MAY 06, 2010 12:00 AM (EDT)
A.M. Best Removes From Under Review and Affirms Ratings of GEICO and Its Members
(908) 439-2200, ext. 5621
Jeffrey Mango, CPA
(908) 439-2200, ext. 5204
(908) 439-2200, ext. 5378
(908) 439-2200, ext. 5644
FOR IMMEDIATE RELEASE
OLDWICK, N.J. - MAY 06, 2010 12:00 AM (EDT)
A.M. Best Co. has removed from under review with negative implications and affirmed the financial strength rating (FSR) of A++ (Superior) and issuer credit ratings (ICR) of "aaa" of Government Employees Group (GEICO) (Chevy Chase, MD) and its property/casualty members. A.M. Best also has removed from under review with negative implications and affirmed the ICR of "aaa" as well as the debt rating of "aaa" on $150 million 7.35% senior unsecured debentures, due 2023 of the immediate parent holding company, GEICO Corporation (Wilmington, DE). The outlook assigned to all ratings is stable. (See below for a detailed list of companies and ratings.)
On November 6, 2009, A.M. Best placed the ratings on all rated members of Berkshire Hathaway Inc. (Berkshire) [NYSE: BRK.A and BRK.B] under review with negative implications as a result of the Berkshire acquisition of the remaining 77% of Burlington Northern Santa Fe (BNSF) railroad, which was not already owned. The under review status reflected A.M. Best's concerns regarding the potential utilization of Berkshire's insurance and reinsurance operations as a funding source for the transaction given the size of the acquisition. Additionally, A.M. Best was concerned with the potential liquidity impact on some of the insurance and reinsurance operations given their exposure to high severity events. Based on a review of the group's financial position as of December 31, 2009 and following the close of the BNSF acquisition, A.M. Best's concerns have been largely mitigated or resolved.
The ratings reflect GEICO's superior financial strength, consistently strong operating performance, brand name recognition and market position as one of the top five personal automobile writers in the United States. GEICO's strong operating results reflect a considerable underwriting expense advantage, which is driven by its direct distribution business model. In addition, the group continues to produce favorable loss experience, while benefiting from a solid stream of investment income. As a result, GEICO has generated substantial capital over the previous five-year period, which has supported steady growth in premiums and enabled it to pay significant dividends to its immediate parent.
The ratings also recognize the considerable resources and financial strength of GEICO Corporation's parent company, National Indemnity Company, as well as its ultimate parent, Berkshire, whose financial profile includes approximately $136 billion of stockholders' equity at December 31, 2009, minimal debt and a long history of strong profitability. Moreover, GEICO Corporation maintains modest financial leverage and strong cash flows to fund fixed charges.
GEICO's negative rating factors include high investment leverage derived from its significant allocation of invested assets to unaffiliated equities. This concern was evident in 2008, when GEICO reported approximately $1.2 billion in unrealized capital losses and $647 million in realized capital losses due primarily to unfavorable equity market conditions. These capital losses resulted in approximately a $1.0 billion decline in statutory surplus in 2008 and a substantial decline in risk-adjusted capitalization. However, as equity market conditions improved in 2009 and solid operating earnings continued, GEICO was able to increase its statutory surplus by approximately $2.4 billion in 2009. In addition, GEICO maintains a modest geographic concentration that exposes it to legislative changes and judicial decisions, as its top five states account for approximately one-half of its direct premiums written. However, this risk is largely mitigated by GEICO's geographic spread throughout the United States and management's proven ability to quickly adapt to changing market conditions.
The FSR of A++ (Superior) and ICRs of "aaa" have been affirmed for Government Employees Group and its following property/casualty members:
- Government Employees Insurance Company
- GEICO Indemnity Company
- GEICO Casualty Company
- GEICO General Insurance Company
For Best's Credit Ratings, an overview of the rating process and rating methodologies, please visit Best's Ratings & Analysis.
The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at Best's Credit Rating Methodology.
Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers.