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NAIC NUMBER 22055 GEICO INDEMNITY COMPANY EXAMINATION DECEMBER 31

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NAIC NUMBER 22055 GEICO INDEMNITY COMPANY EXAMINATION DECEMBER 31 Powered By Docstoc
					  GEICO INDEMNITY COMPANY

EXAMINATION: DECEMBER 31, 2004




                             NAIC NUMBER 22055
                                                    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................................................................................ 11
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 INDEMNITY 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 General Insurance 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.




                                             2
     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
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 were 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 in the District of Columbia on March 22, 1961 as the
Criterion Insurance Company, and commenced underwriting activities on September 1,
1961. It was reincorporated in 1980 in the District of Columbia under a newer District of
Columbia corporation law. On January 3, 1986, the Company was reincorporated and
redomesticated under the laws of Maryland as a stock property and casualty insurer. The
name was changed to its present name on June 25, 1986. Ownership of the Company
resided with Government Employees Insurance Company (GEICO) until September 30,
1992, when financial control was transferred by dividend to GEICO Corporation. GEICO
Corporation 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. The Company writes automobile and motorcycle coverages at standard
rates for persons who do not qualify as preferred risks.


                                               3
Capital Stock:

       The Company’s Articles of Redomestication and Reincorporation authorized the
Company to issue 5,000,000 shares of common stock with a par value of $2 per share. As of
December 31, 2004, the Company had issued 1,500,000 shares of common stock with an
aggregate par value of $3,000,000. All of the outstanding common stock was owned by
GEICO Corporation.


Dividends to Stockholder:

     There were no declared or unpaid dividends during the examination period. 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,
    Potomac, MD                              GEICO

    Robert M. Miller                         Senior Vice President,
    University Park, TX                      GEICO


    William E. Roberts                       Executive Vice President,
    Cabin John, Maryland                     GEICO



                                            4
    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
    Howard Lee Cohen                   Vice President & Actuary
    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
    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



                                       5
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.




                               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


                                              6
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 its parent, 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 its parent, 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 $2,577,564 and $1,885,875 for the years ended 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
18, 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



                                              8
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.


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 was charged for these services under the provisions of
the Intercompany Charge Agreement. During 2004, the Company reimbursed Government
Employees Insurance Company $433,370,307 for services provided under this agreement.

     The Intercompany Charge Agreement was a document that set 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.

      During our review of intercompany balances, we noted that the Company had not
settled in a timely manner certain balances due to an affiliated entity. See the “Comments
and Recommendations” section of this report for additional details.



                    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


                                             9
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
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 coverages 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 $3,000,000 and a market value of $3,271,520.
These funds were held for the protection of all of the Company’s policyholders and creditors.

     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


                                             10
              Georgia                      $ 125,000            $ 145,028
              Louisiana                       50,000               50,422
              New Mexico                     400,000              464,088
              North Carolina                 350,000              352,954

                  Totals                   $ 925,000            $ 1,012,492


                     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 with the
exception of Massachusetts. The Company wrote direct business during 2004 in all of the
jurisdictions in which it was licensed. The majority of the Company’s direct business in
2004 was written in the states of California (5%), Florida (13%), Georgia (3%), Maryland
(5%), New York (26%), North Carolina (4%) and Virginia (6%).

     The Company’s major products were automobile and motorcycle insurance. The
Company markets these products at standard rates for young adults, military personnel and
others who did not qualify as preferred risks.

     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.


              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


                                           11
               Treatment of Policyholders:
                     Claims Processing (Timeliness)
                     Complaints


                                    REINSURANCE

Assumed Reinsurance:

     The Company assumed reinsurance premiums totaling $723,436,000 during 2004, and
as of December 31, 2004, had loss and loss expense reserves for assumed business totaling
approximately $271,600,000.

      With the exception of a small amount of business assumed from the New Hampshire
Reinsurance Facility, a mandatory participation pool, all reinsurance assumed by the
Company was from its affiliates, Government Employees Insurance Company (GEICO) or
its subsidiary, GEICO Casualty Company.

     The treaty with GEICO accounted for approximately 16 percent of premiums assumed
in 2004 and 10 percent of assumed loss and loss expense reserve balances as of December
31, 2004. All of this business was motorcycle liability and standard auto liability business
that GEICO assumed 100 percent from Colonial County Mutual Insurance Company, a
Texas-domiciled company, and retroceded 100 percent to the Company.

     The treaty with GEICO Casualty Company, which accounted for approximately 84
percent of premiums assumed in 2004 and 90 percent of assumed loss and loss adjustment
expense reserve balances at December 31, 2004, was a 90 percent quota share arrangement
on all direct-written business.

Ceded Reinsurance:

     During 2004, The Company ceded reinsurance premiums totaling $46,336,000 and had
recorded reinsurance balances recoverable totaling $105,305,000, including $12,357,000 for
ceded unearned premiums and $86,445,000 for loss and loss adjustment expense reserves, of
which $83,724,000 was for losses and $2,721,000 was 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. In addition, the Company reported ceded reinsurance
premiums payable to these same reinsurers totaling $5,741,000.


