Download - Geico - 1991 Annual Report
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CONTENTS
Financial Highlights
Letters to Shareholders
Insurance Issues
Selected Financial Data
Business Segments
Managements Discussion andAnalysis
Financial Statements
Directors and Officers
GEICO Corporation
One GEICO Plaza
Washington,D.C. 20076-0001Telephone (301) 986-3000
GEICO Corporation (the Corporation
Iy an insurance organization whos(sidiary, Government Employee
Company (GEICO), is a mdtiple-linecasualty insurer currently engaged i]
ferred-risk private passenger automol
for government employees and militz
and homeowners and other lines ofall qualified applicants. GEICO Gene
Company (GGIC), a subsidiary of Cprivate passenger automobile insul
ferred-risk applicants other than go~
ployees and military personnel. GEI(Company (GI), also a subsidiary of Cstandard-risk private passenger aumotorcycle insurance with emphasis
to military personnel. CriteritCompany (Criterion Casualty), a subwrites nonstandard-risk private pa!mobile insurance. Southern Herita
Company (SHIC), acquired by the C1991, writes preferred-risk auto and c
lines insurance through indepenMerastar Insurance Company (MIC),
by the Corporation in 1991, writes Fferred-risk auto insurance and other:
for individuals who are employeesemployer. Resolute Reinsurance Cor
sidiary of Resolute Group, Inc., in turof the Corporation, wrote property
reinsurance in the domestic and interkets until late 1987 when the Compa
writing new and renewal reinsureState Life Insurance Company (Gal
subsidiary of GEICO, offers consumeinsurance products. Criterion Li:
Company, a subsidiary formed by Gwrites structured settlement annuitie
erty and casualty affiliates.Employees Financial Corporation (G
sidiary of GEICO, engages in securand business lending, loan servicing i
banking. The Corporation and its susometimes referred to as the Compaport.
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IFINANCIAL HIGHLIGHTSPn thousands, except per share data)
1remiums ......................................................................et investment income (pretax) ................................et investment income (aftertax) ..............................Realized gains (pretm) ................................................Realized gains (afterta.x) .............................................Net income ....................................................................Weighted average shares (fully diluted) ..................
Net income per share ..................................................
Dividends paid per common share ...........................
Asets .............................................................................
Shareholders' equi~ ............................... ...... ... ..... .... ...
Common shares outstanding .....................................
Book value per share .................. .................................
Return on equity (three-year rolling),,,,., ..................
$ 1,888,368
$ 191,226
$ 161,510
$ 29,331
$ 19,389
$ 196,380
14,571
$ 13.48
$ 2.28
$ 4,085,839
$ 1,184,261
14,209
$ 83.34
24.6%
jHARE RESULTS PROPERTY AND CASUALTY
n Net Income
~ Aftefim Realized Gains
87 88 89 90 91
1991 1990 1989 1988 1987
POLICYHOLDERS SURPLUSAND GEICO CORPORATIONSHAREHOLDERS EQUITY(MILLIoNs OF DOLLARS)
q Shareholders Equity
q PolicyholdersSurplus
900
~
87 88 89 90 91
$ 1,692,518
$ 177,087
$ 152,456
$ 19,587
$ 13,002
$ 208,441
15,279
$ 13.64
$ 2.00
$ 3,575,940
$ 970,008
14,851
$ 65.32
27.8%
$ 1,621,361
$ 152,422
$ 134,862
$ 109,133
$ 73,754
$ 213,053
15,504
$ 13.74
$ 1.80
$ 3,434,372
$ 898,135
15,176
$ 59.18
29,7%
VALUE PER SHAREAND RETURN ON EQUITY
q Book Value Per Share
q Return on Equity(three-yearrolling)
$90
75A
87 88 89 90 91
$ 1,548,989
$ 143,502
$ 125,441
$ 82,351
$ 54,595
$ 189,038
15,861
$ 11.92
$ 1.64
$ 3,060,551
$ 707,390
15,440
$ 45.82
34.1%
$ 1,429,208
$ 130,691
$ 116,200
$ 42,019
$ 27,731
$ 177,914
16,673
$ 10.67
$ 1.36
$ 3,012,541
$ 634,678
16,199
$ 39.18
37.7%
COMBINED Loss ANDEXPENSE RATIOS(AFTER POLICYHOLDER DIVIDENDS)
q Industry(Source A.M.Best,1991estimated)
~ GEICO Corporation(1987and1988adjustedfor theeffectof convertingtosix-monthpremiums)
110%
87 88 89 90 91
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To OUR SHAREHOLDERS
I usually commence this letter by describing in
some detail the financial results summarized on
page 1, This year I will start with something more
important,
Over the past several years, we have made
steady progress in improving customer service, as
noted in the adjoining charts. But we believe much
more improvement is possible if we make a total
commitment to achieve significant and measurable
gains in the quality of our service as perceived by
our customers. To accomplish this, we have
launched a Quality Improvement Process intended
to develop throughout our organization a total
commitment to be the best at what we do and
then find ways to do it better. We believe this total
commitment to quality is imperative if we are to
remain competitive.
