income (aftertax) $161,510 $152,456
Realized gains (pretax) $29,331 $19,587
Realized gains (aftertax) $19,389 $13,002
Net income $196,380 $208,441
Weighted average shares 72,855 76,397
Net income per share $2.70 $2.73
Realized gains per share (aftertax) $.27 $.17
Dividends paid per common share $.456 $.400
Assets $4,242,193 $3,719,019
Shareholders' equity $1,184,261 $970,008
Common shares outstanding 71,047 74,253
Book value per share $16.67 $13.06
Return on equity (three-year rolling) 24.6% 27.8%
Property and casualty policyholders'
surplus $1,104,564 $811,628
</TABLE>
(GRAPHICS)
[At the bottom of page 1 are four, two-color charts which depict certain
financial information. These charts are described as follow:]
[Chart Number 1 - Net Income and Realized Gains Per Share
This bar chart depicts net income and aftertax realized gains per share over
a five year period. The vertical (y) axis is expressed in dollars (from zero
to $4.00) and the horizontal (X) axis shows years (1990 through 1994). The
data plotted is as follows:
Net Aftertax
Income Realized Gains
1990 $2.73 $ .17
1991 $2.70 $ .27
1992 $2.39 $ .84
1993 $3.83 $1.14
1994 $2.97 $ .14]
[Chart Number 2 - Property and Casualty Policyholders' Surplus and GEICO
Corporation Shareholders' Equity (millions of dollars)
This area chart depicts shareholders' equity and policyholders' surplus in
millions of dollars over a five year period. The y-axis is expressed in
millions of dollars (from zero to $1,600 and the x-axis shows years (1990
through 1994). The data plotted is as follows:
Policyholders' Shareholders'
Surplus Equity
1990 $ 811.6 $ 970.0
1991 $1,104.6 $1,184.3
1992 $ 968.3 $1,292.5
1993 $ 916.9 $1,534.6
1994 $1,039.9 $1,445.9]
[Chart Number 3 - Book Value Per Share and Return on Equity
This area chart depicts book value per share over a five year period. There
is also a line graph, imposed on the area graph, showing return on equity
(three-year rolling) over a five year period. There are two y-axes. The left
y-axis is expressed in dollars (zero to $25, in five dollar increments) and
relates to the book value per share area graph. The right y-axis is
expressed in percentage (zero to 30% in increments of 10) and relates to the
return on equity. The x-axis shows years (1990 through 1994). The data
plotted is as follows:
Book Value Return on
Per Share Equity
1990 $13.06 27.8%
1991 $16.67 24.6%
1992 $18.16 19.4%
1993 $21.66 18.7%
1994 $21.17 16.4%]
[Chart Number 4 - Underwriting Ratios (after policyholder dividends)
This area chart compares the property casualty insurance industry
underwriting ratios against GEICO Corporation underwriting ratios. The
y-axis (truncated) is expressed in precentage running from 70% (implied) to
115% (in 15 point increments). The x-axis shows years (1990 through 1994).
The data plotted is as follows:
Industry GEICO Corp.
1990 109.7% 96.4%
1991 108.8% 96.4%
1992 115.7% 100.1%
1993 106.9% 97 5%
1994 109.4% 96.4%]
(Page 1)
<PAGE>
TO OUR SHAREHOLDERS
(photo)
[On page two there are two pictures in the left margin. The top left picture
shows O.M. Nicely, President and Chief Executive Officer, Insurance
Operations. The bottom left picture shows Louis A. Simpson, President and
Chief Executive Officer, Capital Operations.]
Overall financial results in 1994 were satisfactory. Underwriting results
and aftertax net investment income improved while operating earnings per
share were close to the 1993 results.
Management believes the underwriting ratio is the best indication of
how well the property and casualty insurance operations are performing. The
consolidated property and casualty statutory underwriting ratio was 96.4% in
1994 compared to an adjusted ratio of 96.7% in 1993. As you may recall,
last year's ratio of 96.7% was adjusted from the statutory ratio of 99.1% to
eliminate the effect of the California Proposition 103 premium refund, and
also our changed method of recording written premium. These adjustments were
necessary to give a better indication of 1993's underwriting performance.
While the overall underwriting results were satisfactory, 1994 was
impacted significantly by a series of catastrophic losses including winter
freezing in the northeast and the Northridge, California earthquake.
Catastrophe losses were approximately $31 million in both 1994 and 1993
following 1992's gross losses (before reinsurance) of almost $200 million,
the majority of which was Hurricane Andrew. Catastrophe losses contributed
1.3 points to the underwriting ratios in both 1994 and 1993, and 6.3 points
in 1992. In 1994, we elected not to purchase catastrophe reinsurance.
Following major catastrophe losses over the past few years, reinsurers
raised their premiums to a level where we believe the prices in relation to
the coverage provided do not represent a good bargain. We continue to
entertain offers to limit our exposure to catastrophe losses and would
purchase reinsurance if the rates were reasonable and justified. Meanwhile,
we believe that the Corporation's capital base is sufficient to withstand
substantial catastrophe losses.
Underwriting results in our core private passenger automobile
business were quite satisfactory in 1994. Voluntary auto policies-in-force
grew by 6.8%. Property and casualty premiums earned were up 8.4% in 1994
following a 10.1% increase in 1993. These growth rates reflect the strong
auto growth and modest rate increases of the past two years. Our homeowner
line, primarily written as an accommodation to our automobile business, had
a modest underwriting gain with a small decline in policies-in-force.
Consolidated pretax net investment income of $201.8 million is
essentially flat with income of $201.9 million in 1993. Investment income in
1994 reflects lower yields on fixed-income investments due to a shift to
tax-exempt securities and a high rate of issuer redemptions and prepayments
on older, higher yielding investments. However, the Corporation's aftertax
investment income is a better indicator of performance. Aftertax investment
income in 1994 was $173.1 million, up from $165.1 million in 1993, an
increase of 4.9%. The chart displayed on the next page shows the aftertax
net investment income per share over the past few years. The per share
increase from 1993 to 1994 is 6.9%. The increase is greater on a per share
basis because of lower shares outstanding.
Operating earnings, which exclude realized investment gains and
losses and the cumulative effect of changes in accounting, were $2.84 per
share, down slightly from $2.87 per share in 1993. Operating results in 1993
were increased by $.06 per share as the result of our settlement of
California Proposition 103.
Net income was $207.8 million, down from $273.7 million a year
earlier. Net income per share in 1994 was $2.97, down 22.5% from $3.83 in
1993. Net income reflects a lower level of realized gains in 1994. Aftertax
realized gains in 1994
(Page 2)
<PAGE>
were $9.9 million ($.14 per share), down from 1993's $81.3 million ($1.14
per share). Net income was reduced $1.1 million ($.01 per share) in 1994 and
$12.7 million ($.18 per share) in 1993 as the result of accounting changes
discussed in detail in the Management's Discussion and Analysis section.
Included in 1993's $1.14 of aftertax realized gains per share was $.22 from
the sale of 3.3 million shares of AVEMCO stock. Net income, of course, is
highly influenced by the level of investment gains realized. Our guiding
investment principle is to invest for long-term total returns to enhance
shareholder value. Therefore, we realize gains when it makes economic sense
to do so and not to smooth our net income results.
For our purposes, we have defined long-term as a thirty-six month
view and this is the basis on which we measure our investment success or
failure against the market. This is not to suggest, however, that we are not
mindful of shorter time periods. During 1994, your total investment
portfolio achieved an aftertax return of 2.6%. The common stock segment had
an aftertax total return of 9.1% as compared to an imputed aftertax return
of 1.6% for the S&P 500 index. The fixed income segment of the portfolio
also yielded a higher return than the market in 1994. Over the past three
years, the Corporation's common stock portfolio earned a 6.8% compound
annual rate of return after tax, compared to 4.7% for the S&P 500. For the
same three year period, the total portfolio appreciated at a 4.6% annual
rate after tax.
Shareholders' equity of $1,445.9 million at year-end 1994 represents
a decrease of 5.8% from 1993's $1,534.6 million. The decline reflects the
purchase of a net 2,613,498 shares of Treasury Stock for $130.3 million in
1994 and a $101.0 million decrease in the net unrealized appreciation of
investments to $91.2 million at December 31, 1994. As noted, equity
securities performed well in 1994 but this was more than offset by declines
in fixed maturities due to a significant increase in interest rates during
the year. Book value per share declined by 2.3% from year-end 1993 to $21.17
at December 31, 1994.
Return on equity, as measured over a rolling three-year period, was
16.4% in 1994 compared to 18.7% for 1993. The return on equity continues to
be diminished as the Corporation's capital grows. For now, however, your
management feels that the current capital level is prudent.
On February 22, 1995 your Board of Directors increased the quarterly
cash dividend on the Corporation's Common Stock to $.27 per share, up 8%
over the dividend paid in each of the previous four quarters.
[On page 3 there are three bar charts. The first chart, located in the lower
left position displays aftertax net investment income on a per share basis.
The Y-axis is stated in dollars running from 0 to $3.00, in increments of
one dollar. The x-axis is years (1990 through 1994). The data plotted is as
follows:
Aftertax Net
Investment Income
Per Share
1990 $2.00
1991 $2.22
1992 $2.28
1993 $2.31
1994 $2.47]
[The second, in the bottom center position, is intended to compare rates of
return between GEICO's common stock portfolio and the S&P 500. The chart is
labeled "Common Stock Annualized Total Rate of Return After Tax (thirty-six
months ending)." The y-axis is stated in percent, runing from zero to 20, in
increments of 5. The x-axis is years (1990 through 1994). The data is as
follows:
Common
Stock
Portfolio S&P 500
1990 12.1% 10.1%
1991 17.1% 12.9%
1992 11.8% 7.9%
1993 14.9% 10.7%
1994 6.8% 4.7%]
[The third, a stacked bar chart, in the lower right position, is entitled,
"Invested Assets (Millions of Dollars)," and depicts the dollars invested in
three categories. The y-axis is expressed in millions of dollars running
from zero to $4,200 in increments of 700. The x-axis is years (1990 through
1994). The data plotted for the three separate categories is as follows:
Fixed Equity Short-term
Maturities Securities Investments
1990 $1,885.0 $657.3 $151.7
1991 $2,275.0 $807.1 $110.0
1992 $2,476.7 $740.3 $223.0
1993 $3,175.4 $727.2 $116.0
1994 $3,270.1 $782.7 $ 50.0]
(Page 3)
<PAGE>
[On page 4 there are two bar charts in the left margin which are intended to
depict GEICO policyholder satisfaction over a five year period, with auto
policy and claim service, respectively. The vertical (y) axis for both
charts is expressed as percent running 0, 50 and 100. The horizontal (x)
axis for both charts is years (1990 through 1994). The data plotted is as
follows:
Policy Claims
Service Service
1990 91% 87%
1991 91% 89%
1992 92% 89%
1993 94% 90%
1994 94% 90%]
In our 1986 Annual Report we discussed our five operating
principles.
To remind you, those principles are:
* Be fanatics for good service
* Achieve an underwriting profit
* Be the low-cost provider
* Maintain a disciplined balance sheet
* Invest for total return
Realizing that superior customer satisfaction is critical to our
financial success and future growth, management spends much time and effort
promoting to our associates the importance of being fanatics for good
service. Through an annual policyholder survey, we solicit direct feedback
from our customers to assess how pleased they are with the service we
provide. As the charts at the left illustrate, our policyholders tell us
they continue to be quite satisfied with our auto policy and auto claim
service. Last year we also began to keep track of the complimentary letters
and phone calls from our customers. We are pleased to report that during
1994 these compliments received were 17.5% above 1993's level.
Over the years, management has fostered a strong customer service
culture stressing the need to make it easy for our customers to do business
with GEICO. We intensified our efforts through a Quality Improvement
Process, whose basic premise is that our front line associates are in the
best position to identify and correct customer dissatisfiers. Given a
mechanism, referred to as Ideas for Quality (IQs), these associates are able
to alert management to customer service problems and either suggest
solutions themselves or work together with other associates in teams to make
recommendations. The Quality Improvement Process concept is not unique to
GEICO and different companies report varying degrees of success. Sustained
commitment and involvement are the keys to continuous improvement. In 1994
our associates submitted over 19,000 IQs. We have made progress in our
efforts to be fanatics for good service and must keep our focus to achieve
our ultimate objective of delighting our customers.
If you refer to the chart on pages six and seven you will see that
we have achieved an underwriting ratio of less than 100% in all but two
years since 1985. As a reminder, an underwriting ratio of less than 100%
indicates an underwriting profit. Our best assurance of achieving an
underwriting profit is to maintain our expense discipline at all times. The
low-cost provider principle speaks to this.
The direct response distribution system should provide us with a
competitive cost advantage since GEICO does not usually pay a commission on
business acquired. We can pass this cost savings on to our customers and
charge less for our products. Quite frankly, since some companies are
willing to operate at an underwriting loss, this commission advantage alone
is not enough to reduce our prices to the level we think they must be. We
are constantly searching for ways to reduce our other operating expenses.
Assets and liabilities must be accurately stated in the
Corporation's accounting records to properly reflect its capacity to pay
losses and expenses. Disciplined loss reserves are one of management's
greatest challenges since it may take years for claims to settle, and
reducing the reserves a little can improve reported financial results a lot.
Over time, however, understating
(page 4)
<PAGE>
the ultimate claims liabilities can lead to financial collapse. The
Corporation goes to great length to ensure that its reserves are accurate
and adequate to meet foreseeable claims. It is management's responsibility
to maintain a disciplined balance sheet to properly reflect the
Corporation's financial position and measure its results of operations.
Additional comments on the Corporation's loss reserves and methodology are
contained in the Management's Discussion and Analysis section on pages 22
through 24.
As we have said many times, we think that over time, shareholder
value is most enhanced by investing for long-term total returns. We feel
this approach helps keep us from making poor short-term decisions when it
comes to sector allocation or investing in the latest Wall Street craze.
Over the years, the superior performance of your common stock portfolio
segment in particular has added much value to the Corporation. In the
selection of common stocks, we continue to be guided by the same five
criteria that we detailed in our 1986 Annual Report:
* Think independently
* Invest in high-return businesses run for the shareholders
* Pay only a reasonable price, even for an excellent business
* Invest for the long term
* Do not diversify excessively
Since we last mentioned these principles in 1986, the Corporation
has seen its ups and downs, but mostly ups. In reviewing this history,
management asks itself what we could have done better. As the expression
goes, hindsight is always 20-20, and we would possibly have done certain
things differently. We can assure you, however, that we would not have
changed any of our five operating principles or our dedication to them. They
have served us well in the past and we expect to be guided by them in the
future.
We intend to continue to focus our concentration on profitably
growing our core personal lines automobile business, through concentrating
on providing superior customer service and achieving greater operating
efficiencies.
O. M. Nicely
President and Chief Executive Officer
Insurance Operations
February 24, 1995
Louis A. Simpson
President and Chief Executive Officer
Capital Operations
February 24, 1995
(Page 5)
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
GEICO CORPORATION
(In thousands, except per share data)
1994 1993 1992
<S> <C> <C> <C>
OPERATING RESULTS
Premiums $2,476,276 $2,283,488 $ 2,084,502
Net investment income 201,790 201,851 201,526
Realized gains on investments 12,898 120,584 98,535
Interest on loans receivable 10,347 11,519 16,528
Equity in earnings of unconsolidated affil-
iates - 3,306 2,292
Other revenue 14,698 17,552 16,619
Total revenue 2,716,009 2,638,300 2,420,002
Total benefits and expenses 2,507,194 2,351,873 2,247,229
Net income before cumulative effect of
changes in accounting principles 208,815 286,427 172,773
Cumulative effect of changes in accounting
principles (1,051) (12,749) -
Net income $207,764 $273,678 $172,773
WEIGHTED AVERAGE SHARES OUTSTANDING 69,992 71,417 72,387
PER SHARE RESULTS
Net income* $2.97 $3.83 $2.39
Common Stock dividends $1.00 $.680 $.600
FINANCIAL CONDITION
Assets $4,998,105 $4,831,440 $4,525,091
Debt $391,378 $418,085 $287,007
Shareholders' equity $1,445,941 $1,534,579 $1,292,511
Common shares outstanding 68,291 70,834 71,184
Book value per share $21.17 $21.66 $18.16
SIGNIFICANT STATUTORY INDICATORS
(In thousands, except ratios)
PROPERTY AND CASUALTY OPERATIONS**
Surplus for protection of policyholders $1,039,930 $916,943 $968,286
Ratio of twelve months written premiums
to surplus 2.4:1 2.2:1 2.2:1
Loss ratio 82.1% 81.9% 84.8%
Expense ratio 14.3% 17.2% 15.3%
Underwriting ratio 96.4% 99.1% 100.1%
Underwriting ratio after policyholder div-
idends 96.4% 99.1% 100.1%
Adjusted ratios:
Expense ratio 15.6%
Underwriting ratio 97.5%
SELECTED FINANCIAL DATA
GEICO CORPORATION
(In thousands, except per share data)
1991 1990
OPERATING RESULTS
Premiums $1,888,368 $1,692,518
Net investment income 191,226 177,087
Realized gains on investments 29,331 19,587
Interest on loans receivable 20,019 23,606
Equity in earnings of unconsolidated affil-
iates 4,139 3,303
Other revenue 13,944 18,776
Total revenue 2,147,027 1,934,877
Total benefits and expenses 1,950,647 1,726,436
Net income before cumulative effect of
changes in accounting principles 196,380 208,441
Cumulative effect of changes in accounting
principles - -
Net income $196,380 $208,441
WEIGHTED AVERAGE SHARES OUTSTANDING 72,855 76,397
PER SHARE RESULTS
Net income* $2.70 $2.73
Common Stock dividends $.456 $.400
FINANCIAL CONDITION
Assets $4,242,193 $3,719,019
Debt $299,081 $280,799
Shareholders' equity $1,184,261 $970,008
Common shares outstanding 71,047 74,253
Book value per share $16.67 $13.06
SIGNIFICANT STATUTORY INDICATORS
(In thousands, except ratios)
PROPERTY AND CASUALTY OPERATIONS**
Surplus for protection of policyholders $1,104,564 $811,628
Ratio of twelve months written premiums
to surplus 1.7:1 2.1:1
Loss ratio 79.0% 80.8%
Expense ratio 15.9% 15.2%
Underwriting ratio 94.9% 96.0%
Underwriting ratio after policyholder div-
idends 96.4% 96.4%
Adjusted ratios:
Expense ratio
Underwriting ratio
</TABLE>
*The cumulative effect of changes in accounting principles reduced
net income per share by $.01 in 1994 and $.18 in 1993.
**Property and casualty includes Government Employees Insurance
Company, GEICO General, GEICO Indemnity, GEICO Casualty, Resolute,
and during their respective ownership periods, Southern Heritage and
Merastar.
Expense ratios are calculated using underwriting expenses less net
service charges, as related to premiums written.
Adjusted ratios for 1988 and 1987 are calculated to eliminate the
effect of converting to six-month premiums and for 1993 are calcu-
lated to eliminate the effect of the change in accounting for
advance premiums.
