-----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, T3j7nhwsHkf+0KcSdi1HWCaC/9+FV8CB/1Uf+qXWIbRNsK0wyL9QDz42xy5YbwiT TOf2TzpN1Ig6FeAmckz2Iw== 0000277795-96-000001.txt : 19960326 0000277795-96-000001.hdr.sgml : 19960326 ACCESSION NUMBER: 0000277795-96-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960325 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08012 FILM NUMBER: 96537849 BUSINESS ADDRESS: STREET 1: GEICO PLZ CITY: WASHINGTON STATE: DC ZIP: 20076 BUSINESS PHONE: 3019863000 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1995 Commission File No. 1-8012 GEICO CORPORATION Delaware 52-1135801 (Jurisdiction of Incorporation) (IRS Employer Identification No.) One GEICO Plaza, Washington, D. C. 20076-0001 Registrant's telephone number: (301) 986-2500 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE THIS REPORT IS PREPARED IN RELIANCE ON GENERAL INSTRUCTION J TO FORM 10-K 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 NO X* Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 20, 1996.................... $-0- * Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of March 20, 1996 Common Stock, $1.00 par value 67,534,733 Shares *Effective January 2, 1996 pursuant to the terms of the Agreement and Plan of Merger dated as of August 25, 1995 by and among Berkshire Hathaway Inc. ("Berkshire"), HPKF Inc. (an indirect subsidiary of Berkshire created exclusively for the purpose of this transaction), and GEICO Corporation (the "Agreement"), HPKF Inc. was merged with and into GEICO Corporation and all outstanding shares of GEICO Corporation common stock, $1.00 par value per share not previously owned directly or indirectly by Berkshire were purchased by a wholly-owned subsidiary of Berkshire for $70.00 per share in cash. PAGE Page 2 GEICO Corporation Form 10-K Annual Report PART I Item 1. Business (GEICO Corporation and Subsidiaries). GEICO Corporation (the "Corporation") was organized as a Delaware corporation in 1978. In 1979 the Corporation became the parent of Government Employees Insurance Company ("GEICO"), its principal subsidiary, and is also the parent corporation of various additional subsidiaries (collectively, the GEICO Companies). GEICO was founded in 1936 and has been continuously engaged in the insurance business. GEICO is a multiple line property and casualty insurer, the principal business of which is writing private passenger automobile insurance primarily for preferred-risk government employees and military personnel. To a lesser extent it also writes homeowners insurance, fire and boat owners insurance (businesses that GEICO plans to have exited in three years), and personal umbrella liability insurance for all qualified applicants. GEICO General Insurance Company ("GEICO General") is a subsidiary of GEICO which, in 1987, began writing private passenger automobile insurance for preferred-risk drivers not associated with the government or the military. GEICO Indemnity Company ("GI"), a subsidiary of the Corporation, writes standard-risk private passenger automobile and motorcycle insurance. GEICO Casualty Company, ("GEICO Casualty") a subsidiary of GI, writes nonstandard-risk private passenger automobile insurance. These insurance companies market their policies primarily through direct response methods. Criterion Life Insurance Company ("Criterion Life") was formed by GEICO in 1991 to offer structured settlement single premium annuities to claimants of its property/casualty company affiliates. Currently, GEICO, GEICO General, GI and GEICO Casualty have a Standard & Poor's claims paying ability rating of AAA (Superior); they and Criterion Life also have an A. M. Best rating of A++ (Superior). Other active subsidiaries of the Corporation and GEICO involved in the sale of insurance and insurance related products include: International Insurance Underwriters, Inc., which provides various insurance services to military personnel as they are transferred overseas or back to the United States; The Top Five Club, Inc., which offers travel-related benefits to military personnel in the top five military enlisted pay grades; GEICO Financial Services, GmbH, which sells automobile policies to American military personnel through offices in Germany and through agents in England, Germany, Italy, Portugal and Turkey; Insurance Counselors, Inc., Insurance Counselors of Texas, Inc. and Insurance Counselors of Kentucky, Inc., formed primarily to facilitate the marketing of insurance products; and Safe Driver Motor Club, Inc., which offers motor services to customers of subsidiaries of GEICO and sponsors of motor clubs. The Corporation formerly offered financial services through its subsidiary, Government Employees Financial Corporation ("GEFCO"), which directly or through one or more of its own subsidiaries, is in the business of consumer and business lending and loan servicing. The Corporation is in the process of winding down the business of GEFCO. Other subsidiaries of the Corporation include Plaza Resources Company, which is engaged in various investment ventures, Maryland Ventures, Inc., a real estate/property company, and several other companies which serve various corporate purposes. Resolute Reinsurance Company ("Resolute"), 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 it suspended writing new and renewal reinsurance. Resolute is in Page 3 the process of running off its claims obligations. Effective December 31, 1993, the Corporation sold Merastar Insurance Company and Southern Heritage Insurance Company, two small property casualty insurance companies which had been purchased in 1991. Seasonal variations in the business of the Corporation historically are not material. However, extraordinary weather conditions or other factors may have an impact on the frequency or severity of automobile or homeowners claims. Weather related catastrophes, such as Hurricane Andrew in 1992, can severely affect the Corporation's financial results. See management's narrative analysis of the results of operations at Item 7 for more information concerning the effect of such catastrophes on financial results. Periodically, various groups propose actions which may affect the insurance regulatory environment. In the past such proposals have included modification or repeal of the McCarran- Ferguson Act, integration of the medical portion of automobile insurance into the general health care insurance system, and similar initiatives historically intended to affect insurance premium rates generally without addressing the underlying factors upon which those rates are based. The insurance industry is highly competitive. GEICO currently competes most directly with other companies, including mutual companies (which historically write approximately one-third of all property-casualty insurance in the United States), that concentrate on preferred risk private passenger automobile insurance and, to a lesser extent, for standard and nonstandard risks. Because personal lines property and casualty insurance is so stringently regulated by each state in which the Companies do business, it is difficult for companies to differentiate their products. Additionally, some companies exacerbate price competition by selling their products at inadequate rates for a period of time, because long delays in reporting and settling certain claims result in underestimating ultimate loss costs, or the products are sold in anticipation of profits from their investment portfolios. Consequently, GEICO's business is very sensitive both to the price of its product and the perceived level of customer service it provides. Competition for preferred risks, which is substantial, tends to focus on issues of price and service, while price is a more significant factor to other risks. The GEICO Companies place great emphasis on customer satisfaction and write their auto business predominantly with six-month policies, allowing them to manage rate changes more effectively. GEICO also believes its reputation is a material asset and protects its name and other service marks through appropriate registrations. As of December 31, 1995 the Corporation and its subsidiaries had 7,561 full-time employees and 717 part-time employees. A number of benefits are provided or made available for most full-time employees. Item 2. Properties. GEICO, the principal subsidiary of the Corporation, owns its GEICO Plaza headquarters building in Chevy Chase, Maryland, its Regional Office buildings in Woodbury, New York, Macon, Georgia, Dallas, Texas, and Stafford County near Fredericksburg, Virginia, certain of its claims drive-in facilities and certain additional properties. GEICO also leases its Regional Offices in San Diego, California and office space and drive-in claims facilities in various cities in the United States. These facilities will accommodate foreseeable space requirements. GEICO also maintains and continually upgrades sophisticated electronic data processing equipment and software and telecommunications facilities to enable it to process applications and claims efficiently. PAGE Page 4 Item 3. Legal Proceedings. There are no material legal proceedings to which the Corporation is a party or of which the property of the Corporation is the subject. Item 4. Submission of Matters to a Vote of Security Holders. Omitted in reliance on General Instruction J(2)(c) to Form 10-K. