GEICO GENERAL INSURANCE COMPANY EXAMINATION: DECEMBER 31, 2004 NAIC NUMBER 35882

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1 GEICO GENERAL INSURANCE COMPANY EXAMINATION: DECEMBER 31, 2004 NAIC NUMBER 35882

2 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...7 Intercompany Agreements...8 Fidelity Bond and Other Insurance...9 Pension, Stock Ownership and Insurance Plans...9 Statutory Deposits Territory and Plan of Operation Insurance Products and Related Practices Reinsurance Accounts and Records Financial Statements Balance Sheet Assets Liabilities, Surplus and Other Funds Statement of Income Capital and Surplus Account Analysis of Examination Changes to Surplus Growth of the Company Notes to Financial Statements Comments and Recommendations Subsequent Events Conclusion Signatures... 26

3 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 Honorable Ann Womer Benjamin Secretary, Midwestern Zone, NAIC Director of Insurance Ohio Department of Insurance 2100 Stella Court Columbus, Ohio Honorable Julie M. Bowler Secretary, Northeastern Zone, NAIC Insurance Commissioner Commonwealth of Massachusetts Division of Insurance One South Station, 5 th Floor Boston, Massachusetts 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 Honorable Gary Smith Secretary, Western Zone, NAIC Insurance Commissioner State of Idaho Department of Insurance 700 West State Street Boise, Idaho Honorable R. Steven Orr Insurance Commissioner Maryland Insurance Administration 525 St. Paul Place Baltimore, Maryland

4 Dear Sirs and Madames: In compliance with your instructions and in accordance with Section of the Insurance Article of the Annotated Code of Maryland, an association examination has been conducted of the financial condition and activities of the GEICO GENERAL INSURANCE COMPANY (hereinafter called the Company), at its home offices located at 5260 Western Avenue, Chevy Chase, Maryland , 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: Government Employees Insurance Company (GEICO) 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 We placed substantial reliance on the audited financial statements for 2

5 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, 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 are no prior exam findings for the report dated October 20, 2000, which covered the period from January 1, 1995, to December 31, General: HISTORY The Company was incorporated on March 27, 1978 as Equi-Gen Insurance Company under the laws of Iowa to act as the vehicle for the transfer of corporate domicile of the Equitable General Insurance Company from Fort Worth, Texas to Des Moines, Iowa, effective December 31, Equitable General Insurance Company was incorporated under the laws of Texas on May 15, 1934, under the name Associated Casualty Company, and began business the following day. Several name changes ensued, with the present name being adopted on September 29, Complete financial control of the Company was acquired on March 31, 1982 by Government Employees Insurance Company from the Equitable Life Assurance Society. On June 22, 1989, the Company was reincorporated and redomesticated under the laws of Maryland as a stock property and casualty insurer. As of December 31, 1994, the Company s ultimate parent was GEICO Corporation, which was a publicly owned holding company. 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, 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. Most new business was automobile liability and physical damage insurance 3

6 written for preferred-risk individuals who were neither government employees nor military personnel. Capital Stock: The Company s Articles of Redomestication and Reincorporation authorized the Company to issue 357,142 shares of common stock with a par value of $28 per share. As of December 31, 2004, the Company had issued 110,000 shares of common stock with an aggregate par value of $3,080,000. All of the outstanding common stock was owned by Government Employees Insurance Company. Dividends to Stockholder: During the examination period the following ordinary cash dividends were paid: December 31, 2000 $5,900,000 December 31, 2001 $5,800,000 December 31, 2002 $5,800,000 December 31, 2003 $5,300,000 December 31, 2004 $5,700,000 Dividends were paid to Government Employees Insurance Company for all years under examination. In addition, the Company did not declare or pay any extraordinary dividends during the examination period. Management: The following persons were serving as the Company s Directors as of December 31, 2004: Name and Address Olza M. Nicely, Chairman Great Falls, Virginia Charles R. Davies Warrenton, Virginia John J. Geer, Jr. Vienna, VA James M. Hitt Herndon, VA Donald R. Lyons Principal Occupation President and Chief Executive Officer, GEICO and GEICO Corporation Senior Vice President and General Counsel, GEICO and GEICO Corporation Vice President, GEICO Vice President, GEICO Senior Vice President, 4

