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GEICO GENERAL INSURANCE COMPANY
EXAMINATION: DECEMBER 31, 2004
NAIC NUMBER 35882
TABLE OF CONTENTS
Page
Salutation......................................................................................................................................1
Scope of Examination ..................................................................................................................2
Status of Prior Examination Findings .........................................................................................3
History ..........................................................................................................................................3
General .................................................................................................................................3
Capital Stock........................................................................................................................4
Dividends to Stockholder ....................................................................................................4
Management.........................................................................................................................4
Board of Directors.......................................................................................................4
Officers ........................................................................................................................5
Committees..................................................................................................................6
Conflicts of Interest .............................................................................................................6
Corporate Records ...............................................................................................................6
Affiliated Companies ...................................................................................................................7
Intercompany Agreements...........................................................................................................8
Fidelity Bond and Other Insurance..............................................................................................9
Pension, Stock Ownership and Insurance Plans .........................................................................9
Statutory Deposits ..................................................................................................................... 10
Territory and Plan of Operation................................................................................................ 11
Insurance Products and Related Practices................................................................................ 12
Reinsurance ............................................................................................................................... 12
Accounts and Records............................................................................................................... 13
Financial Statements ................................................................................................................. 14
Balance Sheet.................................................................................................................... 15
Assets........................................................................................................................ 15
Liabilities, Surplus and Other Funds....................................................................... 16
Statement of Income......................................................................................................... 17
Capital and Surplus Account............................................................................................ 18
Analysis of Examination Changes to Surplus ................................................................. 20
Growth of the Company................................................................................................... 21
Notes to Financial Statements .................................................................................................. 22
Comments and Recommendations ........................................................................................... 23
Subsequent Events .................................................................................................................... 24
Conclusion................................................................................................................................. 25
Signatures .................................................................................................................................. 26
Baltimore, Maryland
January 12, 2006
Honorable Alfred W. Gross
Chairman, NAIC Financial Condition (E) Committee
Insurance Commissioner
SCC Bureau of Insurance Commonwealth of Virginia
1300 East Main Street
Richmond, Virginia 23219
Honorable Ann Womer Benjamin
Secretary, Midwestern Zone, NAIC
Director of Insurance
Ohio Department of Insurance
2100 Stella Court
Columbus, Ohio 43215
Honorable Julie M. Bowler
Secretary, Northeastern Zone, NAIC
Insurance Commissioner
Commonwealth of Massachusetts
Division of Insurance
One South Station, 5th Floor
Boston, Massachusetts 02110
Honorable Eleanor Kitzman
Secretary, Southeastern Zone, NAIC
Insurance Commissioner
State of South Carolina Department of Insurance
300 Arbor Lake Drive, Suite 1200
Columbia, South Carolina 29223
Honorable Gary Smith
Secretary, Western Zone, NAIC
Insurance Commissioner
State of Idaho Department of Insurance
700 West State Street
Boise, Idaho 83720
Honorable R. Steven Orr
Insurance Commissioner
Maryland Insurance Administration
525 St. Paul Place
Baltimore, Maryland 21202-2272
Dear Sirs and Madames:
In compliance with your instructions and in accordance with Section 2-205 of the
Insurance Article of the Annotated Code of Maryland, an association examination has been
conducted of the financial condition and activities of the
GEICO GENERAL INSURANCE COMPANY
(hereinafter called the Company), at its home offices located at 5260 Western Avenue,
Chevy Chase, Maryland 20815-3799, and the following Report on Examination is
submitted.
SCOPE OF EXAMINATION
This examination, covering the period from January 1, 2000 to December 31, 2004,
including any material transactions and/or events noted occurring subsequent to December
31, 2004, was conducted under the association plan of the National Association of Insurance
Commissioners (NAIC) by examiners of the Maryland Insurance Administration
representing the Northeastern Zone of the NAIC. The Southeastern, Midwestern and
Western Zones were invited to participate, but did not respond to the examination call.
Concurrent with this examination, we also examined the following companies in the
GEICO Corporation Group:
Government Employees Insurance Company (GEICO)
GEICO Indemnity Company
GEICO Casualty Company
Examination reports for those companies will be issued under separate cover.
Our examination was conducted in accordance with examination policies and standards
established by the Maryland Insurance Administration and procedures recommended by the
NAIC and, accordingly, included such tests of the accounting records and such other
procedures as we considered necessary in the circumstances.