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The following table shows the quarterly high and low prices for the Common Stock, as published in the tabulation of New York Stock Exchange Composite Transactions. The table shows dividends paid to shareholders of record in each quarter of 1995 and 1994. Dividends 1995 High Low Paid Fourth quarter 70 68 1/4 $ .27 Third quarter 68 7/8 54 1/2 .27 Second quarter 59 3/8 49 1/2 .27 First quarter 51 1/8 47 5/8 .27 Dividends 1994 High Low Paid Fourth quarter 51 1/4 49 $ .25 Third quarter 51 1/2 47 5/8 .25 Second quarter 57 5/8 49 5/8 .25 First quarter 57 1/2 51 1/8 .25 Effective January 2, 1996, all of the Company's Common Stock is owned directly or indirectly by Berkshire Hathaway Inc. The Common Stock was delisted and deregistered from the New York Stock Exchange and the Pacific Stock Exchange effective February 5, 1996. Item 6. Selected Financial Data. Omitted in reliance on General Instruction J(2)(a) to Form 10-K. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Omitted in reliance on General Instruction J(2)(a) to Form 10-K; replaced by management's narrative analysis of the results of operations. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS MERGER WITH BERKSHIRE HATHAWAY INC. Effective January 2, 1996, the Corporation completed a merger with Berkshire Hathaway Inc. (Berkshire) and became a wholly-owned indirect subsidiary of Berkshire. The merger was approved by the Maryland Insurance Administration and the New York Insurance Department and by the Shareholders of the Corporation at a Special Meeting held on December 20, 1995. Berkshire, which owned approximately 51% of the outstanding voting Common Stock of the Corporation before the merger, paid all remaining holders of the Corporation's Common Stock $70 per share in cash in a taxable transaction. Pursuant to the Merger Agreement, the Corporation's Treasury Stock was retired, participants of the Stock Option Plans were entitled to receive the excess of $70 over the per share exercise price for each option held, and the Employee Stock Page 5 Ownership Plan was terminated. These transactions will be recorded immediately prior to the merger in 1996. As a result of the merger, the Corporation is entitled to omit certain information from this Form 10-K pursuant to General Instruction J to Form 10-K and provides the following discussion pursuant to paragraph (2)(a) thereof. RESULTS OF OPERATIONS REVENUE Premiums -- Consolidated premiums earned in 1995 were $2,787.0 million, up 12.5% from a year ago when premiums were $2,476.3 million. Premium growth reflects an increase of 3.1% in total policies in force in 1995 and modest average rate changes. Voluntary auto policies-in-force increased 7.6% during 1995. Policy growth in the standard and nonstandard auto lines was 26.5% as efforts have been expanded to offer a rate quote to potential customers who do not meet GEICO preferred-risk underwriting guidelines. Voluntary auto new business sales in 1995 increased 16.5%. Preferred-risk voluntary automobile rates increased 5.3%. Renewal persistency in the preferred-risk auto lines exceeded 92%. Residual market (involuntarily written assigned-risk business) policy counts decreased 21.5% during 1995. 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 11.3% during 1995. 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 homeowner customers Aetna policies. The great majority of GEICO's existing homeowner 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 had little impact on 1995 financial results. Homeowners policy counts declined 9.5% in 1995 reflecting reductions in new business and a reunderwriting and inspection program for properties in coastal areas exposed to catastrophic losses. Homeowner rates increased 2.3% in 1995 as the Company has tried to more accurately reflect catastrophe loss exposure in its rates. Life insurance premiums from the sale of structured settlement annuities with life contingencies by Criterion Life were $2.4 million in 1995 compared to $2.9 million in 1994. Structured settlement sales without life contingencies, which are accounted for as investment contracts, totaled $14.7 million in 1995 and $16.2 million in 1994. Net Investment Income -- Consolidated pretax net investment income increased 12.4% in 1995 to $226.8 million reflecting additional funds from operations available for investment. Aftertax net investment income in 1995 increased 11.2% to $192.5 million. Realized Gains on Investments -- Pretax net realized gains were $21.6 million in 1995. 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 E to the financial statements. Interest on Loans Receivable -- Interest on loans receivable decreased 64.2% in 1995 to $3.7 million 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. Page 6 Other Revenue -- Other revenue was $14.9 million in 1995 compared to $14.7 million in 1994. Other revenue consists primarily of oil and gas revenue, commissions, and motor club dues. BENEFITS AND EXPENSES Losses and loss adjustment expenses incurred increased 12.4% to $2,244.4 million in 1995. 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 82.3% in 1995 compared to 82.1% a year ago. Incurred losses from 1995 catastrophe events totaled approximately $51 million up from $31 million last year. Catastrophe losses added 1.9 points to the loss ratio in 1995 and 1.3 points in 1994. Adjusting for the unusually severe winter weather during 1994's first quarter, auto claims frequency (that is, the number of claims in a given period relative to the car count) for property damage accidents was up 2 to 3% when compared with 1994, while bodily injury and uninsured motorists claim frequency was up about 2% for the year. The average auto claims severity (the average amount paid per claim) for all coverages was up approximately 4% over 1994, including about 7 to 8% for auto damage coverages and relatively flat bodily injury severity. Life benefits and interest on policyholders' funds were $9.8 million in 1995 compared to $8.6 million in 1994 reflecting growth in structured settlement annuity business. Policy acquisition expenses increased 6.5% in 1995 to $213.1 million. The increase reflects the growth in business partially offset by the effect of reducing the general expense ratio to 13.6% from 14.3% in 1994. Other operating expenses were $244.1 million. Other operating expenses increased 5.2% in 1995 due in part to merger related expenses, primarily legal and consulting fees, of $5.6 million. Other operating expenses include $.6 million of incentive compensation expense in 1995 and $8.5 million in 1994 related to the overperformance of the Corporation's common stock portfolio compared to the S&P 500. Other operating expenses 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. The consolidated statutory underwriting ratio was 95.9% in 1995 compared to 96.4% in 1994 reflecting improved underwriting results. Interest expense increased to $34.4 million in 1995 reflecting the issuance of $100 million of 7.5% Notes in April 1995. 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 was $4.2 million in 1995 and negative in 1994 when the stock price declined. INCOME TAXES Federal income taxes were $60.7 million in 1995 compared to $42.4 million in 1994. The increase reflects a larger underwriting gain from insurance operations and higher investment income. The Corporation has not established a valuation allowance for its deferred tax assets because it believes it is "more likely than not" that all such amounts 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 cumulative current tax expense totaling approximately $242.3 million. Page 7 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 temporary differences, 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 $75.7 million in 1995 and $58.1 million in 1994 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 released for allocation to participant accounts. 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 Net income totaled $247.6 million ($3.66 per share) compared to $207.8 million ($2.97 per share) in 1994. The cumulative effect of changes in accounting principles reduced net income per share by $.01 in 1994. The weighted average shares outstanding were 67,593,419 in 1995 compared to 69,992,442 in 1994. Net unrealized appreciation of investments, which is reflected in shareholders' equity but not in net income, increased $298.6 million, net of deferred taxes, in 1995 to $389.7 million at December 31, 1995. The unrealized appreciation on fixed maturities was $135.0 million during 1995 resulting in unrealized appreciation of $74.3 million as of December 31, 1995 due to a significant decrease in interest rates during the year. The unrealized appreciation on equity securities increased $163.6 million during 1995 to $315.4 million. In 1994 the unrealized appreciation on investments decreased $101.1 million due to $142.5 million of unrealized depreciation on fixed maturities due to a significant increase in interest rates partially offset by $41.4 million of unrealized appreciation on equity securities. The common stock portfolio, adjusted for purchases and sales, had a total aftertax gain (including unrealized gains and losses) of 24.9% in 1995 compared to 9.1% in 1994. Page 8 Item 8. Financial Statements and Supplementary Data. REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors GEICO Corporation We have audited the accompanying consolidated balance sheets of GEICO Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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 to conform with recent pronouncements of the Financial Accounting Standards Board. COOPERS & LYBRAND L.L.P. Washington, D.C. February 16, 1996 Page 9
