FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Three Months Ended March 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
Registrant's Telephone No: (301) 986-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES x NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of April 30, 1995
Common Stock, $1.00 par value 67,889,574
Page 1 of 9 pages
FORM 10-Q - QUARTERLY REPORT
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GEICO CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, December 31,
Investments: 1995 1994
Fixed maturities available for sale, at
market (amortized cost $3,426,237,878
and $3,363,422,770) $ 3,420,827,497 $ 3,270,125,446
Equity securities available for sale,
at market (cost $551,927,100 and
$556,960,522) 865,279,478 782,708,006
Short-term investments 174,264,759 50,032,937
Total Investments 4,460,371,734 4,102,866,389
Cash 15,248,673 27,579,312
Loans receivable, net 54,904,293 59,448,297
Accrued investment income 55,755,515 67,254,744
Premiums receivable 248,928,414 238,652,876
Reinsurance receivables 127,244,649 127,189,085
Prepaid reinsurance premiums 8,956,779 10,361,216
Amounts receivable from sales of securities 6,335,415 2,022,214
Deferred policy acquisition costs 71,709,807 72,358,845
Federal income taxes 22,051,016 98,974,942
Property and equipment, at cost less accumulated
depreciation of $119,039,044 and $113,612,108 141,205,030 141,741,242
Other assets 60,609,708 49,656,013
TOTAL ASSETS $ 5,273,321,033 $ 4,998,105,175
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Property and casualty loss reserves $ 1,752,734,635 $ 1,704,717,841
Loss adjustment expense reserves 313,288,718 307,606,072
Unearned premiums 774,723,388 747,342,502
Life benefit reserves and policyholders' funds 104,345,313 101,297,929
Debt:
Corporate and other 404,011,002 340,378,156
Finance company 43,500,000 51,000,000
Amounts payable on purchase of securities 20,453,098 8,407,963
Other liabilities 285,715,122 291,414,052
Total Liabilities 3,698,771,276 3,552,164,515
SHAREHOLDERS' EQUITY
Common Stock - $1 par value, 150,000,000
shares authorized, 71,596,409 and
71,565,359 issued, 67,989,159 and
68,291,463 outstanding 71,596,409 71,565,359
Paid-in surplus 170,984,667 169,083,940
Unrealized appreciation of investments 205,112,786 91,166,775
Retained earnings 1,373,975,561 1,330,021,435
Treasury Stock, at cost (3,607,250 and 3,273,896
shares of Common Stock) (183,460,481) (167,114,614)
Unearned Employee Stock Ownership Plan shares (63,659,185) (48,782,235)
Total Shareholders' Equity 1,574,549,757 1,445,940,660
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,273,321,033 $ 4,998,105,175
See Notes to Consolidated Financial Statements
Page 2 of 9 pages
GEICO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended March 31,
1995 1994
REVENUE
Premiums $659,004,005 $587,540,733
Investment income, net of expenses of $2,538,556
and $2,349,688 55,298,808 48,421,495
Realized gains on investments 5,609,808 6,598,240
Interest on loans receivable 2,401,585 2,648,612
Other revenue 3,864,359 3,631,902
Total Revenue 726,178,565 648,840,982
BENEFITS AND EXPENSES
Losses and loss adjustment expenses 531,001,384 493,492,533
Life benefits and interest on policyholders' funds 2,000,111 2,473,662
Policy acquisition expenses 51,430,475 49,994,636
Other operating expenses 57,059,150 55,849,383
Interest expense:
Corporate and other 6,567,903 6,797,454
Finance company 770,129 659,409
Total Benefits and Expenses 648,829,152 609,267,077
Net income before income taxes 77,349,413 39,573,905
Federal income tax expense 15,109,134 3,413,633
Net income before cumulative effect of
change in accounting principle 62,240,279 36,160,272
Cumulative effect of change in accounting
principle for postemployment benefits, net of tax - (1,051,329)
Net Income $ 62,240,279 $ 35,108,943
Earnings Per Share
Net income before cumulative effect of
change in accounting principle $ .91 $ .51
Cumulative effect of change in accounting
principle - (.01)
Net Income $ .91 $ .50
Dividends Per Share $ .27 $ .25
See Notes to Consolidated Financial Statements
Page 3 of 9 pages
GEICO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1995 1994
Operating Activities:
Net income $ 62,240,279 $ 35,108,943
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting
principle for postemployment benefits,
net of tax - 1,051,329
Net premiums receivable (10,275,538) (1,154,107)
Deferred policy acquisition costs 649,038 1,685,392
Reinsurance receivables and prepaid reinsurance
premiums 1,348,873 (7,349,082)
Loss, life benefit and loss adjustment
expense reserves 54,028,277 55,051,647
Unearned premiums 27,380,886 15,785,754