(page 6)
<PAGE>
SELECTED FINANCIAL DATA
GEICO CORPORATION
(In thousands, except per share data)
1989 1988 1987
OPERATING RESULTS
Premiums $1,621,361 $1,548,989 $1,429,208
Net investment income 152,422 143,502 130,691
Realized gains on investments 109,133 82,351 42,019
Interest on loans receivable 29,215 31,159 27,100
Equity in earnings of unconsolidated
affiliates 10,462 11,246 8,785
Other revenue 16,796 14,129 17,916
Total revenue 1,939,389 1,831,376 1,655,719
Total benefits and expenses 1,726,336 1,642,338 1,477,805
Net income before cumulative effect of
changes in accounting principles 213,053 189,038 177,914
Cumulative effect of changes in accounting
principles - - -
Net income $213,053 189,038 177,914
WEIGHTED AVERAGE SHARES OUTSTANDING 77,522 79,303 83,363
PER SHARE RESULTS
Net income* $2.75 $2.38 $2.13
Common Stock dividends $.360 $.328 $.272
FINANCIAL CONDITION
Assets $3,582,156 $3,189,095 $3,101,993
Debt $302,152 $299,955 $260,313
Shareholders' equity $898,135 $707,390 $634,678
Common shares outstanding 75,882 77,198 80,993
Book value per share $11.84 $9.16 $7.84
SIGNIFICANT STATUTORY INDICATORS
(In thousands, except ratios)
PROPERTY AND CASUALTY OPERATIONS**
Surplus for protection of policyholders $814,806 $650,880 $548,408
Ratio of twelve months written premiums
to surplus 2.0:1 1.9:1 2.6:1
Loss ratio 81.8% 83.2% 81.2%
Expense ratio 15.2% 17.5% 15.5%
Underwriting ratio 97.0% 100.7% 96.7%
Underwriting ratio after policyholder
dividends 97.4% 100.7% 96.7%
Adjusted ratios:
Expense ratio 14.6% 15.2%
Underwriting ratio 97.8% 96.4%
SELECTED FINANCIAL DATA
GEICO CORPORATION
(In thousands, except per share data)
1986 1985
OPERATING RESULTS
Premiums $1,289,856 $1,073,937
Net investment income 125,129 124,627
Realized gains on investments 146,729 142,549
Interest on loans receivable 27,051 25,124
Equity in earnings of unconsolidated
affiliates 5,990 2,774
Other revenue 15,792 25,361
Total revenue 1,610,547 1,394,372
Total benefits and expenses 1,392,805 1,223,793
Net income before cumulative effect of
changes in accounting principles 217,742 170,579
Cumulative effect of changes in accounting
principles - -
Net income $217,742 $170,579
WEIGHTED AVERAGE SHARES OUTSTANDING 86,305 92,149
PER SHARE RESULTS
Net income* $2.52 $1.85
Common Stock dividends $.216 $.200
FINANCIAL CONDITION
Assets $2,982,149 $2,603,803
Debt $250,244 $255,292
Shareholders' equity $623,997 $515,636
Common shares outstanding 83,580 88,484
Book value per share $7.47 $5.83
SIGNIFICANT STATUTORY INDICATORS
(In thousands, except ratios)
PROPERTY AND CASUALTY OPERATIONS**
Surplus for protection of policyholders $671,414 $583,000
Ratio of twelve months written premiums
to surplus 2.0:1 2.0:1
Loss ratio 81.4% 87.9%
Expense ratio 14.7% 15.0%
Underwriting ratio 96.1% 102.9%
Underwriting ratio after policyholder
dividends 96.9% 102.9%
Adjusted ratios:
Expense ratio
Underwriting ratio
[/TABLE]
*The cumulative effect of changes in accounting principles reduced
net income per share by $.01 in 1994 and $.18 in 1993.
**Property and casualty includes Government Employees Insurance
Company, GEICO General, GEICO Indemnity, GEICO Casualty, Resolute,
and during their respective ownership periods, Southern Heritage and
Merastar.
Expense ratios are calculated using underwriting expenses less net
service charges, as related to premiums written.
Adjusted ratios for 1988 and 1987 are calculated to eliminate the
effect of converting to six-month premiums and for 1993 are calcu-
lated to eliminate the effect of the change in accounting for
advance premiums.
COMMON STOCK
The Corporation's Common Stock is listed on both the New York and Pacific
Stock Exchanges, ticker symbol "GEC." Under Securities and Exchange
Commission rules, certain securities dealers are permitted to make an
over-the-counter market in the Corporation's stock. The number of holders of
record of the Corporation's Common Stock at January 31, 1995 was 2,998.
The following table shows the quarterly high and low prices for the
Common Stock, as published in the tabulation of the New York Stock Exchange
Composite Transactions. The table also shows dividends paid to shareholders
of record in each quarter of 1994 and 1993.
Dividends
1994 High Low Paid
Fourth Quarter $51.25 $49.00 $ .25
Third Quarter 51.50 47.63 .25
Second Quarter 57.63 49.63 .25
First Quarter 57.50 51.13 .25
Dividends
1993 High Low Paid
Fourth Quarter $56.00 $50.75 $ .17
Third Quarter 58.88 49.75 .17
Second Quarter 61.13 47.38 .17
First Quarter 67.63 59.25 .17
(Page 7)
<PAGE>
CORPORATE CITIZENSHIP
[In the upper right corner is a picture of three individuals with the
following caption:
Educators for Excellence is a product of our associates' active involvement
in the Fredericksburg, Va., community. Pictured above are GEICO claims
manager Michael Rutland (left), Stafford County school board member H.
Carson Rhyne, Jr. (center), and Superintendent of Stafford County Public
Schools Dr. Russell Watson.]
GEICO's strong record of profitability and its 58-year commitment to serving
its customers reflect the seriousness of its responsibilities to
shareholders and policyholders. But the Corporation also takes seriously
its responsibility as a good corporate citizen in the communities of which
it is a part. GEICO demonstrates its citizenship role in two primary areas.
First, through financial support and active involvement, the Corporation
participates in various activities to improve the quality of life in the
local community. The GEICO Philanthropic Foundation, which provides much of
the financial support, is funded primarily by the GEICO group of property
and casualty insurance companies. Second, GEICO supports and encourages
associate participation in various civic and community groups.
Corporate Community Involvement
Because GEICO is headquartered in the Washington, D.C., area, which includes
suburban Virginia and Maryland, much of the Corporate activity occurs there.
But many of the organizations GEICO supports have a national outreach. One
example is the New York Neighborhood Housing Services (NHS), which works
with residents, local business and city governments to help low and
moderate-income residents purchase and renovate homes through loans to
families who may be unable to obtain credit through traditional means. The
Corporation serves on the advisory board of the New York NHS and the
Foundation made a financial contribution to that organization in 1994.
The Corporation also supports the Boy Scouts (and helps organize the
Washington area annual golf tournament), the Salvation Army, the Armed
Services YMCA and the USO of Metropolitan Washington and serves on the YMCA
and USO boards. For the past few years GEICO has been a sponsor of the
annual National Wheelchair Games, a major event of the Paralyzed Veterans of
America.
As a member of its board of directors, GEICO provides active
assistance to the Greater Washington Metropolitan Area Urban League, which
offers job training and placement, tutoring and educational enrichment
programs for youth, a comprehensive program for the elderly, counseling to
families in crisis and assistance in community development. GEICO also
participates in the programs and operations of the Greater Washington Boys
and Girls Clubs and serves on the board. The clubs help children,
especially those at risk, build confidence, develop character, and acquire
the skills needed to grow into productive, civic- minded and responsible
adults. The Foundation provides financial support to the nonprofit Jubilee
Jobs, a Washington, D.C., organization which has been quite successful in
taking unemployed inner-city residents off the streets and off welfare by
finding them jobs and helping them become contributors to, rather than
dependents of, society. GEICO serves on the Jubilee Jobs Corporate Action
Committee.
In support of education, the Foundation matches associate
contributions to colleges and universities and many associates participate
in this program. Another example of support to education is the long
relationship GEICO has maintained with Howard University in Washington,
D.C., and its participation on the insurance advisory board of the College
of Insurance Education at the University's School of Business. GEICO has
participated in a variety of other activities at Howard University, provided
financial support and hired students as summer interns. In further support
of education, the Corporation offers modest scholarship programs to select
students who live and attend college
(Page 8)
<PAGE>
in the vicinity of the regional offices.
GEICO takes a special interest in military and government employees,
one indication of which is the Foundation's substantial financial support to
the Federal Employees Education/Assistance Fund. Another indication of that
interest is GEICO's annual Public Service and Military Service Awards which
recognize four active and one retired federal employee and five active
military members who have made exceptional contributions to safety, health
and welfare programs.
The recently opened Fredericksburg, Va., regional office honors
Fredericksburg area school teachers with an awards program, Educators for
Excellence, created through the cooperative efforts of GEICO associates and
local school boards. One teacher will be selected annually from each of
five neighboring school districts to receive $1,000 in recognition of
superior performance. In Montgomery County, Md., the GEICO corporate home,
GEICO is a participant in a county government program that provides for the
construction of affordable housing for county residents.
[In the upper right corner is a picture of three associates with the
following caption:
Daryl Glover (seated), Katy Radin, and Carlos Acker are just three of
GEICO's corporate headquarters associates who participate in Mentors Inc.
The program provides academic coaching and career focus for Washington,
D.C., public high school students.]
Associate Involvement
At each location, GEICO associates support a wide variety of local charities
and participate in public service organizations. They volunteer their time
in a multitude of ways such as organizing Special Olympics events for
handicapped children, rehabilitating homes, and speaking about safety at
school and civic group meetings. Twenty-one GEICO associates are making a
significant difference in many young lives through Mentors Inc., an
organization that matches volunteer adults one-on-one with District of
Columbia public high school students.
The Corporation honors the helpful spirit of its associates with an
annual GEICO Volunteer Service Award. The 1994 winner was a volunteer fire
fighter from the Woodbury, N.Y. , office. Activities of past winners have
been varied; they have included a day care center board member, an emergency
medical technician, a community dental care president, a Special Olympics
volunteer, and an AIDS clinic volunteer.
In the fall of each year, all locations participate in their local
United Way campaigns, raising money either by pledges or creative fund
raising activities. The Foundation matched associate contributions
dollar-for-dollar in 1994, bringing the total contribution to local United
Way organizations to more than $900,000. By contributing to United Way,
whose member agencies address such a broad spectrum of needs, GEICO and its
associates make sure their dollars benefit many different organizations at
every level from local to national. In addition to the United Way Campaign,
GEICO associates in the Washington office annually conduct their own
campaign to raise funds for the local Children's Hospital. Associates'
gifts to other qualifying organizations of their choosing are also matched
to encourage associates' support of worthy community activities.
Occasionally, there arises a need so severe that the companies and
their associates make extraordinary efforts to help. Tropical Storm Alberto
created such a need in 1994 when the storm hit particularly hard the Macon,
Ga., area, home of a GEICO regional office. GEICO, through the Foundation,
contributed $50,000 to the American Red Cross flood relief effort. GEICO
associates across the country raised thousands of dollars more to aid 13 of
their Macon colleagues whose homes were damaged in the flood.
The many associates who donate their own time and effort to improve
their communities and to help in times of crisis reflect well upon the
Corporation and have earned praise and thanks from GEICO and those they
assist.
(PAGE 9)
<PAGE>
SAFETY
Beginning with its founder, GEICO has a long, proud history of promoting
highway safety. Its efforts have contributed to automobile travel that is
much safer today than even 10 years ago.
In 1993 there were 6 percent fewer traffic fatalities than in 1983,
despite 16 percent more vehicles registered, 38 percent more miles driven
annually and 14 percent more drivers. Anyway you look at it, death rates
were lower, whether measured by 10,000 motor vehicles (down 19 percent), 100
million vehicle miles (down 32 percent) or 100,000 population (down 14
percent).
Several factors contribute to this change. Many cars now have air
bags, and by the 1996 model year virtually all new passenger vehicles will
have air bags for both drivers and front-seat passengers. Research by the
Insurance Institute for Highway Safety (IIHS) showed that driver deaths in
frontal crashes were 28 percent lower in air bag-equipped cars than in
comparable cars with manual lap/shoulder belts only.
Air bags work best when safety belts are used, and 66 percent of the
population has now gotten the message to buckle up. A total of 48 states
now require those in cars to use safety belts. Nine of those states have
primary enforcement laws, meaning that police can stop a car simply for
non-use rather than only for another traffic infraction.
Fewer people now drink and drive. In 1993, 37 percent of the
drivers fatally injured in traffic crashes had a blood alcohol content (BAC)
of .10 or more, compared to 50 percent of the drivers in 1980. New
legislation placed tougher penalties on impaired driving, and the laws were
accompanied by tougher enforcement. At the same time public awareness
campaigns enlightened residents to the problem and mobilized public support.
These changes would not have happened without the work of GEICO and
its allies in the auto and highway safety field. The insurance industry
pushed for air bag requirements, safety belt laws and stricter drunk driving
legislation, and joined forces with many other groups to help bring about
these changes.
One group, IIHS, has used its prestigious research abilities to
document the need for many safety changes. Its work on air bags, safety
belts, automobile safety and drunk driving issues are among those where it
has been influential. The independent research organization receives
financial support from the nation's insurance companies, including GEICO,
and GEICO officers serve on the boards of IIHS and its Highway Loss Data
Institute.
In its safety work, GEICO usually backs financial contributions in
the safety area with people power. By assuming leadership positions in
these organizations, GEICO helps ensure the effectiveness of the
organizations. Here's what is happening, with GEICO's help, through some of
these groups.
* After a countrywide fact-finding mission, the National Commission
Against Drunk Driving has focused its efforts on the 21 to 34 year-old
driving group, which represents more than 50 percent of the drivers involved
in alcohol-related fatal crashes.
* The National Association of Independent Insurers Safety Foundation
has launched a program that urges states to adopt a graduated license
program to reduce the number of accidents that occur because of young,
inexperienced drivers.
* The Network of Employers for Traffic Safety, or NETS, now has 11
statewide organizations to help involve employers in extending the auto and
highway safety message to their workers.
* On the local level, the Washington Regional Alcohol Program uses
seasonal programs to reach high school students with the drunk or drugged
driving message. In addition, GEICO and its associates supported several
First Night celebrations. These alcohol-free community-based programs offer
a safe, creative alternative to New Year's revelry.
Apart from these efforts, GEICO has helped assure safe travel for children
of young military families with donations of hundreds of infant safety seats
to military and naval installations in the U.S. and overseas.
Though much progress has been made to assure safer travel, much
remains to be done. These areas will draw the attention of GEICO and its
highway safety allies:
* Drunk driving. Despite a reduction in drunk driving, progress has
slowed and alcohol-impaired driving remains one of the most serious highway
safety problems. Male drivers 21 to 40 years of age constitute the
majority of fatally injured drivers with high blood alcohol contents, and
the group has recorded only a modest decline in the 1980s. Laws now on the
books have been instrumental in reducing the drunk driving problems; the key
to making further progress is enforcement, which must be both widespread and
visible.
(Page 10)
<PAGE>
[In the upper left portion of the page is a picture of two associates with
the following caption:
Vince Giampietro and Gary Burns, from our government liaison program, along
with associates from each of our regional and branch office locations spread
the auto safety message in local communities.]
* Teenage drinking and driving. The adoption of 21 year-old alcohol
purchase age laws helped reduce drunk driving in this age group, but in
recent years adherence to minimum purchase age laws appears to be declining.
* Graduated licensing. An intermediate stage between the learner's
permit and an adult license, graduated licensing can help get 16 to 18
year-olds through their most dangerous driving years alive and uninjured by
gradually giving them added training and on-the-road experience and
monitoring their performance more closely. The focus on this group comes
because 16 and 17 year-olds have four times as many crashes as other
drivers. Graduated licensing will not resolve this problem alone, but it
would deal with the factors that lead to these crashes: inexperience,
inadequate skills, excessive driving during high-risk hours of darkness,
risk-taking, and misjudgment.
* The aging driver. Drivers over 40 are generally more cautious and
have fewer accidents, but those over the age of 65 have more accidents per
miles driven than any other age group except teenagers. Running red lights,
failing to yield right of way and making improper turns are the most common
causes of their accidents. Because older drivers are more vulnerable to
trauma, their injuries tend to be more serious.
* Daytime running lights. Studies have shown that the use of
automobile lights during daylight hours increases a car's visibility to
other drivers and thus can lead to accident reduction. General Motors is
experimenting with running lights, which are slightly less bright than a
headlamp's lowbeam. These lights are already prevalent in Canada.
Does GEICO make a difference? By taking a leadership role in its
work on safety issues, GEICO and its highway safety allies have contributed
significantly to the reduction in deaths and injuries on our nation's
highways. It is a role that GEICO, with fervor, will continue to play.
(Page 11)
<PAGE>
SERVICE
[In the upper right portion of the page is a picture of three associates
with the following caption:
Wendy Collins, Sharon MacDonald (center) and John Walsh are representative
of GEICO's sales and service associates who give customers competent and
knowledgeable insurance service 24 hours a day, seven days a week.]
After a hectic day, have you ever arrived at the dry cleaner or the drug
store just minutes after it has closed for the day? It really is frustrating
not to be able to conduct business when it is most convenient for you. Some
businesses seem to operate for their convenience, not the customer's.
GEICO realizes how much you value your time and is prepared to
respond to your insurance needs at your convenience. You can request a rate
quote, make a change to an existing policy or report a claim, around the
clock, 365 days a year. Other companies advertise 24-hour service, but their
idea of providing service at 3 a.m. or on weekends is with an answering
machine. GEICO will answer your call with a trained insurance professional
each and every time you call, day or night, weekends or holidays.
Such a complete customer-focused organization does not happen
overnight. There are two ingredients that must come together in order to
make it easy for the customer to do business with GEICO. The associates
themselves are the first ingredient, of course. GEICO carefully selects and
then thoroughly trains each associate who interacts with the public. In
GEICO's annual survey of policyholders, a question is asked about the level
of courtesy provided by the representatives. The favorable responses
received indicate that policyholders feel they are being treated with
courtesy and respect by GEICO counselors.
Technology is the second important ingredient in providing excellent
service. Since the majority of the business is conducted by telephone, GEICO
must have the absolute, ultimate capability that telecommunications
technology can offer. This state-of-the-art telecommunications technology
must be coupled to a computerized network that can provide instant access to
a rate quote system, claims systems or a policyholder's records. Systems are
expensive to develop and maintain but must remain top-notch to provide
service that delights customers.
Your management is committed to providing the ultimate in 24-hour
insurance accessibility and service. A key component of that commitment to
service is the Quality Improvement Process launched in 1991.
GEICO's Quality Improvement Process depends on every associate's
commitment to search for new and better ways to provide the best customer
service in the industry. GEICO established the Corporate Quality Awards in
1993 to honor individuals and groups of associates who produced
extraordinary Ideas for Quality (IQs) or provided outstanding service during
the previous year. Up to six awards may be given each year. Following are
profiles of the GEICO Corporate Quality Award winners for 1994.
(Page 12)
<PAGE>
Most Noteworthy IQ Accepted
Kit Johnston, senior employment specialist, Dallas, Texas, office
In the course of her recruiting duties, Kit Johnston perceived a
need for a more visual means of communicating the duties and
responsibilities of entry-level positions in sales and claims. She suggested
using videos, then wrote down ideas for scenes and scripts.
She was prepared to shoot the video herself, but realized the
potential benefit of having the professional videographers in GEICO's media
center produce and distribute the films to all GEICO human resources
departments. The project will be completed early in 1995.
Most IQs Accepted
Kathleen Lottman, senior all-lines counselor, Virginia Beach, Va., office
Kathy Lottman submitted 189 IQs during 1994, of which 160 were
accepted-a rate of nearly 85 percent! This was Lottman's second consecutive
year as the office's leading submitter of IQs. Lottman's IQs addressed a
wide range of issues-everything from policies, procedures and systems to
associate and customer safety. Many of her ideas come from the best possible
source-her customers.
Quality Assurance of Products and Systems (Team)
Virginia Beach Phone Check Committee, Virginia Beach, Va., office
A team of Virginia Beach associates brought a money-saving idea to
fruition. Janet Lewis, Ann Van Vleet, Sherry Tiaba, Sandy Richardson, Linda
Shipley, Joe Thomas and John Izzo implemented the Phone Check system whereby
prospective policyholders give GEICO counselors their checking account
information over the phone. GEICO then withdraws the initial premium payment
from the new policyholder's checking account at a much lower processing cost
than if a credit card were used.
Quality and Leadership
Ken Lalia, auto damage field supervisor, Woodbury, N.Y., office
Ken Lalia's staff of seven adjusters handles approximately 800
claims a month, in addition to which Lalia performs 35 reinspections per
month. His performance of these duties, according to home office claim
department audits, exceeds company standards. In addition to his regular
duties, Lalia has restructured and coordinated his region's auto damage
basic training program since 1992. Under his direction, the program has
achieved a 100 percent success rate over the past two years.
Make It Easy Award (Individual)
Jim Pennisten, resident adjuster, Rochester/Buffalo, N.Y., office
When GEICO's Rochester resident adjuster transferred to another
region in May, Jim Pennisten took action. He voluntarily took on the
Rochester claims in addition to his regular Buffalo assignments. From June
through September, he worked up to 12 hours a day, traveled up to 800 miles
a week, and closed over 100 claims per month, allowing GEICO to avoid using
independent adjusters during this period.
