Best Affirms GEICO’s ‘A++’ Rating

June 14, 2004

A.M. Best Co. announced that it “has affirmed GEICO’s “A++” (Superior) financial strength rating, and its “aaa” debt rating for the company’s existing debt securities. The outlook for the ratings is stable.

“The ratings reflect GEICO’s superior financial strength, strong operating performance, brand name recognition and market position as one of the top ten personal automobile writers in the United States,” said Best. The rating agency indicated that GEICO’s above average investment leverage, as well as its exposure to potential regulatory issues in several of its larger states, “modestly offset” these strengths.

The stable out look is based on “GEICO’s superior financial strength, consistent track record of profitability and considerable market presence,” said Best.

“GEICO’s strong operating results reflect a considerable underwriting expense advantage, driven by its direct distribution business model and improved loss experience in recent years,” Best observed. “Overall returns also benefit from its consistent and stable stream of investment income. When combined with its capital gains, GEICO has generated significant capital over the last five years, which has supported steady growth in net premium written and enabled it to declare substantial dividends.

“Further, GEICO maintains a strategic advantage due to its leadership position in the government and military employee market, as well as an excellent reputation for providing quality service. GEICO also benefits from a strategic alliance with an unaffiliated insurer, as well as ownership of an independent agency that provides the ability to supplement its automobile products with homeowners coverage without assuming the corresponding catastrophe risk.”

Best also indicated that the rating “recognizes the considerable resources and financial strength of GEICO’s ultimate parent, Berkshire Hathaway Inc., whose financial profile includes approximately $78 billion of stockholders’ equity, minimal debt and a long history of strong profitability. Moreover, the immediate holding company, GEICO Corporation, maintains modest financial leverage and strong cash flows to fund fixed charges.”

The negative rating factors include “above average investment leverage, derived from its significant allocation of invested assets to unaffiliated common stock,” said Best. However, the rating agency added that its “risk adjusted capitalization and historic success in managing its portfolio partially mitigate this risk.”

Best also noted that “GEICO maintains a modest geographic concentration that exposes it to legislative changes and judicial decisions, as its top four states account for approximately one-half of its direct premiums written. However, this risk is largely mitigated by its geographic spread throughout the rest of the country and management’s proven ability to quickly adapt to changing market conditions.”

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