Federal income taxes 15,042,427 587,802
Realized gains (5,609,808) (6,598,240)
Provision for depreciation 6,340,591 5,413,290
Accrual of discount and amortization of
premiums on investments 3,594,107 4,801,692
Other 1,498,859 20,916,764
Net cash provided by operating activities 156,237,991 125,301,184
Investing Activities:
Purchases of equity securities (69,456,530) (60,462,550)
Purchases of fixed maturities (213,129,150) (340,514,702)
Increase in payable on security purchases 12,045,135 74,777,402
Sales of fixed maturities 37,003,611 14,203,693
Maturities and redemptions of fixed maturities 109,919,991 181,516,074
Sales of equity securities 79,896,091 41,281,637
Net change in short-term investments (124,231,822) 22,208,504
Change in receivable from security sales (4,313,201) 33,007
Decrease in principal on loans receivable 4,864,844 5,198,580
Proceeds from sale of subsidiary - 9,686,024
Purchase of property and equipment, net (5,804,379) (8,103,760)
Other 359,499 164,779
Net cash used by investing activities (172,845,911) (60,011,312)
Financing Activities:
Repayment of debt (375,000) (731,739)
Net change in short-term borrowings 41,500,000 (6,000,000)
Exercise of stock options 531,650 278,753
Purchase of Common Stock (Treasury) (20,641,966) (15,121,016)
Dividends paid to shareholders (18,411,456) (17,664,057)
Other 1,674,053 733,997
Net cash provided (used) by financing activities 4,277,281 (38,504,062)
Change in cash (12,330,639) 26,785,810
Cash at beginning of period 27,579,312 18,361,546
Cash at end of period $ 15,248,673 $ 45,147,356
See Notes to Consolidated Financial Statements
Page 4 of 9 pages
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with the instructions to Form 10-Q and,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. However, in the
opinion of management, the financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows.
The information has been prepared from the records of GEICO Corporation (the
Corporation) which are subject to audit at year-end by independent public
accountants. The results of operations for the three months ended March 31,
1995 are not necessarily indicative of such results for the entire year.
Consolidation
The consolidated financial statements include the accounts of GEICO
Corporation and its subsidiaries.
Significant intercompany accounts and transactions have been eliminated.
Income Taxes
Federal income taxes in the statements of income are based on an estimated
annual effective tax rate which reflects exclusion of tax-exempt interest
income and the intercorporate dividends received deduction.
Postemployment Benefits
In the first quarter of 1994 the Corporation adopted Statement of Financial
Accounting Standards No. 112 "Employers' Accounting for Postemployment
Benefits." The cumulative effect of adopting this statement at January 1,
1994 was a charge of $1.1 million, net of tax, which was included in the
statements of income as a change in accounting principle.
Common Stock Repurchases
During the first three months of 1995 the Corporation repurchased a net
333,354 shares of its Common Stock for $16.0 million. At March 31, 1995
there were 3,392,750 shares remaining under the current repurchase
authorization.
Earnings Per Share
The computation of earnings per share is based on the weighted average
number of common shares assumed outstanding of 68,078,823 and 70,849,517 for
the three months ended March 31, 1995 and 1994, respectively.
Subsequent Events
On April 24, 1995 the Corporation issued $100 million of 7.5% notes due in
2005.
In April 1995, Government Employees Financial Corporation sold $38 million
of its remaining receivables and other assets and used the proceeds to
reduce its short-term debt.
Page 5 of 9 pages
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Consolidated premiums were $659,004,005 for the first quarter of 1995, up
12.2 percent from $587,540,733 in 1994, reflecting continued growth in
voluntary auto lines and modest rate increases. The number of voluntary
automobile policies in force grew 7.8 percent during the twelve month period
ending March 31, 1995. Total voluntary policies in force (all lines) grew
4.8% in the same time period as homeowners policies have declined. Policy
growth in the standard and nonstandard auto lines was 27.9 percent as
efforts have been expanded to offer a rate quote to potential customers who
do not meet GEICO/GEICO General preferred-risk underwriting guidelines.
These lines currently have a modest premium base, but provide an opportunity
for significant growth. New business homeowner insurance sales are less in
1995 than 1994.