Our examination included a review of the Company’s business policies and practices,
management and corporate matters, a verification and evaluation of assets and a
determination of the existence of liabilities. In addition, our examination included tests to
provide reasonable assurance that the Company was in compliance with applicable laws,
rules and regulations. In planning and conducting our examination, we gave consideration to
the concepts of materiality and risk, and our examination efforts were directed accordingly.
The Company was audited annually by an independent public accounting firm. The
firm expressed unqualified opinions on the Company’s financial statements for calendar
years 2000 to 2004. We placed substantial reliance on the audited financial statements for
2
calendar years 2000 through 2003, and consequently performed only minimal testing for
those periods. We concentrated our examination efforts on the year ended December 31,
2004. We reviewed the working papers prepared by the independent public accounting firm
related to the audit for the year ended December 31, 2004, and directed our efforts to the
extent practical to those areas not covered by the firm’s audit.
STATUS OF PRIOR EXAMINATION FINDINGS
There are no prior exam findings for the report dated October 20, 2000, which covered
the period from January 1, 1995, to December 31, 1999.
HISTORY
General:
The Company was incorporated on March 27, 1978 as Equi-Gen Insurance Company
under the laws of Iowa to act as the vehicle for the transfer of corporate domicile of the
Equitable General Insurance Company from Fort Worth, Texas to Des Moines, Iowa,
effective December 31, 1978. Equitable General Insurance Company was incorporated
under the laws of Texas on May 15, 1934, under the name Associated Casualty Company,
and began business the following day. Several name changes ensued, with the present name
being adopted on September 29, 1982. Complete financial control of the Company was
acquired on March 31, 1982 by Government Employees Insurance Company from the
Equitable Life Assurance Society. On June 22, 1989, the Company was reincorporated and
redomesticated under the laws of Maryland as a stock property and casualty insurer. As of
December 31, 1994, the Company’s ultimate parent was GEICO Corporation, which was a
publicly owned holding company.
On August 25, 1995, the boards of directors of Berkshire Hathaway Inc. (Berkshire) and
GEICO Corporation approved an Agreement and Plan of Merger for Berkshire to acquire
GEICO Corporation. At the same time, HPKF Inc., an indirect subsidiary of Berkshire,
would be merged into GEICO Corporation, with GEICO Corporation as the surviving entity.
Following the merger, GEICO Corporation became an indirect wholly owned subsidiary of
Berkshire. The agreement was subject to the approval of state insurance regulators as well
as the holders of a majority of GEICO Corporation’s shares not previously owned by
Berkshire. The agreement was approved by the Maryland Insurance Administration
effective October 13, 1995, and the merger was consummated on January 2, 1996.
The primary purpose for which the Company was formed was to write insurance against
any kind of loss, damage or liability properly a subject of insurance, if such insurance was
not disapproved by the Maryland Insurance Commissioner as being contrary to the law or
public policy. Most new business was automobile liability and physical damage insurance
3
written for preferred-risk individuals who were neither government employees nor military
personnel.
Capital Stock:
The Company’s Articles of Redomestication and Reincorporation authorized the
Company to issue 357,142 shares of common stock with a par value of $28 per share. As of
December 31, 2004, the Company had issued 110,000 shares of common stock with an
aggregate par value of $3,080,000. All of the outstanding common stock was owned by
Government Employees Insurance Company.
Dividends to Stockholder:
During the examination period the following ordinary cash dividends were paid:
December 31, 2000 $5,900,000
December 31, 2001 $5,800,000
December 31, 2002 $5,800,000
December 31, 2003 $5,300,000
December 31, 2004 $5,700,000
Dividends were paid to Government Employees Insurance Company for all years under
examination. In addition, the Company did not declare or pay any extraordinary dividends
during the examination period.
