-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DDon/lAVtwsW1b9i357/IYL3LN6egFLfGcDayitOWhXk1daH7wkaWV5SAfrPJ5a+ tqJNDjI0EGfWe06GZay/+Q== 0000277795-95-000013.txt : 19951119 0000277795-95-000013.hdr.sgml : 19951119 ACCESSION NUMBER: 0000277795-95-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEICO CORP CENTRAL INDEX KEY: 0000277795 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 521135801 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08012 FILM NUMBER: 95591327 BUSINESS ADDRESS: STREET 1: GEICO PLZ CITY: WASHINGTON STATE: DC ZIP: 20076 BUSINESS PHONE: 3019862027 10-Q 1 10-Q 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 September 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 October 31, 1995 Common Stock, $1.00 par value 67,528,833 Page 1 of 10 pages
FORM 10-Q - QUARTERLY REPORT PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GEICO CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS September 30, December 31, Investments: 1995 1994 Fixed maturities available for sale, at market (amortized cost $3,671,852,700 and $3,363,422,770) $ 3,742,269,035 $ 3,270,125,446 Equity securities available for sale, at market (cost $510,519,982 and $556,960,522) 914,976,582 782,708,006 Short-term investments 191,892,351 50,032,937 Total Investments 4,849,137,968 4,102,866,389 Cash 19,439,006 27,579,312 Loans receivable, net 12,018,642 59,448,297 Accrued investment income 60,394,105 67,254,744 Premiums receivable 276,522,601 238,652,876 Reinsurance receivables 124,121,844 127,189,085 Prepaid reinsurance premiums 10,373,592 10,361,216 Amounts receivable from sales of securities 51,164 2,022,214 Deferred policy acquisition costs 72,753,722 72,358,845 Federal income taxes - 98,974,942 Property and equipment, at cost less accumulated depreciation of $120,191,092 and $113,612,108 138,480,306 141,741,242 Other assets 31,123,997 49,656,013 TOTAL ASSETS $ 5,594,416,947 $ 4,998,105,175 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Property and casualty loss reserves $ 1,840,803,350 $ 1,704,717,841 Loss adjustment expense reserves 331,794,593 307,606,072 Unearned premiums 817,341,550 747,342,502 Life benefit reserves and policyholders' funds 108,931,081 101,297,929 Debt: Corporate and other 424,430,327 340,378,156 Finance company 8,800,000 51,000,000 Amounts payable on purchases of securities 16,153,639 8,407,963 Federal income taxes 19,818,504 - Other liabilities 287,478,976 291,414,052 Total Liabilities 3,855,552,020 3,552,164,515 SHAREHOLDERS' EQUITY Common Stock - $1 par value, 150,000,000 shares authorized, 71,668,009 and 71,565,359 issued, 67,522,133 and 68,291,463 outstanding 71,668,009 71,565,359 Paid-in surplus 174,943,908 169,083,940 Unrealized appreciation of investments 313,617,900 91,166,775 Retained earnings 1,454,447,741 1,330,021,435 Treasury Stock, at cost (4,145,876 and 3,273,896 shares of Common Stock) (212,815,323) (167,114,614) Unearned Employee Stock Ownership Plan shares (62,997,308) (48,782,235) Total Shareholders' Equity 1,738,864,927 1,445,940,660 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,594,416,947 $ 4,998,105,175 See Notes to Consolidated Financial Statements
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GEICO CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 REVENUE Premiums $710,318,813 $629,596,043 $2,057,918,552 $1,822,392,728 Investment income, net of expenses of $2,714,116 and $7,770,812 in 1995 and $2,437,335 and $7,126,117 in 1994 56,413,976 50,099,114 168,151,999 148,066,453 Realized gains on investments 4,092,407 1,758,198 4,293,921 12,337,735 Interest on loans receivable 262,728 2,556,992 3,357,749 7,774,539 Other revenue 3,379,795 3,719,628 10,943,337 10,967,634 Total Revenue 774,467,719 687,729,975 2,244,665,558 2,001,539,089 BENEFITS AND EXPENSES Losses and loss adjustment expenses 555,951,623 498,736,782 1,661,550,628 1,470,909,454 Life benefits and interest on policyholders' funds 2,314,999 1,957,609 6,975,656 6,568,494 Policy acquisition expenses 53,720,032 48,125,677 158,004,279 148,616,244 Other operating expenses 63,447,574 59,726,744 169,945,098 171,171,313 Interest expense: Corporate and other 9,471,564 5,788,632 24,800,752 18,336,858 Finance company 111,274 801,235 1,193,172 2,193,836 Total Benefits and Expenses 685,017,066 615,136,679 2,022,469,585 1,817,796,199 Net income before income taxes 89,450,653 72,593,296 222,195,973 183,742,890 Federal income tax expense 20,764,709 13,937,979 43,501,494 31,519,844 Net income before cumulative effect of change in accounting principle 68,685,944 58,655,317 178,694,479 152,223,046 Cumulative effect of change in accounting principle for postemployment benefits, net of tax - - - (1,051,329) Net Income $ 68,685,944 $ 58,655,317 $ 178,694,479 $ 151,171,717 Earnings Per Share Net income before cumulative effect of change in accounting principle $1.02 $ .84 $2.64 $2.16 Cumulative effect of change in accounting principle - - - (.01) Net Income $1.02 $ .84 $2.64 $2.15 Dividends Per Share $ .27 $ .25 $ .81 $ .75 See Notes to Consolidated Financial Statements
