-----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, MgC0YXRFTjOFJ54KH76qIp8QM5X4zVMDtZQjs8qMsTxmscLzbfgYU7cD2A/M4cuo dURlqVImVNXmMrqprtk7VQ== 0000950157-95-000281.txt : 19951010 0000950157-95-000281.hdr.sgml : 19951010 ACCESSION NUMBER: 0000950157-95-000281 CONFORMED SUBMISSION TYPE: SC 13E3 PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19951006 SROS: NYSE SROS: PSE GROUP MEMBERS: BERKSHIRE HATHAWAY INC. GROUP MEMBERS: HPKF INC SUBJECT COMPANY: 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: SC 13E3 SEC ACT: 1934 Act SEC FILE NUMBER: 005-06097 FILM NUMBER: 95578983 BUSINESS ADDRESS: STREET 1: GEICO PLZ CITY: WASHINGTON STATE: DC ZIP: 20076 BUSINESS PHONE: 3019862027 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: HPKF INC CENTRAL INDEX KEY: 0001001815 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 13E3 BUSINESS ADDRESS: STREET 1: 1440 KIEWIT PLAZA CITY: OMAHA STATE: NE ZIP: 68131 BUSINESS PHONE: 6839147 MAIL ADDRESS: STREET 1: 1440 KIEWIT PLAZA CITY: OMAHA STATE: NE ZIP: 68131 SC 13E3 1 TRANSACTION STATEMENT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- SCHEDULE 13E-3 RULE 13E-3 TRANSACTION STATEMENT (PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934) GEICO CORPORATION (Name of the Issuer) BERKSHIRE HATHAWAY INC. HPKF INC. GEICO CORPORATION (Name of Person(s) Filing Statement) Common Stock, $1.00 par value (Title of Class of Securities) 36158210 9 (CUSIP Number of Class of Securities) Marc D. Hamburg Rosalind A. Phillips Berkshire Hathaway Inc. GEICO Corporation 1440 Kiewit Plaza One GEICO Plaza Omaha, NE 68131 Washington, DC 20076 (402) 346-1400 (301) 986-3000 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of Person(s) Filing Statement) Copies to: John B. Frank, Esq. Robert A. Kindler, Esq. Munger, Tolles & Olson Cravath, Swaine & Moore 355 South Grand Avenue Worldwide Plaza Los Angeles, CA 90071 825 Eighth Avenue (213) 683-9100 New York, NY 10019 (212) 474-1000 This statement is filed in connection with (check the appropriate box): a.[X] The filing of solicitation materials or an information statement subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the Securities Exchange Act of 1934. b.[ ] The filing of a registration statement under the Securities Act of 1933. c.[ ] A tender offer d.[ ] None of the above Check the following box if the soliciting materials or information statement referred to in checking box (a) are preliminary copies.[X] Calculation of Filing Fee Transaction Valuation Amount of Filing Fee $2,329,042,310* $465,808.46 - ----------------------------- * For purposes of calculation of fee only. This amount assumes the purchase of 33,272,033 shares of Common Stock, par value $1.00 per share, of GEICO Corporation at $70 net in cash per share. The amount of the filing fee calculated in accordance with Rule 0-11 equals 1/50 of 1% of the value of the shares to be purchased. |X| Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number or the Form or Schedule and the date of its filing. Amount Previously Paid: $465,808.46 Filing Party: GEICO Corporation Form or Registration No: Schedule 14A Date Filed: October 5, 1995 This Rule 13E-3 Transaction Statement (the "Statement") relates to a proposal to approve and adopt an Agreement and Plan of Merger (the "Merger Agreement") dated as of August 25, 1995, among Berkshire Hathaway Inc., a Delaware corporation ("Berkshire"), HPKF Inc., a Delaware corporation ("Sub") and GEICO Corporation, a Delaware corporation (the "Company"), and the merger of Sub with and into the Company upon the terms and subject to the conditions set forth in the Merger Agreement (the "Merger"). This Statement is intended to satisfy the reporting requirements of Section 13(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), if and to the extent they are deemed to be applicable to this transaction. The filing of this Statement shall not be construed as an admission by the Company or Berkshire that the Company is "controlled by" Berkshire or that Berkshire is an "affiliate" of the Company within the meaning of Rule 13e-3 under Section 13(e) of the Exchange Act. A copy of the Merger Agreement has been filed by the Company as Appendix A to the proxy statement (the "Proxy Statement") filed as Exhibit (d) to this Statement. The cross-reference sheet below is being supplied pursuant to General Instruction F to Schedule 13E-3 and shows the location in the Proxy Statement of the information required to be included in response to the items of this Statement. The information in the Proxy Statement, including all appendices hereto, is hereby expressly incorporated herein by reference and the responses to each item in this Statement are qualified in their entirety by the information contained in the Proxy Statement and such appendices. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Proxy Statement. Item 1. Issuer and Class of Security Subject to the Transaction. (a) The information set forth in "SUMMARY--The Parties" and "THE COMPANY" is incorporated herein by reference. (b) The information set forth on the cover page of the Proxy Statement and in "THE SPECIAL MEETING--Record Date and Voting" is incorporated herein by reference. (c)-(d) The information set forth in "AVAILABLE INFORMATION" and "MARKET PRICE AND DIVIDEND INFORMATION" is incorporated herein by reference. (e) Not applicable. (f) The information set forth in "CERTAIN TRANSACTIONS IN THE COMMON STOCK" is incorporated herein by reference. Item 2. Identity and Background. (a)-(d),(g) The information set forth in "ADDITIONAL INFORMATION", "SUMMARY", "BERKSHIRE", "SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS" and Appendix D to the Proxy Statement is incorporated herein by reference. (e) Negative. (f) Negative. Item 3. Past Contacts, Transactions or Negotiations. (a)(1) Not applicable. (a)(2) The information set forth in "SPECIAL FACTORS-- Background of the Transaction" is incorporated herein by reference. (b) The information set forth in "SPECIAL FACTORS-- Background of the Transaction" is incorporated herein by reference. Item 4. Terms of the Transaction. (a) The information set forth in "SUMMARY" and "THE MERGER AGREEMENT" is incorporated herein by reference. (b) The information set forth in "SUMMARY", "SPECIAL FACTORS-- Source and Amount of Funds", and "--Interests of Certain Persons in the Transaction", and "THE MERGER AGREEMENT-- The Merger" is incorporated herein by reference. Item 5. Plans or Proposals of the Issuer or Affiliate. (a) Not applicable. (b) Not applicable. (c) The information set forth in "SPECIAL FACTORS-- Interests of Certain Persons in the Transaction", "THE MERGER AGREEMENT- The Merger" and "-Employee Benefits Plans" and "CERTAIN EFFECTS OF THE MERGER; OPERATIONS OF THE COMPANY AFTER THE MERGER" is incorporated herein by reference. (d)-(g) The information set forth in "CERTAIN EFFECTS OF THE MERGER; OPERATIONS OF THE COMPANY AFTER THE MERGER" is incorporated herein by reference. Item 6. Source and Amount of Funds or Other Consideration. (a) The information set forth in "SPECIAL FACTORS-Source and Amount of Funds" and "THE MERGER AGREEMENT-The Merger" is incorporated herein by reference. (b) The information set forth in "SUMMARY-Source and Amount of Funds", "SPECIAL FACTORS-Source and Amount of Funds" and "THE MERGER AGREEMENT-Expenses" is incorporated herein by reference. (c) Not applicable. (d) Not applicable. Item 7. Purpose(s), Alternatives, Reasons and Effects. (a)-(b) The information set forth in "SPECIAL FACTORS-Purpose of the Transaction" and "-Background of the Transaction" is incorporated herein by reference. (c) The information set forth in "SPECIAL FACTORS-Background of the Transaction" and "-Reasons for the Transaction" is incorporated herein by reference. (d) The information set forth in "SUMMARY-Certain Federal Income Tax Consequences", "-The Merger Agreement", "SPECIAL FACTORS-Certain Federal Income Tax Consequences", "THE MERGER AGREEMENT-The Merger" and "CERTAIN EFFECTS OF THE MERGER; OPERATIONS OF THE COMPANY AFTER THE MERGER" is incorporated herein by reference. Item 8. Fairness of the Transaction. (a) The information set forth in "SUMMARY-Recommendation of the Board", "-Interests of Certain Persons in the Transaction", "SPECIAL FACTORS-Reasons for the Transaction" and "-Interests of Certain Persons In the Transaction" is incorporated herein by reference. (b) The information set forth in "SUMMARY-Recommendation of the Board" and "SPECIAL FACTORS-Reasons for the Transaction" are incorporated herein by reference. (c) The information set forth in "SUMMARY-The Special Meeting", "THE SPECIAL MEETING-Vote Required; Revocability of Proxies" is incorporated herein by reference. (d) The information set forth in "SPECIAL FACTORS-Background of the Transaction" and "-Reasons for the Transaction" is incorporated herein by reference. (e) The information set forth in "SUMMARY-Recommendation of the Board" and "SPECIAL FACTORS-Background of the Transaction" and "-Reasons for the Transaction" is incorporated herein by reference. (f) Not applicable. Item 9. Reports, Opinions, Appraisals and Certain Negotiations. (a)-(b) The information set forth in"SUMMARY-Opinion of Financial Advisor" and "SPECIAL FACTORS-Background of the Transaction", "-Reasons for the Transaction" and "-Opinion of Financial Advisor" is incorporated herein by reference. (c) The information set forth in "SPECIAL FACTORS-Opinion of Financial Advisor" is incorporated herein by reference. Item 