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. <F4> 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
<FN>
Notes:
(1) Relevant comparable companies include Allstate, Cincinnati Financial,
Ohio Casualty, Progressive and SAFECO.
(2) Based on Company estimate of $3.33 per share.
(3) Based on 1996 IBES estimate as of August 19, 1995.
(4) Auto Corporation multiples as of August 18, 1995.
(5) Auto Corp. retains an unusually large portfolio of equity investments
at the Parent Company, which management views as capital available to
support the insurance operations in the event of a catastrophe. The
negative effect on current operating income of this policy (relative
to investing in bonds) closely offsets the cost of purchasing
catastrophe cover in the reinsurance market, which the Company has
chosen to forgo since Hurricane Andrew. As a result, no adjustment to
operating earnings has been made. (6) Based on primary shares
outstanding of 67,719,710 as of 6/30/95.
</FN>
-20-
PROJECT AUTO
Summary
($ in Millions, except per share data)
II. Premiums over Publicly-Traded Companies
Assumed Public Market Range<F1>: $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<F2> $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 $14,378,905 NA
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PROJECT AUTO
Statutory Operating Comparison of Selected Property/Casualty Companies(1)
($ 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 $19,755,047 NA
Avg. Investment Yield(2)
1990 5.67% 6.03% 7.03% 9.08% 3.81% 8.70% 5.62%
1991 6.28 6.27 6.70 8.69 3.87 8.28 5.68
1992 5.60 6.22 6.93 8.00 7.68 7.60 5.63
1993 5.34 6.04 6.48 8.42 3.99 7.17 5.18
1994 4.94 5.83 5.87 8.51 3.69 7.04 5.09
5-Year Average 5.57% 6.08% 6.60% 8.54% 4.61% 7.76% 5.44% 6.50%
Loss Ratio
1990 70.5% 75.2% 60.8% 61.4% 48.9% 65.4% 77.9%
1991 68.8 73.2 58.1 60.4 50.3 68.0 69.9
1992 75.9 87.2 58.3 63.8 55.5 63.8 69.6
1993 72.1 68.3 62.7 64.8 53.1 60.2 69.5
1994 72.8 75.5 64.7 61.6 54.5 64.7 76.1
5-Year Average 72.0% 75.9% 60.9% 62.4% 52.5% 64.4% 72.6% 64.8%
Expense Ratio(3)
1990 25.6% 36.6% 39.5% 43.0% 47.4% 41.4% 31.3%
1991 25.9 35.8 41.2 43.1 53.5 40.1 31.8
1992 25.2 35.6 41.1 43.0 46.7 39.8 31.8
1993 25.9 35.9 39.5 43.3 41.1 38.7 30.3
1994 24.4 36.4 37.7 41.3 37.9 38.7 31.3
5-Year Average 25.4% 36.1% 39.8% 42.7% 45.3% 39.7% 31.3% 39.2%
Combined Ratio
1990 96.1% 111.8% 100.3% 104.4% 96.3% 106.8% 109.2%
1991 94.7 109.0 99.3 103.5 103.8 108.1 101.7
1992 101.1 122.8 99.4 106.8 102.2 103.6 101.4
1993 98.0 104.2 102.2 108.1 94.2 98.9 99.8
1994 97.2 111.9 102.4 102.9 92.4 103.4 107.2
5-Year Average 97.4% 111.9% 100.7% 105.1% 97.8% 104.2% 103.9% 103.9%
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PROJECT AUTO
Statutory Operating Comparison of Selected Property/Casualty Companies(1)
($ 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.
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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.
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