7 Potomac, MD Robert M. Miller University Park, TX William E. Roberts Cabin John, Maryland David L. Schindler Rockville, Maryland Thomas M. Wells Brookeville, Maryland GEICO Senior Vice President, GEICO Executive Vice President, GEICO Senior Vice President, GEICO Senior Vice President and Chief Financial 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 John J. Geer, Jr. Vice President 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 5

8 James F. Nayden, Jr. Nancy L. Pierce David H. Pushman George W. Rogers Rynthia M. Rost Joseph R. Thomas Edward W. Ward, III Vice President & Legislative Counsel Vice President Vice President Vice President Vice President Vice President 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. 6

9 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 Government Employees Insurance Company (GEICO), (I) GEICO General Insurance Company, (I) GEICO Indemnity Company, (I) GEICO Casualty Company, (I) Criterion Delaware Maryland Maryland Maryland Maryland Insurancecy, Inc. Wholly owned TX NOTE: all subsidiaries were wholly owned subsidiaries. (I) Denotes insurance company 7

10 Investment Advisory Agreement: INTERCOMPANY AGREEMENTS Effective January 1, 1990, the Company entered into an investment advisory agreement with 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 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 $127,528 and $115,647 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 17, 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. 8

11 Intercompany Charge Agreement: The Company had no employees. All needed services (e.g., maintenance of accounting records, underwriting, etc.) were performed by employees of Government Employees Insurance Company. The Company would be charged for these services under the provisions of the Intercompany Charge Agreement. As indicated in the Reinsurance section of this report, the Company cedes 100 percent of its direct business to its parent. Under the reinsurance agreement, the Company receives a ceding commission from its parent adequate to cover all expenses related to its business ceded. Since all of the Company's business was ceded 100 percent to its parent, and all of the Company's expenses were paid by its parent under the reinsurance agreement, no additional payments were made in 2004 under the Intercompany Charge Agreement. The Intercompany Charge Agreement is a document that sets 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. 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 insureds 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 coverages 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 the years under examination since the plan was adequately funded in 9

12 accordance with the Company s policy. The accumulated benefit obligation is included with Government Employees Insurance Company. 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 coverage at their own expense. Postretirement Benefits: In addition to pension benefits, certain health care and life insurance benefits are provided for certain employees who retire under the pension plan. The accumulated benefit obligation is included with Government Employees Insurance Company. Stock Ownership Plans: The Company did not have any stock ownership plans. STATUTORY DEPOSITS In compliance with Section 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 $3,300,000 and a market value of $3,633,372. These funds were held for the protection of all of the Company s policyholders and creditors. 10

13 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 $ 135,000 $ 156,630 Georgia 150, ,033 Louisiana 100, ,844 Massachusetts 200, ,056 New Hampshire 15,000 16,654 New Mexico 350, ,077 North Carolina 350, ,954 Oregon 275, ,061 Total $1,575,000 $1,748,309 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 during 2004 in all of these jurisdictions except for Hawaii, Massachusetts, Michigan, New Jersey, North Carolina and South Carolina. The majority of the Company s direct business in 2004 was written in the states of California (6%), Connecticut (3%), Florida (18%), Georgia (3%), Maryland (7%), New York (23%), Texas (7%) and Virginia (5%). As indicated in the Reinsurance section of this report, the Company cedes 100 percent of its business to its parent. The Company s major product was automobile insurance, which represented all of its direct premiums written during The Company markets this product at preferred rates for individuals who were neither government employees nor 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. 11

14 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, 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 our examination, we did not review the following market conduct-related areas: Assumed Reinsurance: Policy Forms Fair Underwriting Practices Advertising and Sales Materials Treatment of Policyholders: Claims Processing (Timeliness) Complaints REINSURANCE The Company assumed reinsurance premiums totaling ($141,000) during 2004 and, as of December 31, 2004, had loss and loss expense reserves for assumed business totaling $35,876,036. With the exception of a small amount of business assumed from the New Hampshire Reinsurance Facility, a mandatory participation pool, the Company did not have any active in-force assumed reinsurance treaties. Ceded Reinsurance: During 2004, the Company ceded reinsurance premiums totaling $3,907,383,000 and had recorded reinsurance balances recoverable totaling $3,101,923,000 including $1,034,130,000 for ceded unearned premiums and $2,067,782,000 for loss and loss adjustment expense reserves, of which $1,878,895,000 was for losses and $188,887,000 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. The Company did not report any ceded reinsurance premiums payable to these same reinsurers. 12