10. Interest in Securities of the Issuer. (a)-(b) The information set forth in "SUMMARY-The Parties", "SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS", "CERTAIN TRANSACTIONS IN THE COMMON STOCK" and Appendix D to the Proxy Statement is incorporated herein by reference. Item 11. Contracts, Arrangements or Understandings With Respect to the Issuer's Securities. The information set forth in "SUMMARY-The Berkshire Proxy Agreement" and "SPECIAL FACTORS-Background of the Transaction" is incorporated herein by reference. Item 12. Present Intention and Recommendations of Certain Persons With Regard to the Transaction. (a) The information set forth in "SUMMARY-The Special Meeting", "-The Berkshire Proxy Agreement", "-Security Ownership of Management and Certain Beneficial Owners" and "THE SPECIAL MEETING-Vote Required; Revocability of Proxies" is incorporated herein by reference. (b) The information set forth in "SUMMARY-Recommendation of the Board" and "SPECIAL FACTORS-Reasons for the Transaction" is incorporated herein by reference. Item 13. Other Provisions of the Transaction. (a) The information set forth in "SUMMARY-Appraisal Rights" and "THE SPECIAL MEETING-Appraisal Rights" is incorporated herein by reference. (b) Not applicable. (c) Not applicable. Item 14. Financial Information. (a) The information set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995, and June 30, 1995 is incorporated herein by reference. (b) Not applicable. Item 15. Persons and Assets Employed, Retained or Utilized. (a)-(b) The information set forth in "SUMMARY-Solicitation of Proxies" and "THE SPECIAL MEETING-Solicitation of Proxies" is incorporated herein by reference. Item 16. Additional Information. The information set forth in the Proxy Statement and the Appendices thereto is incorporated herein by reference. Item 17. Material to be Filed as Exhibits. (a) Not applicable. (b)(1) Fairness opinion of Morgan Stanley (incorporated herein by reference to Appendix B to the Proxy Statement). (b)(2) Fairness opinion material prepared by Morgan Stanley. (c)(1) Berkshire Proxy Agreement. (c)(2) Merger Agreement (incorporated herein by reference to Appendix A to the Proxy Statement). (d) Proxy Statement and related Notice of Special Meeting, letter to stockholders and proxy card (incorporated herein by reference to the Proxy Statement and related materials filed by the Company on Schedule 14A). (e) Full text of Section 262 of the DGCL (incorporated herein by reference to Appendix C to the Proxy Statement). (f) Not applicable. SIGNATURE After due inquiry and to the best of its knowledge and belief, each of the undersigned certify that the information set forth in this statement is true, complete and correct. BERKSHIRE HATHAWAY INC. by: /s/ Marc D. Hamburg ------------------------ (Signature) Date: October 5, 1995 Marc D. Hamburg Vice President, Chief Executive Office and Treasurer HPKF INC. by: /s/ Marc D. Hamburg ------------------------ (Signature) Date: October 5, 1995 Marc D. Hamburg Vice President GEICO CORPORATION by: /s/ W. Alvon Sparks, Jr. -------------------------- (Signature) Date: October 5, 1995 W. Alvon Sparks, Jr. Executive Vice President and Chief Financial Officer EXHIBIT INDEX Exhibit No. Page No. (a) Not applicable (b)(1) Fairness opinion of Morgan Stanley (incorporated herein by reference to Appendix B to the Proxy Statement). (b)(2) Fairness opinion material prepared by Morgan Stanley. (c)(1) Berkshire Proxy Agreement. (c)(2) Merger Agreement (incorporated herein by reference to Appendix A to the Proxy Statement). (d) Proxy Statement and related Notice of Special Meeting, letter to stockholders and proxy card (incorporated herein by reference to the Proxy Statement and related materials filed by the Company on Schedule 14A). (e) Full text of Section 262 of the DGCL (incorporated herein by reference to Appendix C to the Proxy Statement). (f) Not applicable. EX-22 2 EXHIBIT (B)(2) -- FAIRNESS OPINION MATERIAL Exhibit (b)(2) PROJECT AUTO Fairness Opinion Presentation August 24, 1995 PROJECT AUTO Fairness Opinion Presentation Table of Contents SECTION I EXECUTIVE SUMMARY SECTION II COMPANY OVERVIEW Tab A Profile of Auto Corporation Tab B Stock Market Analysis Tab C Shareholder Analysis Tab D Summary of Wall Street Research SECTION III SUMMARY OF ANALYSIS Tab A Summary Tab B Multiple Matrix Tab C Trading Comparison of Selected Companies Tab D Premiums Paid Tab E Summary of Discounted Cash Flow Analysis APPENDIX A OPERATING COMPARISON OF SELECTED COMPANIES APPENDIX B WEIGHTED AVERAGE COST OF CAPITAL SECTION 1 PROJECT AUTO Executive Summary 1. Transaction o Value: $70/share cash offer by Parent Co. for the 49.3% of Auto shares not owned by Parent Co., including management options and performance shares o Structure: Cash-out merger of a special purpose wholly-owned subsidiary of Parent Co. into Auto Corporation. o Conditions: Approval by holders representing eighty percent of the outstanding stock (including, therefore, approval of a majority of the shares other than those of the Parent Co.); regulatory approvals; bring down of reps and warranties, including no material adverse change, to closing o Other terms: Fiduciary out at discretion of the Board of Auto Corporation; no break-up fee o Timing: Offer expected to be reviewed by the Board on August 24 and 25; Definitive Agreement to be agreed and signed at such time; announcement to follow o Closing expected early in first quarter 1996 -1- PROJECT AUTO Executive Summary (continued) 2. Auto Corporation o Auto Corporation is a publicly-traded holding company which is principally engaged in private automobile insurance - private auto line represents 93% of premiums - original focus was government employees - now focused on preferred market - growing in standard and non-standard lines - distribution via direct advertising (cable tv), direct mail, and a limited number of agents - focused on Eastern US, particularly New York, Florida and Mid-Atlantic states; growing in Midwest - sixth largest private auto insurer in US with 2% market share nationwide; much smaller than State Farm, Allstate o Market value of $3.8 billion or $56.50 per share at 8/21/95 - trades at premium to comparables - thin volume o Parent Co. established initial large minority shareholding in 1976 when Auto experienced financial difficulties -2- PROJECT AUTO Executive Summary (continued) 3. Parent Co. o Holding Company with widely diverse interests, including insurance - National Indemnity subsidiary and other subsidiaries of Holding Company hold approximately 50.7% of GEICO shares - However, Parent and subsidiaries do not vote Auto shares (which are voted by NationsBank as a result of an agreement with state insurance regulators) o Parent is a financially strong enterprise - Market value of $29 billion - Very strong balance sheet - AAA/AA1 rated 4. Morgan Stanley's Role o Retained by the Board of Directors of Auto Corporation to render a fairness opinion on the transaction - We have not solicited interest from any other party Question to be answered: Is the consideration to be received by the shareholders of Auto, other than Parent Co., fair from a financial point of view? -3- SECTION II A [Flowchart depicting Corporate Structure of GEICO Corporation] -4- PROJECT AUTO Line of Business Profile 1994 Revenue ($MM) P&C Insurance $2,662.7 o Private automobile insurance represents approximately 93% of premiums o Homeowners insurance represents approximately 6% of premiums - $200 million gross loss in Hurricane Andrew - Ceased marketing for own account in 1995 - Renewal rights sold to Aetna in March 1995 - Auto Corporation to exit in 3 years - Substantial catastrophe exposure remains until exit P&C Reinsurance 0.2 o In run-off since 1986 ("Resolute Group") o About $60 million in reserves, $20 million in GAAP equity o Latent liability exposure Life Insurance 9.8 o Structured settlements ("Criterion Life") provided to Auto's P&C companies Consumer Finance 12.0 o GAAP shareholders' equity of ("GEFCO") $7.9 million; total assets of $68 million, in process of winding down Other & Misc. 31.3 o Includes earnings on parent -------- company investments $2,716.0 ======== -5- PROJECT AUTO Private Passenger Automobile Market Share Overview 1993 NPW 1 State Farm Group $20,757,846 22.23% 2 Allstate 11,301,012 12.10% 3 Farmers Group 5,758,223 6.17% 4 Nationwide Group 3,494,766 3.74% 5 USAA Group 3,223,235 3.45% 6 GEICO 1,871,475 2.00% 7 Liberty Mutual 1,841,066 1.97% 8 Prudential 1,532,554 1.64% 9 Progressive 1,509,151 1.62% 10 American Family 1,485,352 1.59% Total Industry 93,375,607 100.00% Source: A.M. Best's Aggregates and Averages, 1994 -6- PROJECT AUTO Private Auto Customer Segment Composition of Premiums 1994 Expected Growth -------------- --------------- Customer Segment Existing New P-I-F Premiums -------- --- ----- -------- Preferred Risk 91% 71% 6% 10% Standard Risk 5 22 25 29 Non-Standard Risk 3 7 48 53 ---- ---- --- --- 100% 100% 8% 12% -7- PROJECT AUTO 1994 Direct Premiums Written By State(1) ($ in thousands) Direct % Premiums of Rank State Written Total 1 New York $ 541,352 21.7% 2 Florida 335,778 13.5 3 Maryland 286,505 11.5 4 Virginia 217,765 8.7 5 Texas 161,041 6.5 6 California 100,942 4.1 7 Connecticut 95,991 3.9 8 Georgia 92,456 3.7 9 Louisiana 67,910 2.7 10 District of Columbia 51,896 2.1 ---------- ---- Total Top 10 States 1,951,636 78.4 All Other States 537,377 21.6 ---------- ----- Total 1994 Direct Premiums Written $2,489,013 