Best Affirms, Assigns Ratings to GEICO and Affiliates; Outlook Stable

June 25, 2012

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A++’ (Superior) and issuer credit ratings (ICR) of “aaa” of the members of Government Employees Group (GEICO), which is based in Chevy Chase, Maryland. 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, GEICO Corporation of Wilmington, Delaware.

The outlook for the above ratings is stable. Best has also assigned an FSR of ‘A++’ (Superior) and ICRs of “aaa” to GEICO Advantage Insurance Company, GEICO Choice Insurance Company and GEICO Secure Insurance Company, all with stable outlooks. The companies are domiciled in Omaha, Nebraska, unless otherwise indicated.

The affirmations reflect GEICO’s “solid risk-adjusted capitalization, continued strong operating performance, brand name recognition and preeminent 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.

“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 GEICO Corporation.”

Best explained that the ratings of GEICO Advantage, GEICO Choice and GEICO Secure “reflect the benefits derived from utilizing the same infrastructure, platform and personnel of GEICO. As a result, it is expected that the operating performance and risk-adjusted capital position of these companies will be commensurate with the other members of GEICO.”

All of 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., whose financial profile includes approximately $165 billion of stockholders’ equity at December 31, 2011, minimal debt and a long history of strong profitability,” said Best. “Moreover, GEICO Corporation maintains modest financial leverage and strong cash flows to fund fixed charges.”

As negative factors, Best singled out 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 said it believes the members of GEICO “are well positioned at their current rating levels. If either deteriorating underwriting results or an equities market downturn result in a significant decline in risk-adjusted capital, negative rating pressure would be exerted on the ratings.”

Best summarized the companies affected by its rating actions as follows:
The FSR of ‘A++’ (Superior) and ICRs of “aaa” have been affirmed for the following members of Government Employees Group:
Government Employees Insurance Company
GEICO Indemnity Company
GEICO Casualty Company
GEICO General Insurance Company

The FSR of A++ (Superior) and ICR of “aaa” have been assigned to the following members of Government Employees Group:
GEICO Advantage Insurance Company
GEICO Choice Insurance Company
GEICO Secure Insurance Company

Source: A.M. Best

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