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GEICO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 1995 1994 Operating Activities: Net income $ 178,694,479 $ 151,171,717 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 (37,869,725) (29,848,902) Deferred policy acquisition costs (394,877) 987,156 Reinsurance receivables and prepaid reinsurance premiums 3,054,865 (2,357,068) Loss, life benefit and loss adjustment expense reserves 161,995,841 110,942,212 Unearned premiums 69,999,048 68,958,043 Federal income taxes (1,291,631) (6,990,987) Realized gains (4,293,921) (12,337,735) Provision for depreciation 19,650,165 16,592,523 Amortization of premiums, net of accrual of discount, on investments 10,080,268 14,261,275 Other 16,511,370 51,378,406 Net cash provided by operating activities 416,135,882 363,807,969 Investing Activities: Purchases of equity securities (111,005,251) (123,783,877) Purchases of fixed maturities (816,879,022) (680,517,477) Increase in payable on security purchases 7,745,676 11,947,773 Sales of fixed maturities 99,810,709 41,859,754 Maturities and redemptions of fixed maturities 410,587,315 425,057,290 Sales of equity securities 163,349,198 153,591,241 Net change in short-term investments (141,859,414) (54,812,177) Change in receivable from security sales 1,971,050 (3,084,647) Loans receivable sold or repaid 49,973,208 9,957,516 Proceeds from sale of subsidiary - 9,686,024 Purchase of property and equipment, net (18,422,434) (22,084,108) Other 368,975 (229,601) Net cash used by investing activities (354,359,990) (232,412,289) Financing Activities: Issuance of debt 99,768,000 - Repayment of debt (750,000) (36,038,469) Net change in short-term borrowings (72,200,000) (1,700,000) Exercise of stock options 2,692,028 916,253 Purchase of Common Stock (Treasury) (47,092,727) (43,467,911) Dividends paid to shareholders (54,972,374) (52,772,319) Other 2,638,875 5,653,293 Net cash used by financing activities (69,916,198) (127,409,153) Change in cash (8,140,306) 3,986,527 Cash at beginning of period 27,579,312 18,361,546 Cash at end of period $ 19,439,006 $ 22,348,073 See Notes to Consolidated Financial Statements
Page 4 of 10 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 nine months ended September 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 nine months of 1995 the Corporation repurchased a net 871,980 shares of its Common Stock for $45.3 million. At September 30, 1995 there were 6,575,619 shares remaining under the current repurchase authorization. However, pursuant to the terms of the merger agreement with Berkshire Hathaway dated August 25, 1995, the Corporation shall not repurchase any of its Common Stock. Earnings Per Share The computation of earnings per share is based on the weighted average number of common shares assumed outstanding of 67,310,889 and 70,106,963 for the three months ended September 30, 1995 and 1994, respectively, and 67,706,322 and 70,486,722 for the nine months ended September 30, 1995 and 1994, respectively. Merger Agreement On August 25, 1995 the Board of Directors of GEICO Corporation approved a merger agreement under which Berkshire Hathaway Inc. would acquire the remaining shares of GEICO Corporation at $70 per share. The merger is subject to approval of state insurance regulators and the approval of the holders of 80% of GEICO Corporation's stock. Since Berkshire Hathaway owns about 51% of GEICO Corporation's outstanding shares, approximately 59% of the shares not owned by Berkshire Hathaway must also vote in favor of the merger for it to be approved. The Corporation anticipates that the closing of the merger will occur in early January, 1996. Page 5 of 10 pages Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Consolidated premiums were $710,318,813 for the third quarter of 1995, up 12.8 percent from $629,596,043 in 1994. For the nine months ended September 30, earned premiums were $2,057,918,552 in 1995, up 12.9 percent from $1,822,392,728 in 1994, reflecting continued growth in voluntary auto lines and modest rate increases. The number of voluntary automobile policies in force grew 7.9 percent during the twelve month period ending September 30, 1995. Total voluntary policies in force (all lines) grew 4.3 percent in the same time period as homeowners policies have declined. Policy growth in the standard and nonstandard auto lines was 27.9 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 Life 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 12.6 percent to $56,413,976 for the third quarter of 1995 from $50,099,114 in the third quarter of 1994. For the nine months ended September 30, pre-tax net investment income was $168,151,999 in 1995, up 13.6 percent from $148,066,453 in 1994. The increase reflects additional funds from operations available for investment. After-tax net investment income for the nine months increased 12.3 percent to $143.1 million from $127.4 million. Realized gains on investments were $4,092,407 for the third quarter of 1995 compared to realized gains of $1,758,198 in the third quarter of 1994. For the nine months ended September 30, realized gains on investments were $4,293,921 in 1995 and $12,337,735 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 56.8 percent to $3,357,749 for the nine month period ended September 30, 1995 from the comparable prior year period as Government Employees Financial Corporation (GEFCO), our finance subsidiary, has reduced 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 September 30, 1995 GEFCO had approximately $21 million of remaining assets. Losses and loss adjustment expenses incurred increased 11.5 percent and 13.0 percent to $555,951,623 and $1,661,550,628 for the three and nine months ended September 30, 1995 over the comparable prior year periods. Catastrophe losses in the third quarter of 1995 and 1994 were approximately $4 million in each quarter. Year-to-date catastrophe losses approximate $41 million compared to $24 million in the first nine months of last year. The major losses in 1995 were from second quarter hailstorms in Texas and flooding in New Orleans. 