100.0% ========== ===== Note: (1) Source: Schedule T - 1994 Statutory Annual Statement. -8- PROJECT AUTO Private Auto Distribution Distribution Channel Comments Direct -Referrals o 60% of new sales are from referral -Mail o Engine of growth in 80's; response rate slowed in early 90's -TV (Cable) o New program in 1994; very successful. Could allow faster growth -Internet o Experimental stages, but interesting long-term prospects Agent -"GFR"s o 97 GFR's operate in 33 states: focused on military and related civilian populations -9- PROJECT AUTO Summary Financial Information ($MM) Average/CAGR P&C Company to 1994 Plan ---------------- ------------- GAAP-Aggregate 12/31/94 6/30/95 10-Year 5-Year Early Later - -------------- -------- ------- ------- ------ ----- ----- Net Premiums $2,476.3 $1,347.6 8.9% 10.0% 12.0% 6.0% Earned Total Revenues 2,716.0 1,470.2 7.4 9.2% -- -- Net Operating Earnings(1) 199.4 109.9 7.0 1.3 -- -- Common Book Value 1,445.9 1658.1 13.4 11.2 -- -- Long-Term Debt 391.4 431.2 4.9 10.5 -- -- ROAE(%) 13.4 13.3 17.3 14.9 -- -- GAAP-Per Share - -------------- Net Operating Earnings (1)(2) $ 2.85 $ 1.62 10.2% 3.3% -- -- Dividends 1.00 0.54 18.2 25.0 -- -- Common Book Value 21.17 24.44 16.5 13.1 -- -- Statutory Summary - --------- Loss Ratio 82.1% 83.8% 82.4% 81.7% 82.6% 85.8% Expense Ratio 14.3 13.1 15.6 15.6 13.2 10.0 Combined Ratio 96.4 96.9 98.0 97.3 95.8 95.8 NPW/Surplus 2.45x N.A. 2.11x 2.12x 2.50x 2.70x Notes: (1) Realized gains have been subtracted using a 35% tax rate. (2) Computed using weighted average shares. -10- PROJECT AUTO Opportunities and Risks vs. Plan OPPORTUNITIES TO EXCEED PLAN RISKS TO ACHIEVING PLAN Growth Limitations on growth as public company o Fully leverage cable-TV o 1% faster growth cuts EPS by about o Fine-tune programs to "quote 2.5% in year one all callers" o Acceleration imperils control of o Establish new geographies overall business o In long-term future, new o Constraints on senior claims electronic distribution personnel o Investment spending required to boost growth more than 2-3% Competitive Environment Achievement of expense reductions o Competitors may not achieve o Plan calls for 10% expense ratio vs. rate reductions as a result 13.2% today of expense reductions assumed in plan, allowing Auto to Control of fast-growing standard/ achieve better loss ratios non-standard segments Industry environment now unusually favorable o Regulation o Inflation Catastrophes in next 2-3 years -11- B [Graph depicting GEICO Corporation's Annotated Trading History from 1994-Present] -12- [Graph depicting GEICO Corporation's Ten Year Trading History, charted against the S&P 500] -13- [Graph depicting GEICO Corporation's Historical Price/Volume Analysis] -14- [Graph depicting the Ten Year Price/Earnings Analysis for the Property & Casualty Insurance Industry] -15- [Graph depicting GEICO Corporation's Relative Price/Earnings Ratio v. an index of Property & Casualty Insurers and the S&P 500 Index Price/Earnings Ratio] -16- [Graph depicting the Ten Year Price/Book Ratio for GEICO Corporation, an Index of Property & Casualty Insurers and the S&P 500 Index] -17- C PROJECT AUTO Analysis of Institutional Shareholdings
Total Equity Equity Assets Under Current Cumulative Weighted Report Institution Orientation Management Change Holdings %TSO %TSO Av. Yield Date Berkshire Hathaway, Inc. Strategic 11.3 0 34,250,000 50.4% 50.4% 1.7% 6/30/95 Tukman Capital Management Inc. Value 1.8 132,200 4,228,231 6.2% 56.7% 2.5% 6/30/95 Riggs National Bank (DC) N/A 0.8 0 1,864,739 2.7% 59.4% 2.7% 6/30/95 Stein Roe & Farnham Growth 5.6 (163,050) 915,342 1.3% 60.8% 1.9% 6/30/95 Spears Benzak Salomon N/A 2.1 (12,420) 635,373 0.9% 61.7% 2.1% 6/30/95 Wells Fargo Inst Trust NA Index 85.9 (8,401) 593,018 0.9% 62.6% 2.7% 3/31/95 College Retire Equities Index, Growth 41.2 (3,100) 476,310 0.7% 63.3% 2.6% 3/31/95 California Public Employee Index 21.4 1,500 399,600 0.6% 63.9% 2.6% 3/31/95 Retirement Bankers Trust NY Corp. Index, Growth 69.3 (4,700) 384,715 0.6% 64.4% 2.7% 6/30/95 Lasalle National Trust N.A. Growth 4.1 (8,140) 339,579 0.5% 64.9% 2.5% 6/30/95 California State Teachers Index 18.5 6,500 264,036 0.4% 65.3% 2.5% 3/31/95 Retirement State Street Boston Corp. Index 63.4 21,500 233,100 0.3% 65.7% 3.0% 6/30/95 Mellon Bank Corporation Index, Value 57.8 (1,350) 205,025 0.3% 66.0% 2.7% 3/31/95 Anb Investment Mgmt & Tr N/A N/A 7,500 191,000 0.3% 66.3% N/A 6/30/95
PROJECT AUTO Analysis of Institutional Shareholdings
Total Equity Equity Assets Under Current Cumulative Weighted Report Institution Orientation Management Change Holdings %TSO %TSO Av. Yield Date First Union Corporation Value 9.2 (18,240) 178,500 0.3% 66.5% 3.4% 6/30/95 Capital Guardian Trust Value 15.7 (334,100) 176,700 0.3% 66.8% 2.2% 6/30/95 Robert Fleming (Flem Capital) N/A 1.4 (25,767) 171,333 0.3% 67.0% 1.4% 6/30/95 Segall Bryant & Hamill N/A N/A (9,150) 169,500 0.2% 67.3% N/A 3/31/95 Century Capital Mgmt Inc N/A N/A 0 167,000 0.2% 67.5% N/A 6/30/95 Selected Venture Advs LP N/A 1.6 151,100 151,100 0.2% 67.7% 2.1% 6/30/95 Blair WM & Co. Investment Growth 2.4 150,200 150,200 0.2% 68.0% 1.2% 6/30/95 Management Vontobel USA Inc. N/A 0.1 68,300 131,400 0.2% 68.2% 2.2% 3/31/95 Morgan J P & Company, Inc. Growth 34.8 17,400 131,235 0.2% 68.4% 2.5% 6/30/95 Primecap Management Company Growth 2.1 6,500 130,000 0.2% 68.5% 1.3% 6/30/95 Reed, Conner & Birdwell N/A 0.3 3,100 108,675 0.2% 68.7% 2.8% 6/30/95 Wilshire Assoc Inc Index 7.5 22,000 93,000 0.1% 68.8% 3.3% 6/30/95 Southern Fiduciary Group N/A 0.1 (2,200) 91,724 0.1% 69.0% 1.8% 6/30/95 New York State Teachers Index 21.7 0 73,600 0.1% 69.1% 2.9% 6/30/95 Retirement
PROJECT AUTO Analysis of Institutional Shareholdings
Total Equity Equity Assets Under Current Cumulative Weighted Report Institution Orientation Management Change Holdings %TSO %TSO Av. Yield Date Yacktman Asset Management Co. N/A 0.3 (900) 67,000 0.1% 69.2% 2.9% 6/30/95 Nationsbank Corporation Growth 15.2 (3,610) 60,800 0.1% 69.3% 3.0% 6/30/95 Fiduciary Trust Company Growth 6.4 7,200 60,415 0.1% 69.4% 2.3% 3/31/95 International. Comerica, Inc. Growth 11.3 0 60,350 0.1% 69.5% 2.5% 3/31/95 Weitz, Wallace R & Co. N/A 0.3 0 59,200 0.1% 69.5% 1.4% 6/30/95 Oak Value Capital Mgmt N/A N/A 58,775 58,775 0.1% 69.6% N/A 6/30/95 Bank of New York Value 9.1 (2,135) 53,900 0.1% 69.7% 2.7% 6/30/95 Weiss Peck & Greer Growth 3.7 0 52,750 0.1% 69.8% 1.4% 3/31/95 Barnett Banks Trust Co. Growth, Value 2.3 0 49,610 0.1% 69.9% 3.0% 6/30/95 Barclays Bank PLC Index 2.7 0 48,815 0.1% 69.9% 2.8% 3/31/95 Gardner Investments N/A 0.3 (1,000) 46,962 0.1% 70.0% 2.0% 3/31/95 Chase Manhattan Corp. Growth, Index 7.1 0 43,500 0.1% 70.1% 2.7% 6/30/95 Top 40 Institutions 55,512 47,566,112 70.1% Remaining 85 Institutions (112,117) 899,362 1.3% ----------------------------
PROJECT AUTO Analysis of Institutional Shareholdings
Total Equity Equity Assets Under Current Cumulative Weighted Report Institution Orientation Management Change Holdings %TSO %TSO Av. Yield Date Total Institutional Holdings (56,605) 48,465,474 71.4% ======== Other Holdings 19,424,526 28.6% ---------- ----- Total Shares Outstanding 67,890,000 100.0% ========== ======
Summary of Latest 13-F Reports 32 Institutions increased holdings, of which 7 were new investors. 36 Institutions decreased holdings, of which 2 eliminated their positions. 57 Institutions held their positions. Index funds representing 6.0% of Total Insitutional Shares Outstanding. -18- D PROJECT AUTO Summary of Wall Street Research Earnings Forecasts/Original Date Firm 1995E 1996E Recommendation 07/17/95 Paulsen Dowling $3.15 $3.30 -- 3.25 3.50 07/17/95 Conning & Co. 3.25 3.85 -- 3.50 07/14/95 Prudential Securities 3.25 3.65 Hold 3.60 3.45 07/14/95 Merrill Lynch 3.35 3.70 -- 3.50 08/18/95 Morgan Stanley 3.35 3.60 Neutral 3.55 07/05/95 Fox-Pitt 3.25 3.55 -- 3.10 3.25 06/30/95 DLJ Securities 3.40 3.65 -- 3.50 05/16/95 Company Estimate 3.33 Mean (1) 3.29 3.61 3.43 3.40 Median (1) 3.25 3.65 3.50 3.45 Note: (1) Does not include Company Estimate. -19- SECTION III A PROJECT AUTO Summary ($ in Millions, except per share data) I. Public Market Trading (1) Analysis of Selected Publicly-Traded Property & Casualty Insurance Companies AUTO Public Market AUTO Corp. Multiple Range Corp. Relevant Multiple Range Implied Range 1995E Net Operating Income (2) $ 224.4 (5) 9.0 x - 16.8 x 16.8 x 14.3 x - 16.8 x $3,209 - $3,770 1996E Net Operating Income (3) 253.2 (5) 8.4 - 15.2 15.2 12.6 - 15.2 3,190 - 3,849 06/30/95 GAAP Equity 1,658.1 1.08 - 2.38 2.33 2.00 - 2.38 3,316 - 3,946 Public Market Reference Range $3,200 - $3,850 Per Share (6) $47.25 - $56.85 Notes: (1) Relevant comparable companies include Allstate, Cincinnati Financial, Ohio Casualty, Progressive and SAFECO. (2) Based on Company estimate of $3.33 per share. (3) Based on 1996 IBES estimate as of August 19, 1995. (4) Auto Corporation multiples as of August 18, 1995. (5) Auto Corp. retains an unusually large portfolio of equity investments at the Parent Company, which management views as capital available to support the insurance operations in the event of a catastrophe. The negative effect on current operating income of this policy (relative to investing in bonds) closely offsets the cost of purchasing catastrophe cover in the reinsurance market, which the Company has chosen to forgo since Hurricane Andrew. As a result, no adjustment to operating earnings has been made. (6) Based on primary shares outstanding of 67,719,710 as of 6/30/95.