Make It Easy Award (Team)
Engineering staff and Bobbie Hutto, staff services, Macon, Ga., office
On July 6, Tropical Storm Alberto caused floods that forced
evacuation of the GEICO building in Macon and shut down the area's water
supply for more than two weeks. In the days that followed, the engineering
staff-John Bates, Simon Cullins, Michael Donaldson, Samuel Hester, Jimmy
Jones, Tony Rutherford, Danny Simmons and Juston Trivett-worked tirelessly
to keep the GEICO building's water-cooled air conditioning system
functioning and provide as comfortable a working environment as possible.
Meanwhile, Bobbie Hutto made sure the associates had drinking water,
portable toilets, hotel rooms for showers, and countless other necessary
items and services. Thanks to their efforts, nearly all the associates were
able to return to work within a day or two after the flood.
(Page 13)
<PAGE>
BUSINESS SEGMENTS
PROPERTY AND CASUALTY INSURANCE
Government Employees Insurance Company
GEICO General Insurance Company
GEICO Indemnity Company
GEICO Casualty Company
The principal business of the Corporation is personal lines (auto,
homeowners and other personal lines) property and casualty insurance, which
is offered to the insuring public through four affiliated companies.
Government Employees Insurance Company and GEICO General Insurance Company
serve our primary market, the preferred-risk direct-response customer. These
two companies accounted for 91.6% of the Corporation's total premium in
1994. GEICO Indemnity Company (GI) writes automobile insurance for standard
risks and motorcycle insurance. GEICO Casualty, a GI subsidiary, offers
nonstandard-risk automobile insurance to those not qualifying for preferred
or standard-risk insurance. GI and GEICO Casualty accounted for an
additional 8.3% of the Corporation's total premium in 1994.
Government Employees Insurance Company was founded in 1936 to provide
private passenger automobile insurance to government employees and military
personnel and, in 1958, also began providing auto insurance to other
eligible preferred-risk drivers. In 1987 Government Employees Insurance
Company returned to marketing new auto policies to preferred-risk government
employees and military personnel only, while GEICO General Insurance Company
(GGIC) commenced serving all other preferred-risk drivers. In 1954
Government Employees Insurance Company also began offering additional types
of personal lines property insurance and now offers homeowners, personal
umbrella liability, boatowners, and fire insurance.
Government Employees Insurance Company is licensed and operates in
the District of Columbia and in all states except New Jersey. GGIC, which
primarily writes private passenger auto insurance, conducts business in 44
states and the District of Columbia and is licensed in the District of
Columbia and in all states except New Jersey. The acronym "GEICO" is used in
the remainder of this report to refer to the combined activities and
financial results of the two primary preferred-risk companies, Government
Employees Insurance Company and GEICO General Insurance Company.
GEICO Indemnity was organized in 1961 with the primary
responsibility for meeting the automobile insurance needs of younger
enlisted military personnel not meeting GEICO's preferred-risk underwriting
standards. New customers were acquired and service was provided primarily
through commissioned contract agents, referred to as General Field
Representatives (GFRs). While GFRs remain important to the military market,
GI policies are now also being sold to the general standard-risk market
through direct response channels as well as by GFRs. GI operates in the
District of Columbia and all states except Massachusetts, New Jersey and
South Carolina.
GEICO Casualty was formed in 1982 to offer nonstandard-risk
automobile insurance to the military market principally through GFRs. As is
the case with GI, GEICO Casualty policies are also now being sold through
direct response sources to the general nonstandard-risk market. GEICO
Casualty operates in 36 states.
GEICO markets its insurance products using primarily direct-response
marketing methods, which means the prospective customer responds directly
over the phone or through the mail to various forms of marketing. GEICO also
relies heavily upon the referral of prospects by current policyholders, a
low cost method of acquiring new customers. By insuring preferred risks and
managing expenses efficiently, GEICO can offer a price advantage to most of
its customers.
GEICO also manages a sponsored marketing program through which
various groups and associations allow GEICO to market to their members
directly by mail and through membership publications.
GEICO's marketing efforts have been concentrated primarily in
geographic areas where it has established a presence and where the business
can be managed efficiently and profitably while providing quality service.
Approximately 70% of GEICO's preferred-risk auto customers are located in
eight states, California, Connecticut, Florida, Georgia, Maryland, New York,
Texas and Virginia. In 1994, GEICO began testing national cable television
advertising. The initial response was encouraging and this form of
solicitation may prove to be cost effective in reaching additional markets
where the Company would like to grow.
As part of its efforts to expand its direct-response business, the
Company has begun providing GEICO Indemnity or GEICO Casualty rate quotes to
those inquirers who do not meet the GEICO preferred-risk guidelines. By
placing prospects in the standard and nonstandard-risk companies, GEICO is
making more efficient use of marketing resources used to generate the
inquiry.
Military and military-base civilian personnel are served primarily
through 96 GFRs operating in 33 states. These GFRs are
(Page 14)
<PAGE>
a significant source of new business for GEICO Indemnity and GEICO Casualty.
The Corporation's consolidated property and casualty statutory
underwriting ratio was 96.4% in 1994 compared to 99.1% in 1993 and 100.1% in
1992 (largely a result of record weather-related losses). However, after
adjusting to eliminate the effect of the change in accounting for advance
premiums during 1993, the adjusted ratio for that year was 97.5% including
.8% for the payment of California Proposition 103 refunds of $21.0 million.
Property and casualty operations, including reinsurance, produced a GAAP
underwriting gain of $85.9 million in 1994 compared to $78.1 million in 1993
and a loss of $.5 million in 1992 due to Hurricane Andrew.
Surplus for the protection of policyholders of the property and
casualty insurance company subsidiaries at December 31, 1994 was $1,039.9
million, up 13.4% from $916.9 million at the end of 1993, resulting in a 2.4
to 1 premiums-to-surplus ratio. The Corporation intends to manage GEICO to a
ratio of approximately 2.5 to 1 in the future, which is deemed to represent
a prudent degree of leverage. The Corporation has significant assets at the
parent company level which are available to provide capital as necessary to
support the operations of its insurance subsidiaries. The policyholders'
surplus of the property and casualty subsidiaries is well in excess of the
risk-based capital requirements prescribed by the National Association of
Insurance Commissioners.
Private Passenger Automobile Insurance
The Corporation's principal product line is private passenger automobile
insurance, accounting for 92.8% of the property and casualty earned premium
in 1994. Based on the A. M. Best report of premiums written in 1993, the
Corporation is the nation's sixth largest provider of such insurance. In
1994 automobile insurance premiums earned, including service charges,
totaled $2,295.3 million, up 8.6% from $2,114.5 million a year earlier.
Approximately 3.5 million automobiles were insured by the Companies at the
end of 1994. Automobile premiums earned included $113.1 million in 1994 for
residual market (involuntarily written policies) compared to $110.8 million
in 1993.
The number of regular automobile claims reported to GEICO, GI and GEICO
Casualty increased 10.0% in 1994, following increases of 4.1% in 1993 and
10.8% in 1992. The increases are attributable in part to the increase in
units insured, higher bodily injury claims frequency and continued high
levels of catastrophe-related claims.
The cost of settling bodily injury claims continues to rise due largely
to higher medical and medical-related costs. Bodily injury claim costs in
GEICO increased an estimated 2 to 4% in 1994 (precise costs may not be known
for several years), following 4 to 5% increases in both 1993 and 1992. Costs
associated with repairing damaged automobiles increased about 5% in 1994
after increases of approximately 2% in both 1993 and 1992. Medical coverage
costs rose about 4% in 1994, compared to increases of approximately 7% in
1993 and 9% in 1992.
GEICO and others have estimated for some time that fraudulent claims
and other fraudulent activities related to insurance, particularly auto
insurance, may add at least 10 to 15% to the cost of insurance losses. This,
of course, ultimately drives up insurance premiums. GEICO continues its
aggressive programs designed to detect and prevent both claims and
underwriting fraud. These programs include inspecting vehicles when insuring
them initially, reviewing claimants' medical bills, reviewing underwriting
data for integrity, and using special investigation units to review and
investigate all types of suspicious claims. GEICO's anti-fraud programs
annually pay for themselves many times over by reducing fraudulent claims
costs, thereby holding down our insureds' premium rates.
Homeowners Insurance
Government Employees Insurance Company provides homeowners insurance
principally as an accommodation line to existing automobile policyholders.
Homeowners premiums earned totaled $149.8 million, up from $142.1 million in
1993, and accounted for 6.1% of the property and casualty premiums earned in
1994. Homeowner new business sales decreased substantially in 1994 and
policies-in-force dropped 3.8%.
Homeowners insurance produced statutory underwriting gains of $1.6
million in 1994 and $9.1 million in 1993 following a loss of $81.1 million
in 1992 due primarily to Hurricane Andrew. Gross incurred homeowner losses
from major weather-related storms totaled $19.4 million in 1994, $14.0
million in 1993 and $151.4 million ($86.3 million after reinsurance) in
1992. The $19.4 million of catastrophe losses in 1994 were the second
highest in GEICO's homeowner history behind only 1992 (Hurricane Andrew).
Catastrophic losses in 1994 include just over $8 million in freezing losses
due to the severe winter weather in the northeast and $4.5 million for the
Northridge, California earthquake in January.
(Page 15)
<PAGE>
Other Property and Casualty Lines
In addition to its automobile and homeowners lines, GEICO offers fire, boat,
yacht and personal umbrella liability. The marketing of separate mechanical
breakdown insurance (MBI) policies, a single premium coverage that provides
warranty protection for new automobiles, was discontinued in 1994. All of
these other property and casualty lines accounted for approximately one
percent of property and casualty premiums earned in 1994.
Reinsurance
Resolute Group, Inc. reported net income of $3.2 million in 1994 and $3.3
million in 1993. No new business has been written since 1987 and the company
is in the process of running off its claims obligations.
LIFE INSURANCE
Criterion Life Insurance Company
Criterion Life Insurance Company (Criterion Life) was formed in 1991 to make
available single premium annuities, which are used to fund structured
payouts of liability insurance claim settlements, to its property and
casualty company affiliates. Criterion Life received $18.8 million in
premium and deposits from this source in 1994 compared to $16.5 million in
1993. Life insurance operations reported net income of $.7 million in 1994
compared to a net loss of $.9 million in 1993. Garden State Life Insurance
Company, which primarily marketed term life insurance, was sold in June
1992.
FINANCE
Government Employees Financial Corporation
Government Employees Financial Corporation (GEFCO), headquartered in Denver,
Colorado, engages in secured consumer and business lending and loan
servicing. In 1994, GEFCO had a net loss of $4.1 million, compared with net
income of $1.9 million the prior year. The loss in 1994 includes
establishing valuation allowances for anticipated sales of GEFCO's finance
receivables.
GEFCO's operations have been contracted in recent years, including
the sale of its industrial bank charter in 1992. Loans receivable have been
substantially reduced and, in January 1995, GEFCO signed a letter of intent
to sell approximately $44 million of its remaining receivables and other
assets. GEFCO has returned excess capital to its parent, GEICO, and its
shareholder's equity was $7.9 million at December 31, 1994.
(page 16)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue
Premiums - Consolidated premiums earned in 1994 were $2,476.3 million, up
8.4% from a year ago when premiums were $2,283.5 million which, in turn, was
an increase of 9.5% over 1992. Premium growth reflects increases of 4.8% and
6.3% in total policies-in-force in 1994 and 1993, respectively, and modest
average rate increases in both years.
Voluntary auto policies-in-force increased a satisfactory 6.8%
during 1994 following a 6.0% increase in 1993. Voluntary auto new business
sales in 1994 increased 11.3% after a slight decline in 1993. Preferred-risk
voluntary automobile rates increased 3.5% in 1994 compared to an increase of
3.8% in 1993. Renewal persistency in the auto lines continued to be quite
satisfactory, with preferred-risk exceeding 92%.
Residual market (involuntarily written assigned-risk business)
policy counts increased 12.9% during 1994 after a slight decrease in 1993.
The business continues to remain unprofitable due to the inadequate rates
dictated by the regulators. The premium rates for involuntarily written
business in GEICO increased an average of 4.1% during 1994, compared to 1.6%
in the previous year.
Homeowners policy counts declined 3.8% in 1994 after growing 7.4% in
1993. However, homeowner rates increased 11.7% in 1994 compared to 5.1% in
1993 as the Company tries to more accurately reflect catastrophe loss
exposure in its rates. The decline in policies reflects reduced marketing
and a reunderwriting and inspection program for properties in coastal areas
exposed to catastrophic losses.
Life insurance premiums from the sale of structured settlement
annuities with life contingencies by Criterion Life were $2.9 million in
1994 compared to $2.3 million in 1993. Life insurance premiums of $13.2
million in 1992 included the operations of Garden State Life Insurance
Company prior to its sale on June 26, 1992. Structured settlement sales
without life contingencies, which are accounted for as investment contracts,
totaled $16.2 million in 1994 and $14.5 million in 1993.
On November 8, 1988 California voters passed Proposition 103 which
called for premium refunds, significant rate reductions and certain changes
in the state's insurance laws. In May 1993, the Corporation's insurance
subsidiaries affected by Proposition 103 entered into an agreement with the
California Insurance Department as to their California insurance premium
refund obligations. The GEICO Companies agreed to pay an aggregate of $21
million to policyholders affected and these payments fully discharged and
extinguished their obligations to roll back rates, make refunds or pay
interest. Additionally, the rates and rate levels in use since November 8,
1988 were deemed approved. During 1989 and 1990 the Companies had accrued
$14.3 million and $13.4 million, respectively, for potential premium
refunds. As a result of the settlement, premium refunds of $21.0 million
were paid, resulting in a $6.7 million pretax increase in operating earnings
in 1993.
Each of the Corporation's insurance company subsidiaries is subject
to regulation and supervision of its insurance businesses in each of the
jurisdictions in which it does business. In general, such regulation is for
the protection of policyholders rather than shareholders. Legislation has
been introduced in recent sessions of Congress proposing modification or
repeal of the McCarran-Ferguson Act which reaffirms the proposition that it
is the responsibility of state governments to regulate the insurance
industry and provides a limited exemption to the "business of insurance"
from federal anti-trust laws. Whether any changes to the current statute
will be made, and the effect of such changes, if any, cannot be determined.
The Congress and certain state legislatures are also considering the effects
of the use of sex, age, marital status, rating territories and other
traditional rating criteria as a basis for rating classification; certain of
such criteria no longer can be used in some states, and have been and are
being challenged in the courts of other states.
Clinton administration proposals to integrate the medical benefits
portion of both workers compensation and automobile insurance into a general
health care insurance system were not enacted during 1994 and, in fact, met
with a certain amount of public resistance. The Corporation believes these
recommendations were without merit but, at this time, cannot predict with
certainty whether similar proposals will be forthcoming from the newly
seated Congress. Additionally, some individual states are considering
various health care reform proposals and the Corporation cannot predict the
outcome of such initiatives at this time.
Net Investment Income - Consolidated pretax net investment income of
$201.8 million in 1994 is flat compared to $201.9 million in 1993 and $201.5
million in 1992. Investment income reflects lower yields on fixed-income
investments due to a high rate of issuer redemptions and prepayments on old,
higher yielding investments and increased acquisitions of tax-exempt
securities. Aftertax net investment income in 1994 increased 4.9% to $173.1
million from $165.1 million in 1993 reflecting the shift to tax-exempt
securities.
Realized Gains on Investments - Pretax net realized gains were
(Page 17)
<PAGE>
$12.9 million in 1994, compared to $120.6 million in 1993 and $98.5 million
in 1992. Realized gains include a $23.5 million gain in 1993 on the sale of
AVEMCO shares and a $14.0 million loss in 1992 on the sale of Garden State
Life Insurance Company. Realized gains are primarily from the sale of equity
securities. Such gains are a result of financial market conditions and can,
therefore, fluctuate widely from period to period. The components of
realized and unrealized gains and losses on investments are detailed in Note
D to the financial statements.
Interest on Loans Receivable - Interest on loans receivable
decreased 10.2% in 1994 to $10.3 million as Government Employees Financial
Corporation (GEFCO), our finance subsidiary, continues to reduce its loans
receivable. In January 1995, GEFCO signed a letter of intent to sell the
bulk of its remaining loans receivable.
Equity in Earnings of Affiliate - Equity in earnings of affiliate
of $3.3 million in 1993 and $2.3 million in 1992 reflects the Corporation's
equity in earnings of AVEMCO, previously a 34% owned general aviation
insurance company. In October 1993 the Corporation sold 3.3 million shares
of its 3.9 million shares of AVEMCO and the remaining shares were accounted
for as an equity security available for sale, until sold in 1994.
Other Revenue - Other revenue was $14.7 million in 1994, compared to
$17.6 million in 1993 and $16.6 million in 1992. Other revenue consists
primarily of oil and gas revenue, commissions, and motor club dues.
Benefits and Expenses
Losses and loss adjustment expenses incurred increased 9.6% to $1,996.5
million in 1994, up from $1,821.8 million in 1993 and $1,725.0 million in
1992. The statutory loss ratio for property and casualty insurance, which
measures the portion of premiums earned paid or reserved for losses and
related claims handling expenses, was 82.1% in 1994, compared to 81.9% a
year ago and 84.8% in 1992. For statutory accounting purposes in 1993 the
California Proposition 103 refund was treated as a $21.0 million reduction
in both written and earned premium. The loss and LAE ratio excluding the
effect of the California Proposition 103 premium refunds in 1993 was 81.1%.
Gross incurred losses from 1994 catastrophe events totaled
approximately $31 million, up slightly from last year. Catastrophe losses in
1992 were a record high totaling $198.4 million, including $150.4 million
from Hurricane Andrew. Net of reinsurance recoveries, 1992 catastrophe
losses were $125.9 million. Catastrophe losses added 1.3 points to the loss
ratio in both 1994 and 1993 and 6.3 points in 1992.
The Corporation is susceptible to large losses from a severe storm
or earthquake in any area in which it has a large business concentration.
The Corporation's greatest areas of concentration, which may be especially
subject to hurricanes, are along the east coast of the United States. Over
75 percent of the Corporation's country-wide auto and homeowners premium in
1994 was written in 17 states that border on the Atlantic Ocean or Gulf of
Mexico, with large concentrations in Florida, the Maryland/Virginia/District
of Columbia area, and the New York City/Long Island/Connecticut area. Hawaii
is another location that is vulnerable to hurricanes and in which the
Corporation has a modest amount of auto business and a small amount of
homeowner business. The Corporation generally does not, however, write
high-risk properties close to the water's edge. While hurricanes are
considered a major threat to coastal states, other regions, such as the
midwest (which frequently experiences tornadoes and hailstorms), are also
potentially subject to occasional storms or natural disasters.
Recognizing the potential for large losses from a natural disaster,
the Corporation historically sought to protect its capital base (surplus for
the protection of policyholders within the insurance companies) by
purchasing reinsurance coverage. GEICO purchased $15 million of catastrophe
reinsurance for homeowners coverage in 1993, significantly less than in
prior years due to large rate increases requested by reinsurers in response
to Hurricane Andrew and other recent catastrophes. This coverage expired at
the end of April 1994. In response to concerns of the insurance industry and
various consumer groups, the Florida Hurricane Catastrophe Fund became
effective June 1, 1994. In return for an annual premium, 75% of homeowners
losses in excess of $26 million (two times Florida homeowner yearly written
premiums) are covered subject to a constraint of overall money available to
the Fund. The Corporation's insurance subsidiaries currently have no other
catastrophe reinsurance effective in any other states.
The Corporation's insurance subsidiaries reinsure excess risks on
any single loss. GEICO's principal reinsurer for this coverage is General
Reinsurance Corporation which is rated A++ (Superior) by A. M. Best. GEICO
has also reinsured a significant portion of its commercial umbrella
liability business which was written from 1981 to 1984. The largest
anticipated amount recoverable for this coverage is from Constitution
Reinsurance Corporation which is rated A+ (Superior) by A. M. Best.