Last year I wrote you about the five business
disciplines which we have followed for many
years. We will continue to adhere to all of those
disciplines which include: maintain a disciplined
balance sheet, manage to an underwriting profit,
be the low cost provider, and invest for total re-
turn. But increased emphasis will be on the first,
which is: be fanatics for good service.
Some might say that we cant afford to empha-
size service and quality and also be the low cost
provider of insurance services. We dont think we
can afford not to be the best. A total quality ap-
proach to our business will lead to better satisfied
policyholders and associates, reduced costs, and an
improved bottom line. That resdt surely leads to
greater value for our shareholders. We believe all
three of these constituent groups will see increas-
ingly positive restik from our efforts as we make
progress in our total quality improvement process.
It is not obvious but 1991 was one of our best
years ever as we built shareholder value. Net in-
come per share was $13.48 compared to $13.64 in
1990 and net income was $196.4 million, down
from $208.4 million in the prior year. Realized in-
vestment gaim after tax of $19.4 million were mod-
estly ahead of 1990 but unrealized appreciation of
$183.1 million at the end of 1991 was far ahead!Unrealized appreciation, of course, is reflected on-
ly in shareholders equity, not in the income state-
ment.
The comparison of financial results between the
past two years is further confused by the fact that
our 1990 results benefited from a one-time fresh
start tax adjustment. This adjustment cosmet
ly increased 1990 income by $22.2 million or $
per share. Also 1991 results include charges fo
centive compensation that may be paid out ir
ture years and which fluctuate with the Compa
Common Stock price or investment performs :
Those charges, which reflect our conservative
counting practices, were $1.22 per share in 1
and $.26 per share in 1990.
The operating and financial results of ou r
property and casuaIty companies were outsta
ing. They include results for the part of the ]
that we owned Southern Heritage and Mera:
Insurance Companies, as described on page 11.
believe both of these companies will become m
vahrable in the future, Our property and casut
insurance operations achieved a consolida
statutory underwriting ratio of 96.4%, after poli
holder dividends, as they also did in 1990. We
not routinely pay dividends to policyholders as
strive for the lowest possible premium rate e
year, but we chose to decline a policyholder d
dend for certain states in 1991 because underw
ing results were more favorable than we had an
ipated. This shotid result in improved policy ~
sistency and new sales in these states.
The Companys auto insurance results benefi
from the publics improved driving performs
resulting in little or no growth in auto claims
quency. Paradoxically, weather-related incur
losses for property insurance were high beta
1991 was our second worst year for catastro]
losses.
Property and casualty earned premiums w
up 11.6% over 1990, a result of strong pol
growth with only modest rate increases. Po]
growth for all voluntary product lines combil
(but excluding the policies of the two purcha
subsidiaries) was 9.0% for the 12 months end
December, 1991. This was the strongest pol
growth that we have experienced in recent yea
Aftertax net investment income was $161.5 I
lion, up 5.9% from $152,5 million in 1990, Fall
interest rates and declining yields contribute
I
the modest growth in investment income. We m
sure investment management performce on a
tal return basis that includes realized and unre
ized gain or loss over a rolling three-year peri
Vice Chairman Lou Simpson discusses our o
standing investment results in his letter.
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SATISFACTION WITHGEICO POLICYSERVICE
90
80
70
60
50
87 88 89 90 91
SATISFACTION WITHGEICO CLAIM SERVICE
87 88 89 90 91
Return on equity (ROE) was 24.6%, also mea-
sured over a three-year period. Shareholders equi-
ty increased 22.1% over 1990, to $1,184.3 million,
largely because of the significant increase in unre-
alized appreciation in the portfolio.