-20- PROJECT AUTO Summary ($ in Millions, except per share data) II. Premiums over Publicly-Traded Companies Assumed Public Market Range: $3,200 - $3,850 Premium: 20.0% $3,840 - $4,620 30.0% 4,160 - 5,005 40.0% 4,480 - 5,390 50.0% 4,800 - 5,775 M&A Market Reference Range $4,200 - $5,000 Add: Option Proceeds 108 - 108 ----- ----- Total $4,308 - $5,108 Per Share $61.76 - $73.22 III. Precedent M&A Transaction Analysis of Selected M&A Transactions in the Property & Casualty Insurance Industry
Auto Acquisition Corp. Multiple Range Relevant Multiple Range Implied Range ---- -------------- ----------------------- ------------- 15.0 x - 21.0 x $3,366 - $4,712 1995E Net Operating Income(3) $224.4 6.5 x - 25.4x 2.50 x - 3.00 4,145 - 4,974 6/30/95 GAAP Equity 1,658.1 0.80 - 3.23 Acquisition Reference $3,600 - $4,800 Range Add: Option Proceeds 108 - 108 ----- ----- Total $3,708 - $4,908 Per Share(2) $53.16 - $70.36
IV. Discounted Cash Flow Analysis(4) Present Value of Future Cash Flows Terminal GAAP Net Income Multiple Discount Rate 15X 16x 17x Four Companies DCF Range $3,845 - $4,196 ---- --- --- --- 11% $4,151 $4,343 $4,535 Plus Other Adjustments(5) 370 - 370 12% 3,845 4,020 4,196 Add: Option Proceeds 108 - 108 ----- ----- 13% 3,566 3,727 3,887 Total $4,323 - $4,674 Per Share(2) $61.97 - $67.00 Notes: (1) Relevant comparable companies include Allstate, Cincinnati Financial, Ohio Casualty, Progressive and SAFECO. (2) Based on 69,762,040 fully diluted shares outstanding. (3) Based on Company estimate of $3.33 per share. (4) Base case as of 12/31/95. (5) Reflects adjustments for dividends, reserve redundancies, the life insurance operations, GEFCO, the Resolute Group and other adjustments at the Parent Company. -21- B PROJECT AUTO ------------------------------------------------------------ Summary ($ in Millions, except per share data) II. Premiums over Publicly-Traded Companies Assumed Public Market Range(1): $3,200 - $3,850 ------ ------ Premium: 20.0% $3,840 - $4,620 30.0% 4,160 - 5,005 40.0% 4,480 - 5,390 50.0% 4,800 - 5,775 M&A Market Reference Ranges $4,200 - $5,000 Add: Option Proceeds 108 - 108 --- --- Total $4,308 - $5,108 Per Share(2) $61.76 - $73.22 III. Precedent M&A Transaction Analysis of Selected M&A Transactions in the Property & Casualty Insurance Industry
Auto Acquisition Corp Multiple Range Relevant Multiple Range Implied Range ---- -------------- ----------------------- ------------- 15.0 x - 21.0 x $3,366 - $4,712 1995E Net $224.4 6.5 x - 25.4x 2.50 - 3.00 4,145 - 4,974 Operating Income(3) 1,658.1 0.80 - 3.23 $3,600 - $4,800 6/30/95 GAAP Equity Acquisition Reference 108 Add: Option Proceeds $3,708 - $4,908 108 Total $53.16 - $70.36 Per Share(2)
IV. Discounted Cash Flow Analysis(4) Present Value of Future Cash Flows Discount Terminal GAAP Net Income Multiple Rate 15X 16x 17x Four Companies DCF Range $3,845 - $4,196 11% $4,151 $4,343 $4,535 Plus Other Adjustments(5) 370 - 370 12% 3,845 4,020 4,196 Add: Option Proceeds 108 - 108 13% 3,566 3,727 3,887 Total $4,323 - $4,674 Per Shares(2) $61.97 - $67.00 Notes: (1) Relevant comparable companies include Allstate, Cincinnati Financial, Ohio Casualty, Progressive and SAFECO. (2) Based on 69,762,040 fully diluted shares outstanding. (3) Based on Company estimate of $3.33 per share. (4) Base case as of 12/31/95. (5) Reflects adjustments for dividends, reserve redundancies, the life insurance operations, GEFCO, the Resolute Group and other adjustments at the Parent Company. -21- B PROJECT AUTO Multiple Matrix ($ in Millions, except per share data)
Equity as a Multiple of ----------------------------- GAAP Net Operating Income ----------------------------- % Equity Market Premium Fully Adjusted 1994 1995E 1996E 06/30/95 Share to Diluted Option Transaction ---- ----- ----- -------- Price(1) Market(2) Shares Proceeds(3) Value(4) $199.4 $224.4 $253.2 $1,658.1 -------- --------- ------ ------------ -------- ------ ------ ------ -------- $54.00 -4.4% 69.8 ($108.3) $3,659 18.3 x 16.3 x 14.5 x 2.21 x $56.00 -0.9% 69.8 ($108.3) $3,798 19.0 16.9 15.0 2.29 $58.00 2.7% 69.8 ($108.3) $3,938 19.7 17.5 15.6 2.37 $60.00 6.2% 69.8 ($108.3) $4,077 20.4 18.2 16.1 2.46 $62.00 9.7% 69.8 ($108.3) $4,217 21.1 18.8 16.7 2.54 $64.00 13.3% 69.8 ($108.3) $4,356 21.8 19.4 17.2 2.63 $66.00 16.8% 69.8 ($108.3) $4,496 22.5 20.0 17.8 2.71 $68.00 20.4% 69.8 ($108.3) $4,636 23.2 20.7 18.3 2.80 $70.00 23.9% 69.8 ($108.3) $4,775 23.9 21.3 18.9 2.88 $72.00 27.4% 69.8 ($108.3) $4,915 24.6 21.9 19.4 2.96 Notes: (1) Based on primary shares outstanding of 67.9 million. (2) Market price of $56.50 as of August 21, 1995. (3) Based on the exercise of 1.9 million stock options for $101.1 million and 103,227 Performance Award shares for $7.2 million as of July 1, 1995. (4) Equity after the deduction of option proceeds
-22- C PROJECT AUTO - ----------------------------------------------------------------------------- Trading Comparison of Selected Property/Casualty Insurers(1) $MM, except per share data
Current Price 5-Year Market Current as % of 52-Week Earnings Per Share I/B/E/S --------------- ------------------ Value Price High Low 1994A 1995E 1996E Growth ----- ----- ---- --- ----- ----- ----- ------ AUTO $ 3,861 $56.88 95.8% 119.4% $3.30 $3.38 $3.73 11.5% P/C INSURERS ------------ Allstate(2)(4) $14,144 $31.50 94.4% 139.2% $2.70 $3.50 $3.75 11.0% Cincinnati Fin. 2,796 52.75 90.6 120.4 3.64 3.85 4.20 10.0 Ohio Casualty(4) 1,138 31.63 92.3 117.1 3.54 2.80 3.30 8.5 Progressive 2,927 40.75 96.7 126.4 3.40 2.85 3.24 14.0 SAFECO 3,739 59.38 99.2 127.0 4.94 5.33 6.20 10.0 MEAN 94.6% 126.0% 10.7% MEDIAN 94.4 126.4 10.0 Price as a Multiple of Return GAAP Earnings 1994 Statutory on Avg. Dividend -------------- ---------------- 1994A 1995E 1996E GAAP Book Net Gain Surplus Equity Yield ----- ------ ----- --------- -------- ------- ------ ------- AUTO 17.2 x 16.8 x 15.2 x 2.33 x 18.3 3.71(3) 14.3% 1.9% P/C INSURERS ------------ Allstate(2)(4) 11.7 x 9.0 x 8.4 x 1.47 x NM 2.16 13.1% 2.5% Cincinnati Fin. 14.5 13.7 12.6 1.24 20.1 2.80 9.6 2.6 Ohio Casualty(4) 8.9 11.3 9.6 1.22 NM 1.72 13.9 4.8 Progressive 12.0 14.3 12.6 2.38 12.7 3.16 22.4 0.5 SAFECO 12.0 11.1 9.6 1.08 14.1 2.48 9.5 3.6 MEAN 11.8 x 11.9 x 10.5 x 1.48 x 15.6 x 2.47 x 13.7% 2.8% MEDIAN 12.0 11.3 9.6 1.24 14.1 2.48 13.1 2.6 Notes: (1) Financial data as of 6/30/95, unless otherwise stated. Market data as of 8/18/95. Estimates are from IBES as of 8/19/95. (2) Before catastrophe charges for the Northridge earthquake of $1.63 billion pre-tax ($1.06 after-tax) (3) Based on consolidated policyholders' surplus. (4) Financial data as of 3/31/95.
-23- PROJECT AUTO Credit Statistics of Selected Property/Casualty Insurers(1)
Best's Credit Ratings (Moody's/S&P) 1994 NPW/ EBITDA/ Long Term Debt/ Rating(2) Claim Paying(2) Senior Debt Surplus Interest Book Cap(3) Mkt Cap(4) --------- --------------- ----------- ------- -------- ----------- ---------- AUTO A++ Aa1 / AAA Aa3 / AA 2.32 11.8 20.4 9.9 Allstate(7) A- Aa3 / AA A2 / A 2.49 x 25.9 x 8.3% 5.8% Cinncinnati Fin. A++ nr / AA+ A2 / AA- 2.80 NA 10.9 9.0 Ohio Casualty(7) A+ nr / AA- nr / nr 0.92 134.7(6) 7.0 5.8 Progressive A++ A1 / BBBq A3 / A+ 2.65 7.5 33.9 18.3 SAFECO A++ Aa1 / AAA Aa3 / AA 1.48 5.7 13.2 12.3 MEAN 2.07x 13.0 x 14.7% 10.2% MEDIAN 2.49 7.5 10.9 9.0 Total Debt / ------------------------ R.E. & Mortg. Adjusted Adjusted as % of Tot. Dividend Payout Book Cap(3) Mkt Cap(4) Inv. Assets Yield Ratio ----------- ---------- ----------- -------- ------ AUTO 20.4 9.9 0.0 1.9 32.7 Allstate(7) 8.3% 5.8% 8.2% 2.5% 28.9% Cinncinnati Fin. 10.9 9.0 0.0 2.6 37.3 Ohio Casualty(7) 7.0 5.8 0.0 4.8 43.0 Progressive 33.9 18.3 0.0 0.5 6.5 SAFECO 17.3 16.2 6.2 3.6 42.9 MEAN 15.5% 11.0% 2.9% 2.8% 31.7% MEDIAN 10.9 9.0 0.0 2.6 37.3 Notes: (1) Financial data as of 6/30/95, unless otherwise stated. Market data as of 8/18/95. (2) Rating applies to company's principal operating company or pool. (3) Book capitalization is the sum of long term debt, common and preferred equity; adjusted book capitalization includes short term debt. (4) Market capitalization is the sum of long term debt, preferred stock and the market value of common stock; adjusted market capitalization includes short term debt. (5) Commercial paper program is Allmerica's only debt. (6) Excluded from mean calculation. (7) Financial data as of 3/31/95.