Excluding the weather-related catastrophes, auto claims frequency
(that is, the number of claims in a given period relative to the car count)
for property damage coverages was up 4% when
(Page 18)
<PAGE>
compared with 1993, while bodily injury and uninsured motorists claim
frequency was up about 3 to 5% for the year. The average auto claims
severity (the average amount paid per claim) for all coverages was up,
including about 5% for property damage.
Life benefits and interest on policyholders' funds declined to $8.6
million from $13.5 million in 1993, which included a provision of $5.5
million to reflect lower yields anticipated in the related investment
portfolio.
Policy acquisition expenses of $200.0 million in 1994, increased
1.3% from $197.5 million in 1993, reflecting the growth in business offset
by a lower general expense ratio. In 1992 such expenses were $183.7 million.
Other operating expenses were $232.0 million compared to $213.6
million in 1993 and $251.1 million in 1992. Other operating expenses
increased 8.6% in 1994 due in part to $8.5 million of incentive compensation
expense related to the significant overperformance of the Corporation's
common stock portfolio compared to the S&P 500. The expense was a negative
$4.1 million in 1993 when the portfolio underperformed the S&P 500, and $1.7
million for overperformance in 1992. Other operating expense in 1994 also
include $8.3 million to write down GEFCO's assets to estimated realizable
values, and accrue expenses related to settlements and winding down GEFCO's
operations.
Other operating expenses in 1992 included stock appreciation rights
(SARs) expense of $44.8 million, reflecting the increase in the
Corporation's stock price from $39.80 to $65.00 per share during the year.
The majority of SARs were exercised in 1992 and the remainder were canceled
in January 1993. Performance shares expense, which also varies with the
price of the Corporation's Common Stock, was $1.8 million in 1994 compared
to $3.1 million and $7.3 million for 1993 and 1992, respectively.
The consolidated statutory underwriting ratio was 96.4% in 1994
compared to 99.1% in 1993 and 100.1% in 1992. These ratios include
weather-related losses of 1.3 points in both 1994 and 1993 and 6.3 points in
1992. In 1993 the property and casualty companies changed their accounting
to record premiums written on the policy effective date instead of the date
the initial billing is processed. The statutory underwriting ratio, after
adjusting to eliminate the effect of this change in accounting, was 97.5% in
1993 and includes .8% for the payment of $21.0 million of California
Proposition 103 refunds during the year.
Corporate and other interest expense increased to $24.6 million in
1994 from $17.0 million a year earlier and $20.7 million in 1992. This
increase is due to the issuance of $150 million of 7.35% Debentures on July
14, 1993. Corporate and other interest expense also includes interest on
deferred compensation which is linked to changes in the Corporation's stock
price for those individuals who choose that option. Such interest expense
increased significantly in 1992 when the price of the Corporation's stock
went from $39.80 to $65.00 and was negative in 1993 and 1994 as the price
declined to $49.00. Finance company interest expense reflects lower levels
of borrowings by GEFCO.
Income Taxes
Federal income taxes were $42.4 million in 1994 compared to $92.2 million in
1993 and $45.2 million in 1992. The decline in 1994 is due to less realized
gains and a shift of the bond portfolio to tax-exempt securities. Federal
income taxes in 1993 include the effect of adjusting current and deferred
taxes to 35% from 34% due to the enactment of the Omnibus Budget
Reconciliation Act of 1993 in the third quarter. The "fresh start" benefit
for discounting reserves was $1.9 million in 1992.
Effective January 1, 1993 the Corporation adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes." The
statement required a change to the liability method of accounting for
deferred taxes and also establishes guidelines for recognizing deferred tax
assets. Under the liability method, deferred tax accounts are adjusted to
reflect the most recently enacted tax rates at which deferred amounts will
be eventually paid or recovered. The Corporation has not established a
valuation allowance because it believes it is "more likely than not" that
all deferred tax assets will be fully realized based upon the Corporation's
past history of profitability and anticipated future earnings. The
Corporation's level of taxable income during the last three years has
resulted in current tax expense totaling approximately $234.2 million.
The Tax Reform Act of 1986 included provisions to increase
significantly property and casualty insurance companies' current taxes
payable by accelerating the reporting of taxable income and prorating
investment income to tax indirectly 15% of the tax-exempt interest and the
amount of dividends received deduction on securities purchased after August
7, 1986. The provisions, which accelerate taxable income, include
discounting reserves for tax purposes, disallowing 20% of the increase in
unearned premiums as a tax deduction, and reporting 20% of the reserve for
unearned premiums at December 31, 1986 as taxable income ratably over six
years beginning in 1987. The increase in current taxes resulting from these
timing differences,
(Page 19)
<PAGE>
whereby income is reported sooner for tax purposes than for financial
statement purposes, is offset by a deferred tax benefit with no impact
on the total tax provision for financial statement purposes. Current
tax expense on net income was $58.1 million in 1994, $108.6 million in 1993
and $67.6 million in 1992 reflecting these provisions.
Changes in Accounting Principles
In the first quarter of 1994 the Corporation adopted Statement of Position
No. 93-6 "Employers' Accounting for Employee Stock Ownership Plans" which
requires employers to recognize compensation cost based on the fair value of
the ESOP shares as of the date the shares are committed-to-be-released,
beginning with shares acquired after December 31, 1992. This statement was
adopted effective January 1, 1994 on a prospective basis. Accordingly, the
Corporation's income statement will reflect a charge or benefit to earnings
for the appreciation or depreciation on shares purchased by the ESOP after
1992 when such shares are committed-to-be-released for allocation to
participant accounts. No tax benefit is recorded for net charges since such
amounts are not deductible for tax purposes.
In the first quarter of 1994 the Corporation adopted Statement of
Financial Accounting Standards No. 112 "Employers' Accounting for
Postemployment Benefits." The cumulative effect of adopting this statement
at January 1, 1994 was a charge of $1.1 million, net of tax, which was
included in the statements of income as a change in accounting principle.
This statement will not have a significant impact on future operating
expenses.
The cumulative effect of adopting Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" at January 1, 1993 was a
charge of $8.8 million which is included in the consolidated statements of
income as a change in accounting principle. A substantial part of the
cumulative adjustment results from increasing the deferred tax liability
related to unrealized appreciation of equity securities that existed at
December 31, 1986 from 28% to 34% due to the increase in the capital gains
tax rate for years beginning in 1987. The cumulative adjustment also
includes immediate recognition of the remaining $1.9 million "fresh start"
benefit for discounting of reserves.
Effective January 1, 1993 the Corporation also adopted Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This statement requires
employers to accrue postretirement benefits, such as health care and life
insurance plans for retirees, over the period the employee works to earn the
benefit rather than using a pay-as-you-go cash basis. The cumulative effect
of adopting this statement at January 1, 1993 was a charge of $3.9 million,
net of tax, which is included in the consolidated statements of income as a
change in accounting principle.
Effective December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" which requires the classification of
securities into one of three categories: held to maturity, available for
sale, or trading. At December 31, 1993 all fixed maturities were classified
as available for sale and reported at market value since the Corporation may
not hold those securities to maturity. Fixed maturities were previously
carried at amortized cost. All equity securities (common stocks and
nonredeemable preferred stocks) are also classified as available for sale
and reported at market value, as in prior years. The unrealized gains and
losses on securities available for sale are reported as a separate component
of shareholders' equity, net of applicable deferred income taxes.
Net Income
Net income totaled $207.8 million ($2.97 per share), compared to $273.7
million ($3.83 per share) in 1993 and $172.8 million ($2.39 per share) in
1992. Net income in 1994 included net aftertax realized gains of $9.9
million ($.14 per share), compared to 1993 and 1992 gains of $81.3 million
($1.14 per share) and $60.7 million ($.84 per share), respectively. The
cumulative effect of changes in accounting principles reduced net income per
share by $.01 in 1994 and $.18 during 1993. Per share earnings included a
special tax benefit of $.03 in 1992 for the "fresh start" provisions for
discounting reserves. The weighted average shares outstanding were
69,992,442 in 1994 compared to 71,417,006 in 1993 and 72,386,572 in 1992.
Net unrealized appreciation of investments, which is reflected in
shareholders' equity but not in net income, decreased $101.0 million in 1994
to $91.2 million compared to $192.2 million at December 31, 1993. Effective
December 31, 1993, investments in fixed maturities were classified as
available for sale and reported at market value. The unrealized
appreciation, net of deferred taxes, on fixed maturities of $81.8 million at
December 31, 1993 was reflected directly in shareholders' equity in 1993.
The unrealized appreciation on fixed maturities decreased $142.5 million
during 1994 resulting in unrealized depreciation of $60.6 million as of
December 31, 1994 due to a significant increase in interest rates during the
year. Unrealized appreciation on equity securities increased $41.4 million
during 1994 to
(Page 20)
<PAGE>
$151.8 million.
As part of the Corporation's effort to concentrate on its core
direct-response business, Merastar Insurance Company and Southern Heritage
Insurance Company were sold effective December 31, 1993 to a partnership of
which a former chairman of GEICO Corporation is the general partner. The
aggregate proceeds from the sales approximated shareholder's equity
resulting in no material aftertax gain or loss. These two subsidiaries had
approximately $96 million of assets and $42 million of shareholder's equity
at the date of sale and premiums of $41 million in 1993.
On June 26, 1992 the Corporation completed the sale of Garden State
Life Insurance Company for $40.0 million. Garden State's operations are
included in the consolidated results up to the date of sale. Garden State
had approximately $91 million of assets and $53 million of shareholder's
equity at the date of sale and premium revenue of $10.7 million for the
first six months of 1992.
CAPITAL STRUCTURE
On May 20, 1992, the Corporation's shareholders approved an increase in the
number of authorized shares of Common Stock from 60 million to 150 million
and the Corporation's Common Stock was split five-for-one. The stock split
resulted in the issuance of an additional 56,668,048 shares of $1 par value
Common Stock and $56,668,048 was transferred from paid-in surplus to the
common stock account. At the same time, all Treasury Stock was retired and
an authorization was granted to repurchase up to 7,000,000 shares. All share
and per share data presented have been restated to reflect the five-for-one
stock split.
On December 31, 1994, the Corporation's common shares outstanding
totaled 68,291,463, reduced through repurchases from the 71,047,460 shares
outstanding on December 31, 1991. The Corporation acquired through open
market and private transactions a net 2,613,498 shares for $130.3 million in
1994, 389,857 shares for $22.1 million in 1993 and 482,941 shares for $24.1
million in 1992. In 1992, 619,374 shares were issued upon exercise of stock
options for $10.4 million. Subsequent to December 31, 1994, the Corporation
has purchased an additional 138,484 shares for $6.8 million. As of December
31, 1994 and February 17, 1995, a total of 3,726,104 and 3,587,620
shares, respectively, remained under the current repurchase authorization.
Book value per share at December 31, 1994 was $21.17 based on
68,291,463 shares outstanding and shareholders'equity of $1,445.9
million, down 2.3% from $21.66 per share at the end of 1993. The decline
reflects a decrease in unrealized appreciation of investments and
substantial repurchases of shares at a cost in excess of book value per
share. The Corporation paid dividends per share of $1.00 in 1994 compared to
$.68 in 1993 and $.60 in 1992.
On July 14, 1993, GEICO Corporation issued $150 million of 7.35%
Debentures due 2023. The Corporation used the net proceeds for investment
in marketable securities and general corporate purposes, such as the
repayment of $92 million of short-term debt which had been borrowed earlier
in 1993. The Debentures provided additional funds which could also be used
to make capital contributions to the insurance subsidiaries in the event of
large catastrophe losses.
In July 1994 the Corporation entered a new three year revolving
credit agreement under which the Corporation, Government Employees Insurance
Company and GEFCO can borrow up to $150 million with total borrowings not to
exceed $150 million. At December 31, 1994, GEFCO had borrowed $51 million
under the facility which is due in 1995. GEFCO may pay the debt by
reborrowing under the agreement or using proceeds from the collection or
sale of loans receivable.
During 1994 the Corporation's real estate subsidiaries prepaid $34.6
million of collateralized debt.
The GEICO Companies Employee Stock Ownership Plan (ESOP) purchases
shares of the Corporation's stock with borrowed funds as authorized by the
Board of Directors. The repayment of such loans, including interest, is
guaranteed by the Corporation. In turn, the Corporation makes voluntary
contributions to the ESOP which are used to pay the interest and to reduce
the principal. As principal and interest payments are made, a prorated
number of shares is released to the accounts of all participating
associates.
The ESOP borrowed $9.2 million in 1994, $6.5 million in 1993 and
$5.9 million in 1992. In the same period, the Corporation charged $29.8
million to expense for the ESOP including contributions to enable the ESOP
to make interest payments and repay $25.8 million of the loan principal. On
December 31, 1994, the loan balance was $50 million with principal payments
due each year to the year 2004. The obligations of the ESOP are included in
the Corporation's debt. An amount representing the obligations of the ESOP,
which has not been charged to compensation expense, is deducted from
shareholders' equity.
(Page 21)
<PAGE>
PROPERTY AND CASUALTY
LOSS RESERVES
Loss Reserving Methodology
Reserves for loss and loss adjustment expenses (LAE) at any report date
reflect the estimate of the liability for the ultimate cost of reported
claims and estimated "incurred but not reported" (IBNR) claims arising from
accidents which had occurred by that date. Property and casualty loss
reserves on unsettled claims are based on averages for all automobile
physical damage, property damage liability and medical payments claims, and
for other automobile liability claims reported within the most recent three
months. Case-basis estimates are established for automobile bodily injury
liability, uninsured motorist and personal injury protection claims in the
third month and for lines of business other than automobile from inception.
IBNR loss reserves are calculated estimates. The reserves for losses include
additional amounts to reflect anticipated future economic and social
conditions. The determination of these amounts includes consideration of
studies of the Companies' reserve levels performed annually by independent
consulting actuaries. The methods used to develop reserves are subject to
continuing review and refinement.
Property and casualty reserves include a provision for inflation in
the expected cost of settling claims. Reserves for IBNR claims and for
claims while on average are based on selected average claim costs which
reflect the costs and inflation trends observed in claims closed in recent
quarters. Case-basis reserves are established by claims personnel based
upon the projected cost of settling each claim in today's dollars plus an
explicit provision for inflation through the anticipated claim settlement
date.
Reserves are tested for adequacy using many analyses and actuarial
projections. Some projections, using claim closure models, use an assumed
rate of inflation by which the historical cost of settling claims is
expected to increase in the future. Other tests, such as incurred loss and
payment projections, reflect the inflation which is implicit in the
historical data. Assumed inflation rates are selected after giving
consideration to each of our Companies' experience, industry data and
economic indicators. The strengths and weaknesses of each projection and
reserve test are reviewed, using actuarial judgment and knowledge of the
Companies' operations, before selecting the reserve amount for loss and loss
adjustment expenses.
Loss and LAE reserves at December 31, 1994 include $100 million ($53
million net after reinsurance) for commercial umbrella liability business,
which was issued by GEICO from 1981 to 1984. The ultimate development of
losses related to the significant risks of this long-tail business, which
includes certain environmental and product liability risks, is uncertain.
Losses for GEICO's commercial umbrella cannot be projected using the
traditional actuarial methods described above. The reserve for loss and LAE
for this business represents management's estimate of the ultimate liability
which will emerge from a small number of potentially large claims.
Reconciliation of Claim Reserves
Property and casualty loss reserves under generally accepted accounting
principles (GAAP) reporting differ from statutory reserves because GAAP
reserves are reduced for anticipated salvage and subrogation recoveries and
exclude certain reserves which were assumed under a statutory reinsurance
contract. Reinsurance recoverable on unpaid losses and LAE are also reported
as assets for GAAP purposes rather than netted against reserves. A
reconciliation of statutory reserves for loss and LAE to GAAP reserves for
loss and LAE is shown below.
An analysis of the changes in property and casualty aggregate GAAP
reserves for losses and LAE, net of reinsurance on unpaid losses and LAE,
for each of the last three years is presented on the next page. Since
reserves are necessarily based on estimates, the ultimate cost may vary from
the original estimates. As adjustments to these estimates become necessary,
they are reflected in current operations.
<TABLE>
<CAPTION>
PROPERTY AND CASUALTY RESERVES
(In millions)
<S> <C> <C> <C>
December 31,
1994 1993 1992
Statutory reserves for loss and LAE $1,992.9 $1,844.6 $1,720.6
Anticipated salvage and subrogation recoveries (85.4) (77.0) (73.3)
Statutory reinsurance contract (20.6) (20.6) (20.6)
GAAP reserves for loss and LAE, net of
reinsurance 1,886.9 1,747.0 1,626.7
Reinsurance recoverable on unpaid loss and
LAE reserves 125.4 121.0 129.5
GAAP reserves for loss and LAE $2,012.3 $1,868.0 $1,756.2
</TABLE>
(Page 22)
<PAGE>
Loss Reserve Development
Loss and loss adjustment expense reserves are established at each valuation
date for all reported and projected IBNR claims using management's judgment
based on the information known as of that date. As time passes, more
information about the claims becomes known and reserve estimates are
appropriately adjusted upward or downward. Because of the estimation,
elements encompassed in the reserving process, and the time it takes to
settle many of the most substantial claims, several years are required
before a meaningful comparison of actual losses to the original estimate of
reserves can be developed.
The development of reserves is represented by the difference between
estimates of reserves as of the original year's end and the re-estimated
liability at each subsequent year's end. This is based on actual payments in
full or partial settlement of claims, plus re-estimates of the reserves
required for claims still open or claims still unreported (IBNR). Downward
development means that the original reserve estimates were higher than
subsequently indicated, while upward development means that the original
reserve estimates were lower than subsequently indicated.
The table on the next page presents the GAAP claim reserve liability
for loss and LAE, net of reinsurance recoverable on unpaid loss and LAE, as
originally estimated for the years 1984 through 1994, the cumulative amounts
paid with respect to the reserves for each subsequent year, the re-estimated
liability at the end of each year, and the resulting development of the
original reserve estimates for 1984 through 1993 as evaluated through
December 31, 1994.
The Corporation strives to establish adequate reserves at the
original valuation date; however, as the table shows, reserves may
subsequently develop substantially upward or downward. The upward
development of reserves, net of reinsurance, for 1984 through 1987 is
primarily due to increased estimates of incurred losses for Resolute and
commercial umbrella liability insurance for prior years. Reserves, net of
reinsurance, for Resolute and commercial umbrella liability insurance at
December 31, 1984, 1985, 1986, and 1987 have developed upward approximately
$110 million, $118 million, $113 million and $84 million, respectively.
Reinsurance ceded has reduced the upward development on these two lines of
business by approximately 50%.
Management believes that its aggregate reserves for loss and loss
adjustment expenses at December 31, 1994 are reasonable and adequate to
cover the ultimate cost of losses on reported and unreported claims which
had occurred by that date. However, given the inherent variability of
conditions which affect future claim settlements, such reserves are
necessarily based on estimates and ultimate costs may vary from such
estimates.
<TABLE>
<CAPTION>
RECONCILIATION OF CLAIM RESERVES
(In millions)
<S> <C> <C> <C>
1994 1993 1992
Reserves for loss and LAE, net of reinsurance,
at January 1 $1,747.0 $1,626.7 $1,450.4
Reserves of subsidiaries sold - (21.5) -
Cumulative effect of accounting change for
postretirement benefits on LAE - 1.2 -
1,747.0 1,606.4 1,450.4
Incurred loss and LAE
Provision for current accident year claims 2,097.8 1,899.6 1,795.8
Decrease in provision for prior accident
years claims (101.3) (77.8) (70.8)
Total loss and LAE incurred 1,996.5 1,821.8 1,725.0
Payments for loss and LAE
Payments on current accident year claims (1,128.2) (973.7) (950.9)
Payments on prior accident years claims (728.4) (707.5) (597.8)
Total payments for loss and LAE (1,856.6) (1,681.2) (1,548.7)
Reserves for loss and LAE, net of reinsurance,
at December 31 $1,886.9 $1,747.0 $1,626.7
</TABLE>
(Page 23)
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED PROPERTY AND CASUALTY RESERVE DEVELOPMENT
(In millions)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1984 1985 1986 1987 1988 1989
Net Reserves for Loss
and LAE $580.2 $698.6 $831.5 $993.4 $1,117.4 $1,214.9
Cumulative Payments as of:
One year later 274.3 329.7 376.8 453.7 472.0 518.5
Two years later 393.3 478.5 563.2 660.3 692.5 764.2
Three years later 461.7 569.7 666.9 774.8 819.2 896.2
Four years later 503.8 619.0 727.7 836.6 884.4 965.3
Five years later 524.8 654.7 761.0 869.9 915.9 997.8
Six years later 549.0 673.6 778.5 885.8 934.1
Seven years later 560.6 684.3 788.7 894.4
Eight years later 567.7 691.3 793.1
Nine years later 572.7 694.7
Ten years later 576.2
Net Reserves Re-estimated as of:
End of year 580.2 698.6 831.5 993.4 1,117.4 1,214.9
One year later 563.6 694.2 834.5 1,009.1 1,070.1 1,181.7
Two years later 562.5 707.8 862.2 990.5 1,068.6 1,171.9
Three years later 580.7 729.7 854.0 1,003.4 1,068.9 1,167.4
Four years later 597.4 730.1 878.5 1,008.5 1,071.9 1,155.3
Five years later 598.6 765.5 886.1 1,013.0 1,067.4 1,172.7
Six years later 635.5 775.7 893.9 1,013.9 1,088.4
Seven years later 645.4 784.3 897.9 1,034.3
Eight years later 653.1 791.0 921.4
Nine years later 661.3 816.0
Ten years later 686.5
Upward (Downward)
Development $106.3 $117.4 $89.9 $40.9 $(29.0) $(42.2)
</TABLE>
[CAPTION]
<TABLE>
CONSOLIDATED PROPERTY AND CASULATY RESERVE DEVELOPMENT
(In millions)
<S> <C> <C> <C> <C> <C>
As of December 31, 1990 1991 1992 1993 1994
Net Reserves for Loss
and LAE $1,306.5 $1,450.4 $1,626.7 $1,747.0 $1,886.9
Cumulative Payments as of:
One year later 550.7 597.8 707.5 728.4
Two years later 812.3 897.9 1,012.6
Three years later 956.5 1,041.7
Four years later 1,024.3
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Net Reserves Re-estimated as of:
End of year 1,306.5 1,450.4 1,626.7 1,747.0 1,886.9
One year later 1,265.9 1,379.6 1,548.9 1,645.7
Two years later 1,255.0 1,354.1 1,531.5
Three years later 1,237.4 1,357.2
Four years later 1,247.0
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Upward (Downward)
Development $(59.5) $( 93.2) $(95.2) $(101.3) -
</TABLE>
Upward development of reserves for 1984 through 1987 is substantially
due to increased estimates of liability losses incurred from
Resolute's reinsurance operations and commercial umbrella liability
claims described herein.
LIQUIDITY
Cash Flow
Cash flow from operations of the Corporation and its subsidiaries increased
to $460.6 million in 1994 compared to $351.5 million in 1993 and $262.2
million in 1992. Operating activities in 1993 included the receipt of $31.2
million of income tax refunds resulting from the overpayment of taxes in
1992, and the payment of $21 million of California Proposition 103 refunds.
Cash flow in 1992 was reduced by increased disbursements for weather-related
catastrophe losses including Hurricane Andrew, the exercise of stock
appreciation rights, and dividends to policyholders which were declared in
1991 but paid in 1992.
During the most recent three-year period, the Corporation's
financing activities used $174.5 million net to repurchase its Common Stock
and $160.6 million to pay dividends to its shareholders. Financing
activities in 1994 included the prepayment of $34.6 million of
collateralized debt of the Corporation's real estate subsidiaries and the
repayment of $20.7 million of GEFCO's short term debt. Additionally in
October 1994 the Corporation borrowed $40 million under a bank note to
partially finance Treasury Stock purchases, of which $10 million was repaid
in December 1994. Financing activities in 1993 included the issuance of $150
million of 7.35% Debentures due 2023 and the repayment of $12.6 million of
GEFCO's short term debt.
During the same three-year period, the Corporation used a net $835.1
million in investing activities, including significant increases in
obligations of states and political subdivisions in 1994 and 1993 and U. S.
Government corporations and
(Page 24)
<PAGE>
agencies in 1992. Investing activities also included proceeds of $12.7
million in 1994 from the sale of Southern Heritage, $74.3 million in 1993
from the sale of Merastar Insurance Company and AVEMCO shares and $40.0
million in 1992 from the sale of Garden State Life Insurance Company.
The Corporation's construction of a new 350,000 square foot regional
office building in Stafford County, Virginia costing approximately $35
million was completed early in 1994. Purchases of property and equipment
included $6.2 million in 1994, $23.2 million in 1993 and $5.6 million in
1992 for the building and land.
The Corporation receives dividends in cash and/or securities from
Government Employees Insurance Company (GEICO), its principal subsidiary,
and GEICO Indemnity Company (GI) which provide a portion of the funds
necessary for parent company operations. In 1994 the Corporation received
dividends of $132.0 million from GEICO compared to $161.1 million in 1993
and $298.9 million in 1992 from GEICO and GI. The Corporation has shifted a
significant portion of its equity portfolio from GEICO to the parent company
level during the past three years. The parent company owns common stocks
with a market value of $602.5 million at December 31, 1994. The regulatory
restrictions on dividends were modified in 1993 and limit the maximum
dividend which GEICO and GI may pay without prior approval by the state
commissioner to the greater of 10% of statutory policyholders' surplus or
net income. See Note C to the consolidated financial statements.
The Corporation and its subsidiaries have a continuing outlook for a
positive cash flow and ample liquidity from operations.
Investments
Pretax net investment income was $201.8 million in 1994, $201.9
million in 1993 and $201.5 million in 1992. Flat investment income reflects
lower yields on fixed-income investments due to a high rate of issuer
redemptions and prepayments on old, higher yielding investments and
increased acquisitions of tax-exempt securities. Investment income growth
over the past three years was moderated due to repurchases of the
Corporation's Common Stock using funds which would otherwise have been
available for investment. Aftertax net investment income increased 4.9% to
$173.1 million reflecting the increase in tax-exempt securities.
Net new investments of $239.9 million were made in the consolidated
portfolio in 1994. Net purchases made included $459.1 million of tax-exempt
bonds, including prerefunded AAA issues backed by U.S. Treasuries and state
general obligation bonds with maturities in the seven to fifteen year range.
Net sales and maturities included $111.2 million of U. S. Government/Agency
bonds, including prepayments of mortgage-backed securities, and $66.0
million of short-term investments. During the year the Corporation realized
net aftertax gains of $9.9 million from the sale of investments.
The common stock portfolio, adjusted for purchases and sales, had a
total aftertax gain (including unrealized gains and losses) of 9.1% in 1994
compared to aftertax gains of 3.8% in 1993 and 7.5% in 1992. The comparable
returns for the S&P 500 were gains of 1.6% in 1994, 7.1% in 1993 and 5.7% in
1992. The common stock portfolio is concentrated in a relatively small
number of companies. The largest industry positions in the portfolio at year
end were in finance (21.8%), toys (18.6%), services (18.5%), apparel
(18.4%), health care (9.9%) and banks (7.1%).
The GEICO Corporation Investment Summary shows the year end
consolidated investment portfolio for 1994, 1993 and 1992. Effective
December 31, 1993 the Corporation adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" and has classified its investment in fixed maturities (bonds and
redeemable preferreds) as available for sale. Such securities are reported
at market value with unrealized gains and losses, net of deferred taxes,
reported as a separate component of shareholders' equity since the
Corporation may not hold these securities to maturity. Fixed maturity
investments were carried at amortized cost at year end 1992. Equity
securities are carried at year end market value, as in prior years.
The Corporation's policy is to invest in bonds with a rating of A
(upper medium quality) or above. The estimated weighted average rating of
the bond portfolio at December 31, 1994 was between Aa (high quality) and
Aaa (best quality). The investment portfolio does not include any
below-investment-grade bonds of a material amount. The Corporation has not
invested in high-risk derivative securities such as futures, forward, swap,
and option contracts or other financial instruments with similar
characteristics to any significant extent.
During 1994 interest rates rose sharply after declining for several
years. Rates along the entire yield curve were pushed higher reflecting
concerns about the strong economy and inflation. Yields on 3-month Treasury
bills increased from 3.06% to 5.69%, 5-year Treasury notes from 5.21% to
7.83% and 30-year Treasury bonds from 6.35% to 7.88%. Higher interest rates
(Page 25)
<PAGE>
resulted in a decline in market prices for the Corporation's investments in
fixed maturities. The market value of fixed maturity investments was
$3,270.1 million at December 31, 1994, which was $93.3 million below
amortized cost, compared to a market value of $3,175.4 million at December
31, 1993, which was $125.9 million above amortized cost.
At December 31, 1994, the Corporation and its subsidiaries held
$77.6 million in cash and short-term investments. In addition, approximately
$422.6 million of the bond portfolio will mature in 1995, including a
portion of the asset-backed securities.
FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board and the American Institute of
Certified Public Accountants have issued several statements which affect
accounting practices used by the Corporation. See page 45 for a discussion
of these statements, their implementation, and their effect on the
Corporation's financial statements.
<TABLE>
<CAPTION>
GEICO CORPORATION INVESTMENT SUMMARY
(In millions)
<S> <C> <C> <C> <C>
1994 1993 1992
Carrying Carrying Carrying
Value(1) % Portfolio Value(1) Value(1)
Fixed maturities
U.S. Treasury Securities and
obligations of U.S. government
corporations and agencies $842.1 20.5% $1,014.2 $1,080.7
Obligations of states and
political subdivisions 2,292.6 55.9 1,992.1 1,167.2
Corporate bonds and notes 97.5 2.4 120.1 172.7
Total bonds 3,232.2 78.8 3,126.4 2,420.6
Redeemable preferred stocks 37.9 .9 49.0 56.1
3,270.1 79.7 3,175.4 2,476.7
Equity securities
Common stocks 759.8 18.5 687.1 724.1
Nonredeemable preferred stocks 22.9 .6 40.1 16.2
782.7 19.1 727.2 740.3
Short-term investments 50.1 1.2 116.0 223.0
Totals $4,102.9 100.0% $4,018.6 $ 3,440.0
(1) Carrying value for fixed maturities is market value for 1994 and 1993
and amortized cost for 1992. Carrying value for equity securities is market
value for all years.
</TABLE>
[CAPTION]
<TABLE>
GEICO CORPORATION BOND MATURITY TABLE
(In millions)
<S> <C> <C> <C>
1994
Market Amortized
Value % Portfolio Value
Maturity
1995 $422.6 13.1% $ 418.9
1996 to 1999 1,410.6 43.7 1,430.5
2000 to 2004 1,193.9 36.9 1,258.9
2005 to 2009 165.8 5.1 170.3
2010 and later 39.3 1.2 43.6
$3,232.2 100.0% $3,322.2
(1) Asset-backed securities, consisting of mortgage-backed obligations
of U.S. government corporations and agencies and corporate obligations
collateralized by mortgage and other financial instruments, are included
in the bond maturity table based on their estimated average remaining
lives.
</TABLE>
(Page 26)
<PAGE>
REPORT OF COOPERS & LYBRAND L.L.P,
Independent Accountants
To The Shareholders
GEICO Corporation
We have audited the accompanying consolidated balance sheets of GEICO
Corporation and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
GEICO Corporation and subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the
Corporation changed its methods of accounting for postemployment benefits in
1994 and for income taxes, postretirement benefits other than pensions, and
investments in debt securities in 1993.
Washington, D.C.
February 17, 1995
(page 27)
<PAGE>
<TABLE>
<CAPTION
GEICO CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, in thousands of dollars
<S> <C> <C>
ASSETS 1994 1993
Investments - Note D:
Fixed maturities available for sale, at market
U.S. Treasury securities and obligations of U.S.
government corporations and agencies (amortized
cost $873,440 and $983,883) $ 842,086 $1,014,240
Obligations of states and political subdivisions
(amortized cost $2,343,200 and $1,900,937) 2,292,622 1,992,151
Corporate bonds and notes (amortized cost $105,523
and $116,703) 97,554 120,084
Redeemable preferred stocks (amortized cost
$41,259 and $47,996) 37,863 48,963
3,270,125 3,175,438
Equity securities available for sale, at market
Common stocks (cost $534,370 and $527,402) 759,791 687,050
Nonredeemable preferred stocks (cost $22,591
and $38,840) 22,917 40,108
782,708 727,158
Short-term investments 50,033 116,019
Total Investments 4,102,866 4,018,615
Cash 27,580 18,362
Loans receivable, net - Note E 59,448 75,803
Accrued investment income 67,255 63,723
Premiums receivable 238,653 206,783
Reinsurance receivables 127,189 121,522
Prepaid reinsurance premiums 10,361 9,694
Amounts receivable from sales of securities 2,022 920
Deferred policy acquisition costs - Note F 72,359 71,839
Federal income taxes - Note J 98,975 26,731
Property and equipment, at cost less accumulated
depreciation of $113,612 and $103,514 - Note I 141,741 135,812
Other assets 49,656 81,636
Total Assets $4,998,105 $4,831,440
See Notes to Consolidated Financial Statements
</TABLE>
(page 28)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY 1994 1993
Liabilities
Policy liabilities:
Property and casualty loss reserves - Note G $1,704,718 $1,586,135
Loss adjustment expense reserves - Note G 307,606 281,824
Unearned premiums 747,342 675,116
Life benefit reserves and policyholders' funds 101,298 87,681
2,860,964 2,630,756
Debt - Note I:
Corporate and other 340,378 346,385
Finance company 51,000 71,700
Amounts payable on purchase of securities 8,408 1,997
Other liabilities 291,414 246,023
Total Liabilities 3,552,164 3,296,861
Shareholders' Equity - Note K
Common Stock - $1 par value, 150,000,000 shares
authorized, 71,565,359 and 71,494,649 shares issued
and 68,291,463 and 70,834,251 shares outstanding 71,565 71,495
Paid-in surplus 169,084 165,251
Unrealized appreciation of investments - Note D 91,167 192,239
Retained earnings 1,330,022 1,191,509
Treasury Stock, at cost (3,273,896 and
660,398 shares) (167,115) (36,740)
Unearned Employee Stock Ownership Plan shares -
Notes I and M (48,782) (49,175)
Total Shareholders' Equity 1,445,941 1,534,579
Total Liabilities and Shareholders' Equity $4,998,105 $4,831,440
</TABLE>
(page 29)
<PAGE>
<TABLE>
<CAPTION>
GEICO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<S> <C> <C> <C>
For the year ended December 31, in thousands
of dollars except per share results 1994 1993 1992
Revenue
Premiums - Note N $2,476,276 $2,283,488 $2,084,502
Net investment income - Note D 201,790 201,851 201,526
Realized gains on investments - Note D 12,898 120,584 98,535
Interest on loans receivable 10,347 11,519 16,528
Equity in earnings of unconsolidated af-
filiate - 3,306 2,292
Other revenue 14,698 17,552 16,619
Total Revenue 2,716,009 2,638,300 2,420,002
Benefits and Expenses
Losses and loss adjustment expenses -
Note G 1,996,518 1,821,783 1,724,958
Life benefits and interest on
policyholders' funds 8,573 13,521 14,664
Policy acquisition expenses - Note F 200,044 197,545 183,655
Other operating expenses - Note K 231,984 213,555 251,055
Impact of premium refunds - Note H - (6,699) -
Interest expense - Note I:
Corporate and other 24,646 17,040 20,682
Finance company 3,050 2,935 6,987
Total Benefits and Expenses 2,464,815 2,259,680 2,202,001
Net Income Before Income Taxes 251,194 378,620 218,001
Federal income tax expense - Note J 42,379 92,193 45,228
Net income before cumulative effect of
changes in accounting principles 208,815 286,427 172,773
Cumulative effect of changes in account-
ing principles:
Postemployment benefits, net of tax (1,051) - -
Income taxes - (8,814) -
Postretirement benefits, net of tax - (3,935) -
Net Income $ 207,764 $ 273,678 $ 172,773
Earnings Per Share - Notes K and L
Net income before cumulative effect of
changes in accounting principles $2.98 $4.01 $2.39
Cumulative effect of changes in
accounting principles (.01) (.18) -
Net Income $2.97 $3.83 $2.39
See Notes to Consolidated Financial Statements
</TABLE>
(page 30)
<PAGE>
<TABLE>
<CAPTION>
GEICO CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, in thousands of dollars
<S> <C> <C> <C> <C>
Unrealized
Appreciation
Common Paid-in of Retained
Stock Surplus Investments Earnings
Balance at December 31, 1991 $32,178 $192,780 $183,137 $1,657,668
Net income 172,773
Dividends ($.60 per share post-split) (42,464)
Decrease in unrealized appreciation,
net of deferred taxes - Note D (26,697)
Exercise of stock options 619 20,783
Tax benefit of stock options 6,189
Five-for-one stock split - Note K 56,668 (56,668)
Purchase of Common Stock
Reissuance of Common Stock 167
Retirement of Common Stock -
Note K (18,011) (823,168)
Employee Stock Ownership Plan:
Borrowings
Repayments
Additional accrued compensation
Tax benefit of dividends 930
Balance at December 31, 1992 71,454 163,251 156,440 965,739
Net income 273,678
Dividends ($.68 per share) (48,300)
Increase in unrealized appreciation,
net of deferred taxes - Note D 35,799
Exercise of stock options 41 1,953
Tax benefit of stock options 303
Purchase of Common Stock
Reissuance of Common Stock (256)
Employee Stock Ownership Plan:
Borrowings
Repayments
Additional accrued compensation
Tax benefit of dividends 392
Balance at December 31, 1993 71,495 165,251 192,239 1,191,509
Net income 207,764
Dividends ($1.00 per share) (69,619)
Decrease in unrealized appreciation,
net of deferred taxes - Note D (101,072)
Exercise of stock options 70 3,379
Tax benefit of stock options 362
Purchase of Common Stock
Reissuance of Common Stock 92
Employee Stock Ownership Plan:
Borrowings
Repayments
Additional accrued compensation
Tax benefit of dividends 426
Fair value adjustment, net of
taxes - Note M (58)
Balance at December 31, 1994 $71,565 $169,084 $ 91,167 $1,330,022
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
For the years ended December 31, in thousands of dollars
Employee
Treasury Stock Total
Stock, Ownership Shareholders'
at Cost Plan Equity
Balance at December 31, 1991 $(831,814) $ (49,688) $1,184,261
Net income 172,773
Dividends ($.60 per share post-split) (42,464)
Decrease in unrealized appreciation,
net of deferred taxes - Note D (26,697)
Exercise of stock options 21,402
Tax benefit of stock options 6,189
Five-for-one stock split - Note K -
Purchase of Common Stock (31,781) (31,781)
Reissuance of Common Stock 7,519 7,686
Retirement of Common Stock - Note K 841,179 -
Employee Stock Ownership Plan:
Borrowings (5,904) (5,904)
Repayments 5,904 5,904
Additional accrued compensation 212 212
Tax benefit of dividends 930
Balance at December 31, 1992 (14,897) (49,476) 1,292,511
Net income 273,678
Dividends ($.68 per share) (48,300)
Increase in unrealized appreciation,
net of deferred taxes - Note D 35,799
Exercise of stock options 1,994
Tax benefit of stock options 303
Purchase of Common Stock (26,067) (26,067)
Reissuance of Common Stock 4,224 3,968
Employee Stock Ownership Plan:
Borrowings (6,506) (6,506)
Repayments 6,506 6,506
Additional accrued compensation 301 301
Tax benefit of dividends 392
Balance at December 31, 1993 (36,740) (49,175) 1,534,579
Net income 207,764
Dividends ($1.00 per share) (69,619)
Decrease in unrealized appreciation,
net of deferred taxes - Note D (101,072)
Exercise of stock options 3,449
Tax benefit of stock options 362
Purchase of Common Stock (137,377) (137,377)
Reissuance of Common Stock 7,002 7,094
Employee Stock Ownership Plan:
Borrowings (9,169) (9,169)
Repayments 9,169 9,169
Additional accrued compensation 393 393
Tax benefit of dividends 426
Fair value adjustment, net of
taxes - Note M (58)
Balance at December 31, 1994 $(167,115) $(48,782) $1,445,941
See Notes to Consolidated Financial Statements
</TABLE>
(Page 31)
<PAGE>
<TABLE>
<CAPTION>
GEICO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
For the year ended December 31, in thousands of
dollars 1994 1993 1992
Operating Activities:
Net income $ 207,764 $ 273,678 $ 172,773
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cumulative effect of changes in
accounting principles:
Postemployment benefits, net of tax 1,051 - -
Income taxes - 8,814 -
Postretirement benefits, net of tax - 3,935 -
Net premiums receivable (31,870) 168,585 (30,634)
Deferred policy acquisition costs (520) 2,170 (7,331)
Reinsurance receivables and prepaid
reinsurance premiums (6,334) 13,524 4,906
Loss, life benefit and loss adjustment
expense reserves 146,792 144,144 178,139
Unearned premiums 72,226 (157,736) 92,694
Dividends to policyholders - (3,902) (23,827)
Premium refunds - (27,700) -
Federal income taxes (18,556) 20,283 (52,655)
Realized gains (12,898) (120,584) (98,535)
Equity in undistributed earnings
of affiliate - (2,463) (736)
Provision for depreciation 22,434 19,377 15,769
Accrual of discount and amortization
of premiums on investments 13,687 4,665 (1,904)
Other 66,827 4,710 13,567
Net cash provided by operating
activities 460,603 351,500 262,226
Investing Activities:
Purchases of equity securities (210,633) (320,331) (276,654)
Purchases of fixed maturities (903,183) (1,275,425) (894,050)
Increase in payable on security
purchases 6,411 922 1,075
Sales of fixed maturities 75,440 108,618 129,998
Maturities and redemptions of fixed
maturities 497,979 543,043 523,995
Sales of equity securities 231,859 368,820 405,532
Net change in short-term investments 65,986 104,834 (113,068)
Change in receivable from security sales (1,102) (822) 15,948
Decrease in principal on loans
receivable 17,812 20,366 28,216
Proceeds from sales of affiliates and
subsidiaries 9,686 73,538 38,104
Purchase of property and equipment, net (28,197) (41,086) (27,962)
Other (529) 196 (10,420)
Net cash used by investing
activities (238,471) (417,327) (179,286)
Financing Activities:
Issuance of debt - 149,458 -
Repayment of debt (36,038) (2,102) (52,086)
Net change in short-term borrowings 9,300 16,300) 40,000
Decrease in savings deposits - - (23,149)
Exercise of stock options 1,129 783 10,400
Purchase of Common Stock (Treasury) (125,086) (22,696) (26,724)
Dividends paid to shareholders (69,864) (48,300) (42,464)
Other 7,645 7,274 2,496
Net cash provided (used) by
financing activities (212,914) 68,117 (91,527)
Change in cash 9,218 2,290 (8,587)
Cash at beginning of year 18,362 16,072 24,659
Cash at end of year $ 27,580 $ 18,362 $ 16,072
See Notes to Consolidated Financial Statements
</TABLE>
(page 32)
<PAGE>
GEICO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
BASIS OF REPORTING
The consolidated financial statements include the accounts of GEICO
Corporation (the Corporation) and its subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
The financial statements are presented in conformity with generally
accepted accounting principles (GAAP). These principles differ from
statutory accounting practices for the insurance subsidiaries. See Note C
regarding statutory amounts of net income, shareholder's equity and
limitations on dividends.
