GOVERNMENT EMPLOYEES INSURANCE COMPANY EXAMINATION: DECEMBER 31, 2004
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 ...6 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 ... 24
Subsequent Events ... 25
Conclusion... 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
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
GOVERNMENT EMPLOYEES INSURANCE COMPANY
(hereinafter called the Company or GEICO), 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:
GEICO General Insurance Company
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 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 original Government Employees Insurance Company (GEICO) was incorporated in Texas in August, 1936. That company was formed as the successor to the Government Employees Insurance Association, a reciprocal exchange that was formed on March 20, 1934 under the title Government Employees Underwriters. The Company was reincorporated in the District of Columbia in 1937. On January 31, 1979, the Company again reincorporated within the District of Columbia. On the same date, control of the Company was transferred to GEICO Corporation, a publicly owned holding company. On January 3, 1986, the Company was reincorporated and redomesticated under the laws of Maryland as a stock property and casualty insurer.
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 has in the past written automobile insurance, comprehensive personal liability, personal umbrella liability, boat owners, personal property floaters and homeowners policies, as well as fire and allied lines of insurance. However, most new business written during the examination period was automobile liability and physical damage insurance written for preferred risk individuals who were active or retired government employees or military personnel.
Capital Stock:
The Company’s Articles of Redomestication and Reincorporation authorized the Company to issue 45,000,000 shares of common stock with a par value of $1 per share; 300,000 shares of senior preferred stock with a par value of $10 per share; and 10,000,000 shares of cumulative convertible preferred stock with a par value of $1 per share. As of December 31, 2004, the Company had issued 33,436,758 shares of common stock with an aggregate par value of $33,436,758. All of the outstanding common stock was owned by GEICO Corporation.
Dividends to Stockholder:
The Company declared and paid the following cash dividends to its stockholder during the examination period:
Ordinary Extraordinary Total 2000 $ - $ - $ - 2001 50,000,000 - 50,000,000 2002 150,000,000 - 150,000,000 2003 264,000,000 1,000,000,000 1,264,000,000 2004 304,000,000 - 304,000,000 Total $768,000,000 $1,000,000,000 $1,768,000,000
There were no declared but unpaid dividends as of December 31, 2004. The Company’s Board of Directors approved all dividends, and the Maryland Insurance Administration was properly notified of the dividends in accordance with Section 7-705 of the Insurance Article of the Annotated Code of Maryland. Extraordinary dividends which were paid in 2003 were approved by the Maryland Insurance Administration in accordance with Section 7-706 of the Insurance Article of the Annotated Code of Maryland
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
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
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 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 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.
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 $8,866,000 and $7,818,000 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 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 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:
Effective August 19, 1992, the Company entered into an Intercompany Charge Agreement 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. During 2004, the Company performed services for affiliates under this agreement and was reimbursed for these services as follows:
GEICO Casualty Company $151,737,445 GEICO Indemnity Company 433,370,307
Total $585,107,752
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 insured 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 coverage 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 2000, 2001, 2002, 2003 or 2004 since the plan was adequately funded in accordance with the Company’s policy. The plan’s accumulated benefit obligation as of December 31, 2004 was $583,222,000. The fair value of the plan’s assets as of that date was $738,734,223.
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:
GEICO Corporation and its subsidiaries provide certain health and life insurance benefits for eligible retirees. The health benefits continue through age 65. Postretirement benefits expense for the Company was $2,772,000 for 2004. The unfunded accumulated postretirement benefits obligation for retired and fully eligible employees at December 31, 2004 was $19,617,000 and the unfunded postretirement benefits obligation for non-vested employees at December 31, 2004 was $25,063,000. The liability for eligible employees is appropriately recognized on the Company's balance sheet.
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 $3,575,000 and a market value of $3,670,433. 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 California $ 750,000 $ 772,118 Georgia 300,000 341,973 Iowa 2,000,000 2,186,800 Louisiana 500,000 504,220 New Jersey 100,000 102,949 New Mexico 510,000 570,954 North Carolina 350,000 352,954 Total $ 4,510,000 $ 4,831,968
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 in all of these jurisdictions in 2004. The majority of the Company’s direct business was written in the states of California (6%), Florida (12%), Georgia (4%), Maryland (10%), New York (18%), North Carolina (4%), Texas (5%) and Virginia (8%).
The Company’s major product was automobile insurance, which represented 99% of the net premiums written during 2004. The Company markets this product at preferred rates for individuals who were active or retired government employees or 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.
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 this 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 business directly though reinsurance treaties and participation in various pools, associations and syndicates. The Company assumed premiums of $4,029,719,186 in 2004, and had gross assumed loss and loss adjustment expense reserves as of December 31, 2004 totaling approximately $ 1,881,390,000.