-24- D PROJECT AUTO - ----------------------------------------------------------------------------- Premiums Paid in Selected Auto Insurance Transactions
Price Paid as a Multiple of Acquiree GAAP/Statutory Announcement Aggregate Net Book Net Market ROAE of Date Acquiree/Acquiror Value Income Value Premiums Value Acquiree Comments - ------------ ----------------- --------- ------ ----- -------- ------ -------- -------- 04/27/95 Viking Insurance $106.0 11.6x 1.26x 69.6% N.A. 10.34% The Company specializes Holdings, Inc. (a 10.7 1.29 69.6 in providing monthly subsidiary of Talegen insurance policies to the Holdings)/Guaranty non-standard automobile National Corp. market through independent insurance agents in 18 states. 01/12/95 Victoria Financial 55.3 NM 2.03 N.A. 2.27x 1.1 The Company is primarily Corp./USF&G Corp. 22.7 2.68 N.A. an Ohio non-standard auto insurer. The company has acquired licenses recently to issue insurance in another 17 states and the District of Columbia. 07/28/94 Bankers and Shippers 142.0 N.A. N.A. N.A. N.A. N.A. The Company writes and (A Sub. of Travelers)/ 21.9 2.21 76.7 retains non-standard auto Integon Corp. policies to compete in personal line niche markets. 07/07/94 National Corp./ 27.9(1) 11.28 3.05 52.4 N.A. 29.28 The Company specializes Guardian Royal 8.0 1.58 54.3 in motorcycle and non- Exchange PLC standard automobile liability and physical damage liability insurance. 1/31/94 Armco Inc. Insurance 85.0 7.2 N.A. N.A. N.A. N.A. Armco's operations sold Operations/Vik N.A. 0.90 N.A. mainly auto (41%), workers Brothers Insurance, compensation (22%) and Inc. commercial mutiperil (19%) insurance. 11/23/93 Federal Kemper Insurance 105.0 N.A. N.A. N.A. N.A. N.A. The Company predominantly Co. (Sub. of Kemper 11.5 1.62 83.7 writes automobile Corp.)/Anthem P&C insurance in the mid- Holdings (Sub. of Atlantic and midwestern Associated Group) regions. 11/19/93 American Ambassador 100.0 9.5 1.23 113.6 N.A. N.A. The Company writes full Casualty Co. (Sub. 10.3 1.63 115.2 coverage non-standard of Allianz)/Guardian private passenger Royal Exchange PLC automobile insurance. -25- - -------- Note: (1) All values converted from British pound to US Dollar at an exchange rate of 0.682 pound/dollar.
PROJECT AUTO Premiums Paid in Selected Auto Insurance Transactions (continued) Price Paid as a Multiple of Acquiree GAAP/Statutory
Announcement Aggregate Net Book Net Market ROAE of Date Acquiree/Acquiror Value Income Value Premiums Value Acquiree Comments - ------------ ----------------- --------- ------ ----- -------- ------ -------- -------- 07/02/93 Economy Fire & Casualty Co. $420.0 21.0x 1.37x 104.7% N.A. 9.19% The Company principally (Sub. of Kemper Corp.)/ 19.2 1.79 103.0 writes personal lines St. Paul Cos. insurance, emphasizing private passenger automobile and homeowners coverage. 03/18/93 Leader National Insurance co. 38.0 8.8 1.00 44.2 N.A. 9.95 The Company primarily writes (Sub. of Dyson-Kissner-Moran N.A. 1.36 45.4 insurance for substandard Corp.)/ automobile risks, motorcycles Penn Central Corp. and some commercial vehicles. (51% owned by American Financial Corp.) 04/23/92 Chandler Insurance Co., Ltd. 48.8 25.4 0.81 34.6 1.27x 3.15 The Company's P&C and (Loc. in Caymen Islands.)/ 25.8 1.91 N.A. reinsurance subsidiaries Chandler Management primarily write automobile liability, workers' compensation and surety insurance. 02/18/92 Global Insurance Company/ 8.9 N.A. 0.80 N.A. N.A. N.A. The Company reinsures small Lawrence Insurance Group 9.6 0.67 39.8 to medium size insurance companies. The Company additionally writes auto liability and auto physical insurance. 10/31/91 Shelby Insurance Company 125.0 N.A. N.A. N.A. N.A. N.A. The Company writes auto (Sub. of Allegheny Corp.)/ N.A. 2.13 101.5 liability, auto physical, The Associated Group commercial multi-peril and homeowners insurance. 10/12/90 Atlanta/Windsor/Stonewall/ 335.0 10.7 1.93 N.A. N.A. 19.50 The Company writes high Penn Central Corp. 14.8 2.56 98.0 risk auto insurance. 03/12/90 General Casualty Cos./ 630.0 24.5 2.50 N.A. N.A. N.A. The Company primarily Winterthur Insurance Co. 15.0 3.41 220.1 writes auto liability, auto physical, commercial multi- peril and workers' compensation insurance. 09/29/89 Mid-Continent Casualty 80.0 N.A. N.A. N.A. N.A. N.A. The Company primarily writes (Sub. of Great American 11.2 2.00 106.9 worker's compensation, auto Communications)/ liability and auto physical American Financial insurance. Corporation
-26- PROJECT AUTO Premiums Paid in Selected Auto Insurance Transactions (continued) Price Paid as a Multiple of Acquiree GAAP/Statutory
Announcement Aggregate Net Book Net Market ROAE of Date Acquiree/Acquiror Value Income Value Premiums Value Acquiree Comments - ------------ ----------------- --------- ------ ----- -------- ------ -------- -------- 08/09/88 Farmers Group, Inc./ $5,250.0 17.2x 3.23x N.A. 1.38x 18.82% The Company primarily writes BATUS Inc. 38.6 2.99 100.7x personal automobile (Sub. of BAT Industries coverages. The Company PLC.) additionally writes multiple lines of business for select commercial risks. 06/10/88 Guaranty National 108.4(2) 6.5 1.64 82.5 1.07 25.30 The Company principally Corporation/ 7.6 1.78 104.3 writes non-standard Orion Capital Corp. automobile insurance risks, general liability insurance and general property insurance. High $5,250.0 25.4x 3.23x 113.6% 2.27x 29.28% 38.6 3.41 220.1 Low $8.9 6.5 0.80x 34.6% 1.07 1.10% 7.6 0.67 39.8 Mean $450.9 14.0 1.7x 71.7% 1.50 14.0% 16.2 1.9 94.2 Median $105.0 11.2 1.5 69.6% 1.33 10.3% 13.2 1.8 99.4 Note: (2) As of September 9, 1988 (the Record Date for the acquisition,) there were 12,388,987 shares outstanding. Orion already owned 49.7% and purchased the remaining 6,234,237 shares it didn't own. The aggregate value is based on the company buying 100% of the Company.
-27- [Bar Graph depicting Premiums Paid For U.S. Public Targets and Precent Premium to Unaffected Market Price] -28- [Bar Graph depicting Premiums Paid in Selected Squeeze Out Transactions from 1984 - April 1994] -29- E PROJECT AUTO Summary of Assumptions - Base Case Discounted Cash Flow Analysis Statutory Income Statement o Gross Premiums Written: 12.7% growth in 1995; 12% from 1996 to 2000; 6% thereafter o Combined Ratio: 95.8% from 1995 to 2005 o Loss Ratio: Increases from 82.6% in 1995 to 85.8% in 2000; 85.8% thereafter o Expense Ratio: Declines from 13.2% in 1995 to 10% in 2000; 10% thereafter Dividend Constraints o Maximum NPW/Surplus: 2.5x in 1995; 2.6x in 1996; 2.7x in 1997 and thereafter Asset Allocation/Investment Yields o Asset allocation of new funds: Taxables - 27.7%; Municipals - 70.0%; Short-term Investments - 2.3%; o New Investment Yields: Current market for all years after 1995; 1995 reconciled to Company estimates -30- PROJECT AUTO Component Summary - Base Case ($ in millions, except per share data) Aggregate Range --------------- Subsidiaries: - ------------ Property & Casualty Group(1) $3,845.0 - $4,195.8 1995 Dividend(2) 120.7 - 120.7 Present Value of Catastrophe Cover (30.0) - (30.0) Life Insurance Operations(3) 3.7 - 3.7 GEFCO(3) 7.9 - 7.9 Resolute Group(4) 21.6 - 21.6 Parent Company:(5) - ----------------- Shareholders' Equity $1,658.1 Less: Investment in GEICO 1,247.3 Less: Investments in other affiliates 192.1 Add: ESOP bank loan 65.0 Equity (net of subsidiaries): $283.7 - $283.7 Other Adjustments - ----------------- Plus: Reserve Redundancy(6) 60.0 - 60.0 Less: 1995 Dividend from subsidiaries(7) (60.0) - (60.0) Less: 1995 Dividend Paid Prior to Close(8) (37.7) - (37.7) Sub-total $4,214.8 - $4,565.6 Plus: Option Proceeds(9) 108.3 - 108.3 Total $4,323.2 - $4,673.9 Per Share Value(10) $61.97 - $67.00 Notes: (1) Discounted cash flow analysis as of 12/31/95 assuming a 12% discount rate and a terminal multiple of 15.0x to 17.0x (2) Based on net premiums written to surplus constraint of 2.5x. (3) Operations included at stockholders' equity as of 6/30/95. (4) GAAP stockholders' equity as of 6/30/95. (5) Parent Company financial data as of 6/30/95. (6) Based