INVESTMENTS
Effective December 31, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" which requires the classification of securities into one
of three categories: held to maturity, available for sale, or trading. All
fixed maturities (bonds, notes and redeemable preferred stocks) have been
classified as available for sale and reported at market value since the
Corporation may not hold those securities to maturity. All equity
securities (common stocks and nonredeemable preferred stocks) have been
classified as available for sale and reported at market value. Prior to
December 31, 1993, all fixed maturities were reported at amortized cost and
all equity securities were reported at market value. Short-term investments
include repurchase agreements which are fully collateralized by U.S.
Treasury securities or obligations of U.S. government corporations and
agencies.
GEICO Corporation's equity in changes in unrealized appreciation
(depreciation) on investments reported at market value, after deferred
income tax effects, is reported directly in shareholders' equity. Realized
gains and losses on sales of investments, as determined on a specific
identification basis, are included in the statements of income. Investments
for which the current market value has declined below cost are reviewed and
a realized loss is recorded if it is warranted by the specific
circumstances.
LOANS RECEIVABLE
GEFCO records interest income on the accrual method, with suspension of
accrual if collection is not probable. Assets acquired in foreclosure are
held for sale and carried at the lower of fair value, net of estimated
selling costs, or cost. The allowance for loan losses is established based
upon estimates of future net losses, loss experience and prevailing economic
conditions. Continuing efforts are made to recover all monies written off.
Assets acquired in foreclosures of $17.4 million and $23.9 million are
included in other assets at December 31, 1994 and 1993, respectively.
REINSURANCE
Reinsurance receivables related to claims incurred and prepaid reinsurance
premiums are reported as assets.
DEFERRED POLICY ACQUISITION COSTS
Costs that vary with and are directly related to the production of business
and are recoverable have been deferred. Such costs include commissions,
premium taxes, advertising and certain underwriting and policy issuance
costs. The costs of acquiring insurance are being amortized to income as
the related written premiums are earned.
PROPERTY AND EQUIPMENT
The annual provisions for depreciation are computed by the straight-line
method over 31 to 45 year useful lives for buildings and over 3 to 10 year
useful lives for equipment.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Property and casualty loss reserves are based on averages for automobile
claims reported within the most recent three months, case-basis estimates
for other reported claims and calculated estimates of unreported losses.
The reserve for losses further includes additional amounts to reflect
anticipated future economic and social conditions. The determination of
these additional amounts includes consideration of studies of reserve levels
performed by independent consulting actuaries. The reserve for losses has
been reduced for anticipated salvage and subrogation recoveries. Loss
adjustment expense reserves are based upon estimates of expenses to be
incurred in the settlement of claims.
Management believes that its aggregate reserves for loss and loss
adjustment expenses at December 31, 1994 are reasonable and adequate to
cover the ultimate cost of losses on reported and unreported claims arising
from accidents which had occurred by that date, but such reserves are
necessarily based on estimates and the ultimate cost may vary from such
estimates. As adjustments to these estimates become necessary, such
adjustments are reflected in current operations. The methods used to
develop these reserves are subject to continuing review and refinement.
LIFE BENEFIT RESERVES AND POLICYHOLDERS' FUNDS
Liabilities for future life policy benefits have been computed principally
by the net level premium method with anticipated rates of mortality,
withdrawals and investment yield based upon company experience. Annuity
contracts without mortality risks are accounted for as investment contracts
and are recorded as policyholders' funds on deposit.
(page 33)
<PAGE>
PREMIUM REVENUE
Property and casualty premiums are earned prorata over the terms of the
policies, and life and annuity premiums are recognized as revenue over the
premium paying period. Premium revenue is reported net of reinsurance.
INCOME TAXES
The Corporation files a consolidated federal income tax return which
includes all subsidiaries except Criterion Life, which files a separate
return.
Effective January 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" which
required an adjustment of deferred taxes to the liability method and also
established guidelines for recognizing deferred tax assets. The cumulative
effect of adopting this statement was a charge of $8.8 million which is
included in the consolidated statements of income as a change in accounting
principle. Prior to 1993, deferred income taxes were provided for the
difference between the results of operations includable in the federal
income tax returns and that reported for financial statement purposes, as
required by the deferred method.
POSTRETIREMENT BENEFITS
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" which required employers to accrue
postretirement benefits, such as health care and life insurance plans for
retirees, over the period the employee works to earn the benefit rather than
using a pay-as-you-go cash basis. The cumulative effect of adopting this
statement was a charge of $3.9 million, net of tax, which is included in the
consolidated statements of income as a change in accounting principle.
POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards No. 112 "Employers' Accounting for Postemployment
Benefits" which required employers to accrue postemployment benefits, such
as long-term disability benefits, over the period the employee works to earn
the benefit rather than using a pay-as-you-go cash basis. The cumulative
effect of adopting this statement was a charge of $1.1 million, net of tax,
which is included in the consolidated statements of income as a change in
accounting principle.
(page 34)
<PAGE>
NOTE B: SUBSIDIARIES AND AFFILIATES
PROPERTY AND CASUALTY INSURANCE
The Corporation's property and casualty insurance subsidiaries are
Government Employees Insurance Company (GEICO), GEICO General Insurance
Company, GEICO Indemnity Company and GEICO Casualty Company.
Merastar Insurance Company and Southern Heritage Insurance Company,
former subsidiaries, were sold effective December 31, 1993 to a partnership,
of which GEICO Corporation's former Chairman is the general partner,
resulting in no material realized gain or loss after tax. Merastar and
Southern Heritage had approximately $96.1 million of assets and $42.0
million of shareholder's equity at the date of sale and premiums of $40.6
million in 1993. The results of their operations are included in the
property and casualty results until the date of sale.
<TABLE>
<CAPTION
PROPERTY AND CASUALTY INSURANCE
<S> <C> <C>
Condensed Balance Sheets December 31,
(In thousands) 1994 1993
Assets
Investments
Fixed maturities, at market $3,124,150 $2,970,337
Equity securities, at market 180,204 245,051
Short-term investments 42,014 59,908
Affiliates 8,776 18,274
Cash 22,882 12,600
Property and equipment, net 136,623 129,530
Premiums receivable, net 238,473 206,570
Reinsurance receivables 106,322 94,965
Prepaid reinsurance premiums 10,361 9,694
Deferred policy acquisition costs 72,359 71,839
Federal income taxes 91,303 17,543
Other assets 79,895 75,321
$4,113,362 $3,911,632
Liabilities and Shareholder's Equity
Reserves for losses and loss
adjustment expenses $1,956,460 $1,801,383
Unearned premiums 747,218 674,955
Other liabilities 216,281 208,872
Shareholder's equity 1,193,403 1,226,422
$4,113,362 $3,911,632
</TABLE>
<TABLE>
<CAPTION>
PROPERTY AND CASUALTY INSURANCE
<S> <C> <C> <C>
Condensed Income Statements Year Ended December 31,
(In thousands) 1994 1993 1992
Premiums $2,473,230 $2,281,147 $2,071,132
Net investment income 172,307 174,985 177,363
Realized gains on investments 16,611 81,481 142,386
Equity in income of affiliates (778) 1,832 5,687
Other revenue 1,359 1,868 1,927
Total Revenue 2,662,729 2,541,313 2,398,495
Losses and loss
adjustment expenses 1,999,381 1,823,662 1,720,756
Other expenses 391,397 382,022 347,279
Interest expense 3,266 3,653 4,557
Federal income tax expense 52,350 78,281 80,266
Total Benefits and Expenses 2,446,394 2,287,618 2,152,858
Net income before cumulative
effect of changes in
accounting principles 216,335 253,695 245,637
Cumulative effect of changes
in accounting principles (1,016) (9,721) -
Net Income $ 215,319 $ 243,974 $ 245,637
</TABLE>
<TABLE>
<CAPTION>
RESOLUTE GROUP, INC.
Resolute Group, Inc., a reinsurance subsidiary, stopped accepting new
business in late 1987. Summary financial data are as follows:
<S> <C> <C> <C>
(In millions) 1994 1993 1992
Investments $ 53.6 $ 55.5 $ 57.0
Total assets 82.9 90.2 106.0
Loss and loss adjustment
expense reserves 58.0 69.3 86.3
Shareholder's equity 19.2 18.0 13.9
Premiums earned .2 .1 .1
Underwriting gain (loss) 2.1 .8 (5.7)
Net investment income 2.9 3.4 3.6
Net income (loss) 3.2 3.3 (1.1)
</TABLE>
(page 35)
<PAGE>
LIFE INSURANCE
Criterion Life Insurance Company, a subsidiary, was formed in December 1991
and assumed the structured settlement annuity business previously written by
Garden State Life Insurance Company. Criterion Life writes structured
settlement annuities for the Corporation's property and casualty affiliates.
Summary financial data for the Corporation's life insurance subsidiaries,
including the operations of Garden State through its date of sale in June
1992, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In millions) 1994 1993 1992
Investments $ 96.1 $ 96.1 $ 77.4
Total assets 105.5 100.0 80.7
Shareholder's equity 3.7 11.7 10.2
Premiums 2.9 2.3 13.2
Net investment income 6.9 7.2 8.6
Net income (loss) .7 (.9) 3.0
</TABLE>
The sale of Garden State Life Insurance Company for $40.0 million was
completed in June 1992 and its operations are included in the consolidated
results up to the date of sale. Garden State had approximately $91 million
of assets and $53 million of shareholder's equity at the date of sale and
premiums of $10.7 million for the first six months of 1992. Realized gains
(losses) on investments in 1992 include a $14.0 million pretax loss on the
sale.
<TABLE>
<CAPTION>
GEFCO
Summary financial data for GEFCO, a consumer finance subsidiary, are as
follows:
<S> <C> <C> <C>
(In millions) 1994 1993 1992
Total assets $ 68.4 $ 86.4 $ 108.3
Shareholder's equity 7.9 12.0 14.1
Revenue 12.0 13.7 19.3
Net income (loss) (4.1) 1.9 2.3
</TABLE>
All savings deposits, which were held by GEIBank Industrial Bank, a former
subsidiary of GEFCO, were liquidated during 1992.
AVEMCO CORPORATION
In October 1993 the Corporation sold 3.3 million shares of its 3.9 million
shares of AVEMCO Corporation, previously a 34% owned general aviation
insurance company, for $57.6 million which resulted in an aftertax realized
gain of $15.9 million. Prior to this sale the investment in AVEMCO was
accounted for using the equity method. The remaining investment was
accounted for as an equity security available for sale and reported at
current market value, until sold in 1994 for $9.1 million which resulted in
an aftertax realized gain of $.8 million. Dividends of $.8 million in 1993
and $1.6 million in 1992 were received from AVEMCO while accounted for on
the equity method.
NOTE C: STATUTORY ACCOUNTING PRACTICES
<TABLE>
<CAPTION>
The Corporation's subsidiaries prepare their statutory financial statements
in accordance with accounting principles and practices prescribed by
regulatory authorities.
Results as determined under statutory practices are as follows:
<S> <C> <C> <C>
(In millions) 1994 1993 1992
Consolidated property and casualty
insurance and reinsurance:
Net income $ 211.4 $ 223.6 $ 233.3
Policyholders' surplus 1,039.9 916.9 968.3
Consolidated life insurance:
Net income (loss) (.2) .6 2.9
Policyholders' surplus 5.6 6.0 5.5
</TABLE>
Statutory requirements place limitations on the maximum amount of annual
dividends and other distributions which can be remitted to the Corporation
by its consolidated insurance subsidiaries without prior approval of the
appropriate state insurance commissioners. The consolidated insurance
companies had total shareholder's equity of $1,193.4 million at December 31,
1994 of which approximately $201.1 million is available for payment of
dividends in 1995 and other amounts may be available in the form of loans or
cash advances. The Corporation received dividends of $132.0 million, $147.1
million and $297.9 million in cash and securities from GEICO in 1994, 1993,
and 1992, respectively. During 1992 GEICO also distributed a dividend
consisting of its investment in GEICO Indemnity (GI) to the Corporation.
The Corporation contributed capital of $6 million to GI during 1994 and
received dividends of $14 million and $1 million from GI in 1993 and 1992,
respectively.
<TABLE>
<CAPTION>
NOTE D: INVESTMENT OPERATIONS
INVESTMENT INCOME
The sources of investment income are summarized as follows:
<S> <C> <C> <C>
(In thousands) 1994 1993 1992
Fixed maturities $189,876 $191,008 $182,096
Equity securities 13,639 12,692 17,549
Short-term investments 6,866 6,893 9,631
Other 1,023 1,045 2,111
Total investment income 211,404 211,638 211,387
Investment expenses 9,614 9,787 9,861
Net investment income $201,790 $201,851 $201,526
</TABLE>
The Corporation's investment in Federal Home Loan Mortgage Corporation
common stock with a market value of $166.0 million exceeded 10% of the
Corporation's shareholders' equity at December 31, 1994.
There were no investments in fixed maturities which were non-income
producing for the year ended December 31, 1994.
(page 36)
<PAGE>
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
Realized gains (losses) from sales and maturities of investments are
summarized as follows:
<S> <C> <C> <C>
(In thousands) 1994 1993 1992
Fixed maturities $ (2,175) $ 7,477 $ 11,887
Equity securities 15,367 90,418 100,692
Investments in subsidiaries
and affiliate (294) 22,689 (14,044)
Realized gains $ 12,898 $ 120,584 $ 98,535
</TABLE>
Realized gains and losses from sales and maturities of fixed maturities
consist of gross realized gains of $1.4 million, $8.0 million and $12.7
million and gross realized losses of $3.5 million, $.6 million and $.8
million for 1994, 1993 and 1992, respectively.
Realized gains on investments in subsidiaries and affiliates include a
$23.5 million realized gain in 1993 on the sale of AVEMCO shares and a $14.0
million realized loss in 1992 on the sale of Garden State.
<TABLE>
<CAPTION>
UNREALIZED APPRECIATION (DEPRECIATION)
A summary of the net change in unrealized appreciation (depreciation) on
investments in fixed maturities and equity securities in 1994 and 1993 and
equity securities in 1992, reflected directly in shareholders' equity, is as
follows:
<S> <C> <C> <C>
(In thousands) 1994 1993 1992
Increase (decrease) in
unrealized appreciation:
Fixed maturities $(219,216) $ 125,919 $ -
Equity securities 64,787 (63,826) (39,747)
Equity in affiliate's
unrealized appreciation
(depreciation) - (544) (237)
Deferred federal income
taxes 53,357 (25,750) 13,287
Increase (decrease) in unrealized
appreciation, net of deferred
taxes $(101,072) $ 35,799 $ (26,697)
</TABLE>
<TABLE>
<CAPTION>
Effective December 31, 1993 investments in fixed maturities are classified
as available for sale and reported at market value. The unrealized
appreciation on fixed maturities of $125.9 million at December 31, 1993 was
reflected directly in shareholders' equity in 1993.
A summary of unrealized appreciation on investments in fixed maturities,
which were reported at amortized cost in 1992, is as follows:
<S> <C>
(In thousands) 1992
Market value $2,588,560
Amortized cost 2,476,710
Unrealized appreciation at December 31, 1992 $ 111,850
Increase (decrease) in unrealized
appreciation during the year $ (34,833)
</TABLE>
<TABLE>
<CAPTION>
GROSS UNREALIZED GAINS (LOSSES)
Gross unrealized gains (losses) on investments in fixed maturities are
summarized as follows:
<S> <C> <C>
December 31,
(In thousands) 1994 1993
Gross unrealized gains:
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies $ 1,392 $ 31,179
Obligations of states and
political subdivisions 23,837 91,934
Corporate bonds and notes 170 3,980
Redeemable preferred stocks - 1,379
25,399 128,472
Gross unrealized losses:
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies 32,746 822
Obligations of states and political
subdivisions 74,415 720
Corporate bonds and notes 8,139 599
Redeemable preferred stocks 3,396 412
118,696 2,553
$ (93,297) $ 125,919
The consolidated unrealized appreciation on investments in equity securities
at December 31, 1994, before deferred tax effects, consisted of gross gains
of $247.3 million and gross losses of $21.6 million.
</TABLE>
<TABLE>
<CAPTION>
INVESTMENTS IN FIXED MATURITIES
The market value and amortized cost of investments in fixed maturities at
December 31, 1994 are shown below by their scheduled maturity dates.
Asset-backed securities, consisting of mortgage-backed obligations of U.S.
government corporations and agencies and corporate obligations
collateralized by mortgage and other financial instruments, are included
based on their estimated average remaining lives.
<S> <C> <C>
Market Amortized
(In thousands) Value Cost
1995 $ 422,563 $ 418,866
1996 - 1999 1,411,992 1,432,015
2000 - 2004 1,228,462 1,296,249
2005 and after 207,108 216,292
$3,270,125 $3,363,422
(page 37)
<PAGE>
NOTE E: LOANS RECEIVABLE
LOANS RECEIVABLE
Loans receivable are comprised primarily of GEFCO's collateral loans, with
maximum terms of 180 months, net of the allowance for loan losses. These
loans are primarily collateralized by residential real estate and timeshare
intervals, which are primarily in resort areas.
