FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Three Months Ended June 30, 1995
Commission File No 1-8012
GEICO CORPORATION
Delaware 52-1135801
(Jurisdiction of Incorporation) (IRS Employer Identification
No.)
One GEICO Plaza, Washington, D.C. 20076
Registrant's Telephone No: (301) 986-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES x NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of July 31, 1995
Common Stock, $1.00 par value 67,719,710
Page 1 of 9 pages
FORM 10-Q - QUARTERLY REPORT
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GEICO CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
Investments: 1995 1994
<S> <C> <C>
Fixed maturities available for sale, at
market (amortized cost $3,540,774,456
and $3,363,422,770) $ 3,597,830,943 $ 3,270,125,446
Equity securities available for sale,
at market (cost $517,904,178 and
$556,960,522) 863,030,114 782,708,006
Short-term investments 201,322,196 50,032,937
Total Investments 4,662,183,253 4,102,866,389
Cash 20,086,042 27,579,312
Loans receivable, net 11,144,853 59,448,297
Accrued investment income 67,464,881 67,254,744
Premiums receivable 255,753,076 238,652,876
Reinsurance receivables 125,906,451 127,189,085
Prepaid reinsurance premiums 11,915,754 10,361,216
Amounts receivable from sales of securities 401,600 2,022,214
Deferred policy acquisition costs 72,803,160 72,358,845
Federal income taxes 22,967,680 98,974,942
Property and equipment, at cost less accumulated
depreciation of $124,861,429 and $113,612,108 140,126,345 141,741,242
Other assets 41,752,866 49,656,013
TOTAL ASSETS $ 5,432,505,961 $ 4,998,105,175
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Property and casualty loss reserves $ 1,798,906,744 $ 1,704,717,841
Loss adjustment expense reserves 320,188,578 307,606,072
Unearned premiums 792,874,989 747,342,502
Life benefit reserves and policyholders' funds 106,936,809 101,297,929
Debt:
Corporate and other 424,791,681 340,378,156
Finance company 6,400,000 51,000,000
Amounts payable on purchases of securities 48,720,655 8,407,963
Other liabilities 275,584,835 291,414,052
Total Liabilities 3,774,404,291 3,552,164,515
SHAREHOLDERS' EQUITY
Common Stock - $1 par value, 150,000,000
shares authorized, 71,636,509 and
71,565,359 issued, 67,835,260 and
68,291,463 outstanding 71,636,509 71,565,359
Paid-in surplus 173,240,504 169,083,940
Unrealized appreciation of investments 266,369,062 91,166,775
Retained earnings 1,403,710,463 1,330,021,435
Treasury Stock, at cost (3,801,249 and 3,273,896
shares of Common Stock) (193,612,618) (167,114,614)
Unearned Employee Stock Ownership Plan shares (63,242,250) (48,782,235)
Total Shareholders' Equity 1,658,101,670 1,445,940,660
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,432,505,961 $ 4,998,105,175
See Notes to Consolidated Financial Statements
</TABLE>
Page 2 of 9 pages
GEICO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE> (Unaudited)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
REVENUE
<S> <C> <C> <C> <C>
Premiums $688,595,734 $605,255,952 $1,347,599,739 $1,192,796,685
Investment income, net of
expenses of $2,518,140 and
$5,056,696 in 1995 and
$2,339,094 and $4,688,782 in
1994 56,439,215 49,545,844 111,738,023 97,967,339
Realized gains (losses) on
investments (5,408,294) 3,981,297 201,514 10,579,537
Interest on loans receivable 693,436 2,568,935 3,095,021 5,217,547
Other revenue 3,699,183 3,616,104 7,563,542 7,248,006
Total Revenue 744,019,274 664,968,132 1,470,197,839 1,313,809,114
BENEFITS AND EXPENSES
Losses and loss adjustment
expenses 574,597,621 478,680,139 1,105,599,005 972,172,672
Life benefits and interest
on policyholders' funds 2,660,546 2,137,223 4,660,657 4,610,885
Policy acquisition expenses 52,853,772 50,495,931 104,284,247 100,490,567
Other operating expenses 49,438,374 55,595,186 106,497,524 111,444,569
Interest expense:
Corporate and other 8,761,285 5,750,772 15,329,188 12,548,226
Finance company 311,769 733,192 1,081,898 1,392,601
Total Benefits and Expenses 688,623,367 593,392,443 1,337,452,519 1,202,659,520
Net income before income
taxes 55,395,907 71,575,689 132,745,320 111,149,594
Federal income tax expense 7,627,651 14,168,232 22,736,785 17,581,865
Net income before cumulative
effect of change in
accounting principle 47,768,256 57,407,457 110,008,535 93,567,729
Cumulative effect of change in
accounting principle for
postemployment benefits,
net of tax - - - (1,051,329)
Net Income $ 47,768,256 $ 57,407,457 $ 110,008,535 $ 92,516,400
Earnings Per Share
Net income before cumulative
effect of change in
accounting principle $ .71 $ .81 $1.62 $1.32
Cumulative effect of change
in accounting principle - - - (.01)