Management:
The following persons were serving as the Company’s Directors as of December 31,
2004:
Name and Address Principal Occupation
Olza M. Nicely, Chairman President and Chief Executive Officer,
Great Falls, Virginia GEICO and GEICO Corporation
Charles R. Davies Senior Vice President and General Counsel,
Warrenton, Virginia GEICO and GEICO Corporation
John J. Geer, Jr. Vice President,
Vienna, VA GEICO
James M. Hitt Vice President,
Herndon, VA GEICO
Donald R. Lyons Senior Vice President,
4
Potomac, MD GEICO
Robert M. Miller Senior Vice President,
University Park, TX GEICO
William E. Roberts Executive Vice President,
Cabin John, Maryland GEICO
David L. Schindler Senior Vice President,
Rockville, Maryland GEICO
Thomas M. Wells Senior Vice President and Chief Financial
Brookeville, Maryland Officer,
GEICO and GEICO Corporation
The following persons were serving as the Company’s principal officers as of
December 31, 2004:
Olza Minor Nicely President, Chief Executive Officer and
Chairman of the Board
Thomas Milton Wells Chief Financial Officer & Senior Vice
President
Jess C. Reed Chief Information Officer & Group Vice
President
Charles G. Schara Treasurer
Jan C. Stewart Secretary & Assistant Vice President
William Evan Roberts Executive Vice President
Charles Robinson Davies General Counsel, Senior Vice President &
Assistant Secretary
Donald R. Lyons Senior Vice President
Robert M. Miller Senior Vice President
David Leon Schindler Senior Vice President
James G. Brown Vice President
Michael H. Campbell Vice President of Corporate Financial
Reporting
John J. Geer, Jr. Vice President
James M. Hitt Vice President
Lily S. Hopkins Vice President
John J. Izzo Vice President
S. Gregory Kalinsky Vice President
Carl J. Kelle Vice President
Warren A. Klawitter Vice President & Actuary
Charles D. Kline, Jr. Vice President & Actuary
William J. McDonald Controller
5
James F. Nayden, Jr. Vice President & Legislative Counsel
Nancy L. Pierce Vice President
David H. Pushman Vice President
George W. Rogers Vice President
Rynthia M. Rost Vice President
Joseph R. Thomas Vice President
Edward W. Ward, III Vice President
Committees:
As of December 31, 2004, the Company’s Board of Directors had not appointed any
committees.
Conflicts of Interest:
Directors, officers and responsible employees regularly responded to conflict of interest
questionnaires. If possible conflicts were disclosed, they were scrutinized further by
Company officials. Our review of the questionnaires for the years under examination
indicated no reported conflicts. In addition, we did not note any potential conflicts of
interest during our examination.
Corporate Records:
We reviewed the minutes of the meetings of the Board of Directors for the period under
examination. Based on our review, it appeared that the minutes documented the Company’s
significant transactions and events, and that the Directors approved those transactions and
events.
6
AFFILIATED COMPANIES
As previously noted, the Company’s ultimate parent was Berkshire Hathaway Inc.
(Berkshire), a publicly traded holding company owning subsidiaries engaged in a number of
diverse business activities, including significant insurance activities. According to the
Company, there is one stockholder of Berkshire who owns or controls 10 percent or more of
the stock of Berkshire. As of December 31, 2004, Warren E. Buffett owned and controlled
approximately 31% of Berkshire. Portions of the holding company structure as of December
31, 2004, are depicted in the following chart:
Domiciliary
Jurisdiction
BERKSHIRE HATHAWAY INC. Delaware
GEICO CORPORATION Delaware
Government Employees Insurance Company (GEICO), (I) Maryland
GEICO General Insurance Company, (I) Maryland
GEICO Indemnity Company, (I) Maryland
GEICO Casualty Company, (I) Maryland
Criterion
Insurancecy, Inc. Wholly owned TX
NOTE: all subsidiaries were wholly owned subsidiaries.
(I) Denotes insurance company
7
INTERCOMPANY AGREEMENTS
Investment Advisory Agreement:
Effective January 1, 1990, the Company entered into an investment advisory agreement
with GEICO Corporation (Corporation) whereby Corporation agreed to act in the capacity of
an advisor by formulating an investment policy and performing the management and
investment of the Company’s assets. Upon written authorization from the Company,
Corporation could effect securities transactions under guidelines previously authorized by
the Company. Corporation’s duties included the performance of investment data processing
services, financial market analysis, valuation of prospective assets, price negotiation for
purchases and sales of assets and economic forecasts. Fees for these services are paid under
the below-mentioned “Investment Advisory Fee Agreement”.
Investment Advisory Fee Agreement:
Effective January 1, 1996, the Company entered into an investment advisory fee
agreement with GEICO Corporation (Corporation) whereby, for services rendered under the
aforementioned “Investment Advisory Agreement”, the Company paid Corporation a
quarterly fee equal to .025 percent of the statutory value of the Company’s investment
portfolio excluding real estate and cash. These fees were calculated on the basis of the
Company’s securities portfolio at the end of the second preceding quarter. Investment
advisory fees were paid in advance from the Company to Corporation at the beginning of
each quarter and amounted to $127,528 and $115,647 for the years ending December 31,
2004 and 2003, respectively.