GEICO CORPORATION CONSOLIDATED BALANCE SHEETS December 31, in thousands of dollars 1995 1994 ASSETS Investments: Fixed maturities available for sale, at market U.S. Treasury securities and obligations of U.S. government corporations and agencies (amortized cost $922,574 and $873,440) $ 955,230 $ 842,086 Obligations of states and political subdivisions (amortized cost $2,513,537 and $2,343,200) 2,592,202 2,292,622 Corporate bonds and notes (amortized cost $89,040 and $105,523) 91,759 97,554 Redeemable preferred stocks (amortized cost $41,257 and $41,259) 41,570 37,863 3,680,761 3,270,125 Equity securities available for sale, at market Common stocks (cost $477,462 and $534,370) 954,813 759,791 Nonredeemable preferred stocks (cost $15,975 and $22,591) 16,248 22,917 971,061 782,708 Short-term investments 341,325 50,033 Total Investments 4,993,147 4,102,866 Cash 50,339 27,580 Accrued investment income 69,974 67,255 Amounts receivable from sales of securities - 2,022 Premiums receivable 280,018 238,653 Reinsurance receivables 125,660 127,189 Prepaid reinsurance premiums 7,988 10,361 Deferred policy acquisition costs 73,984 72,359 Loans receivable, net 11,339 59,448 Federal income taxes - 98,975 Property and equipment, at cost less accumulated depreciation of $120,638 and $113,612 146,317 141,741 Other assets 36,739 49,656 Total Assets $5,795,505 $4,998,105
See Notes to Consolidated Financial Statements Page 10
1995 1994 LIABILITIES Policy liabilities: Property and casualty loss reserves $1,872,037 $1,704,718 Loss adjustment expense reserves 340,008 307,606 Unearned premiums 813,726 747,342 Life benefit reserves and policyholders' funds 112,970 101,298 3,138,741 2,860,964 Debt 434,444 391,378 Amounts payable on purchases of securities 1,518 8,408 Federal income taxes 49,409 - Other liabilities 302,945 291,414 Total Liabilities 3,927,057 3,552,164 SHAREHOLDERS' EQUITY Common Stock - $1 par value, 150,000,000 shares authorized, 71,680,609 and 71,565,359 shares issued and 67,534,733 and 68,291,463 shares outstanding 71,681 71,565 Paid-in surplus 176,058 169,084 Unrealized appreciation of investments 389,722 91,167 Retained earnings 1,505,419 1,330,022 Treasury Stock, at cost (4,145,876 and 3,273,896 shares) (212,816) (167,115) Unearned Employee Stock Ownership Plan shares (61,616) (48,782) Total Shareholders' Equity 1,868,448 1,445,941 Total Liabilities and Shareholders' Equity$5,795,505$4,998,105
Page 11
GEICO CORPORATION CONSOLIDATED STATEMENTS OF INCOME For the year ended December 31, in thousands of dollars except per share results 1995 1994 1993 REVENUE Premiums $2,787,011$2,476,276 $2,283,488 Net investment income 226,804 201,790 201,851 Realized gains on investments 21,587 12,898 120,584 Interest on loans receivable 3,704 10,347 11,519 Other revenue 14,909 14,698 20,858 Total Revenue 3,054,015 2,716,009 2,638,300 BENEFITS AND EXPENSES Losses and loss adjustment expenses 2,244,398 1,996,518 1,821,783 Life benefits and interest on policyholders' funds 9,798 8,573 13,521 Policy acquisition expenses 213,081 200,044 197,545 Other operating expenses 244,074 231,984 213,555 Impact of premium refunds - - (6,699) Interest expense 34,365 27,696 19,975 Total Benefits and Expenses 2,745,716 2,464,815 2,259,680 Net Income Before Income Taxes 308,299 251,194 378,620 Federal income tax expense 60,675 42,379 92,193 Net income before cumulative effect of changes in accounting principles 247,624 208,815 286,427 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 Income $ 247,624$ 207,764 $ 273,678 EARNINGS PER SHARE Net income before cumulative effect of changes in accounting principles $3.66 $2.98 $4.01 Cumulative effect of changes in accounting principles - (.01) (.18) Net Income $3.66 $2.97 $3.83
See Notes to Consolidated Financial Statements Page 12 GEICO CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31, in thousands of dollars
Unrealized Common Paid-in Appreciation Retained Stock Surplus of Investments Earnings 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 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 (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 (58) Balance at December 31, 1994 71,565 169,084 91,167 1,330,022 Net income 247,624 Dividends ($1.08 per share) (72,553) Increase in unrealized appreciation, net of deferred taxes 298,555 Exercise of stock options 116 5,285 Tax benefit of stock options 863 Purchase of Common Stock Reissuance of Common Stock 369 Employee Stock Ownership Plan: Borrowings Repayments Additional accrued compensation Tax benefit of dividends 326 Fair value adjustment, net of taxes 457 Balance at December 31, 1995 $71,681 $176,058 $389,722 $1,505,419
See Notes to Consolidated Financial Statements Page 13 Employee Treasury Stock Total Stock, Ownership Shareholders' at Cost Plan Equity $ (14,897) $(49,476) $1,292,511 273,678 (48,300) 35,799 1,994 303 (26,067) (26,067) 4,224 3,968 (6,506) (6,506) 6,506 6,506 301 301 392 (36,740) (49,175) 1,534,579 207,764 (69,619) (101,072) 3,449 362 (137,377) (137,377) 7,002 7,094 (9,169) (9,169) 9,169 9,169 393 393 426 (58) (167,115) (48,782) 1,445,941 247,624 (72,553) 298,555 5,401 863 (61,926) (61,926) 16,225 16,594 (23,998) (23,998) 10,098 10,098 1,066 1,066 326 457 $(212,816) $(61,616) $1,868,448 PAGE Page 14
GEICO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended December 31, in thousands of dollars 1995 1994 1993 Operating Activities: Net income $ 247,624 $ 207,764 $ 273,678 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 Realized gains (21,587) (12,898) (120,584) Accrual of discount and amortization of premiums on investments 13,623 13,687 4,665 Net premiums receivable (41,365) (31,870) 168,585 Reinsurance receivables and prepaid reinsurance premiums 3,902 (6,334) 13,524 Deferred policy acquisition costs (1,625) (520) 2,170 Loss, life benefit and loss adjustment expense reserves 202,647 146,792 144,144 Unearned premiums 66,384 72,226 (157,736) Dividends to policyholders - - (3,902) Premium refunds - - (27,700) Federal income taxes (12,589) (18,556) 20,283 Provision for depreciation 27,657 22,434 19,377 Other 18,141 66,827 2,247 Net cash provided by operating activities 502,812 460,603 351,500 Investing Activities: Purchases of fixed maturities (843,751) (903,183) (1,275,425) Purchases of equity securities (236,747) (210,633) (320,331) Change in payable on security purchases (6,890) 6,411 922 Sales of fixed maturities 125,216 75,440 108,618 Maturities and redemptions of fixed maturities 515,393 497,979 543,043 Sales of equity securities 322,029 231,859 368,820 Net change in short-term investments (291,292) 65,986 104,834 Change in receivable from security sales 2,022 (1,102) (822) Loans receivable sold or repaid 50,786 17,812 20,366 Proceeds from sales of affiliates and subsidiaries - 9,686 73,538 Purchase of property and equipment, net (32,233) (28,197) (41,086) Other (324) (529) 196 Net cash used by investing activities (395,791) (238,471) (417,327) Financing Activities: Issuance of debt 99,768 - 149,458 Repayment of debt (750) (36,038) (2,102) Net change in short-term borrowings (69,900) 9,300 (16,300) Exercise of stock options 3,166 1,129 783 Purchase of Common Stock (Treasury) (47,093) (125,086) (22,696) Dividends paid to shareholders (73,206) (69,864) (48,300) Other 3,753 7,645 7,274 Net cash provided (used) by financing activities (84,262) (212,914) 68,117 Change in cash 22,759 9,218 2,290 Cash at beginning of year 27,580 18,362 16,072 Cash at end of year $ 50,339 $ 27,580 $ 18,362
See Notes to Consolidated Financial Statements Page 15 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A: SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS GEICO Corporation (the Corporation) is principally an insurance organization whose subsidiaries include personal lines property and casualty insurers described in Note C. The Corporation provides private passenger automobile insurance to preferred-risk drivers through direct response methods and also offers standard and nonstandard risk automobile insurance. Approximately 70% of the Corporation's customers are located in California, Connecticut, Florida, Georgia, Maryland, New York, Texas and Virginia. The Corporation is vulnerable to catastrophe losses from hurricanes in these coastal states as well as natural disasters in other regions. Approximately 6% of the Corporation's premium is from homeowners insurance. In 1995 the Corporation entered an agreement with Aetna Life and Casualty to phase out of the homeowners insurance business over the next three years. New homeowner customers are offered Aetna policies and most existing homeowner customers will be offered renewal policies in Aetna as their policies begin to expire after January 1, 1996. The Corporation's subsidiaries will act as the servicing agents for these policies. BASIS OF REPORTING The consolidated financial statements include the accounts of 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 D regarding statutory amounts of net income, shareholder's equity and limitations on dividends. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 are carried at cost, which approximates the fair value of these instruments due to their short maturity. 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. Page 16 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE A: SIGNIFICANT ACCOUNTING POLICIES - CONTINUED REINSURANCE Reinsurance receivables related to unpaid claims 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 direct response advertising, certain underwriting and policy issuance costs, commissions, and premium taxes. 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 27 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, 1995 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. 