On April 4, 1995 GEICO announced an agreement with Aetna Fire and Casualty
(Aetna) to phase out of GEICO's homeowners business over the next three
years. New homeowners customers will be offered Aetna policies beginning
at the end of July 1995. The great majority of GEICO's existing homeowners
customers will be offered renewal policies in Aetna as their policies begin
to expire after January 1, 1996. GEICO will act as the servicing agent for
these policies. The agreement with Aetna should have little impact on 1995
financial results.
Pre-tax net investment income increased 14.2 percent to $55,298,808 for the
first quarter of 1995 from $48,421,495 in the first quarter of 1994. The
increase is the result of higher yields on fixed income securities and
additional funds from operations available for investment. After-tax net
investment income for the three months increased 13.7 percent to $47.2
million from $41.5 million.
Realized gains on investments were $5,609,808 for the first quarter of 1995
compared to realized gains of $6,598,240 in the first quarter of 1994.
Realized gains are primarily from the sale of equity securities. Such gains
are a result of financial market conditions and can therefore fluctuate
widely from period to period.
Interest on loans receivable decreased 9.3 percent to $2,401,585 for the
three month period ended March 31, 1995 from the comparable prior year
period as Government Employees Financial Corporation (GEFCO), our finance
subsidiary, continues to reduce its loans receivable. In April 1995, GEFCO
sold $38 million of its remaining receivables and other assets and used the
proceeds to reduce its short-term debt. After this sale GEFCO has
approximately $19 million of remaining assets.
Losses and loss adjustment expenses incurred increased 7.6 percent to
$531,001,384 for the three months ended March 31, 1995 over the comparable
prior year period. The first quarter of 1994 was adversely impacted by
severe winter weather which resulted in a significant increase in automobile
claims frequency due to poor driving conditions and a high level of
homeowners catastrophe freezing losses. Catastrophe losses for the first
quarter of 1995 were approximately $3 million compared to $13 million in the
first quarter of 1994.
In response to concerns of the insurance industry and various consumer
groups, the Florida Hurricane Catastrophe Fund became effective June 1,
1994. In return for an annual premium, 75% of homeowners losses in excess
of $26 million (two times Florida homeowner yearly written premiums) are
covered subject to a constraint of overall money available to the Fund. The
second contract year of the Fund begins June 1, 1995 and terms of coverage
may be modified. The Corporation's insurance subsidiaries currently have
no other catastrophe reinsurance effective in any other states.
Page 6 of 9 pages
The Corporation's insurance subsidiaries reinsure excess risks on any single
loss. GEICO's principal reinsurer for this coverage is General Reinsurance
Corporation which is rated A++ (Superior) by A. M. Best. GEICO has also
reinsured a significant portion of its commercial umbrella liability
business which was written from 1981 to 1984. The largest anticipated
amount recoverable for this coverage is from Constitution Reinsurance
Corporation which is rated A+ (Superior) by A. M. Best.
The statutory ratios of losses and loss adjustment expenses (LAE) incurred
to premiums earned, underwriting expenses to written premiums, and
underwriting ratios for the Corporation's property/casualty subsidiaries are
shown below.
Three Months
Ended March 31,
1995 1994
Loss ratio 82.2% 85.4%
Expense ratio 13.1% 14.1%
Underwriting ratio 95.3% 99.5%
The Corporation's reserves for losses and loss adjustment expenses include
amounts for environmental and product liability claims on policies written
by GEICO from 1981 to 1984 and by Resolute Reinsurance Company from 1982 to
1987. The Corporation believes that the ultimate resolution of its
environmental and product liability claims will not have a material impact
on the Corporation's financial position and results of operations.
Policy acquisition expenses increased only 2.9 percent to $51,430,475 for
the first three months of 1995 compared to $49,994,636 in 1994 and reflects
a reduction in the general expense ratio in 1995. Other operating expenses
increased 2.2 percent to $57,059,150 from $55,849,383. Other operating
expenses for the first three months of 1995 and 1994 include $2.3 million
and $5.2 million, respectively, of incentive compensation expense related
to the significant overperformance of the Corporation's common stock
portfolio compared to the S&P 500.
Total interest expense for the first three months of 1995 decreased to
$7,338,032 from $7,456,863 in 1994. The decline reflects the repayment of
mortgage loans in the third quarter of 1994 partially offset by increased
interest on short-term borrowings by the Corporation in the first quarter
of 1995.