Consolidated Federal Income Tax Allocation Agreement:
The Company and the other entities comprising the GEICO Corporation holding
company system were participants in an agreement, dated June 30, 1988 and amended June
17, 1998, for the allocation of liability due to the consolidated federal income tax return of
the GEICO Corporation group of companies.
The signatories to this agreement agreed to allocate such liability among members of
the group in conformance with appropriate sections of the Internal Revenue Service
Regulations. Under these Regulations, the consolidated tax liability was allocated among the
members of the group in the ratio that each member’s separate return tax liability bore to the
sum of the separate return tax liability of the members. In the event of a net operating loss,
capital loss or carry forward or carry-back, the group credited to member companies
sustaining the loss the amount of tax by which the consolidated tax liability of the group
members has been reduced by reason of the inclusion of any such loss in the consolidated
return. If taxable income, special deductions or credits reported in a consolidated federal
income tax return were revised by the Internal Revenue Service or other appropriate
authority, a recalculation of the tax liability for all parties to the Agreement was made.
8
Intercompany Charge Agreement:
The Company had no employees. All needed services (e.g., maintenance of accounting
records, underwriting, etc.) were performed by employees of Government Employees
Insurance Company. The Company would be charged for these services under the
provisions of the Intercompany Charge Agreement. As indicated in the “Reinsurance”
section of this report, the Company cedes 100 percent of its direct business to its parent.
Under the reinsurance agreement, the Company receives a ceding commission from its
parent adequate to cover all expenses related to its business ceded. Since all of the
Company's business was ceded 100 percent to its parent, and all of the Company's expenses
were paid by its parent under the reinsurance agreement, no additional payments were made
in 2004 under the Intercompany Charge Agreement.
The Intercompany Charge Agreement is a document that sets forth the procedures and
methods to be used for the allocation of expenses among the members of the GEICO
Corporation group. The agreement stated that any transactions under the Intercompany
Charge Agreement will be handled in accordance with the method of allocation described in
“Uniform Accounting: Instruction for Uniform Classification of Expenses,” as set forth in
the NAIC’s Financial Condition Examiners Handbook.
All of the above intercompany agreements were approved by the Maryland Insurance
Administration.
FIDELITY BOND AND OTHER INSURANCE
The Company and other of its affiliates were named insureds under a fidelity bond in
the amount of $5,000,000. The fidelity bond coverage exceeded the minimum suggested by
the NAIC for the Company. Our calculation took into account the four insurers of the
GEICO Corporation group of companies. In addition, the Company had other insurable
risks (e.g., business property). Based on our review, the Company’s insurance coverages for
these risks appeared to be adequate.
PENSION, STOCK OWNERSHIP AND INSURANCE PLANS
GEICO Corporation and its subsidiaries had established a non-contributory defined
benefit pension plan covering substantially all full-time and qualifying part-time employees
who were at least twenty-one years old and had completed one year of service. The plan
provided for payment based on salary and years of service and estimated social security
benefits at the age of retirement. Annual contributions to the plan were determined on an
actuarial basis and were based on amounts, which could be deducted for federal income tax
purposes. The Company made no contributions to the plan and did not recognize any
pension expense in the years under examination since the plan was adequately funded in
9
accordance with the Company’s policy. The accumulated benefit obligation is included with
Government Employees Insurance Company.
Other benefits provided by GEICO Corporation and its subsidiaries included:
1. A defined contribution profit sharing plan (401(k)) for which all full-time and
qualifying part-time employees were eligible. Eligible employees could
participate in the 401(k) portion immediately after being hired by making
contributions, and were eligible to participate in the Company contribution
portion after completing one year of service. Prior to July 1, 2000, employees
were also required to be at least 21 years of age to be eligible for the plan.
2. Medical, dental, accidental death and dismemberment, long term disability and
life insurance coverages for all full-time employees. The Company contributed
75 percent of the employees’ medical premiums, 70 percent of the employees’
dental premiums, 100 percent of the accidental death and dismemberment
premiums and 100 percent of the premiums for basic long term disability and
life insurance coverages. Employees were eligible to purchase optional long
term disability and life insurance coverage at their own expense.
Postretirement Benefits:
In addition to pension benefits, certain health care and life insurance benefits are
provided for certain employees who retire under the pension plan. The accumulated benefit
obligation is included with Government Employees Insurance Company.
Stock Ownership Plans:
The Company did not have any stock ownership plans.