As we reported earlier, GEICO Corporation is-
sued $100 million of 9.15% Debentures due 2021
for the purpose of paying off higher-rate long-term
debt and to pay maturing short-term debt,
Standard & Poors and Moodys both assigned fa-
vorable ratings. At the end of 1991, your
Companys long-term corporate debt to capital ra-
tio was an acceptable 14.5%, down slightly from
the 1990 level.
We negotiated with a prospective buyer for our
life company, Garden State Life Insurance
Company, but the letter of intent expired in late
1991. Negotiations were resumed in February 1992.
We chartered Criterion Life Insurance Company at
year-end 1991 to assume the structured settlement
annuity business of Garden State.
No prospective buyer has been located for
GEFCO, our finance company; consequently, we
continue to shrink that business. GEFCO had a net
10SSof $748thousand in 1991.
Each year since 1988 I have found it necessary to
discuss in this letter the situation in California. We
have discussed the causes of Proposition 103 and
the confusing deve~opments since the Proposition
was passed. An elected insurance commissioner
took office January 1, 1991. His most recent arbi-
trary act was to issue orders to individual
California auto insurers to make policyholder re-
funds based on 1989 premiums. GEICO received
an order to refund $56.2 million of premium, or
39.4% of the total premium earned by GEICO in
California for 1989. That proposed refund amount
exceeds the total underwriting profit from
GEICOS entire U.S. operations in 1989. GEICO
will pursue all available legal remedies to resist
this unreasonable order. You may remember that
the Corporation in 1989 and 1990 took charges
against earnings totalling $27.7 million for the po-
tentiaf refund of premium in California. These 1991
results do not include any additional charge
against earnings for that purpose.
On February 26,1992 your Board of Directors in-
creased the quarterly cash dividend on Common
Stock to $.75 per share, up 31% over the dividend
paid in each of the previous four quarters. The
Board of Directors also proposed an increase in the
number of authorized shares of Common Stock
from 60 million to 150 million and a five-for-one
stock split. The proposed increase in authorized
shares is subject to shareholder approval at the
Corporations annual meeting.
We were deeply saddened by the death on July
30,1991 of William K. Jacobs, Jr., a member of our
Board of Directors from 1948 until his retirement in
1978, and ~ honorary director since then. Bill will
be greatly missed,
We discuss on pages 6 and 7 several auto/traffic
safety and loss reduction issues, We do this to help
inform as many people as possible about these im-
portant issues and to let you know about critical
activities in which we invest both time and money.
OUTLOOK FOR 1992 AND BEYOND. While the
outlook for the national economy is less than rosy,
we believe we can continue to achieve restits gen-
erally satisfactory to you. We are always subject to
a long list of uncertainties, such as the economy
and its impact on driving, accident frequency and
severity, new car sales and other events such as
weather-related catastrophes that can affect our re-
sults. And to the list of uncertainties you can add
actions or inactions by regulators and legislators
and demands by consumers. Despite these chal-
lenges we have set goals to achieve an underwrit-
ing gain in 1992, modest policy and premium
growth and a total commitment to improving ser-
vice to our customers... who support us all.
William B. Snyder
Chairman
February 26,1992
e
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INVESTMENTS
Your Investment portfolio had a good 1991.
Aftertax total return on the total portfolio was
14.7%. GEICOS common stocks had an aftertax to-
tal return of 36.5% compared with the S&Ps 20,3%.
The fixed income portion also performed well even
though the bond portfolio has a relatively short
maturity. Over the last three years GEICOS com-
mon stocks returned 17.1 % annually after tax, com-
pared to 12.9% for the S&P 500, while the entire
portfolio appreciated 10.3% annually after tax. We
realized $19.4 million after tax in capital gains in
1991 while the unrealized gain (net of deferred tax-
es) for the equity portfolio increased $155.7 million.
Aftertax investment income grew 5.9% to $161.5
million, although we used $116.3 million to repur-
chase GEICO Corporation shares. The largest net
changes in the portfolio during the year were the
net purchases of $347 million of U.S. Treasuries
and Agencies and the net sales of $62 million of
common stocks.
In the 1986 GEICO annual report, I outlined our
investment approach toward investing in equities.