15 With the exception of a small amount of business ceded to the New Hampshire Reinsurance Facility, the Company s only active ceded reinsurance treaty was with its parent, Government Employees Insurance Company (GEICO). Under its quota share treaty with GEICO, the Company ceded 100 percent of its personal lines business, net of other reinsurance. This treaty represented 99.9 percent of all premium cessions by the Company in 2004 and approximately 98.3 percent of the ceded loss and loss adjustment expense reserves as of December 31, Our review of the various ceded reinsurance treaties disclosed no unusual provisions. 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. 13

16 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. 14

17 BALANCE SHEET ASSETS Nonadmitted Net Admitted Assets Assets Assets Bonds $ 72,050,574 $ - $ 72,050,574 Cash ($170,460), Cash Equivalents ($40,261,010) and Short-term investments ($10,056,425) 50,487,895-50,487,895 Investment income due and accrued 1,239,403-1,239,403 Premiums and considerations: Uncollected premiums, agents balances in the course of collection 659, ,868 - Deferred premiums, agents balances and installments booked but deferred and not yet due. 39,184 39,184 - Reinsurance: Amounts recoverable from reinsurers 10,512-10,512 Current federal and foreign income tax recoverable and interest thereon 17,878-17,878 Net deferred tax asset 248, ,402 Electronic data processing equipment and software 438, ,898 Furniture and equipment, including health care delivery assets 304, ,204 - Receivables from parent, subsidiaries and affiliates 1,284,732-1,284,732 Other assets nonadmitted 227, ,308 - Aggregate write-ins for other than invested assets 161, ,195 Total assets $ 127,170,053 $ 1,230,564 $ 125,939,489 15

18 LIABILITIES, SURPLUS AND OTHER FUNDS (NOTE 1) Other expenses (excluding taxes, licenses and fees) (NOTE 2) $ 1,000 Unearned premiums (after deducting unearned premiums for ceded reinsurance of $1,034,130,016) 63,423,967 Remittances and items not allocated 1,279 Aggregate write-ins for liabilities 6,418,304 Total liabilities $ 69,844,550 Common capital stock $ 3,080,000 Gross-paid in and contributed surplus 42,487,779 Unassigned funds 10,527,160 Surplus as regards policyholders $ 56,094,939 Total liabilities and surplus $125,939,489 16

19 STATEMENT OF INCOME Investment Income Net investment income earned $ 4,814,069 Net income before federal and foreign income taxes $ 4,814,069 Federal and foreign income taxes incurred (582,122) Net income $ 4,231,947 17

20 CAPITAL AND SURPLUS ACCOUNT Surplus as regards policyholders, December 31, 1999 $ 59,549,089 Gains and (Losses) in Capital and Surplus, 2000 Net income, year ended December 31, 2000 $5,226,112 Change in non-admitted assets (93,386) Dividends to stockholders (5,900,000) Change in capital and surplus for the year (767,274) Surplus as regards policyholders, December 31, ,781,815 Gains and (Losses) in Capital and Surplus, 2001 Net income, year ended December 31, 2001 $4,876,741 Change in net deferred income tax 110,710 Change in non-admitted assets (351,474) Cumulative effect of changes in accounting principles 643,640 Dividends to stockholders (5,800,000) Change in capital and surplus for the year (520,383) Surplus as regards policyholders, December 31, ,261,432 Gains and (Losses) in Capital and Surplus, 2002 Net income, year ended December 31, 2002 $5,265,884 Change in net deferred income tax 61,006 Change in non-admitted assets (186,400) Dividends to stockholders (5,800,000) Change in capital and surplus for the year (659,510) Surplus as regards policyholders, December 31, 2002 $ 57,601,922 <Continued> 18

21 CAPITAL AND SURPLUS ACCOUNT CONTINUED Gains and (Losses) in Capital and Surplus, 2003 Net income, year ended December 31, 2003 $5,220,679 Change in net deferred income tax (60,873) Change in non-admitted assets 180,355 Dividends to stockholders (5,300,000) Change in capital and surplus for the year 40,162 Surplus as regards policyholders, December 31, 2003 $ 57,642,084 Gains and (Losses) in Capital and Surplus, 2004 Net income, year ended December 31, 2004 $4,231,947 Change in net deferred income tax (160,801) Change in non-admitted assets 81,709 Dividends to stockholders (5,700,000) Change in capital and surplus for the year (1,547,145) Surplus as regards policyholders, December 31, 2004 $ 56,094,939 19