STATUTORY DEPOSITS
In compliance with Section 4-106 of the Insurance Article of the Annotated Code of
Maryland, as of December 31, 2004 the Company had deposited in trust with the Maryland
State Treasurer bonds with a total par value of $3,300,000 and a market value of
$3,633,372. These funds were held for the protection of all of the Company’s policyholders
and creditors.
10
In addition, as of December 31, 2004 the Company had bonds on deposit with other
jurisdictions as follows (each deposit was for the protection of the policyholders in that
jurisdiction):
Par Value Market Value
California $ 135,000 $ 156,630
Georgia 150,000 174,033
Louisiana 100,000 100,844
Massachusetts 200,000 222,056
New Hampshire 15,000 16,654
New Mexico 350,000 406,077
North Carolina 350,000 352,954
Oregon 275,000 319,061
Total $1,575,000 $1,748,309
TERRITORY AND PLAN OF OPERATION
As of December 31, 2004, the Company was authorized to transact the business of
insurance in the District of Columbia and all fifty states of the United States. The Company
wrote direct business during 2004 in all of these jurisdictions except for Hawaii,
Massachusetts, Michigan, New Jersey, North Carolina and South Carolina. The majority of
the Company’s direct business in 2004 was written in the states of California (6%),
Connecticut (3%), Florida (18%), Georgia (3%), Maryland (7%), New York (23%), Texas
(7%) and Virginia (5%). As indicated in the “Reinsurance” section of this report, the
Company cedes 100 percent of its business to its parent.
The Company’s major product was automobile insurance, which represented all of its
direct premiums written during 2004. The Company markets this product at preferred rates
for individuals who were neither government employees nor military personnel.
Sales of the Company’s product are mainly through the means of telephone, mail and
the internet. A small number of exclusive agents were also utilized, primarily around military
bases. Regional and branch offices were maintained that could quote premium rates and
issue binders.
11
INSURANCE PRODUCTS AND RELATED PRACTICES
The Maryland Insurance Administration’s Property and Casualty Section’s Market
Conduct Unit conducted a market conduct examination of the GEICO affiliated entities,
Government Employees Insurance Company, GEICO General Insurance Company,
GEICO Indemnity Company, and GEICO Casualty Company, for the period covering
September 1, 2002 through August 31, 2003. The market conduct examination report,
which was issued on April 29, 2005, included reviews of the Company’s sales and
advertising, agent licensing, underwriting practices, policy forms, rating, claims
processing and complaint handling practices and procedures. Our review of the market
conduct report indicated no adverse findings that would have a significant impact on the
financial condition of the Company as of our examination date.
During our examination, we did not review the following market conduct-related areas:
Policy Forms
Fair Underwriting Practices
Advertising and Sales Materials
Treatment of Policyholders:
Claims Processing (Timeliness)
Complaints
REINSURANCE
Assumed Reinsurance:
The Company assumed reinsurance premiums totaling ($141,000) during 2004 and, as
of December 31, 2004, had loss and loss expense reserves for assumed business totaling
$35,876,036.
With the exception of a small amount of business assumed from the New Hampshire
Reinsurance Facility, a mandatory participation pool, the Company did not have any active
in-force assumed reinsurance treaties.
Ceded Reinsurance:
During 2004, the Company ceded reinsurance premiums totaling $3,907,383,000 and
had recorded reinsurance balances recoverable totaling $3,101,923,000 including
$1,034,130,000 for ceded unearned premiums and $2,067,782,000 for loss and loss
adjustment expense reserves, of which $1,878,895,000 was for losses and $188,887,000 for
loss adjustment expenses. If the reinsurers were not able to meet their obligations under the
agreements, the Company would be liable for any defaulted amounts. The Company did not
report any ceded reinsurance premiums payable to these same reinsurers.
12
With the exception of a small amount of business ceded to the New Hampshire
Reinsurance Facility, the Company’s only active ceded reinsurance treaty was with its
parent, Government Employees Insurance Company (GEICO). Under its quota share treaty
with GEICO, the Company ceded 100 percent of its personal lines business, net of other
reinsurance. This treaty represented 99.9 percent of all premium cessions by the Company
in 2004 and approximately 98.3 percent of the ceded loss and loss adjustment expense
reserves as of December 31, 2004.
Our review of the various ceded reinsurance treaties disclosed no unusual provisions.
ACCOUNTS AND RECORDS
The Company’s general accounting records consisted of an automated general ledger
and various subsidiary ledgers. Our review did not disclose any significant deficiencies in
these records.