Net Income $ .71 $ .81 $1.62 $1.31
Dividends Per Share $ .27 $ .25 $ .54 $ .50
See Notes to Consolidated Financial Statements
</TABLE>
Page 3 of 9 pages
GEICO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1995 1994
Operating Activities:
<S> <C> <C>
Net income $ 110,008,535 $ 92,516,400
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting
principle for postemployment benefits,
net of tax - 1,051,329
Net premiums receivable (17,100,200) (11,718,358)
Deferred policy acquisition costs (444,315) 1,428,201
Reinsurance receivables and prepaid reinsurance
premiums (271,904) (5,819,694)
Loss, life benefit and loss adjustment
expense reserves 107,738,248 83,065,536
Unearned premiums 45,532,487 35,914,138
Federal income taxes (18,955,851) (3,778,966)
Realized gains (201,514) (10,579,537)
Provision for depreciation 12,901,109 10,546,490
Amortization of premiums, net of accrual of
discount, on investments 6,382,184 9,505,660
Other (5,641,145) 25,086,246
Net cash provided by operating activities 239,947,634 227,217,445
Investing Activities:
Purchases of equity securities (90,853,264) (108,562,050)
Purchases of fixed maturities (527,669,665) (456,468,915)
Increase in payable on security purchases 40,312,692 9,626,757
Sales of fixed maturities 89,742,387 21,462,315
Maturities and redemptions of fixed maturities 255,872,590 335,257,184
Sales of equity securities 132,422,380 53,958,616
Net change in short-term investments (151,289,259) (23,068,687)
Change in receivable from security sales 1,620,614 (8,603,704)
Loans receivable sold or repaid 49,420,825 6,795,833
Proceeds from sale of subsidiary - 9,686,024
Purchase of property and equipment, net (11,286,212) (17,153,727)
Other 345,139 279,848
Net cash used by investing activities (211,361,773) (176,790,506)
Financing Activities:
Issuance of debt 99,768,000 -
Repayment of debt (375,000) (1,096,283)
Net change in short-term borrowings (74,600,000) 3,200,000
Exercise of stock options 1,498,285 756,505
Purchase of Common Stock (Treasury) (27,890,021) (24,697,726)
Dividends paid to shareholders (36,746,825) (35,249,060)
Other 2,266,430 2,976,602
Net cash used by financing activities (36,079,131) (54,109,962)
Change in cash (7,493,270) (3,683,023)
Cash at beginning of period 27,579,312 18,361,546
Cash at end of period $ 20,086,042 $ 14,678,523
See Notes to Consolidated Financial Statements
</TABLE>
Page 4 of 9 pages
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with the instructions to Form 10-Q and,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. However, in the
opinion of management, the financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows.
The information has been prepared from the records of GEICO Corporation (the
Corporation) which are subject to audit at year-end by independent public
accountants. The results of operations for the six months ended June 30,
1995 are not necessarily indicative of such results for the entire year.
Consolidation
The consolidated financial statements include the accounts of GEICO
Corporation and its subsidiaries.
Significant intercompany accounts and transactions have been eliminated.
Income Taxes
Federal income taxes in the statements of income are based on an estimated
annual effective tax rate which reflects exclusion of tax-exempt interest
income and the intercorporate dividends received deduction.
Postemployment Benefits
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.
Common Stock Repurchases
During the first six months of 1995 the Corporation repurchased a net
527,353 shares of its Common Stock for $26.1 million. In May 1995 the
Board of Directors increased the Common Stock repurchase authorization to
7 million shares. At June 30, 1995 there were 6,920,246 shares remaining
under the current repurchase authorization.
Earnings Per Share
The computation of earnings per share is based on the weighted average
number of common shares assumed outstanding of 67,442,993 and 70,486,273 for
the three months ended June 30, 1995 and 1994, respectively, and 67,782,713
and 70,669,950 for the six months ended June 30, 1995 and 1994,
respectively.
Page 5 of 9 pages
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Consolidated premiums were $688,595,734 for the second quarter of 1995, up
13.8 percent from $605,255,952 in 1994. For the six months ended June 30,
earned premiums were $1,347,599,739 in 1995, up 13.0 percent from
$1,192,796,685 in 1994, reflecting continued growth in voluntary auto lines
and modest rate increases. The number of voluntary automobile policies in
force grew 8.2 percent during the twelve month period ending June 30, 1995.