The vast majority of assumed business was from subsidiaries and affiliates. A 100 percent quota share treaty with GEICO General Insurance Company accounted for 97 percent of all assumed premiums and 98 percent of all assumed loss and loss adjustment expense reserves. The Company also assumed business from affiliates National Indemnity Company and General Reinsurance Corporation.
Non-affiliated assumed business included the following:
1. Auto liability business from Colonial County Mutual Insurance Company, which was retroceded 100 percent to GEICO Indemnity Company and GEICO Casualty Company.
2. Participation in a quota share treaty with Financial Guarantee Insurance Company providing coverage on Municipal Bonds. This business was retroceded 100 percent to Radian Asset Assurance, Inc.
3. A small quota share participation in two general reinsurance pools covering catastrophe losses and other property business.
Our review of each of the above treaties disclosed no unusual provisions.
Ceded Reinsurance:
The Company ceded business through various reinsurance treaties and through participation in various pools, associations, and syndicates. During 2004, the Company ceded reinsurance premiums totaling $123,407,000 and had recorded reinsurance balances recoverable totaling $201,441,000, including $33,489,000 for ceded unearned premiums and $161,362,000 for loss and loss adjustment expense reserves, of which $148,864,000 was for losses and $12,498,000 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 $8,825,000.
Approximately 99 percent of premium cessions and 19.8 percent of ceded loss and loss adjustment expense reserve balances represented retrocessions to GEICO Indemnity and GEICO Casualty Companies on business the Company assumed from Colonial County Mutual Insurance Company.
Approximately 40 percent of all ceded loss and loss adjustment expense reserve balances were with affiliates as of December 31, 2004. Municipal bond business assumed from Financial Guarantee Insurance Company was retroceded 100 percent to Radian Asset Assurance, Inc.
The only other major ceded loss and loss adjustment expense reserve balances existing in the Company’s Annual Statement as of December 31, 2004 were on Commercial Umbrella and Excess Liability business. Although the Company ceased writing these lines of business in 1984, ceded reinsurance reserve balances totaling approximately $49,637,498 still existed with several reinsurers. It should be noted that a number of the original reinsurers on this business were insolvent. However, the Company was not taking credit for estimated recoveries from insolvent companies in its financial statements.
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. However, we noted several accounting related areas in which accounting records and/or controls could be improved. These conditions are further discussed in the “Comments and Recommendations” section of this Report, under the captions “Accounting and Internal Control Procedures”, and “Annual Statement Preparation”.
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.
BALANCE SHEET
ASSETS Assets Nonadmitted Assets Net Admitted Assets Bonds $ 1,457,208,379 $ - $ 1,457,208,379 Stocks: Preferred stocks 3,800,714 - 3,800,714 Common stocks 3,562,746,276 - 3,562,746,276 Real estate:Properties occupied by the Company ( less $0- encumbrances)
156,698,126 - 156,698,126 Cash (($182,160,975)), Cash equivalents ($187,379,404),
and Short-term investments ($4,992,747,400) 4,997,965,829 - 4,997,965,829 Investments income due and accrued 33,151,205 - 33,151,205 Premiums and considerations:
Uncollected premiums and agents’ balances in the course of collection
217,872,827 252,852 217,619,975 Deferred premiums, agents’ balances and installments
booked but deferred and not yet due 581,964,805 17,203 581,947,602 Reinsurance: Amounts recoverable from reinsurers 6,591,113 - 6,591,113 Funds held by or deposited with reinsured companies 53,245 53,245 -Guaranty funds receivable or on deposit 5,339,136 - 5,339,136 Electronic data processing equipment and software 95,963,812 25,378,574 70,585,238
Furniture and equipment 36,074,033 36,074,033
-Receivables from parent, subsidiaries and affiliates 72,485,448 6,119,280 66,366,167 Other assets nonadmitted 21,604,997 21,604,997 -Aggregate write-ins for other than invested assets 594,313 - 594,313 Total Assets $11,250,114,258 $ 89,500,184 $ 11,160,614,074
LIABILITIES, SURPLUS AND OTHER FUNDS
Losses (NOTES 1 and 2) $ 3,314,502,869
Reinsurance payable on paid loss and loss adjustment expense 11,173,413
Loss adjustment expenses (NOTE 1) 710,688,000 Commissions payable, contingent commissions and other similar charges 1,610,568