Since 1986, financial markets have been turbulent,
with stocks particularly volatile as characterimd by
major one day declines in 1987 and 1989.
Leveraged buy-out transactions have all but disap-
peared, the junk bond market has had severe prob-
lems, corporate bankruptcies have multiplied, and
real estate values (particularly commercial) have
declined sharply. Despite these dramatic and pro-
found changes, this investment team believes those
1986 principles remain relevant. We have reprint-
ed them on the opposite page.
While these guidelines are easy to write about in
theory, we find it challenging to apply them in
practice today. Most high return businesses sell at
a very high price relative to earnings and long term
growth prospects, and as a resdt there is a shrink-
ing number of investments which meet our criteria.
Our response to the current environment has
been to further emphasize our most basic princi-
ples of concentration, independent thinking, and
long-term ownership. GEICOS portfolio now con-
sists of eight stocks compared to thirty-six stocks
five years ago. Ordy two of the stocks are part of
the Dow Jones industries and our largest holding
was not part of the S&P 500 until year-end 1991.
Finally, of the eight stocks in the portfolio at year-
end, weve owned six for at least two years, Since
we dont see many good investment ideas, we
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:OMMON STOCK ANNUALIZEDOTAL RATE OF RETURNiI=TER TAXrHIRTY -SIX MONTHS ENDING)
I
9 GEICO Comons
R sar 500
87 88 89 90 91
INVESTED ASSETS(MILLIONS OF DOLLARS)
H Short-term Investments
q Equity Securities
n Fixed Maturities
87 88 89 90 91
GEICOS EQUITYINVESTMENT APPROACH
Since the performance of GEICOS common stock
portfolio has contributed significantly to the in-
crease in value of your investment in GEICO, I
thought you might be interested in learning more
about our investment approach. In an abbreviated
form, here are some of our guidelines:
1. ~irzk independerztly, We try to be skeptical of con-
ventional wisdom and to avoid the waves of irra-
tional behavior and emotion that periodically en-
gulf Wall Street. Such behavior often leads to ex-
cessive prices and, eventually, permanent loss of
capital. We dont ignore unpopular companies. On
the contrary, such situations often present the
greatest opporttities.
2. Invest in high-return businesses run for the share-
holders. Over the long run appreciation in share
prices is most directly related to the return the
company earns on its shareholders investment.
Cash flow, which is more difficult to manipulate
than reported earnings, is a useful additional yard-
stick. Companies that cannot earn positive free
cash flow (cash flow after capital expenditures,
working capital needs and dividends) chew up
owners equity and are continually forced to raise
new capital. We try to identify companies that ap-
pear able to sustain above-average profitability.
Most companies cannot because competition pre-
vents it.
Many executives have priorities other than max-
imizing the value of their enterprises for owners,
such as expanding corporate empires. At GEICO
we ask the following questions in evaluating man-
agement 1. Does management have a substantial
stake in the stock of the company? 2. Is manage-
ment straightforward in dealings with the owners?
(We look for managers who treat us as partners in
the business and inform us frankly of problems as
well m good news.) 3. Is management wi~ing to di-
vest unprofitable operations? 4. Does management
use excess cash to repurchase shares?
The last may be the most important. Managers
who run a profitable business often use excess cash
to expand into less profitable endeavors.
Repurchase of shares is in many cases a much
more advantageous use of surplus resources. At
GEICO, we practice what we preach we concen-
trate on our core business, and over the past eight
years have reduced shares outstanding from over
34 million to under 17 million,
3. Pay only a reasonable price, even for an excellent
business. We try to be disciplined in the price we
pay for ownership even in a demonstrably superi-
or business. Even the worlds greatest business is
not a good investment if the price is too high. The
ratio of price to earnings and its inverse, the earn-
ings yield, are useful gauges in valuing a company,
as is the ratio of price to free cash flow. A helpful
comparison is the earnings yield of a company ver-
sus the return on a risk-free long-term United
States Government obligation,
4. Invest for the long-term. Attempting to guess
short-term swings in individual stocks, the stock
market or the economy is not likely to produce
consistently good results. Short-term develop-
ments are too unpredictable. On the other hand,
shares of quality companies run for the sharehold-
ers stand an excellent chance of providing above-
average returns to investors over the long-term.