     With the exception of four mandatory State participation pools, which represent 99% of
total ceded reserves, the Company’s only ceded reserve balance was with General
Reinsurance Corporation, which provided excess-of-loss coverage.




                                            12
                               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
                                                                  Assets                                  Net Admitted Assets
                                                                                          Assets
Bonds                                                         $    261,766,705      $                 -    $      261,766,705
                                                                                                      -
Common stocks                                                       85,069,826                        -            85,069,826

Cash ($180,176), Cash equivalents ($204,254,754) and
                                                                                                      -
  Short-term investments ($2,352,227,976)                         2,556,662,906                                 2,556,662,906

Investment income due and accrued                                    4,215,053                        -            4,215,053

Premiums and considerations:
   Uncollected premiums and agents’ balances in the
                                                                   117,179,579                 749,068            116,430,511
   course of collection

   Deferred premiums, agents’ balances and installments
                                                                   295,849,568                  25,521            295,824,047
   booked but deferred and not yet due

Reinsurance:
  Amounts recoverable from reinsurers                                6,504,325                        -            6,504,325

Net deferred tax asset                                              92,363,598              16,045,616             76,317,982

Guaranty funds receivable or on deposit                              1,387,013                        -            1,387,013

Electronic data processing equipment and software                      146,885                  13,125               133,760

Furniture and equipment, including health care delivery
                                                                           97,734               97,734                      -
   assets

Receivables from parent, subsidiaries and affiliates                  4,760,632                       -            4,760,632

Aggregate write-ins for other that invested assets                     277,148                        -              277,148

   Total assets                                               $   3,426,280,972     $       16,931,064     $    3,409,349,908




                                                         15
                         LIABILITIES, SURPLUS AND OTHER FUNDS




Losses (NOTE 1)                                                             $    931,837,022

Reinsurance payable on paid loss and loss adjustment expense                      34,798,206

Loss adjustment expenses (NOTE 1)                                                166,656,796

Commissions payable, contingent commissions and other
  similar charges                                                                  2,080,978

Other expenses (excluding taxes, licenses and fees) (NOTE 2)                       2,604,527

Taxes, licenses and fees (excluding federal and foreign income taxes)             15,934,967

Current federal and foreign income taxes                                          19,663,412

Unearned premiums (after deducting unearned premiums for
  ceded reinsurance of $12,356,536)                                              689,926,770

Advance premiums                                                                  17,215,713

Ceded reinsurance premiums payable                                                 5,740,923

Amounts withheld or retained by company for account of others                        405,860

Payable to parent, subsidiaries and affiliates                                   111,650,941

Aggregate write-ins for liabilities                                                1,584,179

     Total liabilities                                                  $       2,000,100,294

Common capital stock                                                    $          3,000,000

Gross paid-in and contributed surplus                                            443,354,309

Unassigned funds                                                                 962,895,305

     Surplus as regards policyholders                                   $       1,409,249,614

     Total liabilities and surplus                                      $       3,409,349,908




                                                 16
                                         STATEMENT OF INCOME


                                                    Underwriting Income

Premiums earned                                                                             $2,300,000,499

Underwriting deductions:

             Losses incurred                                              $ 1,317,505,027

             Loss expenses incurred                                          224,206,385

             Other underwriting expenses incurred                            462,253,594

                   Total underwriting deductions                                              2,003,965,006

Net underwriting gain                                                                       $ 296,035,493

                                                    Investment Income

Net investment income earned                                                $ 56,782,992

Net realized capital gains                                                       237,339

                   Net investment gain                                                          57,020,331

                                                        Other Income

Net loss from agents’ or premium balances charged off
   (amount recovered $8,387,789 amount charged off
   $30,020,551)                                                              $ (21,632,763)

Finance and service charges not included in premiums                           38,778,134

Aggregate write-ins for miscellaneous income                                  (39,199,167)

                   Total other income                                                         (22,053,796)

Net income before dividends to policyholders and before federal
  and foreign income taxes                                                                  $ 331,002,028
Dividends to policyholders                                                                             -
Net income after dividend to policyholders and before federal
  and foreign income taxes                                                                  $ 331,002,028
Federal income taxes incurred                                                                (129,663,412)

Net Income                                                                                  $ 201,338,616




                                                           17
                             CAPITAL AND SURPLUS ACCOUNT

Surplus as regards policyholders, December 31, 1999                      $ 468,223,711

                                Gains and (Losses) in Surplus, 2000

    Net loss, year ended December 31, 2000                   $(51,275,885)
    Net unrealized capital gains or (losses)                    3,623,903
    Change in non-admitted assets                                 823,463
    Surplus Paid In (NOTE 3)                                  175,000,000

Change in capital and surplus for the year                                   128,171,481

Policyholders surplus, December 31, 2000                                     596,395,192

                                Gains and (Losses) in Surplus, 2001

    Net income, year ended December 31, 2001                $121,140,045
    Net unrealized capital gains or (losses)                    9,439,191
    Change in net deferred income tax                         (1,796,514)
    Change in non-admitted assets                               (664,046)
    Cumulative effect of changes in accounting principles    45,409,458