Other expenses (excluding taxes, licenses and fees) (NOTE 3) 222,963,265 Taxes, licenses and fees (excluding federal and foreign income taxes) 49,980,607
Current Federal and foreign income taxes 77,528,547 Net deferred tax liability 118,087,192 Unearned premiums (after deducting unearned premiums for ceded
reinsurance of $33,488,820) 1,750,413,898
Advance premiums 42,558,915
Ceded reinsurance premiums payable 8,825,332 Amounts withheld or retained by company for account of others 15,133,445 Remittances and items not allocated 994,058
Drafts outstanding 296,777
Payable to parent, subsidiaries and affiliates 6,016,625 Aggregate write-ins for liabilities 33,001,292
Total liabilities $ 6,363,774,803
Common capital stock $ 33,436,758
Gross paid-in and contributed surplus 1,201,206,515 Unassigned funds (surplus) 3,562,195,998 Surplus as regards policyholders $ 4,796,839,271 Total liabilities and surplus $11,160,614,074
STATEMENT OF INCOME Underwriting Income
Premiums earned $6,413,136,274
Underwriting deductions:
Losses incurred $4,066,170,502
Loss expenses incurred 728,834,959
Other underwriting expenses incurred 1,046,438,837
Aggregate write-ins for underwriting deductions (7,708,808) Total underwriting deductions 5,833,735,490
Net underwriting gain $ 579,400,784
Investment Income
Net investment income earned $ 269,165,507 Net realized capital gains 416,235,379
Net investment gain 685,400,886
Other Income Net loss from agents’ or premium balances
charged off (amount recovered $4,026,647
amount charged off $21,784,373) $ (17,757,726) Finance and service charges not included in
premiums 88,706,113
(72,016,466) Aggregate write-ins for miscellaneous income
Total other income (1,068,079)
Net income before dividends to policyholder and
before federal and foreign tax $ 1,263,733,592
Dividends to policyholders 0
Net income after dividends to policyholders but before
federal and foreign income taxes $ 1,263,733,592 Federal and foreign income taxes incurred (449,204,420)
CAPITAL AND SURPLUS ACCOUNT
Policyholders surplus, December 31, 1999 $3,178,106,552 Gains and (Losses) in Surplus, 2000
Net income, 2000 $ 42,868,923
Net unrealized capital gains 346,949,890
Change in non-admitted assets (668,851)
Change in capital and surplus for the year 389,149,962 Policyholders surplus, December 31, 2000 3,567,256,514
Gains and (Losses) in Surplus, 2001
Net income, 2001 $381,946,664
Net unrealized capital losses (6,047,705)
Change in net deferred income tax 52,214,334
Change in non-admitted assets (5,818,011)
Cumulative effect of changes in accounting principles 47,734,430 Dividends to stockholders (50,000,000)
Change in capital and surplus for the year 420,029,712 Policyholders surplus, December 31, 2001 3,987,286,226
Gains and (Losses) in Surplus, 2002
Net income, 2002 $321,204,858
Net unrealized capital losses (78,015,388)
Change in unrealized foreign exchange capital gain 3,318,803 Change in net deferred income tax 74,921,099
Change in non-admitted assets (12,146,368)
Dividends to stockholder (150,000,000)
Change in capital and surplus for the year 159,283,004 Policyholders surplus, December 31, 2002 $4,146,569,230
CAPITAL AND SURPLUS ACCOUNT (CONTINUED)
Gains and (Losses) in Surplus, 2003
Net income, 2003 $638,248,343
Net unrealized capital gains 594,597,796
Change in net unrealized foreign exchange capital gain 11,051,022 Change in net deferred income tax 13,321,052
Change in non-admitted assets (15,844,531)
Dividends to stockholders (1,264,000,000)
Change in capital and surplus for the year (22,626,318) Policyholders surplus, December 31, 2003 $ 4,123,942,912
Gains and (Losses) in Surplus, 2004
Net income, 2004 $ 814,529,172
Net unrealized capital gains 128,585,955
Change in net unrealized foreign exchange capital gain 9,254,824 Change in net deferred income tax 22,762,399
Change in non-admitted assets 1,764,009
Dividends to stockholders (304,000,000)
Change in capital and surplus for the year 672,896,359 Policyholders surplus, December 31, 2004 $4,796,839,271
ANALYSIS OF EXAMINATION CHANGES TO SURPLUS
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 $11,160,614,074 $ 9,729,737,398 $9,101,981,918 $8,432,949,776 $7,675,020,526 Liabilities 6,363,774,803 5,605,794,486 4,955,412,688 4,445,663,550 4,107,764,012 Policyholder Surplus 4,796,839,271 4,123,942,912 4,146,569,230 3,987,286,226 3,567,256,514 Premiums earned 6,413,136,274 5,741,523,719 5,035,044,631 4,597,374,717 4,164,893,946 Net underwriting gain (loss) 579,400,784 271,208,712 217,046,461 108,388,173 (192,475,069) Net investment gain 685,400,886 689,486,007 358,791,570 531,164,191 461,728,591 Net Income 814,529,172 638,248,343 321,204,858 381,946,664 42,868,923
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.