22 ANALYSIS OF EXAMINATION CHANGES TO SURPLUS There were no changes to the Company s surplus as a result of our examination. 20

23 GROWTH OF THE COMPANY The financial growth of the Company for the five year period ended December 31, 2004 was as follows: Assets $125,939,489 $ 128,317,103 $119,364,473 $ 127,260,586 $120,319,238 Liabilities 69,844,550 70,675,019 61,762,551 68,999,154 61,537,423 Policyholder Surplus Net investment Gain 56,094,939 57,642,084 57,601,922 58,261,432 58,781,815 4,814,069 6,493,516 6,300,444 5,730,715 5,997,322 Net Income 4,231,947 5,220,679 5,265,884 4,876,741 5,226,112 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. 21

24 NOTES TO FINANCIAL STATEMENTS 1. As described under the caption Reinsurance, all of the Company s business in force when it was purchased by Government Employers Insurance Company (GEICO) in 1982 was ceded under a loss-portfolio reinsurance treaty. Since that time, the Company ceded all of its direct premiums, primarily to GEICO. As a result, as of December 31, 2004, the Company had ceded loss and loss adjustment expense reserves totaling $2,067,782,000 and had no retained loss or loss adjustment expense reserves. If the reinsurers are not able to meet their obligations under the Company's reinsurance agreements, the Company would be liable for any defaulted amounts. 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. 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 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,

25 COMMENTS AND RECOMMENDATIONS There are no comments and recommendations included in this report. During our examination, we made a number of suggestions and recommendations to the Company with regard to record keeping and other procedures relating to its operations. However, these suggestions and recommendations are deemed insignificant and immaterial for inclusion in this report. 23

26 SUBSEQUENT EVENTS There were no significant events occurring subsequent to our examination period that required disclosure. 24

27 CONCLUSION Our examination disclosed that as of December 31, 2004 the Company had: Admitted Assets $ 125,939,489 Liabilities and Reserves $ 69,844,550 Common Capital Stock $ 3,080,000 Gross Paid-in and Contributed Surplus 42,487,779 Unassigned Funds 10,527,160 Surplus as Regards Policyholders $ 56,094,939 Total Liabilities and Surplus $ 125,939,489 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 to 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. 25

28 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, Craig A. Moore, CFE Examiner-in-Charge Maryland Insurance Administration Representing the Northeastern Zone Under the supervision of, Jeffrey Lieman, AFE Chief Examiner Maryland Insurance Administration 26

29 ROBERT L. EHRLICH, JR. Governor MICHAEL S. STEELE Lt. Governor R. STEVEN ORR Commissioner JAMES V. MCMAHAN, III Deputy Commissioner LESTER C. SCHOTT Associate Commissioner Examination and Auditing 525 St. Paul Place, Baltimore, Maryland Direct Dial: Fax: TTY: April 27, 2006 Olza M. Nicely President GEICO General Insurance Company 5260 Western Avenue Chevy Chase, Maryland Dear Mr. Nicely: Enclosed is a draft copy of the Report on Examination of the affairs and financial condition of GEICO General Insurance Company, as of December 31, 2004, dated January 12, 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 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 [email protected].

30 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 Sincerely, Original Signature on File Jeffrey Lieman, CPA, AFE Chief Examiner

31 ROBERT L. EHRLICH, JR. Governor MICHAEL S. STEELE Lt. Governor R. STEVEN ORR Commissioner JAMES V. MCMAHAN, III Deputy Commissioner LESTER C. SCHOTT Associate Commissioner Examination and Auditing 525 St. Paul Place, Baltimore, Maryland Direct Dial: Fax: TTY: June 1, 2006 Olza M. Nicely President GEICO General Insurance Company 5260 Western Avenue Chevy Chase, Maryland 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 GEICO General Insurance Company, to comply with the recommendations made in the Report on Examination as of December 31, 2004, dated January 12, 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 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, Jeffrey Lieman, CPA, AFE Chief Examiner