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 per occurrence 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 10 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 Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 Loss ratio 79.6% 80.7% 82.3% 82.0% Expense ratio 13.4% 14.3% 13.2% 14.3% Underwriting ratio 93.0% 95.0% 95.5% 96.3% 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 6.3 percent to $158,004,279 for the first nine months of 1995 compared to $148,616,244 in 1994 and reflects a reduction in the general expense ratio in 1995. Other operating expenses decreased .7 percent to $169,945,098 from $171,171,313. Other operating expenses for the first nine months of 1995 include a negative $2.7 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 $8.7 million for overperformance during the first nine months of 1994. Total interest expense for the first nine months of 1995 increased to $25,993,924 from $20,530,694 in 1994. The increase reflects the April 1995 issuance of $100 million of 7.5% Notes due in 2005, interest on deferred compensation which is linked to changes in the Corporation's stock price, 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 $89,450,653 and $222,195,973 in the three and nine months ended September 30, 1995 compared to $72,593,296 and $183,742,890 for the comparable periods in 1994. These three and nine month results reflect increases in both underwriting gain from insurance operations and investment income. For the first nine months of 1995 income tax expense increased to $43,501,494 from $31,519,844 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 $68,685,944 for the three months ended September 30, 1995, an increase of 17.1 percent from the comparable 1994 period. Net income was $178,694,479 for the nine months ended September 30, 1995, an increase of 18.2 percent over 1994 year to date results. Net income per share increased 21.4 percent to $1.02 for the three month period and increased 22.8 percent to $2.64 for the nine 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 10 pages The weighted average number of shares outstanding decreased to 67,706,322 for the nine months ended September 30, 1995 compared to 70,486,722 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 $222.5 million to $313.6 million at September 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 nine months. The unrealized appreciation related to fixed maturities increased $106.4 million during the nine month period as interest rates have declined resulting in unrealized appreciation of $45.8 million as of September 30, 1995. The unrealized appreciation on equity securities increased $116.1 million to $267.8 million. Capital Structure and Liquidity During the first nine months of 1995 the Corporation repurchased a net 871,980 shares of its Common Stock for $45.3 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. However, pursuant to the terms of the merger agreement with Berkshire Hathaway dated August 25, 1995, the Corporation shall not repurchase any shares of its Common Stock. Book value per share at September 30, 1995 was $25.75 based upon shareholders' equity of $1,738,864,927 and 67,522,133 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 nine months of 1995 was $416.1 million compared to $363.8 million for the first nine months of 1994. Investing activities include the receipt of $50.0 million from the sale and collection of GEFCO's loans receivable, and financing activities include the repayment of $42.2 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 nine 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. Financing activities in the first nine months of 1994 included the prepayment of $34.6 million of collateralized debt of the Corporation's real estate subsidiaries in the third quarter. Merger Agreement On August 25, 1995 the Board of Directors of GEICO Corporation approved a merger agreement under which Berkshire Hathaway Inc. would acquire all of the GEICO Corporation shares that it does not own at $70 per share. The merger is subject to approval of state insurance regulators and the approval of the holders of 80% of GEICO Corporation's stock. Since Berkshire Hathaway owns about 51% of GEICO Corporation's outstanding shares, approximately 59% of the shares not owned by Berkshire Hathaway must also vote in favor of the merger for it to be approved. The Corporation anticipates that the closing of the merger will occur in early January, 1996. Page 8 of 10 pages 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 9 of 10 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 filed a Report on Form 8-K on August 25, 1995 pursuant to Item 5 thereof. 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: November 14, 1995 By: Thomas M. Wells Group Vice President and Controller (Principal Accounting Officer) Date: November 14, 1995 By: W. Alvon Sparks, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer) Page 10 of 10 pages EX-27 2
7 This schedule contains summary financial information extracted from SEC Form 10-Q and is qualified in its entirety by reference to such financial statements. 1000 9-MOS DEC-31-1995 SEP-30-1995 3742269 0 0 914977 0 0 4849138 19439 124122 72754 5594417 2211450 817342 0 70079 433230 71668 0 0 1667197 5594417 2057919 168152 4294 14301 1664970 158004 169945 222196 43501 178694 0 0 0 178694 2.64 2.64 0 0 0 0 0 0 0
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