0000277795-95-000011.txt : 19950815 0000277795-95-000011.hdr.sgml : 19950815 ACCESSION NUMBER: 0000277795-95-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 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: 95562240 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 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)
ASSETS June 30, December 31, Investments: 1995 1994 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
Page 2 of 9 pages GEICO CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Six Months Ended June 30, Ended June 30, 1995 1994 1995 1994 REVENUE 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
Page 3 of 9 pages GEICO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 1995 1994 Operating Activities: 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
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 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. 1,000 6-MOS DEC-31-1995 JUN-30-1995 3597831 0 0 863030 0 0 4662183 20086 125906 72803 5432506 2157193 792875 0 68839 431192 71637 0 0 1586465 5432506 1347600 111738 202 10659 1107658 104284 106498 132745 22737 110009 0 0 0 110009 1.62 1.62 0 0 0 0 0 0 0