Net income before income taxes was $77,349,413 in the first three months of
1995 compared to $39,573,905 for the comparable period in 1994. The
increase primarily reflects increased underwriting gain from insurance
operations and increased investment income. For the first three months of
1995 income tax expense increased to $15,109,134 from $3,413,633 in 1994 due
to the increase in pretax income. Net income before the cumulative effect
of changes in accounting principles was $62,240,279 in the first three
months of 1995 compared to $36,160,272 in 1994.
In the first quarter of 1994 the Corporation adopted Statement of Financial
Accounting Standards No. 112 "Employers' Accounting for Postemployment
Benefits." The cumulative effect of adopting this statement at January 1,
1994 was a charge of $1.1 million, net of tax, which was included in the
statements of income as a change in accounting principle. This statement
will not have a significant impact on future operating expenses.
Net income was $62,240,279 for the three months ended March 31, 1995, an
increase of 77.3 percent from the comparable 1994 period. Net income per
share for the three months increased 82.0 percent to $.91 from $.50 for the
comparable 1994 period and reflects a decrease in the number of shares
outstanding. The cumulative effect of the change in accounting principles
reduced net income per share by $.01 in 1994.
The weighted average number of shares outstanding decreased to 68,078,823
for the three months ended March 31, 1995 compared to 70,849,517 a year ago
due to Treasury Stock purchases.
Page 7 of 9 pages
The unrealized appreciation of investments, which is reflected in
shareholders' equity but not in net income, increased $113.9 million to
$205.1 million at March 31, 1995 compared to $91.2 million at December 31,
1994 reflecting increases in the market value of both fixed maturities and
equity securities during the quarter. The unrealized depreciation related
to fixed maturities decreased $57.1 million during the three month period
as interest rates have declined resulting in unrealized depreciation of $3.5
million as of March 31, 1995. The unrealized appreciation on equity
securities increased $56.8 million to $208.6 million.
Capital Structure and Liquidity
During the first three months of 1995 the Corporation repurchased a net
333,354 shares of its Common Stock for $16.0 million.
Book value per share at March 31, 1995 was $23.16 based upon shareholders'
equity of $1,574,549,757 and 67,989,159 outstanding shares of Common Stock
compared to $21.17 at December 31, 1994 based upon shareholders' equity of
$1,445,940,660 and 68,291,463 outstanding shares. The increase reflects the
unrealized appreciation of investments during the quarter partially offset
by repurchases of shares at a cost in excess of book value per share and an
increase in unearned ESOP shares purchased with $15 million of additional
ESOP debt.
Cash flow from operations during the first three months of 1995 was $156.2
million compared to $125.3 million for the first three months of 1994.
Investing activities in the first three months of 1994 included a net $9.7
million received from the sale of Southern Heritage Insurance Company, which
was sold effective December 31, 1993.
State Rate Regulation
Each of the Corporation's insurance company subsidiaries is subject to
regulation and supervision of its insurance businesses in each of the
jurisdictions in which it does business. In general, such regulation is for
the protection of policyholders rather than shareholders. Legislation has
been introduced in recent sessions of Congress proposing modification or
repeal of the McCarran-Ferguson Act which reaffirms the proposition that it
is the responsibility of state governments to regulate the insurance
industry and provides a limited exemption to the "business of insurance"
from federal anti-trust laws. Whether any changes to the current statute
will be made, and the effect of such changes, if any, cannot be determined.
The Congress and certain state legislatures are also considering the effects
of the use of sex, age, marital status, rating territories and other
traditional rating criteria as a basis for rating classification; certain
of such criteria no longer can be used in some states, and have been and are
being challenged in the courts of other states.
Subsequent Events
On April 24, GEICO Corporation issued $100 million of 7.5% Notes due 2005.
The Corporation intends to use about half of the net proceeds to repay
short-term debt and the remainder would be available for investment in
marketable securities and general corporate purposes, including repurchases
of shares.
On May 9, the Board of Directors increased the authorization for share
repurchases to 7 million shares including the 3.2 million shares remaining
under the prior authorization.
Also on May 9, the Corporation announced that losses from a series of storms
in Texas, Oklahoma and Louisiana may exceed $20 million for the quarter
ending June 30, 1995.
Page 8 of 9 pages
GEICO CORPORATION
PART II. OTHER INFORMATION
Item 5. Other Events
(a) None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(1) None.
(b) Reports on Form 8-K
GEICO Corporation did not file a Report on Form 8-K during the
three months ended March 31, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GEICO Corporation
Date: May 15, 1995 By:
Thomas M. Wells
Group Vice President and
Controller
(Principal Accounting Officer)
Date: May 15, 1995 By:
W. Alvon Sparks, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Page 9 of 9 pages