on actuarial report as of September 30, 1994. (7) Company plans to dividend $20 million quarterly plus an additional $30 million related to catastrophes during 1995. (8) Based on quarterly dividends of $0.27 per share on fully diluted shares outstanding from 6/30/95 to 12/31/95. (9) Based on the exercise of 1.9 million stock options for $101.1 million and 103,227 Performance Award shares for $7.2 million as of July 1, 1995. (10) Based on fully diluted shares of 69.76 million shares. -31- PROJECT AUTO Component Summary - Sensitivities ($ in millions, except per share data) Total Per Share(1) Discount Rate - 12% Terminal Multiple: 15.0x 17.0x Base Case $61.97 - $67.00 Fast Growth Case o Acceleration to 16% growth for four years o Loss ratio steps up 1.5% points at 16% growth o One-time investments totalling $90 million from 1996 to 1998 $66.89 - $73.43 Higher Expense Ratio Case o Expense ratio decreases to 12% vs. 13.2% in 1995 and 10% in Base Case $52.00 - $56.75 Higher Expense Ratio and Lower Leverage Case o Expenses as above o Maximum NPW/Surplus ratio of 2.4x vs. 2.5x in 1995, (2.0x including Parent Company) and 2.7x in Base Case $50.80 - $55.15 Note: (1) Reflects discounted cash flow analysis as of 12/31/95. Based on fully diluted shares outstanding of 69.76 million. -32- MORGAN STANLEY - P&C INSURANCE DCF MODEL 22-Aug-95 02:23 PM PROJECT AUTO Discounted Cash Flow Summary ($MM)
BASE CASE Page 1 Terminal Retrospective P/E Multiple (based on GAAP results): 15.0 x 16.0 x 17.0 x ----------------------------- ----------------------------- ------------------------------ Discount Rate: 11.0% 12.0% 13.0% 11.0% 12.0% 13.0% 11.0% 12.0% 13.0% Present Value of Dividends Paid to Holding Company $1,273.2 $1,214.2 $1,159.2 $1,273.2 $1,214.2 $1,159.2 $1,273.2 $1,214.2 $1,159.2 PV of Terminal Amount in Year 10 2,877.7 2,630.8 2,407.1 3,069.5 2,806.2 2,567.6 3,261.4 2,981.6 2,728.0 Total $4,150.9 $3,845.0 $3,566.2 $4,342.7 $4,020.4 $3,726.7 $4,534.6 $4,195.8 $3,887.2 Less: Long Term Debt and Preferred Equity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Plus: Cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total $4,150.9 $3,845.0 $3,566.2 $4,342.7 $4,020.4 $3,726.7 $4,534.6 $4,195.8 $3,887.2 (Fully-Diluted Shares Outstanding (MM): 69.76204) Amount Per Share: $59.50 $55.12 $51.12 $62.25 $57.63 $53.42 $65.00 $60.14 $55.72 Total as a Multiple of 12/31/95 GAAP Book Value $1,280.1 3.24 3.00 2.79 3.39 3.14 2.91 3.54 3.28 3.04 1995E GAAP Net Income 242.9 17.1 15.8 14.7 17.9 16.6 15.3 18.7 17.3 16.0 1996E GAAP Net Income 266.1 15.6 14.4 13.4 16.3 15.1 14.0 17.0 15.8 14.6 Terminal Amount in Year 10 $8,171.0 $8,171.0 $8,171.0 $8,715.7 $8,715.7 $8,715.7 $9,260.5 $9,260.5 $9,260.5 Implied Perpetual Growth Rate 5.9% 6.8% 7.7% 6.2% 7.1% 8.1% 6.5% 7.4% 8.3% Percent from Dividends 30.7% 31.6% 32.5% 29.3% 30.2% 31.1% 28.1% 28.9% 29.8% Percent from Terminal Amount 69.3% 68.4% 67.5% 70.7% 69.8% 68.9% 71.9% 71.1% 70.2%
-33- MORGAN STANLEY - P&C INSURANCE DCF MODEL 22-Aug-95 02:23 PM PROJECT AUTO Discounted Cash Flow Summary ($MM)
FAST GROWTH CASE Page 1 Terminal Retrospective P/E Multiple (based on GAAP results): 15.0 x 16.0 x 17.0 x ----------------------------- ----------------------------- ------------------------------ Discount Rate: 11.0% 12.0% 13.0% 11.0% 12.0% 13.0% 11.0% 12.0% 13.0% Present Value of Dividends Paid to Holding Company $819.4 $773.6 $731.2 $819.4 $773.6 $731.2 $819.4 $773.6 $731.2 PV of Terminal Amount in Year 10 3,735.4 3,415.0 3,124.5 3,984.4 3,642.6 3,332.8 4,233.5 3,870.3 3,541.1 Total $4,554.8 $4,188.5 $3,855.7 $4,803.8 $4,416.2 $4,064.0 $5,052.9 $4,643.9 $4,272.3 Less: Long Term Debt and Preferred Equity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Plus: Cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total $4,554.8 $4,188.5 $3,855.7 $4,803.8 $4,416.2 $4,064.0 $5,052.9 $4,643.9 $4,272.3 (Fully-Diluted Shares Outstanding (MM): 69.76204) Amount Per Share: $65.29 $60.04 $55.27 $68.86 $63.30 $58.26 $72.43 $66.57 $61.24 Total as a Multiple of 12/31/95 GAAP Book Value $1,280.1 3.56 3.27 3.01 3.75 3.45 3.17 3.95 3.63 3.34 1995E GAAP Net Income 242.9 18.8 17.2 15.9 19.8 18.2 16.7 20.8 19.1 17.6 1996E GAAP Net Income 234.2 19.4 17.9 16.5 20.5 18.9 17.4 21.6 19.8 18.2 Terminal Amount in Year 10 $10,606.4 $10,606.4 $10,606.4 $11,313.5 $11,313.5 $11,313.5 $12,020.6 $12,020.6 $12,020.6 Implied Perpetual Growth Rate 6.0% 6.9% 7.8% 6.3% 7.2% 8.1% 6.5% 7.5% 8.4% Percent from Dividends 18.0% 18.5% 19.0% 17.1% 17.5% 18.0% 16.2% 16.7% 17.1% Percent from Terminal Value 82.0% 81.5% 81.0% 82.9% 82.5% 82.0% 83.8% 83.3% 82.9%
-34- MORGAN STANLEY - P&C INSURANCE DCF MODEL 22-Aug-95 08:00 PM PROJECT AUTO Discounted Cash Flow Summary(1) ($MM)
HIGHER EXPENSE RATIO CASE Page 1 Terminal Retrospective P/E Multiple (based on GAAP results): 15.0 x 16.0 x 17.0 x ----------------------------- ---------------------------- ----------------------------- Discount Rate: 11.0% 12.0% 13.0% 11.0% 12.0% 13.0% 11.0% 12.0% 13.0% Present Value of Dividends Paid to Holding Company $1,014.1 $969.1 $927.2 $1,014.1 $969.1 $927.2 $1,014.1 $969.1 $927.2 PV of Terminal Amount in Year 10 2,423.5 2,215.6 2,027.2 2,585.1 2,363.3 2,162.3 2,746.6 2,511.0 2,297.5 Total $3,437.6 $3,184.7 $2,954.4 $3,599.2 $3,332.4 $3,089.5 $3,760.7 $3,480.2 $3,224.6 Less: Long Term Debt and Preferred Equity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Plus: Cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total $3,437.6 $3,184.7 $2,954.4 $3,599.2 $3,332.4 $3,089.5 $3,760.7 $3,480.2 $3,224.6 (Fully-Diluted Shares Outstanding (MM): 69.76204) Amount Per Share: $49.28 $45.65 $42.35 $51.59 $47.77 $44.29 $53.91 $49.89 $46.22 Total as a Multiple of 12/31/95 GAAP Book Value $1,280.1 2.69 2.49 2.31 2.81 2.60 2.41 2.94 2.72 2.52 1995E GAAP Net Income 242.9 14.2 13.1 12.2 14.8 13.7 12.7 15.5 14.3 13.3 1996E GAAP Net Income 266.1 12.9 12.0 11.1 13.5 12.5 11.6 14.1 13.1 12.1 Terminal Amount in Year 10 $6,881.3 $6,881.3 $6,881.3 $7,340.1 $7,340.1 $7,340.1 $7,798.9 $7,798.9 $7,798.9 Implied Perpetual Growth Rate 6.3% 7.2% 8.2% 6.6% 7.5% 8.5% 6.8% 7.8% 8.7% Percent from Dividends 29.5% 30.4% 31.4% 28.2% 29.1% 30.0% 27.0% 27.8% 28.8% Percent from Terminal Value 70.5% 69.6% 68.6% 71.8% 70.9% 70.0% 73.0% 72.2% 71.2% -35-
PROJECT AUTO - --------------------------------------------------------------------------------------------------------------------------------- Discounted Cash Flow Summary(1) ($MM)
HIGHER EXPENSE/LOWER LEVERAGE RATIO CASE Page 1 - --------------------------------------------------------------------------------------------------------------------------------- Terminal Retrospective P/E Multiple (based on GAAP results): 15.0x 16.0 x 17.0 x ----------------------------- ----------------------------- ----------------------------- Discount Rate: 11.0% 12.0% 13.0% 11.0% 12.0% 13.0% 11.0% 12.0% 13.0% Present Value of Dividends Paid to Holding Company $ 878.4 $ 835.9 $ 796.2 $ 878.4 $ 835.9 $ 796.2 $ 878.4 $ 835.9 $ 796.2 PV of Terminal Amount in Year 10 2,489.1 2,275.6 2,082.0 2,655.0 2,427.3 2,220.8 2,821.0 2,579.0 2,359.6 Total $3,367.5 $3,111.4 $2,878.2 $3,533.5 $3,263.1 $3,017.0 $3,699.4 $3,414.8 $3,155.9 Less: Long Term Debt and Preferred Equity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Plus: Cash 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total $3,367.5 $3,111.4 $2,878.2 $3,533.5 $3,263.1 $3,017.0 $3,699.4 $3,414.8 $3,155.9 (Fully-Diluted Shares Outstanding (MM): 69.76204) Amount Per Share: $48.27 $44.60 $41.26 $50.65 $46.78 $43.25 $53.03 $48.95 $45.24 Total as a Multiple of 12/31/95 GAAP Book Value $1,326.9 2.54 2.34 2.17 2.66 2.46 2.27 2.79 2.57 2.38 1995E GAAP Net Income 243.9 13.8 12.8 11.8 14.5 13.4 12.4 15.2 14.0 12.9 1996E GAAP Net Income 269.2 12.5 11.6 10.7 13.1 12.1 11.2 13.7 12.7 11.7 Terminal Amount in Year 10 $7,067.6 $7,067.6 $7,067.6 $7,538.8 $7,538.8 $7,538.8 $8,009.9 $8,009.9 $8,009.9 Implied Perpetual Growth Rate 6.5% 7.4% 8.4% 6.8% 7.7% 8.6% 7.0% 7.9% 8.9% Percent from Dividends 26.1% 26.9% 27.7% 24.9% 25.6% 26.4% 23.7% 24.5% 25.2% Percent from Terminal Amount 73.9% 73.1% 72.3% 75.1% 74.4% 73.6% 76.3% 75.5% 74.8% -36- APPENDIX A