At December 31, 1994 and 1993, the accrual of interest income was
suspended on $1.5 million and $4.0 million of loans, respectively.
GEFCO has signed a letter of intent to sell approximately $44
million of loans receivable and other assets during 1995. At December 31,
1994, a valuation allowance of $3.3 million was recorded to reflect the
receivables to be sold at their anticipated net sales price and to record
the remaining receivables at their net realizable value. During the years
ended December 31, 1994 and 1993, principal cash collections on loans
receivable, including amounts from sales of loans, were approximately $32.7
million and $36.2 million, respectively.
In the normal course of its lending operations, GEFCO makes loan
commitments and issues standby letters of credit to its customers. At
December 31, 1994, outstanding commitments and letters of credit totaled
$11.4 million.
</TABLE>
<TABLE>
<CAPTION>
NOTE F: POLICY ACQUISITION COSTS
Policy acquisition costs incurred and expensed are summarized as
follows:
<S> <C> <C> <C>
(In thousands) 1994 1993 1992
Policy acquisition costs
incurred:
Commission and brokerage $ 31,564 $ 35,677 $ 31,418
Premium taxes 43,164 41,643 45,680
Advertising 30,565 26,220 24,101
Salaries, direct mail selling
and other 95,271 91,835 89,787
$ 200,564 $ 195,375 $ 190,986
Policy acquisition costs
expensed $ 200,044 $ 197,545 $ 183,655
</TABLE>
<TABLE>
<CAPTION>
NOTE G: PROPERTY AND CASUALTY RESERVES
Changes in property and casualty GAAP reserves for losses and loss
adjustment
expenses are as follows:
<S> <C> <C> <C>
(In thousands) 1994 1993 1992
Reserves at January 1, net of
reinsurance $1,747,026 $1,626,730 $1,450,357
Reserves of subsidiaries sold - (21,553) -
Cumulative effect of accounting
change for postretirement
benefits - 1,249 -
1,747,026 1,606,426 1,450,357
Incurred related to:
Current accident year 2,097,853 1,899,571 1,795,772
Prior accident years (101,335) (77,788) (70,814)
Total incurred 1,996,518 1,821,783 1,724,958
Payments related to:
Current accident year 1,128,223 973,706 950,792
Prior accident years 728,370 707,477 597,793
Total payments 1,856,593 1,681,183 1,548,585
Reserves at December 31, net of
reinsurance 1,886,951 1,747,026 1,626,730
Reinsurance receivables 125,373 120,933 129,478
GAAP reserves at
December 31 $2,012,324 $1,867,959 $1,756,208
</TABLE>
Reserves have been reduced by approximately $85.4 million, $77.0 million and
$73.3 million at December 31, 1994, 1993 and 1992, respectively, for
anticipated salvage and subrogation recoveries.
Reserves at December 31, 1994 include $100.0 million ($53.0 million
net after reinsurance) for commercial umbrella liability business, which was
issued by GEICO from 1981 to 1984. The ultimate development of losses
related to the significant risks of this long-tail business, which includes
environmental and product liability risks, is uncertain. Losses for GEICO's
commercial umbrella business cannot be projected using traditional actuarial
methods. The reserve for this business represents management's estimate of
the ultimate liability which will emerge from a small number of potentially
large claims. Management believes that the ultimate resolution of the
commercial umbrella business will not have a material impact on the
Corporation's financial position and results of operations.
(page 38)
<PAGE>
NOTE H: PREMIUM REFUNDS
On November 8, 1988, California voters passed Proposition 103, which called
for significant rate reductions and certain changes in the state's insurance
laws. In May 1993, the Corporation's insurance subsidiaries affected by
Proposition 103 entered into an agreement with the California Insurance
Department as to their California insurance premium refund obligations.
These companies agreed to pay an aggregate of $21 million to policyholders
affected and these payments fully discharged and extinguished all
obligations to roll back rates, make refunds or pay interest. Additionally,
the rates and rate levels in use since November 8, 1988 have been deemed
approved. During 1989 and 1990 the Companies had accrued $14.3 million and
$13.4 million, respectively, for potential premium refunds. As a result of
the settlement, premium refunds of $21.0 million were paid, resulting in a
$6.7 million pretax increase in operating earnings in 1993.
<TABLE>
<CAPTION>
NOTE I: DEBT
Debt consists of the following:
<S> <C> <C>
December 31,
(In thousands) 1994 1993
Corporate and Other
GEICO Corporation unsecured debt -
6.30% bank note due 1995 $ 30,000 $ -
9.15% Debentures due 2021 99,643 99,630
7.35% Debentures due 2023 149,485 149,467
GEICO collateralized debt -
9.53% note, $375 due semi-annually,
balance of $7,875 due in 1999 11,250 12,000
Collateralized debt of real estate
subsidiaries -
GEICO Properties, Inc.:
8 1/4% notes, prepaid in 1994 - 9,452
8 1/2% note, prepaid in 1994 - 5,420
GEICO Washington Properties, Inc.:
9 3/8% note, prepaid in 1994 - 20,416
Guaranteed bank loans of Employee Stock
Ownership Plan 50,000 50,000
Total corporate and other debt 340,378 346,385
Finance Company - GEFCO Unsecured Notes
Borrowings under credit agreement -
6.21% weighted average rate, due in 1995 51,000 -
3.41% weighted average rate, due in 1994 - 71,700
Total debt $391,378 $418,085
</TABLE>
DEBT AGREEMENTS
The Corporation has a credit agreement expiring July 1997 under which the
Corporation, GEICO or GEFCO can borrow up to $150 million with total
borrowings not to exceed $150 million. Amounts borrowed by GEICO and GEFCO
are guaranteed by GEICO Corporation. GEFCO had borrowed $51 million under
this agreement at December 31, 1994. This credit agreement replaced a
similar agreement in July 1994 under which GEFCO had borrowed $71.7 million
at December 31, 1993. The agreement provides several options for interest
and repayment terms and a facility fee of 12.50 basis points per annum.
Interest of $27.3 million, $18.2 million and $21.4 million was paid
during 1994, 1993 and 1992, respectively.
DEBT MATURITIES
The aggregate maturities of consolidated debt for the years 1995 through
1999 are $91.8 million, $10.2 million, $9.2 million, $7.7 million and $12.2
million, respectively.
COLLATERALIZED DEBT
Property with a cost of $16.9 million has been pledged as collateral for the
9.53% note of GEICO.
CAPITALIZED INTEREST
Corporate and other interest expense in the statements of income has been
reduced by $.2 million, $1.4 million and $.3 million in 1994, 1993 and 1992,
respectively, representing interest that was capitalized as part of the cost
to construct a new regional office building.
<TABLE>
<CAPTION>
NOTE J: FEDERAL INCOME TAXES
FEDERAL INCOME TAX EXPENSE
Federal income tax expense consists of the following components:
<S> <C. <C> <C>
(In thousands) 1994 1993 1992
Current tax expense $ 58,056 $ 108,560 $ 67,633
Deferred tax benefit (15,677) (14,927) (22,405)
Adjustment of net deferred tax asset
for enactment of rate change - (1,440) -
Federal income tax
expense $ 42,379 $ 92,193 $ 45,228
</TABLE>
Federal income taxes of $60.9 million, $71.7 million and $98.3 million were
paid during 1994, 1993 and 1992, respectively.
<TABLE>
<CAPTION>
EFFECTIVE FEDERAL TAX RATE RECONCILIATION
A reconciliation of the effective federal income tax rates in the
consolidated statements of income to the prevailing federal income tax rates
of 35% in 1994 and 1993 and 34% in 1992 is as follows:
<S> <C> <C> <C>
(In thousands) 1994 1993 1992
Income tax expense at the prevailing
rate of pretax income $ 87,918 $ 132,517 $ 74,120
Effect of:
Tax-exempt interest income (43,089) (33,385) (30,132)
Dividends received deduction (4,107) (4,196) (5,637)
Proration of investment income 5,270 3,497 2,975
Fresh start adjustment - - (1,913)
Sale of Garden State - - 4,461
Other (3,613) (6,240) 1,354
Federal income tax
expense $ 42,379 $ 92,193 $ 45,228
</TABLE>
The federal income tax expense for 1992 was reduced by $1.9 million for the
benefit of the "fresh start" adjustment to initially discount reserves at
January 1, 1987 as required by the Tax Reform Act of 1986. The remaining
$1.9 million of "fresh start" benefit at December 31, 1992 was recognized in
1993 as part of the cumulative adjustment to adopt Statement of Financial
Accounting Standards No. 109.
(page 39)
<PAGE>
<TABLE>
<CAPTION>
FEDERAL INCOME TAX ASSET
The components of the net federal income tax asset included in the financial
statements, as required by the liability method, are as follows:
<S> <C> <C>
(In thousands) December 31,
1994 1993
Deferred tax assets:
Unrealized losses on investments $ 49,093 $ 8,871
Loss and loss adjustment expense reserves 93,956 91,679
Unearned premium reserve 63,974 59,929
Deferred compensation 18,388 18,479
Accrued vacation 3,492 3,647
Postretirement benefits 2,466 2,230
Other 13,939 10,082
Total gross deferred tax assets 245,308 194,917
Deferred tax liabilities:
Unrealized gains on investments 95,451 109,279
Deferred policy acquisition costs 25,326 25,143
Tax benefit transfer lease 5,506 6,685
Property and equipment 5,437 5,391
Accrued investment income 4,602 3,864
Undistributed earnings - 3,027
Other 10,388 11,476
Total gross deferred tax liabilities 146,710 164,865
Net deferred tax asset 98,598 30,052
Current tax receivable (payable) 377 (3,321)
Federal income tax asset $ 98,975 $ 26,731
</TABLE>
The Corporation has not established a valuation allowance because it
believes it is more likely than not that all deferred tax assets will be
fully realized based upon the Corporation's past history of profitability
and anticipated future earnings.
<TABLE>
<CAPTION>
DEFERRED FEDERAL INCOME TAX BENEFIT
The deferred federal income tax benefit resulted from timing differences in
recognition of revenue and expenses for tax and financial statement purposes
as required by the deferred method in 1992 as follows:
<S> <C>
(In thousands) 1992
Deferral of policy acquisition costs $ 2,215
Unearned premiums (14,625)
Discounting of reserves (8,290)
Deferred compensation 3,008
Tax benefit transfer lease (732)
Other policy liabilities (421)
Affiliate's undistributed earnings 470
Other (4,030)
Deferred federal income tax benefit $ (22,405)
</TABLE>
NOTE K: SHAREHOLDERS' EQUITY
STOCK SPLIT AND SHARE RETIREMENT
On May 20, 1992 the Corporation's Common Stock was split five-for-one
resulting in the issuance of an additional 56,668,048 shares of $1 par value
Common Stock. At the same time, all Treasury Stock was retired. An
increase in the number of authorized shares to 150 million from 60 million
was also approved. Per share data in these financial statements and all
share and stock option information in this note reflect the stock split.
SHARE ACQUISITIONS
On May 20, 1992, the Board of Directors authorized the purchase of up to
7,000,000 shares of the Corporation's Common Stock from time to time
depending on market conditions.
The Corporation purchased 2,745,934; 453,854 and 670,616 shares of
Common Stock in 1994, 1993 and 1992, respectively, for an aggregate cost of
$137.4 million, $26.1 million and $31.8 million. The Corporation reissued
132,436; 63,997 and 187,675 shares of Common Stock for $7.1 million, $4.0
million and $7.7 million in 1994, 1993 and 1992, respectively. Subsequent
to December 31, 1994, the Corporation has purchased an additional 138,484
shares for $6.8 million.
As of December 31, 1994 and February 17, 1995, 3,726,104 and
3,587,620 shares, respectively, remain under the current repurchase
authorization.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
Under the Corporation's 1985 Stock Option Plan, options and related stock
appreciation rights (SARs) were granted to officers and key employees for
the purchase of Common Stock at 100% or more of the fair market value at the
date of grant. The options are exercisable in installments beginning one
year from the date of grant and expire not more than ten years and one month
thereafter. Exercisable options at December 31, 1994, 1993, 1992 and 1991
were 374,125; 389,435; 375,435 and 2,027,310, respectively. Under the plan,
an individual may exercise any combination of stock options and SARs as long
as the aggregate number does not exceed the number of stock options granted
to that individual. No more options may be granted under this plan. A
charge of $44.8 million was made against 1992 earnings for the SARs. In
January 1993 the remaining outstanding SARs related to options under the
1985 Stock Option Plan were cancelled and, accordingly, no further charge is
made against earnings for SARs.
Under the Corporation's 1992 Stock Option Plan, options to purchase
2,500,000 shares of Common Stock may be granted to officers and key
employees. The purchase price shall not be less than 100% of the fair
market value at date of grant, and the options are exercisable in
installments beginning six months from the date of grant and expire not more
than ten years thereafter. Exercisable options at December 31, 1994, 1993
and 1992 were 761,830, 71,500 and 17,500, respectively.
(page 40)
<PAGE>
<TABLE>
<CAPTION>
Activity under the 1985 and 1992 Stock Option Plans is summarized as
follows:
<S> <C> <C> <C>
Options Price
Available Per Share On Options
For Grant Date of Grant Outstanding
1985 Stock Option Plan:
Balance at
December 31, 1991 - $11.88 to $32.68 2,293,710
Exercised - 11.88 to 32.68 (1,759,875)
Forfeited - 29.30 (900)
Balance at
December 31, 1992 - 13.80 to 32.68 532,935
Exercised - 13.80 to 32.68 (47,000)
Forfeited - 25.10 (2,000)
Balance at
December 31, 1993 - 13.80 to 32.68 483,935
Exercised - 13.80 to 32.68 (81,610)
Forfeited - 25.10 (400)
Balance at
December 31, 1994 - $13.80 to $32.68 401,925
1992 Stock Option Plan:
Authorized 2,500,000
Granted (249,500) $38.15 to $57.25 249,500
Exercised - - -
Forfeited 2,500 45.81 (2,500)
Balance at
December 31, 1992 2,253,000 38.15 to 57.25 247,000
Granted (982,830) 53.06 to 64.44 982,830
Exercised - 5.81 (600)
Forfeited 3,900 45.81 to 63.94 (3,900)
Balance at
December 31, 1993 1,274,070 38.15 to 64.44 1,225,330
Granted (144,500) 49.44 to 54.31 144,500
Exercised - 45.81 (1,600)
Forfeited or expired 99,400 45.81 to 64.44 (99,400)
Balance at
December 31, 1994 1,228,970 $38.15 to $64.44 1,268,830
</TABLE>
PERFORMANCE SHARES
Under the Corporation's performance share plan, as approved by shareholders,
awards of performance shares may be made to key executives to be paid in
shares of the Corporation's Common Stock or cash based on the attainment of
certain goals. As of December 31, 1994, 149,587 performance share awards
were outstanding and 447,194 shares remained available for future awards.
Charges of $1.8 million, $3.1 million and $7.3 million were made against
1994, 1993 and 1992 earnings, respectively, under the plan.
SHARES RESERVED
At December 31, 1994 a total of 3,496,506 authorized shares have been
reserved for stock options and performance share awards.
NOTE L: EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average
number of common shares assumed outstanding of 69,992,442 in 1994,
71,417,006 in 1993 and 72,386,572 in 1992.
<TABLE>
<CAPTION>
NOTE M: EMPLOYEE BENEFITS
PENSION PLAN
The Corporation and its subsidiaries have a noncontributory defined benefit
pension plan covering most full-time employees. The plan provides for
payment based on salary and years of service. Annual contributions to the
plan are based on amounts determined by consulting actuaries. Plan assets
at December 31, 1994 consist primarily of common stocks and U.S. Government
obligations.
Pension expense is as follows:
<S> <C> <C> <C>
(In thousands) 1994 1993 1992
Service cost - benefits earned
during the year $ 8,314 $ 6,707 $ 6,057
Interest cost on projected
benefit obligation 12,989 11,888 10,817
Actual return on plan assets (10,786) (10,146) (15,217)
Amortization of net asset
existing at January 1, 1986 (3,426) (3,426) (3,426)
Other amortization and deferral (3,553) (3,247) 2,995
Net pension expense $ 3,538 $ 1,776 $ 1,226
The funded status of the plan is as follows: December 31,
(In thousands) 1994 1993
Actuarial present value of benefit obligations:
Vested $105,521 $116,736
Non-vested 2,521 3,257
Accumulated benefit obligation 108,042 119,993
Effect of projected future salary
increases 48,249 57,961
Projected benefit obligation 156,291 177,954
Plan assets at market value 204,460 198,680
Plan assets in excess of projected benefit
obligation 48,169 20,726
Unrecognized net gain (42,128) (4,221)
Unrecognized prior service costs 5,535 2,035
Unrecognized net asset at January 1, 1986
being recognized over eleven years (7,255) (10,681)
Pension asset $ 4,321 $ 7,859
</TABLE>
The projected benefit obligation was determined using an assumed discount
rate of 8.5% and 7%, an assumed long-term rate of return on plan assets of
8.5% and 8.5% and assumed average annual salary increases of 6.25% and 5.7%
in 1994 and 1993, respectively.
(page 41)
<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN
Substantially all employees of the Corporation and its subsidiaries are
covered under the GEICO Companies Employee Stock Ownership Plan (ESOP). The
ESOP may borrow money and use the proceeds to purchase shares of the
Corporation's Common Stock. The Corporation guarantees the loans and makes
annual contributions sufficient to enable the ESOP to pay principal and
interest to the extent it is not paid by dividends on the shares purchased
with the debt proceeds. Shares are released based on the proportion of debt
service paid in the year. The obligations of the ESOP, $50.0 million at
December 31, 1994 and 1993, are included in the Corporation's long-term
debt. An amount, representing the obligations of the ESOP which have not
yet been charged to compensation expense, is deducted from shareholders'
equity. Additional accrued compensation in excess of the current year debt
service is recorded as an expense based on the number of shares released to
participants' accounts.
Effective January 1, 1994 the Corporation adopted Statement of
Position No. 93-6 "Employers' Accounting for Employee Stock Ownership Plans"
on a prospective basis for shares acquired after December 31, 1992 (new
shares). Compensation cost is recognized on new shares based on the fair
value of the shares as of the date the shares are committed-to-be-released
to participants' accounts. Dividends on allocated new shares are charged to
retained earnings. Dividends on unallocated new shares are charged to
compensation cost and the shares are not considered outstanding for earnings
per share computations until committed-to-be-released. Compensation cost
for shares acquired on or before December 31, 1992 (old shares) is
recognized based on the cost of the shares to the plan. Dividends on old
shares are charged to retained earnings and such shares are considered
outstanding for earnings per share computations.
The components of Employee Stock Ownership Plan expense consist of
the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1994 1993 1992
Principal $ 10,098 $ 9,169 $ 6,506
Interest 3,569 3,684 3,798
Dividends used for debt
service (3,594) (2,390) (2,134)
Additional accrued compensation 393 301 212
Dividends on unallocated
new shares 244 - -
Fair value adjustment for
new shares (90) - -
ESOP expense $ 10,620 $ 10,764 $ 8,382
Shares held by the Employee Stock Ownership Plan consist of the
following:
<S> <C> <C>
December 31, 1994
Old Shares New Shares
Allocated 3,135,066 9,402
Committed-to-be-released 343,285 30,393
Unreleased 873,055 248,426
Total 4,351,406 288,221
Fair value of unreleased new shares $12,172,874
</TABLE>
PROFIT SHARING PLAN
The Corporation has a profit sharing plan covering substantially all
employees. Employer contributions of a discretionary amount are declared by
the Board of Directors based on profits. Employer contributions of $8.6
million, $6.4 million and $5.2 million were charged to expense in 1994, 1993
and 1992, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation provides certain health and life insurance benefits for
eligible retirees. The health benefits continue through age 65. Prior to
1993, the cost of providing these benefits was recognized on a pay-as-you-go
basis.
In 1993 the Corporation adopted Statement of Financial Accounting
Standards No. 106 "Employers' Accounting for Postretirement Benefits Other
Than Pensions." The cumulative effect of adopting this statement in 1993
was a charge of $3.9 million, net of tax, which is included in the
consolidated statements of income as a change in accounting principle.