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. Page 17 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE A: SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 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. 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. NOTE B: MERGER WITH BERKSHIRE HATHAWAY INC. Effective January 2, 1996, the Corporation completed a merger with Berkshire Hathaway Inc. (Berkshire) and became a wholly-owned indirect subsidiary of Berkshire. The merger was approved by the Maryland Insurance Administration and the New York Insurance Department and by the Shareholders of the Corporation at a Special Meeting held on December 20, 1995. Berkshire, which owned approximately 51% of the outstanding voting Common Stock of the Corporation before the merger, paid all remaining holders of the Corporation's Common Stock $70 per share in cash in a taxable transaction. Pursuant to the Merger Agreement, the Corporation's Treasury Stock was retired, participants of the Stock Option Plans were entitled to receive the excess of $70 over the per share exercise price for each option held, and the Employee Stock Ownership Plan was terminated. These transactions will be recorded immediately prior to the merger in 1996. Merger related expenses, primarily legal and consulting fees, have been expensed in 1995 as incurred. Page 18 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C: SUBSIDIARIES AND AFFILIATES PROPERTY AND CASUALTY INSURANCE Property and casualty insurance is the Corporation's dominant business segment. The Corporation's property and casualty insurance subsidiaries include Government Employees Insurance Company (GEICO), GEICO General Insurance Company, GEICO Indemnity Company and GEICO Casualty Company. Summary financial data are as follows:
Condensed Balance Sheets December 31, (In thousands) 1995 1994 Assets Investments Fixed maturities, at market $3,495,303 $3,124,150 Equity securities, at market 143,984 180,204 Short-term investments 272,867 42,014 Affiliates 15,048 8,776 Cash 39,120 22,882 Premiums receivable, net 279,947 238,473 Reinsurance receivables 110,530 106,322 Prepaid reinsurance premiums 7,988 10,361 Deferred policy acquisition costs 73,984 72,359 Federal income taxes 28,802 91,303 Property and equipment, net 139,724 136,623 Other assets 84,025 79,895 $4,691,322 $4,113,362 Liabilities and Shareholder's Equity Reserves for losses and loss adjustment expenses $2,163,358 $1,956,460 Unearned premiums 813,619 747,218 Other liabilities 239,235 216,281 Shareholder's equity 1,475,110 1,193,403 $4,691,322 $4,113,362
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GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C: SUBSIDIARIES AND AFFILIATES - CONTINUED PROPERTY AND CASUALTY INSURANCE Condensed Income Statements Year Ended December 31, (In thousands) 1995 1994 1993 Premiums $2,784,658$2,473,230$2,281,147 Net investment income 192,057 172,307 174,985 Realized gains on investments 44,996 16,611 81,481 Other revenue 321 581 3,700 Total Revenue 3,022,032 2,662,729 2,541,313 Losses and loss adjustment expenses 2,244,687 1,999,381 1,823,662 Other expenses 418,568 391,397 382,022 Interest expense 1,615 3,266 3,653 Federal income tax expense 81,659 52,350 78,281 Total Benefits and Expenses 2,746,529 2,446,394 2,287,618 Net income before cumulative effect of changes in accounting principles 275,503 216,335 253,695 Cumulative effect of changes in accounting principles - (1,016) (9,721) Net Income $ 275,503$ 215,319$ 243,974
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 in 1993. RESOLUTE GROUP, INC. Resolute Group, Inc., a reinsurance subsidiary, stopped accepting new business in late 1987. Summary financial data are as follows:
(In millions) 1995 1994 1993 Investments $ 52.8 $ 53.6 $ 55.5 Total assets 76.7 82.9 90.2 Loss and loss adjustment expense reserves 50.5 58.0 69.3 Shareholder's equity 22.6 19.2 18.0 Premiums earned - .2 .1 Underwriting gain (loss) (1.3) 2.1 .8 Net investment income 3.3 2.9 3.4 Net income 1.4 3.2 3.3
Page 20 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C: SUBSIDIARIES AND AFFILIATES - CONTINUED LIFE INSURANCE Criterion Life Insurance Company, a subsidiary, writes structured settlement annuities for the Corporation's property and casualty affiliates. Summary financial data are as follows:
(In millions) 1995 1994 1993 Investments $ 126.6 $ 96.1$ 96.1 Total assets 130.5 105.5 100.0 Shareholder's equity 16.8 3.7 11.7 Premiums 2.4 2.9 2.3 Net investment income 7.7 6.9 7.2 Net income (loss) .3 .7 (.9)
GEFCO GEFCO, a consumer finance subsidiary, is in the process of winding down its business. A substantial portion of its remaining loans receivable were sold in 1995. Summary financial data are as follows:
(In millions) 1995 1994 1993 Total assets $ 14.7$ 68.4$ 86.4 Shareholder's equity 2.2 7.9 12.0 Revenue 4.5 12.0 13.7 Net income (loss) (.7) (4.1) 1.9
NOTE D: STATUTORY ACCOUNTING PRACTICES 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:
(In millions) 1995 1994 1993 Consolidated property and casualty insurance and reinsurance: Net income $ 265.7$ 211.4$ 223.6 Policyholders' surplus 1,170.0 1,039.9 916.9 Consolidated life insurance: Net income (loss) .5 (.2) .6 Policyholders' surplus 8.0 5.6 6.0 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 $1,475.1 million at December 31, 1995 of which approximately $263.6 million is available for payment of dividends in 1996 and other amounts may be available in the form of loans or cash advances. The Corporation received dividends of $143.0 million, $132.0 million and $147.1 million in cash and securities from GEICO in 1995, 1994, and 1993, respectively. The Corporation contributed capital of $25 million and $6 million to GEICO Indemnity during 1995 and 1994, respectively, and received dividends of $14 million from GEICO Indemnity in 1993. Page 21 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E: INVESTMENT OPERATIONS INVESTMENT INCOME The sources of investment income are summarized as follows: (In thousands) 1995 1994 1993 Fixed maturities $ 207,698 $ 189,876 $ 191,008 Equity securities 13,848 13,639 12,692 Short-term investments 14,746 6,866 6,893 Other 994 1,023 1,045 Total investment income 237,286 211,404 211,638 Investment expenses 10,482 9,614 9,787 Net investment income $ 226,804 $ 201,790 $ 201,851
The Corporation's investments in Federal Home Loan Mortgage Corporation and Mattel, Inc. common stock with market values of $274.4 million and $230.6 million, respectively, exceeded 10% of the Corporation's shareholders' equity at December 31, 1995. There were no investments in fixed maturities which were non-income producing for the year ended December 31, 1995. REALIZED GAINS (LOSSES)
Realized gains (losses) from sales and maturities of investments are summarized as follows: (In thousands) 1995 1994 1993 Fixed maturities $ 3,967 $ (2,175)$ 7,477 Equity securities 21,759 15,367 90,418 Investments in subsidiaries and affiliates - (294) 22,928 Other (4,139) - (239) Realized gains $ 21,587 $ 12,898 $ 120,584
Realized gains and losses from sales and maturities of fixed maturities consist of gross realized gains of $4.2 million, $1.4 million and $8.0 million and gross realized losses of $.2 million, $3.5 million and $.6 million for 1995, 1994 and 1993, respectively. Realized gains on investments in subsidiaries and affiliates include a $23.5 million realized gain in 1993 on the sale of shares of AVEMCO Corporation, previously a 34% owned general aviation insurance company which was accounted for using the equity method. Page 22
GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE E: INVESTMENT OPERATIONS - CONTINUED UNREALIZED APPRECIATION (DEPRECIATION) A summary of the net change in unrealized appreciation (depreciation) on investments, reflected directly in shareholders' equity, is as follows: (In thousands) 1995 1994 1993 Increase (decrease) in unrealized appreciation: Fixed maturities $ 207,650 $ (219,216)$ 125,919 Equity securities 251,877 64,787 (63,826) Equity in affiliates' unrealized appreciation (depreciation) - (544) Deferred federal income taxes (160,972) 53,357 (25,750) Increase (decrease) in unrealized appreciation, net of deferred taxes$ 298,555$ (101,072)$ 35,799
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 $125.9 million at December 31, 1993 was reflected directly in shareholders' equity in 1993. GROSS UNREALIZED GAINS (LOSSES)
Gross unrealized gains (losses) on investments in fixed maturities are summarized as follows: December 31, (In thousands) 1995 1994 Gross unrealized gains: U.S. Treasury securities and obligations of U.S. government corporations and agencies$ 32,737$ 1,392 Obligations of states and political subdivisions 79,839 23,837 Corporate bonds and notes 3,009 170 Redeemable preferred stocks 731 - 116,316 25,399 Gross unrealized losses: U.S. Treasury securities and obligations of U.S. government corporations and agencies 81 32,746 Obligations of states and political subdivisions 1,174 74,415 Corporate bonds and notes 290 8,139 Redeemable preferred stocks 418 3,396 1,963 118,696 $ 114,353 $ (93,297)
The consolidated unrealized appreciation on investments in equity securities at December 31, 1995, before deferred tax effects, consisted of gross gains of $489.5 million and gross losses of $11.9 million. Page 23 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE E: INVESTMENT OPERATIONS - CONTINUED INVESTMENTS IN FIXED MATURITIES The market value and amortized cost of investments in fixed maturities at December 31, 1995 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.