13
FINANCIAL STATEMENTS
The following financial statements reflect the financial condition of the Company as of
December 31, 2004, as determined by this examination:
STATEMENT PAGE
Balance Sheet:
Assets 15
Liabilities, Surplus and Other Funds 16
Statement of Income 17
Capital and Surplus Account 18
Analysis of Examination Changes to Surplus 20
Growth of the Company 21
The accompanying Notes to Financial Statements are an integral part of these Financial
Statements.
14
BALANCE SHEET
ASSETS
Nonadmitted Net Admitted
Assets
Assets Assets
Bonds $ 72,050,574 $ - $ 72,050,574
Cash ($170,460), Cash Equivalents ($40,261,010) and
-
Short-term investments ($10,056,425) 50,487,895 50,487,895
Investment income due and accrued 1,239,403 - 1,239,403
Premiums and considerations:
Uncollected premiums, agents’ balances in the course of
collection
659,868 659,868 -
Deferred premiums, agents’ balances and installments
booked but deferred and not yet due.
39,184 39,184 -
Reinsurance:
-
Amounts recoverable from reinsurers 10,512 10,512
Current federal and foreign income tax recoverable and
interest thereon 17,878 - 17,878
Net deferred tax asset 248,402 - 248,402
Electronic data processing equipment and software 438,898 - 438,898
Furniture and equipment, including health care delivery
assets 304,204 304,204 -
Receivables from parent, subsidiaries and affiliates 1,284,732 - 1,284,732
Other assets nonadmitted 227,308 227,308 -
Aggregate write-ins for other than invested assets 161,195 - 161,195
Total assets $ 127,170,053 $ 1,230,564 $ 125,939,489
15
LIABILITIES, SURPLUS AND OTHER FUNDS (NOTE 1)
Other expenses (excluding taxes, licenses and fees) (NOTE 2) $ 1,000
Unearned premiums (after deducting unearned premiums for
ceded reinsurance of $1,034,130,016) 63,423,967
Remittances and items not allocated 1,279
Aggregate write-ins for liabilities 6,418,304
Total liabilities $ 69,844,550
Common capital stock $ 3,080,000
Gross-paid in and contributed surplus 42,487,779
Unassigned funds 10,527,160
Surplus as regards policyholders $ 56,094,939
Total liabilities and surplus $125,939,489
16
STATEMENT OF INCOME
Investment Income
Net investment income earned $ 4,814,069
Net income before federal and foreign income taxes $ 4,814,069
Federal and foreign income taxes incurred (582,122)
Net income $ 4,231,947
17
CAPITAL AND SURPLUS ACCOUNT
Surplus as regards policyholders, December 31, 1999 $ 59,549,089
Gains and (Losses) in Capital and Surplus, 2000
Net income, year ended December 31, 2000 $5,226,112
Change in non-admitted assets (93,386)
Dividends to stockholders (5,900,000)
Change in capital and surplus for the year (767,274)
Surplus as regards policyholders, December 31, 2000 58,781,815
Gains and (Losses) in Capital and Surplus, 2001
Net income, year ended December 31, 2001 $4,876,741
Change in net deferred income tax 110,710
Change in non-admitted assets (351,474)
Cumulative effect of changes in accounting principles 643,640
Dividends to stockholders (5,800,000)
Change in capital and surplus for the year (520,383)
Surplus as regards policyholders, December 31, 2001 58,261,432
Gains and (Losses) in Capital and Surplus, 2002
Net income, year ended December 31, 2002 $5,265,884
Change in net deferred income tax 61,006
Change in non-admitted assets (186,400)
Dividends to stockholders (5,800,000)
Change in capital and surplus for the year (659,510)
Surplus as regards policyholders, December 31, 2002 $ 57,601,922
<Continued>
18
CAPITAL AND SURPLUS ACCOUNT
CONTINUED
Gains and (Losses) in Capital and Surplus, 2003
Net income, year ended December 31, 2003 $5,220,679
Change in net deferred income tax (60,873)
Change in non-admitted assets 180,355
Dividends to stockholders (5,300,000)
Change in capital and surplus for the year 40,162
Surplus as regards policyholders, December 31, 2003 $ 57,642,084
Gains and (Losses) in Capital and Surplus, 2004
Net income, year ended December 31, 2004 $4,231,947
Change in net deferred income tax (160,801)
Change in non-admitted assets 81,709
Dividends to stockholders (5,700,000)
Change in capital and surplus for the year (1,547,145)
Surplus as regards policyholders, December 31, 2004 $ 56,094,939
19
ANALYSIS OF EXAMINATION CHANGES TO SURPLUS
There were no changes to the Company’s surplus as a result of our examination.