Postretirement benefits expense consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1994 1993
Service cost - benefits earned during the
period $ 336 $ 285
Interest cost on accumulated postretirement
benefits obligation 504 491
Postretirement benefits expense $ 840 $ 776
The Corporation's postretirement benefits are not funded. The accumulated
postretirement benefits obligation is as follows:
<S> <C> <C>
(In thousands) December 31,
1994 1993
Retirees and dependents $ 1,715 $ 1,652
Fully eligible active plan participants 1,749 1,895
Other active plan participants 3,198 3,094
Accumulated postretirement benefits
obligation 6,662 6,641
Unrecognized net gain (loss) 384 (161)
Accrued postretirement benefits liability $ 7,046 $ 6,480
</TABLE>
The accumulated postretirement benefits obligation at December 31, 1994 was
determined using an assumed discount rate of 8.5% and an assumed health care
cost trend rate of 12.5% in 1994 decreasing to 6.0% in 2001 and thereafter.
The accumulated postretirement benefits obligation at December 31, 1993 was
determined using an assumed discount rate of 7% and an assumed health care
cost trend rate of 13.0% in 1993 decreasing to 5.5% in 2001 and thereafter.
An increase of 1 percent in the assumed health care cost trend rate in each
year would increase the December 31, 1994 accumulated postretirement
benefits obligation by approximately $.8 million and would increase the 1994
net periodic postretirement benefits cost by approximately $.1 million.
(page 42)
<PAGE>
NOTE N: REINSURANCE
The Corporation's insurance subsidiaries are involved in both the cession
and assumption of reinsurance with other companies. Reinsurance treaties
are maintained for the purpose of insuring certain excess and catastrophe
risks of the subsidiaries and a portion of most risks for Resolute
Reinsurance Company. The Corporation and its insurance subsidiaries remain
liable to the extent the reinsuring companies are unable to meet their
treaty obligations; however, certain amounts ceded are supported by letters
of credit or are indemnified.
The effect of reinsurance on premiums written and earned is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(In thousands) 1994 1993 1992
Premiums written:
Direct business $2,524,648 $2,106,320 $2,165,877
Reinsurance assumed 41,459 42,461 44,760
Reinsurance ceded (18,272) (17,500) (33,880)
$2,547,835 $2,131,281 $2,176,757
Premiums earned:
Direct business $2,450,790 $2,260,162 $2,078,220
Reinsurance assumed 43,092 46,355 40,585
Reinsurance ceded (17,606) (23,029) (34,303)
$2,476,276 $2,283,488 $2,084,502
</TABLE>
Amounts deducted from losses and loss adjustment expenses in the
consolidated statements of income for reinsurance cessions were $26.7
million, $25.5 million and $92.2 million in 1994, 1993 and 1992,
respectively. Amounts deducted from life benefits in the consolidated
statements of income for reinsurance cessions were $1.2 million in 1992.
NOTE O: BUSINESS SEGMENTS
GEICO Corporation's dominant business segment, pursuant to Statement of
Financial Accounting Standards No. 14, is property and casualty insurance,
reflecting a reduction in the Corporation's reinsurance, life insurance and
annuities, and finance business in recent years.
NOTE P: COMMITMENTS AND CONTINGENCIES
Rental expense for all leases was $14.7 million in 1994, $13.7 million in
1993 and $16.8 million in 1992.
The Corporation and its subsidiaries have entered into
noncancellable leases expiring at various dates through 2000 for both real
estate and equipment, all of which are operating leases. The future minimum
rental commitments as of December 31, 1994 for noncancellable leases with a
remaining term of at least one year totaled $11.3 million including $3.6
million, $3.3 million, $2.5 million, $1.6 million and $.3 million for the
years 1995 through 1999, respectively.
In the ordinary course of its insurance operations, the Corporation
is affected by various regulatory, legislative and judicial actions. In the
opinion of management, loss to the Corporation materially in excess of
amounts provided for in the financial statements as a result of any such
actions is not probable.
NOTE Q: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties.
The carrying amounts and fair values of the Corporation's financial
instruments are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(In millions) December 31, 1994
Carrying Fair
Amount Value
Assets:
Fixed maturities $3,270.1 $3,270.1
Equity securities 782.7 782.7
Short-term investments 50.0 50.0
Loans receivable, net 59.4 59.4
Liabilities:
Policyholders' funds on deposit 64.2 66.1
Total debt 391.4 369.8
<S> <C> <C>
(In millions) December 31, 1993
Carrying Fair
Amount Value
Assets:
Fixed maturities $3,175.4 $3,175.4
Equity securities 727.2 727.2
Short-term investments 116.0 116.0
Loans receivable, net 75.8 75.6
Liabilities:
Policyholders' funds on deposit 53.0 60.5
Total debt 418.1 443.4
</TABLE>
The fair value of investments in fixed maturities are based on quoted market
prices, where available, and obtained from independent pricing services for
securities not actively traded. Equity securities are valued based on
quoted market prices. The cost of short-term investments approximates fair
value due to the short maturity of these instruments. The fair value of net
loans receivable at December 31, 1994 is based on the anticipated sales
price pursuant to a letter of intent to sell certain loans in 1995 plus the
estimated net realizable value for the remaining loans. The fair value of
net loans receivable at December 31, 1993 was estimated by discounting the
future cash flows of homogeneous categories of loans using the current rates
at which similar loans would be made to borrowers with similar credit
ratings for the same remaining period. The fair value of policyholders'
funds on deposit is determined by discounting future cash flows. Debt is
valued based on quoted market prices for GEICO Corporation's Debentures and
on quoted market prices for similar issues of debt with similar remaining
maturities for all other debt.
(page 43)
<TABLE>
<CAPTION>
Geico Corporation
Supplemental Financial Information
Quarterly Highlights of Operating Results (Unaudited)
(In millions, except per share results)
<S> <C> <C> <C> <C>
1994
Three Months Ended
Dec. 31 Sept. 30 June 30 Mar. 31
Revenue
Premiums $653.9 $629.6 $605.3 $587.6
Net investment income 53.7 50.1 49.5 48.4
Realized gains on investments .6 1.8 4.0 6.6
Interest on loans receivable 2.6 2.5 2.6 2.7
Affiliate and other revenue 3.7 3.7 3.6 3.6
Total Revenue 714.5 687.7 665.0 648.9
Benefits and Expenses
Losses and loss
adjustment expenses 525.6 498.7 478.7 493.5
Life benefits and interest
on policyholders' funds 2.0 2.0 2.1 2.5
Policy acquisition expenses 51.4 48.1 50.5 50.0
Other operating expenses 60.8 59.7 55.6 55.8
Impact of premium refunds - - - -
Interest expense 7.2 6.6 6.5 7.5
Total Benefits
and Expenses 647.0 615.1 593.4 609.3
Net Income Before
Income Taxes 67.5 72.6 71.6 39.6
Federal income tax expense 10.9 13.9 14.2 3.4
Net income before cumulative
effect of changes in
accounting principles 56.6 58.7 57.4 36.2
Cumulative effect of changes
in accounting principles:
Postemployment benefits,
net of tax - - - (1.1)
Income taxes - - - -
Postretirement benefits,
net of tax - - - -
Net Income $ 56.6 $ 58.7 $ 57.4 $ 35.1
Earnings Per Share
Net income before cumulative
effect of changes in
accounting principles $ .83 $ .84 $ .81 $ .51
Cumulative effect of changes
in accounting principles - - - (.01)
Net Income $ .83 $ .84 $ .81 $ .50
</TABLE>
<TABLE>
<CAPTION>
Supplemental Financial Information
Quarterly Highlights of Operating Results (Unaudited)
(In millions, except per share results)
<S> <C> <C> <C> <C>
1993
Three Months Ended
Dec. 31 Sept. 30 June 30 Mar. 31
Revenue
Premiums $ 598.0 $ 581.1 $ 563.6 $ 540.8
Net investment income 50.3 50.6 51.4 49.5
Realized gains on investments 19.8 29.5 36.9 34.4
Interest on loans receivable 2.6 2.9 2.8 3.2
Affiliate and other revenue 4.1 5.6 5.0 6.2
Total Revenue 674.8 669.7 659.7 634.1
Benefits and Expenses
Losses and loss
adjustment expenses 490.9 456.5 444.4 430.0
Life benefits and interest
on policyholders' funds 7.0 2.4 2.4 1.6
Policy acquisition expenses 51.2 51.2 48.7 46.4
Other operating expenses 58.5 50.6 53.1 51.5
Impact of premium refunds - - (6.7) -
Interest expense 5.9 7.3 3.2 3.5
Total Benefits
and Expenses 613.5 568.0 545.1 533.0
Net Income Before
Income Taxes 61.3 101.7 114.6 101.1
Federal income tax expense 11.1 25.5 30.1 25.5
Net income before cumulative
effect of changes in
accounting principles 50.2 76.2 84.5 75.6
Cumulative effect of changes
in accounting principles:
Postemployment benefits,
net of tax - - - -
Income taxes - - - (8.8)
Postretirement benefits,
net of tax - - - (3.9)
Net Income $ 50.2 $ 76.2 $ 84.5 $ 62.9
Earnings Per Share
Net income before cumulative
effect of changes in
accounting principles $ .70 $ 1.07 $ 1.18 $ 1.06
Cumulative effect of changes
in accounting principles - - - (.18)
Net Income $ .70 $ 1.07 $ 1.18 $ .88
</TABLE>
(page 44)
Financial Accounting Standards
EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS - STATEMENT NO. 112
Statement 112 established accounting standards for accruing obligations
related to benefits provided by employers to former or inactive employees
after employment but before retirement. Such benefits may include salary
continuation, supplemental unemployment benefits, severance benefits,
disability-related benefits, job training and continuation of health care
and life insurance coverages.
The Corporation adopted Statement 112 effective January 1, 1994. The
cumulative effect of adopting this Statement was a charge of $1.1 million,
net of tax, which is included in the consolidated statements of income as a
change in accounting principle.
DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF
FINANCIAL
INSTRUMENTS - STATEMENT NO. 119
Statement 119 establishes footnote disclosure requirements about amounts,
nature and terms of derivative financial instruments such as futures,
forward, swap and option contracts. The Corporation has not invested in
these types of derivative financial instruments to any significant extent.
This Statement also amends Statement 107 "Disclosures about Fair Value of
Financial Instruments" to require a summary footnote showing carrying values
and fair values for all financial instruments. This information is shown in
Note Q to the accompanying financial statements.
EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS - STATEMENT OF
POSITION NO. 93-6
In November 1993, Statement of Position No. 93-6 was issued which
significantly changed the way employers report transactions with leveraged
employee stock ownership plans (ESOPs). This Statement requires employers
to recognize compensation cost based on the fair value of the ESOP shares as
of the date the shares are committed-to-be-released, beginning with shares
acquired after December 31, 1992. The Corporation previously recognized
compensation cost as the shares were committed-to-be-released based on the
cost of the shares at the date the shares were acquired. The Corporation
adopted this Statement in 1994 on a prospective basis for ESOP shares
acquired after December 31, 1992.
DISCLOSURES OF CERTAIN MATTERS IN THE FINANCIAL STATEMENTS OF INSURANCE
ENTERPRISES - STATEMENT OF POSITION NO. 94-5
This Statement of Position requires financial statement disclosure of any
accounting methods used in statutory financials that are permitted by state
insurance departments rather than prescribed statutory accounting practices.
As described in Note C, the Corporation's insurance subsidiaries prepare
their statutory financial statements in accordance with accounting
principles and practices prescribed by regulatory authorities.
This Statement also requires disclosure of information about unpaid
loss and loss adjustment expenses, which is included in Note G to the
accompanying financial statements.
(page 45)
GEICO Corporation
Board of Directors
(caption)
Pictured from left to right; Sam Butler, Tony Nicely, Coleman Raphael, Jim
Cheek, Al Sparks, Jim Clark, John Bretherick, Norma Brown, Bill Ruane, Del
Lewis, Lou Simpson and Reid Thompson.
John H. Bretherick, Jr.
Retired President,
Continental Corporation
Norma E. Brown
Major General,
U.S. Air Force, Retired
Samuel C. Butler
Partner,
Cravath, Swaine & Moore
James E. Cheek
President Emeritus,
Howard University
A. James Clark
Chairman of the Board and President,
Clark Enterprises, Inc.
Delano E. Lewis
President and Chief Executive Officer,
National Public Radio
Olza M. Nicely
President and Chief Executive Officer -
Insurance Operations,
GEICO Corporation
Coleman Raphael
Retired Dean,
School of Business Administration,
George Mason University
William J. Ruane
Chairman of the Board,
Ruane, Cunniff and Co., Inc.
Louis A. Simpson
President and Chief Executive Officer -
Capital Operations,
GEICO Corporation
W. Alvon Sparks, Jr.
Executive Vice President and
Chief Financial Officer,
GEICO Corporation
W. Reid Thompson
Retired Chairman of the Board,
Potomac Electric Power Company
Honorary Director
Lorimer A. Davidson
Chairman Emeritus,
GEICO Corporation
Edward H. Utley retired as Vice Chairman of the Board in November 1994. Mr.
Utley had been Vice Chairman of the Board since 1993, having served as a
Director since 1990 and as President of the Corporation from 1989 to 1993.
(page 46)
COMMITTEES OF THE BOARD
As of December 31, 1994 GEICO Corporation's Board of Directors consisted of
12 members. Assisting the Board in the management of its responsibilities
are five Board Committees. The names of those serving on the Committees and
primary Committee functions are as follows:
Audit Committee
W. Reid Thompson, Chair
John H. Bretherick, Jr.
Norma E. Brown
A. James Clark
Delano E. Lewis
In addition to recommending the appointment of the Corporation's Independent
Accountants, the Audit Committee, which is comprised of non-management
Directors, monitors the Accountants' audits; reviews the audit results with
management and the Accountants; reviews the Annual Report on Form 10-K;
reviews the Corporation's internal controls and accounting procedures with
the Accountants and the Internal Auditor; reviews compliance with the
Corporation's Business Ethics Policy; and carries out actions required under
the Foreign Corrupt Practices Act. The Internal Auditor reports directly to
the Audit Committee and functions as its staff.
Executive Committee
Samuel C. Butler, Chair
Olza M. Nicely
William J. Ruane
Louis A. Simpson
W. Reid Thompson
This Committee has the power to exercise most of the powers of the Board of
Directors when the Board is not in session; recommends plans relating to the
development of corporate structure; reviews proposals regarding merger or
affiliation with other companies; reviews proposals to enter new or expanded
lines of business; and analyzes corporate practices involving disclosure.
Finance Committee
Louis A. Simpson, Chair
James E. Cheek
A. James Clark
Olza M. Nicely
Coleman Raphael
William J. Ruane
W. Alvon Sparks, Jr.
The Finance Committee approves broad investment policies and guidelines and
assists the Corporation's Investment Advisor in their development; approves
and monitors eligible securities; approves all marketable investments and
non-marketable investments in controlled operating units of $25 million or
more and in non-controlled operating units of $5 million or more; monitors
the portfolio to perform the fiduciary responsibilities of the Board,
keeping in mind the makeup of the Corporation's liabilities; monitors the
investment portfolio and its performance relative to comparative standards;
authorizes the purchase, conversion, transfer and sale of stocks, bonds and
of other securities within prescribed guidelines; and approves borrowings by
the Corporation of up to $50 million.
Human Resources Committee
Samuel C. Butler, Chair
John H. Bretherick, Jr.
Coleman Raphael
William J. Ruane
W. Reid Thompson
This Committee reviews programs relating to the development of human
resources, including personnel and compensation practices, education and
training programs and the introduction of external resources (both the
hiring of new associates and retention of consultants). It approves the
compensation of the senior officers of the Corporation and GEICO and the
Presidents of the affiliated companies and reviews the annual budget for
officers' salaries; approves and administers compensation programs;
maintains responsibility for administration of employee benefit plans;
approves or recommends to the Board amendments to the employee benefit
plans; elects all officers of the Corporation and GEICO, except the Chairman
of the Board, Vice Chairman of the Board, Chief Executive Officer(s),
President(s), Executive Vice President(s) and Senior Vice President(s) and
Senior Officers of affiliated companies; reviews management's organizational
plans; and approves Directors' compensation. The Committee also recommends
proposed nominees for election to the Board by the shareholders at the
Annual Meeting or by the Board to fill an existing vacancy.
Social Responsibility Committee
Norma E. Brown, Chair
James E. Cheek
Delano E. Lewis
W. Alvon Sparks, Jr.
This Committee oversees the fulfillment of social responsibilities to
shareholders, policyholders, associates and the general public; reviews the
Affirmative Action Program with respect to employment and upward mobility of
females, minorities and disadvantaged segments of society; monitors
involvement in political action, particularly with respect to state
legislative affairs; and reviews responsibilities to society in the
providing of insurance services and allocating charitable contributions.
(page 47)
GEICO Corporation and Affiliates
Senior Officers
Government Employees Insurance Company
Olza M. Nicely
Chairman, President and
Chief Executive Officer
Senior Vice Presidents
Marion E. Byrd
Simone J. Pace
W. Alvon Sparks, Jr.
Group Vice President
Thomas M. Wells,* Controller
Vice Presidents
Martin Adler, Actuary
R. Paul Cheek
Andrea M. Covell,* Legislative Counsel
Charles R. Davies,* General Counsel
Carroll R. Franklin*
James M. Hitt
Alan R. Ledbetter
Michael F. Long
Donald R. Lyons
Robert M. Miller
David H. Pushman
William E. Roberts
David L. Schindler
Richard C. Van Essendelft
Treasurer
Charles G. Schara*
Corporate Secretary
Rosalind Ann Phillips*
GEICO Corporation
Olza M. Nicely
President and Chief Executive Officer-Insurance Operations
Louis A. Simpson
President and Chief Executive Officer-Capital Operations
W. Alvon Sparks, Jr.
Executive Vice President and
Chief Financial Officer
Simone J. Pace
Senior Vice President and
Chief Information Officer
Rynthia M. Rost
Vice President
GEICO Indemnity Company and
GEICO Casualty Company
Olza M. Nicely
Chairman, President and
Chief Executive Officer
GEICO General Insurance Company
Olza M. Nicely
Chairman, President and
Chief Executive Officer
Government Employees Financial Corporation
W. Alvon Sparks, Jr.
Chairman
John M. Avery
President and
Chief Executive Officer
Criterion Life Insurance Company
W. Alvon Sparks, Jr.
Chairman
Charles G. Schara
President
*Also Officers of GEICO
Corporation with title shown.
(page 48)
Annual Meeting
The Annual Meeting of Shareholders of GEICO Corporation will be held on May
10, 1995 at 10:00 a.m. at the GEICO Fredericksburg Office Building, Route 17
North at Route 654, Stafford County, Virginia.
Transfer Agent and Registrar
The Bank of New York
1-800-524-4458
Shareholder Inquiries
Address shareholder inquiries, including lost
certificate inquiries to:
The Bank of New York
Shareholder Relations Department - 11E
Church Street Station
P.O. Box 11258
New York, NY 10286
Send certificates for transfer and address changes to:
The Bank of New York
Receive and Deliver Department - 11W
Church Street Station
P.O. Box 11002
New York, NY 10286
Stock Exchange Listing
The Corporation's Common Stock is listed on the New York and Pacific Stock
Exchanges. The Common Stock trades under the symbol "GEC."
Statistical Supplement
A statistical supplement for GEICO Corporation containing details of certain
financial and other data which are summarized in this report is available to
shareholders and other interested parties upon written request to the Office
of the Secretary.
Independent Auditors
The financial statements contained in this report have been examined by
Coopers & Lybrand L.L.P., GEICO Corporation's independent auditors. Coopers
& Lybrand L.L.P. has been appointed by the Board of Directors, subject to
ratification by the shareholders, to examine the Corporation's 1995
financial statements. A representative of Coopers & Lybrand L.L.P. will be
present at the Annual Meeting.
Form 10-K
The Corporation's Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission, will be available after March 31, 1995 without
charge to shareholders, upon written request to:
Rosalind Ann Phillips
Corporate Secretary
GEICO Corporation
One GEICO Plaza
Washington, D.C. 20076-0001
This report and the financial statements herein have been published for the
general information of shareholders of GEICO Corporation and are not
intended to induce any purchase or sale of securities.
This report was printed on recycled paper.
(inside back cover)