NOTES TO FINANCIAL STATEMENTS
1. The Company reported “Losses” and “Loss adjustment expenses” reserves totaling $3,314,502,869 and $710,688,000, 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 $148,864,000 for losses and $12,498,000 for loss adjustment expenses.
Included in the above amounts are the Company’s estimated reserves, totaling approximately $31,732,000 gross of reinsurance and $22,086,000 net of reinsurance, for asbestos and environmental claims. The Company’s exposure to these claims generally arises from the sale of a limited number of excess commercial umbrella policies from 1981 through the first quarter of 1984. The Company attempts to estimate the ultimate cost of settling asbestos and environmental exposures by establishing case-basis loss and allocated loss adjustment expense reserves for such claims as they are reported. Additional incurred but not reported reserves for such claims are established by the Company to include the potential for future development of reported claims and the reporting of latent claims. The process of establishing reserves for asbestos and environmental claims is subject to significant uncertainties, due to the potential severity of the claims, lack of historical data, long reporting delays, uncertainty of the number and identity of insureds with potential exposure and unresolved legal issues regarding policy coverage. As additional information on asbestos and environmental claims develops, the Company adjusts its loss and loss adjustment expense reserves accordingly.
In addition, the Company is subject to class-action lawsuits in several areas related to its claims settlement practices, such as the use of after-market parts to repair damaged automobiles. The Company attempts to estimate the ultimate cost of defending any class-action lawsuits by establishing case-basis loss and allocated loss adjustment expense reserves for such lawsuits as they are asserted.
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. For the settlement of certain claims, referred to as structured settlements, the Company purchased annuities to fund payments required to be made pursuant to the structured settlement agreements. The annuities are payable to the claimants and, once purchased pursuant to the structured settlement agreement, the Company no longer carries loss reserve liabilities for the applicable claims. However, the Company would be liable for these annuity payments in the event the insurers, from whom the annuities were purchased, fail to make the scheduled payments to the claimants. The Company believes these insurers, to be financially sound and regards any potential liability as remote. The
aggregate outstanding balance of these settlements, as of December 31, 2004, totaled $108,918,501.
3. 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.
COMMENTS AND RECOMMENDATIONS
Accounting and Internal Control Procedure:
Our review of the procedures and controls disclosed that certain accounting functions were not adequately segregated. For example, the senior manager in the Treasury Department, manages all of the cash disbursement activities and prepares the monthly bank reconciliation for the claims disbursement account. Additionally, there was no supervisory review of bank reconciliation. As a result of the above conditions, errors or irregularities could occur and go undetected. We recommend that the Company re-assign the responsibility for the aforementioned bank reconciliation to improve segregation of duties over cash disbursement for its claims disbursement account. We further recommend that a supervisory employee other than the preparer of the bank reconciliation review and approve the reconciliation.
Annual Statement Preparation:
Statement of Statutory Accounting Practices No. 62 – Property and Casualty Reinsurance, Paragraph 67., requires the Company to disclose details related to uncollectible reinsurance written off during the year, including the name(s) of the reinsurer(s), losses incurred and loss adjustment expenses incurred and premiums earned. However, in its December 31, 2004 Annual Statement, the Company disclosed only the aggregate amount written off during the year and did not include the names or the specific disclosures related to the corresponding reinsurers. We recommend that the Company disclose the required information in accordance with the aforementioned statutory guidance, for each reinsurer for which recoverable amounts were written off during the year.
Additional Comments and Recommendations:
In addition to the above Comments and Recommendations, 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.
SUBSEQUENT EVENTS
There were no significant events occurring subsequent to our examination period that required disclosure.
CONCLUSION
Our examination disclosed that as of December 31, 2004 the Company had:
Admitted Assets $ 11,160,614,074
Liabilities and Reserves $ 6,363,774,803 Common Capital Stock $ 33,436,758 Gross Paid-in and Contributed Surplus 1,201,206,515
Unassigned Funds 3,562,195,998
Surplus as Regards Policyholders $ 4,796,839,271 Total Liabilities and Surplus $ 11,160,614,074
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.
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
April 27, 2006
Olza M. Nicely President
Government Employees 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 Government Employees 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.
R. STEVEN ORR Commissioner JAMES V. MCMAHAN, III
Deputy Commissioner LESTER C. SCHOTT Associate Commissioner Examination and Auditing ROBERT L. EHRLICH, JR.
Governor MICHAEL S. STEELE
Lt. Governor
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
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
June 1, 2006
Olza M. Nicely President
Government Employees 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 Government Employees 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,
Original Signature on File
Jeffrey Lieman, CPA, AFE Chief Examiner
R. STEVEN ORR Commissioner JAMES V. MCMAHAN, III
Deputy Commissioner LESTER C. SCHOTT Associate Commissioner Examination and Auditing ROBERT L. EHRLICH, JR.
Governor MICHAEL S. STEELE
Lt. Governor
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