Market Amortized (In thousands) Value Cost 1996 $ 324,159 $ 320,231 1997 - 2000 1,709,004 1,664,511 2001 - 2005 1,350,357 1,300,430 2006 and after 297,241 281,236 $3,680,761 $3,566,408
NOTE F: POLICY ACQUISITION COSTS Policy acquisition costs incurred and expensed are summarized as follows:
(In thousands) 1995 1994 1993 Policy acquisition costs incurred: Direct response advertising $ 30,748 $ 30,565 $ 26,220 Underwriting and policy issuance costs 97,987 95,271 91,835 Commissions 33,559 31,564 35,677 Premium taxes 52,412 43,164 41,643 $ 214,706 $ 200,564 $ 195,375 Policy acquisition costs expensed $ 213,081 $ 200,044 $ 197,545
NOTE G: LOANS RECEIVABLE Loans receivable, which is net of valuation allowances, is comprised primarily of GEFCO's collateral loans, with maximum terms of 180 months. GEFCO has established valuation allowances to reflect amounts that might reasonably be expected to be realized upon the disposition of its loans receivable and remaining assets, either through sale or otherwise. At December 31, 1995, the loans were primarily collateralized by commercial real estate, and the accrual of interest income was suspended on $3.5 million of loans. During the years ended December 31, 1995 and 1994, principal cash collections on loans receivable, including amounts from sales of loans, were approximately $54.5 million and $32.7 million, respectively. Page 24 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H: PROPERTY AND CASUALTY RESERVES Changes in property and casualty GAAP reserves for losses and loss adjustment expenses are as follows: (In thousands) 1995 1994 1993 Reserves at January 1, net of reinsurance $1,886,951 $1,747,026 $1,626,730 Reserves of subsidiaries sold - - (21,553) Cumulative effect of accounting change for postretirement benefits - - 1,249 1,886,951 1,747,026 1,606,426 Incurred related to: Current accident year 2,338,075 2,097,853 1,899,571 Prior accident years (93,677) (101,335) (77,788) Total incurred 2,244,398 1,996,518 1,821,783 Payments related to: Current accident year 1,281,621 1,128,223 973,706 Prior accident years 761,639 728,370 707,477 Total payments 2,043,260 1,856,593 1,681,183 Reserves at December 31, net of reinsurance 2,088,089 1,886,951 1,747,026 Reinsurance receivables 123,956 125,373 120,933 GAAP reserves at December 31 $2,212,045 $2,012,324 $1,867,959
Reserves have been reduced by approximately $101.3 million, $85.4 million and $77.0 million at December 31, 1995, 1994 and 1993, respectively, for anticipated salvage and subrogation recoveries. Reserves at December 31, 1995 include $111.5 million ($59.9 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. NOTE I: 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 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. Page 25 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J: DEBT Debt consists of the following: December 31, (In thousands) 1995 1994 GEICO Corporation unsecured debt - 6.30% bank note due 1995 $ - $ 30,000 7.50% notes due 2005 99,784 - 9.15% Debentures due 2021 99,657 99,643 7.35% Debentures due 2023 149,503 149,485 GEICO collateralized debt - 9.53% note, $375 due semi-annually, balance of $7,875 due in 1999 10,500 11,250 Guaranteed bank loans of Employee Stock Ownership Plan 63,900 50,000 GEFCO Unsecured Notes Borrowings under credit agreement - 5.90% weighted average rate, due in 1996 11,100 - 6.21% weighted average rate, due in 1995 - 51,000 Debt $434,444 $391,378
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 $11.1 and $51 million under this agreement at December 31, 1995 and 1994, respectively. The agreement provides several options for interest and repayment terms and a facility fee of 12.50 basis points per annum. Interest of $28.1 million, $27.3 million and $18.2 million was paid during 1995, 1994 and 1993, respectively. DEBT MATURITIES The aggregate maturities of consolidated debt for the years 1996 through 2000 are $22.3 million; $10.2 million; $8.7 million; $15.4 million and $6.5 million, respectively. COLLATERALIZED DEBT Property with a cost of $17.5 million has been pledged as collateral for the 9.53% note of GEICO. CAPITALIZED INTEREST Corporate and other interest expense in the consolidated statements of income has been reduced by $.2 million and $1.4 million in 1994 and 1993, respectively, representing interest that was capitalized as part of the cost to construct a new regional office building, which was completed in 1994. Page 26 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K: FEDERAL INCOME TAXES FEDERAL INCOME TAX EXPENSE Federal income tax expense consists of the following components: (In thousands) 1995 1994 1993 Current tax expense $ 75,707 $ 58,056 $ 108,560 Deferred tax benefit (15,032) (15,677) (14,927) Adjustment of net deferred tax asset for enactment of rate change - - (1,440) Federal income tax expense $ 60,675 $ 42,379 $ 92,193
Federal income taxes of $73.3 million, $60.9 million and $71.7 million were paid during 1995, 1994 and 1993, respectively. EFFECTIVE FEDERAL TAX RATE RECONCILIATION A reconciliation of the effective federal income tax rate in the consolidated statements of income to the prevailing federal income tax rate of 35% is as follows:
(In thousands) 1995 1994 1993 Income tax expense at the prevailing rate of pretax income $ 107,905 $ 87,918 $ 132,517 Effect of: Tax-exempt interest income (47,278) (43,089) (33,385) Dividends received deduction (4,081) (4,107) (4,196) Proration of investment income 6,327 5,270 3,497 Other (2,198) (3,613) (6,240) Federal income tax expense $ 60,675 $ 42,379 $ 92,193
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GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE K: FEDERAL INCOME TAXES - CONTINUED FEDERAL INCOME TAX ASSET The components of the net federal income tax asset (liability) included in the financial statements are as follows: (In thousands) December 31, 1995 1994 Deferred tax assets: Unrealized losses on investments $ 7,204 $ 49,093 Loss and loss adjustment expense reserves 99,469 93,956 Unearned premium reserve 67,509 63,974 Deferred compensation 16,830 18,388 Accrued vacation 3,867 3,492 Postretirement benefits 2,643 2,466 Other 13,477 13,939 Total gross deferred tax assets 210,999 245,308 Deferred tax liabilities: Unrealized gains on investments 212,163 95,451 Deferred policy acquisition costs 25,895 25,326 Tax benefit transfer lease 4,032 5,506 Property and equipment 4,017 5,437 Accrued investment income 4,187 4,602 Other 9,206 10,388 Total gross deferred tax liabilities 259,500 146,710 Net deferred tax asset (liability) (48,501) 98,598 Current tax receivable (payable) (908) 377 Federal income tax asset (liability) $ (49,409)$ 98,975
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. NOTE L: SHAREHOLDERS' EQUITY SHARE ACQUISITIONS The Corporation purchased 1,203,002; 2,745,934 and 453,854 shares of Common Stock in 1995, 1994 and 1993, respectively, for an aggregate cost of $61.9 million, $137.4 million and $26.1 million. The Corporation reissued 331,022; 132,436 and 63,997 shares of Common Stock for $16.6 million, $7.1 million and $4.0 million in 1995, 1994 and 1993, respectively. 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 were exercisable in installments beginning one year from the date of grant and expired not more than ten years and one month thereafter. Exercisable options at December 31, 1995, 1994, 1993 and 1992 were 320,675; 374,125; 389,435 and 375,435, respectively. Under the plan, an individual could exercise any combination of stock options and SARs as long as the aggregate number did not exceed the number of stock options granted to that individual. No more options may be granted under this plan. In January 1993 the remaining outstanding SARs related to options under the 1985 Stock Option Plan were cancelled and, accordingly, no further charge was made against earnings for SARs. Page 28 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE L: SHAREHOLDERS' EQUITY - CONTINUED Under the Corporation's 1992 Stock Option Plan, options to purchase 2,500,000 shares of Common Stock were granted to officers and key employees. The purchase price could not be less than 100% of the fair market value at date of grant, and the options were exercisable in installments beginning six months from the date of grant and expired not more than ten years thereafter. Exercisable options at December 31, 1995, 1994, 1993 and 1992 were 780,600, 761,830, 71,500 and 17,500, respectively.
Activity under the 1985 and 1992 Stock Option Plans is summarized as follows: Options Price Available Per Share On Options For Grant Date of Grant Outstanding 1985 Stock Option Plan: 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 Exercised - 13.80 to 29.30 (81,250) Balance at December 31, 1995 - $ 17.43 to $ 32.68 320,675 1992 Stock Option Plan: 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 - 45.81 (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) 49.38 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 Granted (351,000) 49.25 to 57.19 351,000 Exercised - 38.15 to 63.94 (39,000) Forfeited or expired 90,230 45.81 to 64.44 (90,230) Balance at December 31, 1995 968,200 $ 38.15 to $ 64.44 1,490,600
On January 2, 1996, pursuant to the terms of the merger with Berkshire, each holder of a then outstanding option was entitled to receive cash from the Corporation, in settlement thereof, in the amount of the excess of $70 over the exercise per share price of each option held, with the right to defer such amount under the Corporation's deferred compensation plan. The Corporation's obligation to settle the options outstanding at the merger date was $32.9 million of which $6.2 million was paid in cash in January 1996 and the remainder was deferred. As a result, a charge of $21.5 million will be made immediately prior to the merger in 1996 for the excess of the $32.9 million obligation over $11.3 million previously accrued for SARs related to the options. PERFORMANCE SHARES Under the Corporation's performance share plan, as approved by shareholders, awards of performance shares were made to key executives to be paid based on the attainment of certain goals. Charges of $3.0 million, $1.8 million and $3.1 million were made against 1995, 1994 and 1993 earnings, respectively, under the plan. As of December 31, 1995, 103,227 performance share awards were outstanding. Pursuant to the merger with Berkshire, any payment made after the merger will be made in cash on the basis of $70 per share and no Common Stock will be issued. Additionally, no future awards will be granted. Page 29 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE M: EARNINGS PER SHARE The computation of earnings per share is based on the weighted average number of common shares assumed outstanding of 67,593,419 in 1995, 69,992,442 in 1994 and 71,417,006 in 1993. NOTE N: 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, 1995 consist primarily of common stocks and U.S. Government obligations.
Pension expense is as follows: (In thousands) 1995 1994 1993 Service cost - benefits earned during the year $ 7,110 $ 8,314 $ 6,707 Interest cost on projected benefit obligation 14,197 12,989 11,888 Actual return on plan assets (69,205) (10,786) (10,146) Amortization of net asset existing at January 1, 1986 (3,426) (3,426) (3,426) Other amortization and deferral 53,965 (3,553) (3,247) Net pension expense $ 2,641 $ 3,538 $ 1,776 The funded status of the plan is as follows: December 31, (In thousands) 1995 1994 Actuarial present value of benefit obligations: Vested $143,276 $105,521 Non-vested 9,084 2,521 Accumulated benefit obligation 152,360 108,042 Effect of projected future salary increases 73,210 48,249 Projected benefit obligation 225,570 156,291 Plan assets at market value 267,974 204,460 Plan assets in excess of projected benefit obligation 42,404 48,169 Unrecognized net gain (53,043) (42,128) Unrecognized prior service costs 16,148 5,535 Unrecognized net asset at January 1, 1986 being recognized over eleven years (3,829) (7,255) Pension asset $ 1,680 $ 4,321
The projected benefit obligation was determined using an assumed discount rate of 7.0% and 8.5%, an assumed long-term rate of return on plan assets of 8.5% and 8.5% and assumed average annual salary increases of 5.5% and 6.25% in 1995 and 1994, respectively. Page 30 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE N: EMPLOYEE BENEFITS - CONTINUED EMPLOYEE STOCK OWNERSHIP PLAN Substantially all employees of the Corporation and its subsidiaries were covered under the GEICO Companies Employee Stock Ownership Plan (ESOP). The ESOP borrowed money and used the proceeds to purchase shares of the Corporation's Common Stock. The Corporation guaranteed the loans and made annual contributions sufficient to enable the ESOP to pay principal and interest to the extent it was not paid by dividends on the shares purchased with the debt proceeds. Shares were released based on the proportion of debt service paid in the year. The obligations of the Trust, $63.9 million and $50.0 million at December 31, 1995 and 1994, were included in the Corporation's long-term debt. An amount, representing the obligations of the Trust which has not yet been charged to compensation expense, was deducted from shareholders' equity. Additional accrued compensation in excess of the current year debt service was 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 was recognized on new shares based on the fair value of the shares as of the date the shares were committed-to- be-released to participants' accounts. Dividends on allocated new shares were charged to retained earnings. Dividends on unallocated new shares were charged to compensation cost and the shares were 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) was recognized based on the cost of the shares to the plan. Dividends on old shares were charged to retained earnings and such shares were considered outstanding for earnings per share computations.
The components of Employee Stock Ownership Plan expense consist of the following: (In thousands) 1995 1994 1993 Principal $17,000 $10,098 $ 9,169 Interest 4,501 3,569 3,684 Dividends used for debt service (3,269) (3,594) (2,390) Additional accrued compensation 1,067 393 301 Dividends on unallocated new shares 653 244 - Fair value adjustment for new shares 487 (90) - Employee Stock Ownership Plan expense $20,439 $10,620 $10,764
In 1996, pursuant to the merger with Berkshire, all remaining outstanding ESOP bank loans were paid in full from unallocated ESOP assets. The remaining unallocated ESOP assets were allocated among ESOP participants. The interests of all ESOP participants were vested and distributed, and the ESOP was terminated. As a result, a charge of $8.8 million will be made immediately prior to the merger in 1996 representing primarily the excess of the value of the unallocated new shares over the related debt. 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 $8.8 million, $8.6 million and $6.4 million were charged to expense in 1995, 1994 and 1993, respectively. Page 31 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE N: EMPLOYEE BENEFITS - CONTINUED POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Corporation provides certain health and life insurance benefits for eligible retirees. The health benefits continue through age 65. 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 $3.9 million, net of tax, which is included in the consolidated statements of income as a change in accounting principle. Prior to 1993, the cost of providing these benefits was recognized on a pay-as-you-go basis.
Postretirement benefits expense consists of the following: (In thousands) 1995 1994 1993 Service cost - benefits earned during the period$ 293$ 336$ 285 Interest cost on accumulated postretirement benefits obligation 529 504 491 Amortization of gains and losses (17) - - Postretirement benefits expense $ 805 $ 840 $ 776
The Corporation's postretirement benefits are not funded. The accumulated postretirement benefits obligation is as follows:
(In thousands) December 31, 1995 1994 Retirees and dependents $1,304 $1,715 Fully eligible active plan participants 1,992 1,749 Other active plan participants 3,905 3,198 Accumulated postretirement benefits obligation 7,201 6,662 Unrecognized net gain (loss) 351 384 Accrued postretirement benefits liability $7,552 $7,046
The accumulated postretirement benefits obligation at December 31, 1995 was determined using an assumed discount rate of 7.0% and an assumed health care cost trend rate of 8.5% in 1996 decreasing to 5.5% in 2001 and thereafter. 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. An increase of 1 percent in the assumed health care cost trend rate in each year would increase the December 31, 1995 accumulated postretirement benefits obligation by approximately $.9 million and would increase the 1995 net periodic postretirement benefits cost by approximately $.1 million. Page 32 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE O: 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. Pursuant to an agreement with the Florida Hurricane Catastrophe Fund for the year beginning June 1, 1995, 75% of GEICO's homeowners losses in excess of $24 million per occurrence are reimbursed by the Fund subject to a constraint of overall money available to the Fund. GEICO has no other catastrophe reinsurance effective in any other states. 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: (In thousands) 1995 1994 1993 Premiums written: Direct business $2,828,499 $2,524,648$2,106,320 Reinsurance assumed 43,394 41,459 42,461 Reinsurance ceded (16,125) (18,272) (17,500) $2,855,768 $2,547,835$2,131,281 Premiums earned: Direct business $2,761,136 $2,450,790$2,260,162 Reinsurance assumed 44,374 43,092 46,355 Reinsurance ceded (18,499) (17,606) (23,029) $2,787,011 $2,476,276$2,283,488
Amounts deducted from losses and loss adjustment expenses in the consolidated statements of income for reinsurance cessions were $26.1 million, $26.7 million and $25.5 million in 1995, 1994 and 1993, respectively. NOTE P: COMMITMENTS AND CONTINGENCIES Rental expense for all leases was $14.2 million in 1995, $14.7 million in 1994 and $13.7 million in 1993. 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, 1995 for noncancellable leases with a remaining term of at least one year are $3.2 million, $2.8 million, $2.1 million, $.6 million and $.3 million for the years 1996 through 2000, 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. Page 33 GEICO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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:
(In millions) December 31, 1995 Carrying Fair Amount Value Assets: Fixed maturities $3,680.8 $3,680.8 Equity securities 971.1 971.1 Short-term investments 341.3 341.3 Loans receivable, net 11.3 11.3 Liabilities: Policyholders' funds on deposit 72.9 81.6 Debt 434.4 477.7 (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 Debt 391.4 369.8
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 approximate fair value due to the short maturity of these instruments. The fair value of net loans receivable is based on their estimated net realizable value. 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 34
GEICO Corporation Supplemental Financial Information Quarterly Highlights of Operating Results (Unaudited) (In millions, except per share results) 1995 1994 Three Months Ended Three Months Ended Dec. 31 Sept. 30June 30 Mar. 31Dec. 31 Sept. 30June 30 Mar. 31 Revenue Premiums $ 729.1 $ 710.3$ 688.6 $ 659.0$ 653.9 $ 629.6$ 605.3 $ 587.6 Net investment income 58.6 56.4 56.4 55.3 53.7 50.1 49.5 48.4 Realized gains (losses) on investments 17.3 4.1 (5.4) 5.6 .6 1.8 4.0 6.6 Interest on loans receivable .3 .3 .7 2.4 2.6 2.5 2.6 2.7 Other revenue 4.0 3.4 3.7 3.9 3.7 3.7 3.6 3.6 Total Revenue 809.3 774.5 744.0 726.2 714.5 687.7 665.0 648.9 Benefits and Expenses Losses and loss adjustment expenses 582.9 556.0 574.6 531.0 525.6 498.7 478.7 493.5 Life benefits and interest on policyholders' funds 2.8 2.3 2.7 2.0 2.0 2.0 2.1 2.5 Policy acquisition expenses 55.1 53.7 52.8 51.4 51.4 48.1 50.5 50.0 Other operating expenses 74.1 63.4 49.4 57.1 60.8 59.7 55.6 55.8 Interest expense 8.3 9.6 9.1 7.4 7.2 6.6 6.5 7.5 Total Benefits and Expenses 723.2 685.0 688.6 648.9 647.0 615.1 593.4 609.3 Net Income Before Income Taxes 86.1 89.5 55.4 77.3 67.5 72.6 71.6 39.6 Federal income tax expense 17.2 20.8 7.6 15.1 10.9 13.9 14.2 3.4 Net income before cumulative effect of change in accounting principle 68.9 68.7 47.8 62.2 56.6 58.7 57.4 36.2 Cumulative effect of change in accounting principle for postemployment benefits, net of tax - - - - - - - (1.1) Net Income $ 68.9 $ 68.7$ 47.8 $ 62.2$ 56.6 $ 58.7$ 57.4 $ 35.1 Earnings Per Share Net income before cumulative effect of change in accounting principle $ 1.03 $ 1.02$ .71 $ .91$ .83 $ .84$ .81 $ .51 Cumulative effect of change in accounting principle - - - - - - - (.01) Net Income $ 1.03 $ 1.02$ .71 $ .91$ .83 $ .84$ .81 $ .50