Total voluntary policies in force (all lines) grew 4.7% in the same time
period as homeowners policies have declined. Policy growth in the
standard and nonstandard auto lines was 30.3 percent as efforts have been
expanded to offer a rate quote to potential customers who do not meet
GEICO/GEICO General preferred-risk underwriting guidelines. These lines
currently have a modest premium base, but provide an opportunity for
significant growth. New business homeowner insurance sales are less in 1995
than 1994.
On April 4, 1995 GEICO announced an agreement with Aetna Fire and Casualty
(Aetna) to phase out of GEICO's homeowners business over the next three
years. On July 24, 1995 GEICO began offering new homeowners customers Aetna
policies. The great majority of GEICO's existing homeowners customers will
be offered renewal policies in Aetna as their policies begin to expire after
January 1, 1996. GEICO will act as the servicing agent for these policies.
The agreement with Aetna should have little impact on 1995 financial
results.
Pre-tax net investment income increased 13.9 percent to $56,439,215 for the
second quarter of 1995 from $49,545,844 in the second quarter of 1994. For
the six months ended June 30, pre-tax net investment income was $111,738,023
in 1995, up 14.1 percent from $97,967,339 in 1994. The increase reflects
additional funds from operations available for investment and higher yields
on fixed income securities. After-tax net investment income for the six
months increased 12.7 percent to $95.1 million from $84.4 million.
Realized losses on investments were $5,408,294 for the second quarter of
1995 compared to realized gains of $3,981,297 in the second quarter of 1994.
For the six months ended June 30, realized gains on investments were
$201,514 in 1995 and $10,579,537 in 1994. 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.
Interest on loans receivable decreased 40.7 percent to $3,095,021 for the
six month period ended June 30, 1995 from the comparable prior year period
as Government Employees Financial Corporation (GEFCO), our finance
subsidiary, continues to reduce its loans receivable. In April 1995, GEFCO
sold $38 million of its remaining receivables and other assets and used the
proceeds to reduce its short-term debt. At June 30, 1995 GEFCO had
approximately $19 million of remaining assets.
Losses and loss adjustment expenses incurred increased 20.0 percent and 13.7
percent to $574,597,621 and $1,105,599,005 for the three and six months
ended June 30, 1995 over the comparable prior year periods. Catastrophe
losses in the second quarter of 1995 were approximately $35 million. The
major losses were from hailstorms in Texas and flooding in New Orleans.
Year-to-date catastrophe losses approximate $38 million compared to $20
million in the first six months of last year. The first quarter of 1994 was
adversely impacted by severe winter weather which resulted in a significant
increase in automobile claims frequency due to poor driving conditions and
a high level of homeowners catastrophe freezing losses.
In response to concerns of the insurance industry and various consumer
groups, the Florida Hurricane Catastrophe Fund became effective June 1,
1994. The second contract year of the Fund began June 1, 1995. In return
for an annual premium, 75% of homeowners losses in excess of $29 million 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.
Page 6 of 9 pages
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.
The statutory ratios of losses and loss adjustment expenses (LAE) incurred
to premiums earned, underwriting expenses to written premiums, and
underwriting ratios for the Corporation's property/casualty subsidiaries are
shown below.
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Loss ratio 85.3% 80.2% 83.8% 82.7%
Expense ratio 13.1% 14.5% 13.1% 14.3%
Underwriting ratio 98.4% 94.7% 96.9% 97.0%
The Corporation's reserves for losses and loss adjustment expenses include
amounts for environmental and product liability claims on policies written
by GEICO from 1981 to 1984 and by Resolute Reinsurance Company from 1982 to
1987. The Corporation believes that the ultimate resolution of its
environmental and product liability claims will not have a material impact
on the Corporation's financial position and results of operations.
Policy acquisition expenses increased 3.8 percent to $104,284,247 for the
first six months of 1995 compared to $100,490,567 in 1994 and reflects a
reduction in the general expense ratio in 1995. Other operating expenses
decreased 4.4 percent to $106,497,524 from $111,444,569. Other operating
expenses for the first six months of 1995 include a negative $2.2 million
of incentive compensation expense related to the underperformance of the
Corporation's common stock portfolio compared to the S&P 500. This expense
was $7.9 million for overperformance during the first six months of 1994.
Total interest expense for the first six months of 1995 increased to
$16,411,086 from $13,940,827 in 1994. The increase reflects the April 1995
issuance of $100 million of 7.5% Notes due in 2005 and interest on short-
term borrowings partially offset by the repayment of mortgage loans in the
third quarter of 1994.