20
GROWTH OF THE COMPANY
The financial growth of the Company for the five year period ended December 31, 2004 was
as follows:
2004 2003 2002 2001 2000
Assets $125,939,489 $ 128,317,103 $119,364,473 $ 127,260,586 $120,319,238
Liabilities 69,844,550 70,675,019 61,762,551 68,999,154 61,537,423
Policyholder
56,094,939 57,642,084 57,601,922 58,261,432 58,781,815
Surplus
Net investment
4,814,069 6,493,516 6,300,444 5,730,715 5,997,322
Gain
Net Income 4,231,947 5,220,679 5,265,884 4,876,741 5,226,112
NOTE: Amounts in the preceding financial statements for the years ended December 31, 2000,
2001, 2002, and 2003 were taken from the Company’s Annual Statements as filed with
the Administration. Amounts for the years ended December 31, 1999 and December 31,
2004 are amounts per examination.
21
NOTES TO FINANCIAL STATEMENTS
1. As described under the caption “Reinsurance,” all of the Company’s business in force
when it was purchased by Government Employers Insurance Company (GEICO) in
1982 was ceded under a loss-portfolio reinsurance treaty. Since that time, the Company
ceded all of its direct premiums, primarily to GEICO. As a result, as of December 31,
2004, the Company had ceded loss and loss adjustment expense reserves totaling
$2,067,782,000 and had no retained loss or loss adjustment expense reserves. If the
reinsurers are not able to meet their obligations under the Company's reinsurance
agreements, the Company would be liable for any defaulted amounts.
The methodologies utilized by the Company to compute reserves, and the adequacy of
the loss reserves and loss adjustment expense reserves as of December 31, 2004, were
reviewed by our actuary and were determined to be reasonable and adequate.
2. The Company and its affiliates are defendants in several class action lawsuits related
to the use of collision repair parts not produced by the original auto manufacturers.
Management intends to vigorously defend the Company's position over the use of
these aftermarket parts. However, these lawsuits are in various stages of
development and the ultimate outcome cannot be reasonably determined.
In normal course of business, the Company is also involved in other litigation with
claimants, beneficiaries and others. The Company believes that the total amounts that
would ultimately have to be paid if any, arising from these lawsuits in excess of
amounts currently reserved would not have a material effect on its financial position
of the Company as of December 31, 2004.
22
COMMENTS AND RECOMMENDATIONS
There are no comments and recommendations included in this report. During our
examination, we made a number of suggestions and recommendations to the Company with
regard to record keeping and other procedures relating to its operations. However, these
suggestions and recommendations are deemed insignificant and immaterial for inclusion in
this report.
23
SUBSEQUENT EVENTS
There were no significant events occurring subsequent to our examination period that
required disclosure.
24
CONCLUSION
Our examination disclosed that as of December 31, 2004 the Company had:
Admitted Assets $ 125,939,489
Liabilities and Reserves $ 69,844,550
Common Capital Stock $ 3,080,000
Gross Paid-in and Contributed Surplus 42,487,779
Unassigned Funds 10,527,160
Surplus as Regards Policyholders $ 56,094,939
Total Liabilities and Surplus $ 125,939,489
In our opinion, the accompanying balance sheet properly presents the statutory financial
position of the Company as of December 31, 2004, and the accompanying statement of
income properly presents the statutory results of operations for the period then ended. The
supporting financial statements properly present the information prescribed by the Annotated
Code of Maryland, the Code of Maryland Regulations and the National Association of
Insurance Commissioners.
Sections 4-103 to 4-105 of the Insurance Article of the Annotated Code of Maryland
specify the level of capital and surplus required for the Company. We concluded that the
company’s surplus funds met the minimum requirement during the period under
examination.
25
SIGNATURES
In addition to the undersigned, the following examiners representing the Maryland
Insurance Administration participated in certain phases of this examination:
Novalene Forbes, CFE, Maryland Insurance Administration
Charles Igwilo, AFE, Maryland Insurance Administration
Sam Merlo, Maryland Insurance Administration
Puru Shrestha, Maryland Insurance Administration
Moses Taylor, AFE, Maryland Insurance Administration
Kim Bey, RSM McGladrey Inc.
Derek Butler, CFE, RSM McGladrey Inc.
Rudy Fabry, RSM McGladrey Inc.