PAGE Page 35 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III The information required by Items 10, 11, 12 and 13 of this Part III is omitted in reliance on General Instruction J(2)(c) to Form 10-K. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) and (2) List of Financial Statements and Financial Statement Schedules The following consolidated financial statements of the Corporation and subsidiaries are incorporated by reference in Item 8: Consolidated Balance Sheets - December 31, 1995 and 1994 Consolidated Statements of Income - Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows - Years Ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements. (a)(3) and (c) Exhibits The following exhibits are included in response to Item 14(c). Management contracts and compensatory plans are indicated by an asterisk (*). Exhibit No. Description Reference 3-a Certificate of Incorporation, Exhibit 3-a to GEICO Corpo- as amended. ration's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 3-b Bylaws of GEICO Corporation Exhibit No. 3-b to GEICO Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 4-a Specimen certificate representingExhibit 6(c) to File the common stock, $1.00 par value.No. 2-63138 on Form S-14. (Copies of certain indentures, which in the aggregate do not represent securities worth as much as ten percent of the total consolidated assets of GEICO Corporation, will be furnished upon request.) 21 Subsidiaries of GEICO Corporation.Omitted in reliance on General Instruction J(2)(b) to Form 10-K. Page 36 23 Consent of Accountants. Page No. 51. 27 Financial Data Schedule Page No. 52. (Submitted as an exhibit pur- suant to the requirements of Item 601(b)(27) of Reg. S-K and not deemed filed for purposes of Sec. 11 of the Securities Act of 1933 or Sec. 18 of the Securities Exchange Act of 1934.) 28P Information from reports Exhibit 28P to Form SE furnished to state insurance filed in connection with regulatory authorities. GEICO Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 99 Annual Report on Form 11-K forTo be filed by amendment. the Revised Profit Sharing Plan for the Employees of the Govern- ment Employees Companies for the fiscal year ended December 31, 1995. (b) Reports on Form 8-K. On December 20, 1995 GEICO Corporation filed a report on Form 8-K in which it reported under Item 5 that stockholders of the Company had, at a Special Meeting held on that date, approved and adopted the Agreement. The following financial information is included in response to Item 14(d): Reference Report of Independent Accountants Page No. 39. Schedule I - Summary of Investments - Other Than Investments in Related Parties Page No. 40. Schedule II - Condensed Financial Information of Registrant Page Nos. 41 - 44. Schedule III - Supplementary Insurance InformationPage Nos. 45 - 46. Schedule IV - Reinsurance Page No. 47. Schedule V - Valuation and Qualifying Accounts Page No. 48. Schedule VI - Supplemental Information Concerning Property/Casualty Insurance Operations Page Nos. 49 - 50. Financial statements of unconsolidated affiliates and 50% or less owned persons accounted for by the equity method have been omitted because they do not, considered individually or in the aggregate, constitute a significant subsidiary. PAGE Page 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 March 25, 1996 By: /s/ W. Alvon Sparks, Jr. W. Alvon Sparks, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer) March 25, 1996 By: /s/ Thomas M. Wells Thomas M. Wells Group Vice President and Controller (Principal Accounting Officer) PAGE Page 38 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Olza M. Nicely March 25, 1996 Olza M. Nicely Date President and Chief Executive Officer - Insurance Operations and Director (Co-Principal Executive Officer) /s/ Louis A. Simpson March 25, 1996 Louis A. Simpson Date President and Chief Executive Officer - Capital Operations and Director (Co-Principal Executive Officer) /s/ Warren E. Buffett March 25, 1996 Warren E. Buffett Date Director /s/ Marc D. Hamburg March 25, 1996 Marc D. Hamburg Date Director /s/ Forrest N. Krutter March 25, 1996 Forrest N. Krutter Date Director Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants which Have Not Registered Securities Pursuant to Section 12 of the Act (c) The registrant has not sent any annual report to security holders in respect of its fiscal year ended December 31, 1995; the registrant has not sent any proxy soliciting material to more than ten of its security holders subsequent to the proxy statement dated November 20, 1995 in respect of the Special Meeting of Shareholders at which the Agreement was submitted to, and approved by, holders of its common stock. PAGE Page 39 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors GEICO Corporation Our report on the consolidated financial statements of GEICO Corporation and subsidiaries has been included on page 8 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 36 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. As discussed in Note A to the consolidated financial statements, GEICO 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 to conform with recent pronouncements of the Financial Accounting Standards Board. By: COOPERS & LYBRAND L.L.P. Washington, D.C. February 16, 1996 PAGE Page 40 SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
GEICO CORPORATION AND SUBSIDIARIES DECEMBER 31, 1995 In Thousands Amount at which Market shown in the Type of Investment Cost(1) value Balance Sheet Fixed maturities available for sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 922,574 $ 955,230 $ 955,230 Obligations of states and political sub- divisions 2,513,537 2,592,202 2,592,202 Public utility bonds 49,997 51,323 51,323 All other corporate bonds and notes 39,043 40,436 40,436 Redeemable preferred stocks 41,257 41,570 41,570 Total fixed maturities 3,566,408 $3,680,761 3,680,761 Equity securities available for sale: Common stocks: Banks, trusts and insurance companies 72,839 $ 99,875 99,875 Industrial, miscellaneous and all other 404,623 854,938 854,938 Nonredeemable preferred stocks 15,975 16,248 16,248 Total equity securities 493,437 $ 971,061 971,061 Short-term investments 341,325 341,325 Total investments $4,401,170 $4,993,147
(1) Fixed maturities at amortized cost and equity securities at original cost. PAGE Page 41 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT GEICO CORPORATION (PARENT COMPANY) BALANCE SHEETS In Thousands
December 31, 1995 1994 ASSETS Equity securities available for sale, at market Common stocks (cost $532,851 and $539,893)$ 826,809$ 602,505 Short-term investments 64,842 3,928 Total Investments 891,651 606,433 Cash 5,264 342 Accrued investment income 1,027 610 Amounts receivable from sales of securities - 565 Notes receivable from subsidiaries (1) 600 900 Investment in consolidated subsidiaries (1) 1,523,933 1,244,333 Amounts due from subsidiaries (1) 3,583 605 Property and equipment, at cost less accumulated depreciation of $2,080 and $3,895 3,146 856 Other assets 3,201 2,506 Total Assets $2,432,405$1,857,150 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Debt $ 412,844$ 329,128 Amounts payable on purchases of securities 1,518 8,408 Amounts payable on purchases of Common Stock (Treasury) - 248 Federal income taxes 85,949 8,214 Accrued expenses and other liabilities 63,646 65,211 Total Liabilities 563,957 411,209 Shareholders' Equity: Common Stock 71,681 71,565 Paid-in surplus 176,058 169,084 Unrealized appreciation of investments 389,722 91,167 Retained earnings 1,505,419 1,330,022 Treasury Stock, at cost (212,816) (167,115) Unearned Employee Stock Ownership Plan shares (61,616) (48,782) Total Shareholders' Equity 1,868,448 1,445,941 Total Liabilities and Shareholders' Equity $2,432,405$1,857,150
(1) Eliminated in consolidation. See accompanying note to condensed financial statements. PAGE Page 42 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT GEICO CORPORATION (PARENT COMPANY) STATEMENTS OF INCOME In Thousands
For The Year Ended December 31, 1995 1994 1993 Revenue: Dividends from consolidated subsidiaries (1) $143,100 $133,025 $175,375 Dividends from unconsolidated affiliate - - 844 Interest from subsidiaries (1) 16 115 51 Management fees from subsidiaries (1) 18,518 16,701 15,942 Other investment income 14,240 11,439 8,513 Realized gains on investments 11,608 5,302 20,628 Other revenue 44 129 66 Total Revenue 187,526 166,711 221,419 Expenses: Management fees to subsidiaries (1) 2,450 2,800 2,200 General and administrative 24,669 21,142 8,885 Interest 31,420 21,440 13,267 Total Expenses 58,539 45,382 24,352 Income before income tax expense (benefit) and equity in undistributed income 128,987 121,329 197,067 Income tax expense (benefit) (8,785) (7,526) 5,886 Income before equity in undistributed income 137,772 128,855 191,181 Equity in undistributed income of consolidated subsidiaries (1) 109,852 79,960 92,309 Equity in undistributed income of unconsolidated affiliate - - 2,937 Net income before cumulative effect of changes in accounting principles 247,624 208,815 286,427 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 Income $247,624 $207,764 $273,678
(1) Eliminated in consolidation. See accompanying note to condensed financial statements. PAGE Page 43 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT GEICO CORPORATION (PARENT COMPANY) STATEMENTS OF CASH FLOWS In Thousands
For The Year Ended December 31, 1995 1994 1993 OPERATING ACTIVITIES Net income $247,624 $207,764 $273,678 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 Equity in undistributed net income of consolidated subsidiaries (1) (149,846) (97,956) (92,309) Equity in undistributed net income of unconsolidated affiliate - - (2,937) Realized gains (11,608) (5,302) (20,628) Accrual of discount on investments (588) (1,961) - Change in amounts due from subsidiaries (1) (2,978) (529) (1,047) Federal income taxes (3,256) 2,788 14,610 Other 5,918 10,926 (6,613) Net cash provided by operating activities 85,266 116,781 177,503 INVESTING ACTIVITIES Purchases of fixed maturities (62,412) (31,055) (96,835) Purchases of equity securities (236,747) (180,320) (292,587) Change in payable on security purchases (6,890) 8,408 - Sales of fixed maturities - 11,927 - Maturities and redemptions of fixed maturities 63,000 79,036 38,732 Sales of equity securities 295,391 109,599 69,733 Net change in short-term investments (60,914) 46,425 (48,702) Change in receivable from security sales 565 299 (826) Net investment in subsidiaries (1) (21,550) (7,700) (1,000) Proceeds from sales of affiliates and subsidiaries - 9,686 74,282 Decrease in notes receivable from subsidiaries (1) 300 825 200 Purchase of property and equipment, net (2,867) (229) (106) Net cash provided (used) by investing activities (32,124) 46,901 (257,109) FINANCING ACTIVITIES Issuance of debt 99,768 - 149,458 Net change in short-term borrowings (30,000) 30,000 - Exercise of stock options 3,166 1,129 783 Purchase of Common Stock (Treasury) (47,093) (125,086) (22,696) Dividends paid to shareholders (73,206) (69,864) (48,300) Other (855) - - Net cash provided (used) by financing activities (48,220) (163,821) 79,245 Change in cash 4,922 (139) (361) Cash at beginning of year 342 481 842 Cash at end of year $ 5,264 $ 342 $ 481 (1) Eliminated in consolidation. See accompanying note to condensed financial statements.