Furthermore, moving in and out of stocks fre-
quently has two major disadvantages that will sub-
stantially diminish results: transaction costs and
taxes. Capital will grow more rapidly if earnings
compound with as few interruptions for commis-
sions and tax bites as possible,
5. Do not diversify excessively. An investor is not like-
ly to obtain superior results by buying a broad
cross-section of the market the more diversifica-
tion, the more performance is likely to be average,
at best. We concentrate our holdings in a few com-
panies that meet our investment criteria in the be-
lief that we have a chance at superior results only
if we take risks intelligently, when the risk-reward
ratio is favorable to us. Good investment ideas,
that is, companies that meet our criteria, are diffi-
ctit to find. When we think we have found one, we
make a large commitment. The five largest hold-
ings at GEICO account for over 50% of your equity
portfolio.
(Reprintedflom the 1986 GEICO Corporation Annual
Report to Shareholders)
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Insurance IssuEs
NO-FAULT AUTO INSURANCE. A recent
study by Rand Corporations Institute for Civil
Justice confirmed what the insurance industry has
said for years: a carefully designed no-fault auto
insurance system can cut auto insurance costs sig-
nificantly.
Under no-fault, an insured driver is compensat-
ed for accident-related injuries by his or her own
insurance company, regardless of fault in a crash.
In return for this guaranteed benefit, the insured
person gives up the right to sue unless there are se-
rious injuries.
By keeping accident injury cases out of the
courts, auto ins urance costs are reduced, premi-
ums are contained, claims are settled more quickly
and accident victims are not forced to share 30 per-
cent or more of their settlements with attorneys
and pay other significant costs.
GEICO supports no-fault insurance as the best
solution to rising auto insurance premiums.
INSURANCE FRAUD. If you think of insurance
fraud as a victimless crime, think again. Phoney
insurance claims cost an estimated $16 billion dol-
lars annually. Who foots the bill? You and every
.
other consumer who must pay higher auto in
ante premiums to cover the cost.
GEICO and other insurers have established
cial investigation units to detect and prevent
ment of fraudulent claims. But their power tc
ter criminal activity stops there. Thats 1
GEICO encourages legislatures to establish f]
bureaus within their state insurance departm[
Fraud bureaus have prosecutorial powers, the,
giving anti-fraud efforts the force of law.
AIR BAGS. After more than two decade
prodding by insurers and safety organizations,
frontal air bags in all vehicles will become a re
by 1998. The transportation bill passed
Congress in 1991 mandates driver- and passen
side air bags in all passenger cars by Septemb
1997, and in all light trucks and vans by Septen
1,1998.
Despite some isolated problems with air ba[
duced skin abrasions and minor hot gas burrobags combined with seat belts continue to pro
the best crash protection available, Recent stu
by the Insurance Institute for Highway Sa
found that driver deaths in air bag-equipped
..~-~~.992 MODELS WITH AIR BAGS
o~tie~ollowing 1992 model cars have driver-side air bags as standard equipment.~ose w~ti optional driver-side W bags are marked with a cross (~).
k--
.c_ma_Legend*-->Acura NSX
CmLVigortiomeo, all models
~~udi.aUmodels*E~, all models
==B_~t _~y,all modelsB_uick LeSabre, Park Ave.
til~ Riviera@ck Roadmaster
Cadillac, all modelsexcept Brougham
Chevrolet BerettaChevrolet Camaro~evrolet CapriceChevrolet CorsicaChevrolet CorvetteChrysler 5th AvenueChrysler ImperialChrysler LeBaron
Chrysler New YorkerChrysler Town & CountryDodge CaravanDodge DaytonaDodge DynastyDodge Grand CaravanDodge ShadowDodge SpiritDodge StealthFord Aerostar
Ford Crown Vie{Ford MustangFord Taurus*Ford TempoeGeo Metro ConvGeo StormHonda AccordHonda CivicHonda Prelude*Infiniti M30
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~28percent lower than in cars equipped only ~[manual lap-harness safety belts.
31C0 encourages anyone purchasing anew car
mist on an air bag-equipped model. The chart
~w shows which models have air bags for 1992.
?UNK DRIVING. Despite years of anti-drunk
ving campaigns, nearly half of all traffic fatali-
;: some 22,000 each year are alcohol-relat-
But results are better than before.
One proven way to help get drunks off the road
d keep them off is administrative license revoca-