Best Affirms All of GEICO’s ‘A++’ Ratings

May 31, 2011

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A++’ (Superior) and issuer credit ratings (ICR) of “aaa” of Government Employees Group (GEICO) and its property/casualty members. Best also affirmed the ICR of “aaa” as well as the debt rating of “aaa” on $150 million 7.35 percent senior unsecured debentures, due 2023, of the immediate parent holding company, the Delaware-based GEICO Corporation

The outlook for all ratings is stable.

The ratings reflect GEICO’s “superior risk-adjusted capitalization, continued strong operating performance, brand name recognition and solid national market position in the personal automobile segment,” said Best.

“GEICO’s strong operating results reflect a considerable underwriting expense advantage, driven by its direct distribution business model,” Best continued. “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 parent company.”

Best also explained that the ratings “recognize the considerable resources and financial strength of GEICO Corporation’s parent company, National Indemnity Company, as well as its ultimate parent, Berkshire Hathaway Inc.” Warren Buffett’s company’s capitalization “includes approximately $164 billion of stockholders’ equity at December 31, 2010, minimal debt and a long history of strong profitability,” Best observed. “Moreover, GEICO Corporation maintains modest financial leverage and strong cash flows to fund fixed charges.”

As “negative rating factors” Best cited GEICO’s “high investment leverage derived from its significant allocation of invested assets to unaffiliated equities, which could lead to fluctuation in risk-adjusted capitalization due to market swings, as evidenced by the stock market downturn in 2008.

“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 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.”

Best summarized the ratings as follows:
The FSR of A++ (Superior) and ICR 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

Source: A.M. Best

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