PAGE Page 44 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT GEICO CORPORATION (PARENT COMPANY) NOTE TO CONDENSED FINANCIAL STATEMENTS December 31, 1995 The condensed financial statements of GEICO Corporation (parent company) should be read in conjunction with the consolidated financial statements and notes thereto of GEICO Corporation and subsidiaries included in this Form 10-K Annual Report. In 1995 the parent company received $143.1 million of dividends from its consolidated subsidiaries, consisting of $103.1 million of cash and $40.0 million of equity securities. In 1994 the parent company received $133.0 million of dividends from its consolidated subsidiaries, consisting of $115.0 million of cash and $18.0 million of equity securities. The noncash portion of the dividends in 1995 and 1994 related to the acquisition of equity securities is excluded from the parent company's statements of cash flows. PAGE Page 45 SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION GEICO CORPORATION AND SUBSIDIARIES In Thousands
Column A Column B Column C Column D Column E Column F Future Policy Other Deferred Benefits, Policy Policy Losses, Claims Claims and Acquisition and Loss Unearned Benefits Earned Segment Costs Expenses Premiums Payable Premiums Year Ended December 31, 1995 Property and cas- ualty insurance $ 73,984$2,161,524 $813,619 $ - $2,784,658 Reinsurance - 50,521 107 - (21) Life and health insurance - 40,057 - 72,913 2,374 Total insurance segment $ 73,984 $2,252,102 $813,726 $ 72,913 $2,787,011 Year Ended December 31, 1994 Property and cas- ualty insurance$ 72,359 $1,954,308 $747,218 $ - $2,473,230 Reinsurance - 58,016 124 - 161 Life and health insurance - 37,131 - 64,167 2,885 Total insurance segment $ 72,359 $2,049,455 $747,342 $ 64,167 $2,476,276 Year Ended December 31, 1993 Property and cas- ualty insurance $2,281,147 Reinsurance 55 Life and health insurance 2,286 Total insurance segment $2,283,488
PAGE Page 46 SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION GEICO CORPORATION AND SUBSIDIARIES In Thousands
Column G Column H Column I Column J Column K Benefits, Amortization Claims, of Deferred Net Losses and Policy Other Investment Settlement Acquisition Operating Premiums Income Expense Costs Expenses Written $192,057 $2,244,687 $213,147 $203,708 $2,853,432 3,335 (289) (66) 1,620 (38) 7,721 9,798(1) - 564 N/A $203,113 $2,254,196 $213,081 $205,892 $2,853,394 $172,307 $1,999,682 $200,092 $189,645 $2,544,826 2,904 (3,164) (48) 1,271 124 6,893 8,573(1) - 351 N/A $182,104 $2,005,091 $200,044 $191,267 $2,544,950 $174,985 $1,823,793 $197,619 $182,404 $2,129,038 3,360 (2,010) (74) 1,326 (43) 7,229 13,521(1) - 288 N/A $185,574 $1,835,304 $197,545 $184,018 $2,128,995
(1) Includes interest on policyholders' funds of $4,544, $3,972 and $3,565 for the years ended December 31, 1995, 1994 and 1993, respectively. Page 47
SCHEDULE IV - REINSURANCE GEICO CORPORATION AND SUBSIDIARIES THREE YEARS ENDED DECEMBER 31, 1995 In Thousands Percentage Ceded to Assumed of amount Gross other from other Net assumed amount companies companies amount to net Year ended December 31, 1995: Life insurance in force$ - $ - $ - $ - - Premiums earned: Accident and health insurance $ 685$ 685$ - $ - - Property and liability insurance 2,758,077 17,814 44,374 2,784,637 2% Life insurance 2,374 - - 2,374 - Total premiums earned $2,761,136$ 18,499 $ 44,374 $2,787,011 Year ended December 31, 1994: Life insurance in force$ - $ - $ - $ - - Premiums earned: Accident and health insurance $ 781$ 781$ - $ - - Property and liability insurance 2,447,124 16,825 43,092 2,473,391 2% Life insurance 2,885 - - 2,885 - Total premiums earned $2,450,790$ 17,606 $ 43,092 $2,476,276 Year ended December 31, 1993: Life insurance in force$ - $ - $ - $ - - Premiums earned: Accident and health insurance $ 894$ 894$ - $ - - - Property and liability insurance 2,256,982 22,135 46,355 2,281,202 2% Life insurance 2,286 - - 2,286 - Total premiums earned $2,260,162$ 23,029 $ 46,355 $2,283,488
Page 48 SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS GEICO CORPORATION AND SUBSIDIARIES In Thousands
Column A Column B Column C Column D Column E Additions (1) (2) Balance at Charged to Charged to Balance Beginning Costs and Other at End Description of Year Expenses Accounts Deductions of Year Year ended December 31, 1995: Allowance for loan losses $2,397 $ (911) $685(1) $1,414(2) $ 757 Allowance for uncollectable premiums 2,490 7,805 - 7,535(2) 2,760 Year ended December 31, 1994: Allowance for loan losses $2,475 $ 72 $ - $ 150(2) $2,397 Allowance for uncollectable premiums 1,850 6,260 - 5,620(2) 2,490 Year ended December 31, 1993: Allowance for loan losses $2,661 $ 243 $ - $ 429(2) $2,475 Allowance for uncollectable premiums 1,850 4,326 - 4,326(2) 1,850 (1) Transfers from Valuation Allowance for Assets Acquired in Foreclosure (2) Uncollectible Accounts Written Off, Net of Recoveries
PAGE Page 49
SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS GEICO CORPORATION AND SUBSIDIARIES In Thousands Column A Column B Column C Column D Column E Column F Reserves for Deferred Unpaid Losses Discount, Affiliation Policy and Loss if any, with Acquisition Adjustment Deducted in Unearned Earned Registrant Costs Expense Column C Premiums Premiums Consolidated property and casualty subsidiaries Year ended December 31, 1995$73,984 $2,212,045 $ - $813,726 $2,784,637 Year ended December 31, 1994$72,359 $2,012,324 $ - $747,342 $2,473,391 Year ended December 31, 1993 $2,281,202
Page 50
SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS GEICO CORPORATION AND SUBSIDIARIES In Thousands Column G Column H Column I Column J Column K Loss and Loss Adjustment Expenses Amortization Paid Incurred Related to of Deferred Losses Net (1) (2) Policy and Loss Investment Current Prior Acquisition Adjustment Premiums Income Year Years Costs Expenses Written $195,392 $2,338,075 $ (93,677) $213,081 $2,043,260 $2,853,394 $175,211 $2,097,853 $(101,335) $200,044 $1,856,593 $2,544,950 $178,345 $1,899,571 $ (77,788) $197,545 $1,681,183 $2,128,995
Page 51 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of GEICO Corporation on Form S-8, dated August 28, 1992 (File No. 33-48959), and Post-Effective Amendment No. 2 dated August 28, 1992 to Registration Statement No. 33-7412 on Form S-8 and to Post Effective Amendment No. 2 dated November 12, 1992 to Registration Statement No. 2-99661 on Form S-8, which also serves as a Post-Effective Amendment to Registration Statement No. 2-83426 on Form S-8, of our report dated February 16, 1996, on the consolidated financial statements and financial statement schedules of GEICO Corporation and subsidiaries as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994, and 1993, which reports are included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Washington, D.C. March 25, 1996 EX-27 2
7 This schedule contains summary financial information extracted from SEC Form 10-K and is qualified in its entirety by reference to such financial statements. 1000 12-MOS DEC-31-1995 DEC-31-1995 3680761 0 0 971061 0 0 4993147 50339 125660 73984 5795505 2252102 813726 0 72913 434444 71681 0 0 1796767 5795505 2787011 226804 21587 18613 2249652 213081 244074 308299 60675 247624 0 0 0 247624 3.66 3.66 1886951 2338075 (93677) 1281621 761639 2088089 (93677)
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