PROJECT AUTO - ------------------------------------------------------------------------------------------------------------------------ Statutory Operating Comparison of Selected Property/Casualty Companies (1) ($ in Thousands)
Ohio Progressive SAFECO State Farm AUTO AllState Cincinnati Casualty Casualty Ins. Co. Mutual Composite Company(5) Ins. Co. Ins. Co. Ins. Co. Ins. Co. of America Auto Average ---------- -------- ---------- -------- ----------- ---------- ----------- --------- Net Premiums Written 1990 $1,580,256 $14,023,985 $ 776,711 $ 690,150 $ 758,845 $ 894,657 $18,711,801 1991 1,772,041 14,569,772 798,678 701,371 775,682 863,746 20,068,465 1992 1,944,791 15,274,601 836,457 708,984 693,060 966,426 21,510,883 1993 1,882,237 15,801,617 1,054,668 613,838 826,594 1,060,087 22,225,584 1994 2,294,590 16,273,739 1,190,120 604,628 1,139,175 1,114,836 23,629,450 5-Year CAGR 8.4% 3.9% 12.0% -3.9% 9.2% 6.7% 5.9% 5.6% Premiums Earned 1990 $1,533,827 $13,651,923 $ 771,866 $ 675,860 $ 746,841 $ 882,043 $18,208,462 1991 1,692,298 14,513,654 783,733 690,456 765,890 867,430 19,592,725 1992 1,863,938 15,039,996 822,644 713,267 713,580 931,454 21,026,025 1993 2,028,211 15,576,779 982,264 648,331 770,021 1,022,748 21,971,647 1994 2,239,338 16,050,135 1,169,150 609,899 1,030,528 1,088,318 23,216,219 5-Year CAGR 9.8% 4.0% 11.1% -2.6% 6.7% 6.0% 6.2% 5.2% Net investment income 1990 $ 138,645 $1,147,926 $ 108,062 $ 121,316 $ 42,832 $ 154,751 $ 1,942,808 1991 167,248 1,259,278 114,774 125,340 44,236 153,083 2,099,664 1992 160,938 1,329,706 138,777 126,985 86,586 150,557 2,213,927 1993 156,621 1,407,298 146,565 138,474 44,609 150,845 2,142,738 1994 155,693 1,485,003 145,913 141,140 46,322 153,814 2,236,177 5-Year CAGR 1.7% 6.5% 8.8% 4.1% 1.7% -0.3% 3.1% 4.0% Total Assets 1990 $2,810,450 $21,534,372 $1,660,108 $1,516,430 $1,325,246 $1,977,027 $37,507,837 1991 3,298,292 23,735,471 2,040,042 1,736,399 1,379,319 2,122,271 42,676,020 1992 3,313,327 24,633,280 2,280,396 1,819,691 1,286,747 2,280,587 43,603,148 1993 3,307,701 27,698,530 2,596,407 1,851,488 1,292,781 2,433,701 47,536,978 1994 $3,638,963 28,576,062 2,759,252 1,795,502 1,561,407 2,478,301 48,841,935 5-Year Average $3,273,747 $25,235,543 $2,267,241 $1,743,902 $1,369,100 $2,258,377 $44,033,184 NA Total Reserves 1990 $1,279,789 $11,117,143 $ 788,251 $ 697,473 $ 495,068 $ 993,516 12,820,939 1991 1,395,597 12,174,089 889,446 736,085 516,969 1,034,491 13,470,942 1992 1,574,183 13,114,669 962,394 786,406 514,703 1,040,462 14,366,766 1993 1,716,868 13,447,748 1,120,393 795,660 496,355 1,057,415 15,158,270 1994 1,859,066 14,637,670 1,317,980 754,598 510,716 1,109,261 16,077,609 5-Year Average $1,565,101 $12,898,264 $1,015,693 $ 754,044 $ 506,762 $1,047,029 $14,378,905 NA
-37- PROJECT AUTO Statutory Operating Comparison of Selected Property/Casualty Companies(1) ($ in Thousands)
Ohio Progressive SAFECO State Farm AUTO AllState Cincinnati Casualty Casualty Ins. Co. Mutual Composite Company(5) Ins. Co. Ins. Co. Ins. Co. Ins. Co. of America Auto Average ---------- -------- ---------- -------- ----------- ---------- ----------- --------- Policyholders' Surplus 1990 $ 796,566 $4,710,311 $ 476,421 $ 465,821 $349,071 $523,744 $17,889,083 1991 1,069,260 5,421,743 735,427 643,415 333,104 586,055 19,721,100 1992 850,947 4,766,690 933,486 674,210 284,614 720,270 18,751,400 1993 830,024 7,145,055 1,010,328 713,565 309,048 795,986 21,269,733 1994 930,528 6,531,648 984,538 659,997 429,441 751,091 21,143,917 5-Year Average $ 895,465 $5,715,089 $ 828,040 $ 631,402 $341,056 $675,429 $19,755,047 NA Avg. Investment Yield(2) 1990 5.67% 6.03% 7.03% 9.08% 3.81% 8.70% 5.62% 1991 6.28 6.27 6.70 8.69 3.87 8.28 5.68 1992 5.60 6.22 6.93 8.00 7.68 7.60 5.63 1993 5.34 6.04 6.48 8.42 3.99 7.17 5.18 1994 4.94 5.83 5.87 8.51 3.69 7.04 5.09 5-Year Average 5.57% 6.08% 6.60% 8.54% 4.61% 7.76% 5.44% 6.50% Loss Ratio 1990 70.5% 75.2% 60.8% 61.4% 48.9% 65.4% 77.9% 1991 68.8 73.2 58.1 60.4 50.3 68.0 69.9 1992 75.9 87.2 58.3 63.8 55.5 63.8 69.6 1993 72.1 68.3 62.7 64.8 53.1 60.2 69.5 1994 72.8 75.5 64.7 61.6 54.5 64.7 76.1 5-Year Average 72.0% 75.9% 60.9% 62.4% 52.5% 64.4% 72.6% 64.8% Expense Ratio(3) 1990 25.6% 36.6% 39.5% 43.0% 47.4% 41.4% 31.3% 1991 25.9 35.8 41.2 43.1 53.5 40.1 31.8 1992 25.2 35.6 41.1 43.0 46.7 39.8 31.8 1993 25.9 35.9 39.5 43.3 41.1 38.7 30.3 1994 24.4 36.4 37.7 41.3 37.9 38.7 31.3 5-Year Average 25.4% 36.1% 39.8% 42.7% 45.3% 39.7% 31.3% 39.2% Combined Ratio 1990 96.1% 111.8% 100.3% 104.4% 96.3% 106.8% 109.2% 1991 94.7 109.0 99.3 103.5 103.8 108.1 101.7 1992 101.1 122.8 99.4 106.8 102.2 103.6 101.4 1993 98.0 104.2 102.2 108.1 94.2 98.9 99.8 1994 97.2 111.9 102.4 102.9 92.4 103.4 107.2 5-Year Average 97.4% 111.9% 100.7% 105.1% 97.8% 104.2% 103.9% 103.9%
-38- PROJECT AUTO Statutory Operating Comparison of Selected Property/Casualty Companies(1) ($ in Thousands)
Ohio Progressive SAFECO State Farm AUTO AllState Cincinnati Casualty Casualty Ins. Co. Mutual Composite Company(5) Ins. Co. Ins. Co. Ins. Co. Ins. Co. of America Auto Average ---------- -------- ---------- -------- ----------- ---------- ----------- --------- Statutory Return on Average Surplus (4) 1990 18.1% -2.2% 18.4% 15.3% 22.7% 15.5% 1.7% 1991 17.8 3.1 15.4 14.4 7.0 11.9 7.0 1992 13.7 -26.7 13.5 11.1 27.2 14.0 8.9 1993 17.9 15.0 10.2 12.8 23.6 14.2 8.0 1994 20.5 -1.7 8.7 15.9 28.4 13.3 2.3 5-Year Average 17.6% (2.5)% 13.3% 13.9% 21.8% 13.8% 5.6% 11.0% NPW/Surplus 1990 1.98 x 2.98 x 1.63 x 1.48 x 2.17 x 1.71 x 1.05 x 1991 1.66 2.69 1.09 1.09 2.33 1.47 1.02 1992 2.29 3.20 0.90 1.05 2.44 1.34 1.15 1993 2.27 2.21 1.04 0.86 2.67 1.33 1.04 1994 2.47 2.49 1.21 0.92 2.65 1.48 1.12 5-Year Average 2.13 x 2.71 x 1.17 x 1.08 x 2.45 x 1.47 x 1.07 x 1.66 x Risk-Based Capital 1990 NA NA NA NA NA NA NA 1991 NA NA NA NA NA NA NA 1992 NA NA NA NA NA NA NA 1993 NA NA NA NA NA NA NA 1994 366.0% 218.8% 474.0% 274.3% 281.4% 440.7% 412.5% 352.5% 5-Year Average NA NA NA NA NA NA NA NA Notes: (1) Based on statutory data from OneSource. (2) Net investment income divided by average invested assets. (3) Includes both loss expenses and other underwriting expenses incurred. (4) Net income less net realized gains/losses (after-tax) divided by average surplus. (5) Based on Auto Insurance Company results only. Excludes Auto Indemnity and Auto Casualty.
-39- APPENDIX B PROJECT AUTO Weighted Average Cost of Capital
Debt/ Predicted Debt/ Market Pfd/ Unlevered Equity Market Equity Market (Asset) Company Name Beta(1) Equity + Debt Equity Beta Allstate 0.98 5.8% 5.5% 0.0% 0.94 Cincinnati Financial 0.74 7.1% 6.6% 0.0% 0.71 Ohio Casualtu 0.73 5.6% 5.3% 0.0% 0.70 Progressive 0.89 19.0% 16.0% 3.1% 0.77 SAFECO 0.89 15.3% 13.3% 0.0% 0.81 MEAN 0.85 10.6% 9.3% 0.6% 0.79 MEDIAN 0.89 7.1% 6.6% 0.0% 0.77 Relevering of Mean Asset Betas(Mean/Median) Debt/ Pfd/ Relevered Cost of Cost of Cost of Cost of Cost of Mkt Equity Mkt Equity Beta Debt(P/T) Debt(A/T) Preferred Equity Capital(2) 0.0% 0.0% 0.79 7.0% 4.6% 0.0% 12.8% 12.8% 10.0% 0.0% 0.84 7.3% 4.7% 0.0% 13.2% 12.4% 20.0% 0.0% 0.89 7.5% 4.9% 0.0% 13.6% 12.1% 25.0% 0.0% 0.92 7.8% 5.0% 0.0% 13.8% 12.0% 30.0% 0.0% 0.94 8.0% 5.2% 0.0% 14.0% 11.9% 40.0% 0.0% 0.99 8.2% 5.4% 0.0% 14.4% 11.8% 50.0% 0.0% 1.04 8.5% 5.5% 0.0% 14.7% 11.7% 60.0% 0.0% 1.09 8.7% 5.7% 0.0% 15.1% 11.6% 70.0% 0.0% 1.15 9.0% 5.8% 0.0% 15.5% 11.5% 80.0% 0.0% 1.20 9.2% 6.0% 0.0% 15.9% 11.5% 90.0% 0.0% 1.25 9.5% 6.2% 0.0% 16.2% 11.5% 100.0% 0.0% 1.30 9.7% 6.3% 0.0% 16.6% 11.5% Formulas Assumptions Levered Beta D = Debt Unlevered Beta = ---------------------- E = Equity Risk Free Rate 7.01% (3) 1 + (D/E)(1-t)+(Pfd/E) t = Marginal Tax Rate Market Risk Premium 7.40% Pfd = Preferred Marginal Tax Rate (t) 35.00% Cost of Equity = Risk Free Rate + Levered Beta* (Market Risk Premium) NOTES: (1) Source: Barra, U.S. Equity Beta Book as of July 1995. (2) Based on after-tax cost of debt. (3) Current yield on a 10 year government bond as of August 8, 1995.
-40- EX-9 3 EXHIBIT (C)(1)-- BERKSHIRE PROXY AGREEMENT EXHIBIT NO. (c)(1) PROXY AGREEMENT BERKSHIRE HATHAWAY, INC. ("Berkshire") hereby appoints SUBURBAN TRUST COMPANY ("the Bank") as its proxy with respect to all matters for which Berkshire or its subsidiary corporations, National Indemnity Company, National Fire and Marine Insurance Company, Cornhusker Casualty Company and Kerkling Reinsurance Corporation ("the subsidiaries"), have the right to vote shares of the Convertible Preferred and Common Stock of Government Employees Insurance Company ("GEICO") now or hereafter held by Berkshire or the subsidiaries ("the shares"), with such proxy being applicable to each such share of GEICO stock held by Berkshire or the subsidiaries as long as, but only as long as, such share is held by Berkshire or the subsidiaries, subject to the following terms and conditions: 1. Determination of Shares The number of the shares subject to this proxy at the time of its execution is 1,986,953 shares of Convertible Preferred Stock and 1,294,308 shares of Common Stock. Berkshire shall give the Bank notice of any change in the number of the shares subject hereto as promptly as practicable and, in any event, within 10 days of such a change. 2. Method of Voting (a) In voting the shares on any matter presented to it, the Bank shall be guided solely by its best judgment as to which decision will be in the best interests of Berkshire as an investor and without regard to the status of Berkshire or the subsidiaries as actual or potential competitors of GEICO. (b) In reaching its determination on any vote, the Bank shall not discuss that determination with the employees, management, or members of the Board of Directors of Berkshire or the subsidiaries, or with any other proxy for GEICO stock designated by any other insurance company pursuant to any agreement similar to this agreement; provided, that: (i) This prohibition shall not prevent Berkshire, through its investment or legal counsel, from communicating in writing to the Bank such information as may be necessary or desirable to inform the Bank from time-to-time as to Berkshire's general investment policies and practices with respect to holdings in preferred and common stock, or Berkshire's general policies and practices with respect to proposals presented by outside shareholders of companies in which it owns voting stock; provided further, however, that except for willful default or bad faith, the Bank shall incur no liability to Berkshire or to any other party in the event a vote it casts hereunder is deemed not consistent with such policies and practices. (ii) Berkshire shall retain the right to instruct the Bank in writing not to vote the shares on a specific matter or to vote the shares on a matter in the same proportion as the vote ultimately cast by all other voting shareholders; provided further, however, that the Bank shall in any event vote the shares whenever a failure to vote would result in the absence of a quorum for the conduct of GEICO corporate business. (c) Berkshire shall give prompt notice of delivery of any written communication under Paragraph 2(b) to the Superintendent of Insurance of the District of Columbia and to the United States Department of Justice. (d) Promptly following the date on which all votes of shareholders on a given matter are tallied by GEICO, the Bank shall inform Berkshire of all action taken by the Bank under this proxy by providing written notice thereof to Berkshire. 3. Compensation (a) As full and total compensation of the Bank for its services hereunder, Berkshire shall pay to the Bank a fee of $2500, payable $1250 upon the execution of this agreement and $1250 by April 1, 1977; provided, however, that in the event this proxy is terminated pursuant to Paragraph 8 hereof prior to the 1977 annual meeting of GEICO shareholders, the initial payment shall be refunded to Berkshire upon termination; and provided further, that in the event GEICO shareholders are requested during the duration of this proxy to vote upon matters at a special meeting other than the annual meeting of shareholders, Berkshire shall pay the Bank an additional fee of $1000 for voting the stock at each such special meeting. (b) In the event that during the duration of this proxy the Bank shall be required to appear before any court or federal, state or local commission, department or agency to testify or give evidence in its capacity as proxy hereunder, Berkshire shall pay the Bank, in addition to the compensation otherwise payable pursuant to Subparagraph 3(a), $50 for each hour each officer, director or employee of the Bank is required to be engaged in such activity, together with actual out-of-pocket expenses incurred in connection therewith. 4. Application to Consents This proxy shall operate with equal force and effect with respect to all matters for which GEICO solicits the written consent of its shareholders (including any consents required under its Certificate of Incorporation with respect to its Convertible Preferred Stock); provided, that in addition to the written communication permitted under Paragraph 2(b), Berkshire may instruct the Bank in writing as to the customary procedures of Berkshire to be followed in deciding whether or not to grant such consent, subject to satisfaction of the notification requirement of Paragraph 2(c). 5. Notices and Material Correspondence (a) Immediately upon the execution of this proxy, Berkshire shall cause an executed copy thereof, certified by its Secretary or Assistant Secretary, to be sent to the Secretary of GEICO, the Superintendent of Insurance of the District of Columbia, and to the United States Department of Justice. Berkshire shall request the Secretary of GEICO to send to the Bank copies of all material relating to any GEICO meeting of shareholders or to any request for written consent of shareholders. Berkshire shall, from time-to-time, execute such other documents and perform such other acts as shall be necessary to effect the purposes of this proxy. In recognizing any vote, proxy, or written consent effected or executed by the Bank on behalf of Berkshire, GEICO may assume full compliance with the terms and conditions hereof unless its Secretary has received, reasonably in advance of such recognition, written notice to the contrary from an officer of Berkshire. (b) All material correspondence between Berkshire or the subsidiaries and the Bank shall be in writing. Such correspondence, together with the communications provided for in Paragraphs 2(b) and 4, shall be retained for a period of three years and shall be made available for inspection by the Superintendent of Insurance of the District of Columbia and the Department of Justice upon notice and request. 6. Indemnification Berkshire shall indemnify, defend and hold harmless the Bank from and against any and all claims, losses, liabilities, damages or deficiencies (including, without limitation, reasonable attorneys' fees) arising out of actions of the Bank hereunder. Promptly after receipt by the Bank of any claim or notice of the commencement of any action or proceeding subject to this indemnification, the Bank shall provide written notice thereof to Berkshire. 7. Duration This proxy shall take effect as of the date of its execution and, unless earlier terminated in the manner indicated in Paragraph 8, shall be applicable to all matters presented to GEICO shareholders from such date up to but not including the second annual meeting of GEICO shareholders to take place after such date. During the period of its duration, the proxy shall apply to all of the shares held by Berkshire or by the subsidiaries, but shall not apply to the shares after they have been sold by Berkshire or by the subsidiaries. 8. Termination (a) Berkshire and the Bank recognize that, as between them, this proxy is revocable at the pleasure of Berkshire, but Berkshire will exercise such right of revocation only upon the occurrence of one or more of the following events: (i) Berkshire determines, in its sole discretion, that the Bank is no longer acting in accordance with the procedures set forth in Paragraph 2 above; or (ii) Any officer or director of the Bank holds a position of director or officer of GEICO; or (iii) The Superintendent of Insurance of the District of Columbia determines that the Bank, or any person authorized to act on its behalf for the purpose of this proxy: (A) Owns, controls, or holds with power to vote, whether directly or indirectly, five percent or more of the outstanding voting securities of Berkshire; (B) Has outstanding voting securities five percent or more of which are directly or indirectly owned, controlled, or held with power to vote by Berkshire; (C) Is directly or indirectly in control of, controlled by, or under common control with Berkshire; (D) Is an officer, director, partner, co-partner, or employee of Berkshire; (E) Is a member of the immediate family of any natural person who comes within any of the categories set forth in clauses (A) through (D) above; (F) Is a person, or a partner or employee of any person, who at any time since the beginning of the last two fiscal years of Berkshire has acted as legal counsel for Berkshire; or (G) Has had, at any time since the beginning of the last two fiscal years of Berkshire, such a material business or professional relationship with Berkshire or its principal executive officer as to make it reasonably unlikely that the Bank will be able to act in accordance with the procedures set forth under Paragraph 2. For the purpose of enabling the Superintendent to make the determinations referred to in this Subparagraph (iii), Berkshire and the Bank agree to provide such information as to their respective managements, stock ownership, and business affiliates as the Superintendent may reasonably request. No determination shall be made by the Superintendent under clause (G) until Berkshire and the Bank have been given reasonable notice of the pendency of that determination and an opportunity to respond in writing within a reasonable period of time. (iv) Any governmental agency or department determines that this proxy or its exercise is not permitted, either by any law over which that agency or department has jurisdiction and to which Berkshire or the subsidiaries are subject, or by any regulation, rule or order thereunder; or (v) The Superintendent of Insurance of the District of Columbia, upon application of Berkshire, determines the proxy is to be revoked. (b) No termination pursuant to Subparagraphs (i), (ii) and (iv) above shall become effective without the prior approval of the Superintendent of Insurance of the District of Columbia and the United States Department of Justice. (c) The Bank shall have the right to terminate this proxy at any time upon the giving of not less than 30 days notice in writing to Berkshire, the Superintendent of Insurance of the District of Columbia, and the United States Department of Justice. 9. Addresses All notices or other communications hereunder to be addressed to Berkshire shall be sent to: Berkshire Hathaway, Inc. 1440 Kiewit Plaza Omaha, Nebraska 68131 Attention: Warren E. Buffett All notices and other communications hereunder to be addressed to the Bank shall be sent to: Suburban Trust Company 2601 University Blvd. West Wheaton, Maryland 20902 Attention: Thomas F. Lawson All notices and other communications hereunder to be addressed to the Department of Justice shall be sent to: United States Department of Justice Antitrust Division Washington, D. C. 20530 Attention: Assistant Attorney General, Antitrust Division AGREED TO this 24th day of February , 1977. Berkshire Hathaway, Inc. Attest: - ----------------------------- By: -------------------------- Secretary Its Chairman Suburban Trust Company Attest: - ----------------------------- By: -------------------------- Assistant Secretary Its Senior Trust Officer P R O X Y The undersigned, as record owner of common and preferred shares of Government Employee Insurance Company owned beneficially by Berkshire Hathaway Inc. and subsidiaries thereof (National Indemnity Company, National Fire and Marine Insurance Company, Cornhusker Casualty Company and Central Fire and Casualty Company, formerly Kerkling Reinsurance Corporation), pursuant to instructions from Berkshire Hathaway Inc., appoints Suburban Trust Company of Maryland its proxy with respect to all common and preferred shares of Government Employees Insurance Company held in its name for which Berkshire Hathaway Inc. or any of its above-named subsidiaries is the beneficial owner, such proxy to be of the same duration as the Proxy Agreement between Berkshire Hathaway Inc. and Suburban Trust Company (attached hereto as an Exhibit) and to be subject to and governed by all the terms and conditions of that Proxy Agreement. January 16, 1979. NIFCO, A Nominee Partnership By -------------------------- Donald E. Jorgensen, a General Partner -----END PRIVACY-ENHANCED MESSAGE-----