One year ago, the financial future of the Government Employes Insurance Company (Geico) was precarious, at best. Its losses ran well up into the millions of dollars. Several states had prohibited it from writing new auto policies. And most of the firm's fortunes were still exposed, riding on a single line of insurance.
Yesterday, the Washington-based insurance company, its top management reconstituted and its funds partially restored in one of the most impressive turnarounds in the history of insurance, asked the D.C. Superintendent of Insurance for permission to buy controlling interests in three affiliated companies, for the price of $30.9 million.
Is Geico moving too hastily into a deal it doesn't really need.
During five uninterrupted hours of blunt questioning in his office, Maximilian Wallach, the D.C. insurance superintendent, probed and prodded Geico officials for the reasons behind a purchase he said troubled him.
"Some eyebrows might be raised as to why in such a short time Geico is engaging in the acquisition of stock beyond, you might say, the call of duty," Wallach stated at the outset.
In the case of each of the three companies Geico is seeking to invest in - the Government Employes Life Insurance Company (Gelico), Criterion Insurance Company (Crico) and Government Employes Financial Corportation (Gefco) - most of the dirctors also sit on the board of directors of Geico. The firms were established originally to provide multiple insurance and financial services to Geico policyholders, but until recently, Geico has insisted their ownership be separate.
Wallach raised the possibility of a conflict of interest on the part of Geico's directors - a charge denied by Donald Smith, general counsel for Geico, who said the directors were acting solely in Geico's interest. But Wallach persisted, suggesting the stock purchase may not be in the interest of Geico shareholders and wondering aloud whether the 32 per cent premium Geico has agreed to pay for the stock is too high.
The shares Geico wants to buy are now owned by American Financial Corporation, a billion-dollar holding company run by the master acquisitor, Carl Lindner. The deal would give Geico 24.1 percent of Gelico's outstanding common stock, 20 per cent of Crico common, 24 per cent of Geico common and 1.8 per cent of Geico preferred.
Geico officials, supported by an investment banker, a stock analyst, an accountant and a bevy of lawyers, defended the purchase, saying it would cement an already beneficial relationship that exists between the four firms, provide needed diversification for Geico without diluting stockholder equity, and improve Geico's balance sheet.