Net income before income taxes was $55,395,907 and $132,745,320 in the three
and six months ended June 30, 1995 compared to $71,575,689 and $111,149,594
for the comparable periods in 1994. The decline in three month results
reflects a decrease in underwriting gain due to catastrophe losses during
the quarter and realized losses on investments. Year to date results
reflect increases in both underwriting gain from insurance operations and
investment income. For the first six months of 1995 income tax expense
increased to $22,736,785 from $17,581,865 in 1994 reflecting the increase
in pretax income.
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.
Net income was $47,768,256 for the three months ended June 30, 1995, a
decrease of 16.8 percent from the comparable 1994 period. Net income was
$110,008,535 for the six months ended June 30, 1995, an increase of 18.9
percent over 1994 year to date results. Net income per share decreased 12.3
percent to $.71 for the three month period and increased 23.7 percent to
$1.62 for the six months reflecting a decrease in the number of shares
outstanding. The cumulative effect of the change in accounting principle
reduced net income per share by $.01 in 1994.
Page 7 of 9 pages
The weighted average number of shares outstanding decreased to 67,782,713
for the six months ended June 30, 1995 compared to 70,669,950 a year ago due
to Treasury Stock purchases.
The unrealized appreciation of investments, which is reflected in
shareholders' equity but not in net income, increased $175.2 million to
$266.4 million at June 30, 1995 compared to $91.2 million at December 31,
1994 reflecting increases in the market value of both fixed maturities and
equity securities during the six months. The unrealized appreciation
related to fixed maturities increased $97.7 million during the six month
period as interest rates have declined resulting in unrealized appreciation
of $37.1 million as of June 30, 1995. The unrealized appreciation on equity
securities increased $77.5 million to $229.3 million.
Capital Structure and Liquidity
During the first six months of 1995 the Corporation repurchased a net
527,353 shares of its Common Stock for $26.1 million. On May 9, 1995 the
Board of Directors increased the Common Stock repurchase authorization to
7 million shares, including the 3.2 million shares remaining under the prior
authorization.
Book value per share at June 30, 1995 was $24.44 based upon shareholders'
equity of $1,658,101,670 and 67,835,260 outstanding shares of Common Stock
compared to $21.17 at December 31, 1994 based upon shareholders' equity of
$1,445,940,660 and 68,291,463 outstanding shares. The increase reflects the
unrealized appreciation of investments during the year partially offset by
repurchases of shares at a cost in excess of book value per share and an
increase in unearned ESOP shares purchased with $15 million of additional
ESOP debt.
Cash flow from operations during the first six months of 1995 was $239.9
million compared to $227.2 million for the first six months of 1994.
Investing activities include the receipt of $49.4 million from the sale and
collection of GEFCO's loans receivable, and financing activities include the
repayment of $44.6 million of GEFCO's short-term borrowings with the
proceeds. On April 24, GEICO Corporation issued $100 million of 7.5% Notes
due 2005. The Corporation used about half of the net proceeds to repay
short-term debt and the remainder was available for investment in marketable
securities and general corporate purposes, including repurchases of shares.
Investing activities in the first six months of 1994 included a net $9.7
million received from the sale of Southern Heritage Insurance Company, which
was sold effective December 31, 1993.
State Rate Regulation
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.
Page 8 of 9 pages
GEICO CORPORATION
PART II. OTHER INFORMATION
Item 5. Other Events
(a) None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(1) None.
(b) Reports on Form 8-K
GEICO Corporation did not file a Report on Form 8-K during the
three months ended June 30, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GEICO Corporation
Date: August 14, 1995 By:
Thomas M. Wells
Group Vice President and
Controller
(Principal Accounting Officer)
Date: August 14, 1995 By:
W. Alvon Sparks, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 9 of 9 pages
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 3597831
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 863030
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4662183
<CASH> 20086
<RECOVER-REINSURE> 125906
<DEFERRED-ACQUISITION> 72803
<TOTAL-ASSETS> 5432506
<POLICY-LOSSES> 2157193
<UNEARNED-PREMIUMS> 792875
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 68839
<NOTES-PAYABLE> 431192
<COMMON> 71637
0
0
<OTHER-SE> 1586465
<TOTAL-LIABILITY-AND-EQUITY> 5432506
1347600
<INVESTMENT-INCOME> 111738
<INVESTMENT-GAINS> 202
<OTHER-INCOME> 10659
<BENEFITS> 1107658
<UNDERWRITING-AMORTIZATION> 104284
<UNDERWRITING-OTHER> 106498
<INCOME-PRETAX> 132745
<INCOME-TAX> 22737
<INCOME-CONTINUING> 110009
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110009
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.62
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