Change in capital and surplus for the year                                    173,528,134

Policyholders surplus, December 31, 2001                                      769,923,326

                                Gains and (Losses) in Surplus, 2002

    Net income, year ended December 31, 2002                $160,484,269
    Net unrealized capital gains or (losses)                   8,732,136
    Change in net deferred income tax                          9,705,732
    Change in non-admitted assets                             (1,220,616)

Change in capital and surplus for the year                                    177,701,521

Policyholders surplus, December 31, 2002                                 $ 947,624,847




                                     <Continued on next page>

                                                18
                             CAPITAL AND SURPLUS ACCOUNT
                                Continued from previous section

                                Gains and (Losses) in Surplus, 2003

    Net income, year ended December 31, 2003                $215,134,072
    Net unrealized capital gains or (losses)                  14,507,898
    Change in net deferred income tax                         9,393,914
    Change in non-admitted asset                                 (954,071)


Change in capital and surplus for the year                                   238,081,813

Policyholders surplus, December 31, 2003                                $1,185,706,660

                                Gains and (Losses) in Surplus, 2004

    Net loss, year ended December 31, 2004                  $201,338,616
    Net unrealized capital gains or (losses)                  10,433,070
    Change in net deferred income tax                        14,926,831
    Change in non-admitted assets                              (3,155,563)

Change in capital and surplus for the year                                   223,542,954

Policyholders surplus, December 31, 2004                                $1,409,249,614




                                                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 as
follows:


                          2004                2003                 2002             2001              2000

Assets               $ 3,409,349,908     $2,831,439,466        $2,266,994,946   $1,933,378,913   $ 1,678,977,631

Liabilities           2,000,100,294       1,645,732,806         1,319,370,099    1,163,455,587    1,082,582,439

Policyholder
                      1,409,249,614       1,185,706,660          947,624,847      769,923,326       596,395,192
 Surplus

Premiums earned       2,300,000,499       1,846,358,937         1,458,062,058    1,284,398,222    1,259,815,058

Net underwriting
                        296,035,493        164,901,449           172,000,418      108,948,750       (121,628,089)
 gain (loss)

Net investment
                         57,020,331        209,131,089           109,730,511       86,941,463        75,060,106
gain

Net Income
                        201,338,616        215,134,072           160,484,269      121,140,045       (51,275,885)
 (Loss)




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. The Company reported “Losses” and “Loss adjustment expenses” reserves totaling
   $931,837,022 and $166,656,796 respectively. These amounts are shown net of
   estimated amounts recoverable from reinsurers under the Company’s reinsurance
   agreements. If the reinsurers are not able to meet their obligations under these
   agreements, the Company would be liable for any defaulted amounts. The Company has
   recorded reserve credits related to estimated amounts recoverable from reinsurers as of
   December 31, 2004, totaling approximately $83,724,000 for losses and $2,721,000 for
   loss adjustment expenses.

   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 the 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



Payable to parents, subsidiaries and affiliates:

         As of December 31, 2004, the Company reported Payable to parents, subsidiaries
and affiliates totaling $111,650,941. Included in this amount was a payable of
$61,373,112 due to Criterion Insurance Agency, Inc. (CIA), an affiliated insurance
agency, which had not been settled since 2001. According to the original reinsurance
agreement between the Company, a non affiliated Texas entity, and CIA, all amounts due
under this agreement shall be settled within 10 days of the close of each month. For
purposes of our examination, the settlement of this payable to affiliate was determined
not to have any impact on the surplus of the Company, as the original recording of the
liability included the appropriate surplus effects. Therefore, we did not make any
adjustments as a result of this issue. We recommend that the Company settle the past
due amounts with CIA. We also recommend that the Company settle all future
amounts due to CIA within 10 days of the close of each month, in accordance with
the terms and conditions of the original reinsurance agreement.


Additional Comments and Recommendations:

     In addition to the above Comment and Recommendation, during our examination we
made a number of other suggestions and recommendations to the Company with regard to
record keeping and other procedures relating to its operations.




                                               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                                                $ 3,409,349,908

       Liabilities and Reserves                                       $ 2,000,100,294

       Common Capital Stock                                       $       3,000,000

       Gross Paid-in and Contributed Surplus                             443,354,309

       Unassigned Funds                                                  962,895,305

       Surplus as Regards Policyholders                               $ 1,409,249,614

       Total Liabilities and Surplus                                  $ 3,409,349,908


     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,

                                   Original Signature on File
                                   ___________________________
                                   Craig A. Moore, CFE
                                   Examiner-in-Charge
                                   Maryland Insurance Administration
                                   Representing the Northeastern Zone


                                   Under the supervision of,

                                   Original Signature on File
                                   ___________________________
                                   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 Indemnity 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 Indemnity 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 Indemnity 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 Indemnity 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,

                                                             Original Signature on File

                                                             Jeffrey Lieman, CPA, AFE
                                                             Chief Examiner

				
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