Sarah Lucibello, RSM McGladrey Inc.
The actuarial portion of this examination was completed by Joel S. Chansky, FCAS,
MAAA, Mary Ann Grzyb, and Christine Fleming, actuaries with the firm of Milliman, Inc.
Respectfully submitted,
___________________________
Craig A. Moore, CFE
Examiner-in-Charge
Maryland Insurance Administration
Representing the Northeastern Zone
Under the supervision of,
___________________________
Jeffrey Lieman, AFE
Chief Examiner
Maryland Insurance Administration
26
ROBERT L. EHRLICH, JR. R. STEVEN ORR
Governor Commissioner
MICHAEL S. STEELE JAMES V. MCMAHAN, III
Lt. Governor Deputy Commissioner
LESTER C. SCHOTT
Associate Commissioner
Examination and Auditing
525 St. Paul Place, Baltimore, Maryland 21202-2272
Direct Dial: 410-468-2120 Fax: 410-468-2101
Email: jlieman@mdinsurance.state.md.us
1-800-492-6116 TTY: 1-800-735-2258
www.mdinsurance.state.md.us
April 27, 2006
Olza M. Nicely
President
GEICO General Insurance Company
5260 Western Avenue
Chevy Chase, Maryland 20815
Dear Mr. Nicely:
Enclosed is a draft copy of the Report on Examination of the affairs and financial
condition of GEICO General Insurance Company, as of December 31, 2004, dated
January 12, 2006. Please call our attention to any errors or omissions.
Unless a written request for a Hearing with respect to the Report (in accordance with
the provisions of Sections 2-209 and 2-210, Insurance Article of the Annotated Code of
Maryland) is received on or before May 29, 2006, the Report will become final, and will
be filed as a public document within this Administration.
If this Report on Examination contains a section entitled “Comments and
Recommendations” that discloses certain areas requiring action, the Company shall
submit a statement covering the corrective measures which will be taken.
If the Company’s position on any of these points is contrary to the Examiner’s
findings, an explanation should be submitted covering each contested comment and/or
recommendation.
All of your comments concerning these matters must be in writing and shall be
furnished to this Administration within thirty (30) days from the date of this letter (May
29, 2006). In addition to the hard copy mailed to the Administration, also please
send our response electronically in Microsoft Word format to
pgiles@mdinsurance.state.md.us.
The Report on Examination should be called to the attention of your Board of
Directors at its next meeting. Each Director should review the Report and acknowledge
such review over his signature. Documentation of such review should be maintained for
future verification.
If you have any questions or if you would like to discuss this recommendation,
please do not hesitate to call me at 410-468-2120.
Sincerely,
Original Signature on File
Jeffrey Lieman, CPA, AFE
Chief Examiner
ROBERT L. EHRLICH, JR. R. STEVEN ORR
Governor Commissioner
MICHAEL S. STEELE JAMES V. MCMAHAN, III
Lt. Governor Deputy Commissioner
LESTER C. SCHOTT
Associate Commissioner
Examination and Auditing
525 St. Paul Place, Baltimore, Maryland 21202-2272
Direct Dial: 410-468-2120 Fax: 410-468-2101
Email: jlieman@mdinsurance.state.md.us
1-800-492-6116 TTY: 1-800-735-2258
www.mdinsurance.state.md.us
June 1, 2006
Olza M. Nicely
President
GEICO General Insurance Company
5260 Western Avenue
Chevy Chase, Maryland 20815
Dear Mr. Nicely:
We are in receipt of a letter from William J. McDonald, Controller, dated May 22,
2006, which addresses the corrective action taken by GEICO General Insurance
Company, to comply with the recommendations made in the Report on Examination as of
December 31, 2004, dated January 12, 2006. Your response adequately addresses the
recommendations made in the Report.
To the extent deemed necessary, we have made the corrections suggested in Mr.
McDonalds’ letter. During our next examination of the Company, we will review the
implementation of the corrective actions taken.
As the May 22, 2006 letter did not request a hearing, pursuant to § 2-209 of the
Insurance Article, Annotated Code of Maryland, the Report is Final and is attached for
your records. The Report will be forwarded electronically, along with a copy of this
letter, to each Commissioner whose name is set forth on Page 1 of the Report, as well as
to each of the participating zone examiners, to the National Association of Insurance
Commissioners, and to each state in which the Company is licensed, according to your
Annual Statement.
Sincerely,
Jeffrey Lieman, CPA, AFE
Chief Examiner
