With some reluctance, D.C. Insurance Superintendent Maximillian Wallich yesterday announced he will let the Government Employees Insurance Co. (Geico) pay $31 million to buy controlling blocks of stock in three sister firms.
The deal, which Geico has an option to exercise sometime in November, will cement what until now has been an arms-length relationship between the large auto insurer, based in Chevy Chase, and its three affiliates - Government Employees Life Insurance Co. (Gelico). Criterion Insurance Co. (Crico) and Government Employees Financial Corp. (Gefco).
But the size of the purchase, coming this soon after Geico's recovery from million dollar losses last year and the year before, has prompted concern among some stockholders and insurance regulators that the company may be moving too quickly into an expensive acquisition which may not even be necessary.
"I'm not pleased with the decision." Wallich said of his own ruling during a phone interview. "But I couldn't let my other worries enter into it. Geico has satisfied all the legal criteria."
Those criteria are spelled out in Section 35-1903 of the D.C. Code. Which stipulates six situations under which the asquisition of an insurance company can be disapproved. Briefly, the laws say that no restricts competition, jeopardzes the financial stability of the insurer, or involves unfair terms of sale.
The purchase will give Geico a 24.1 per cent interest in Geico, a 20 per cent interest in Orico and a 24 per cent interest in Gefco. In all, Geico will pay $30,856,686 for 1,082,274 shares now owned by American Financial Corp. the Cincinati-based financial holding company run by the master acquisitor. Carl Linder. Geico has said it will finance the purchase from "existing investment portfolio resources.."
"There is no question in my mind this is in Geico's interest," John J. Byrne, president of Geico, said in an interview yesterday. The acquisition, he added, would put Geico in league with other insurance companies. "All of our competitors have multiple lines (of insurance) under a single parent," he said.
Byrne stressed the ideal is intended to do three things: Enchance Geico's earnings; Give Geico a financial interest in the affiliated companies; and provide needed diversification.
Geico has specialized in low-risk auto coverge, while Crico sells to high-risk drivers. Gelico provides life coverage to customers, may of whom are referred by Geico salespeople.
Durinf a lengthy hearing last month, Wallich voiced concern about apparent conflicts of interest in the deal. A majority of the boards of each of the subsidaries also sit on Geico's board of directors. Wallich also asked Geico officials why they were pressing to acquire companies which, when chartered 15 to 25 years ago, were intentionally kept independent. He expressed doubts that things had changes enough since then to warrant dependent relationships.
He further suggested the price Geico is paying may be inflated. It is about 32 per cent above what the stocks were selling for at the time the option agreement was signed in May.
In his order yesterday, Wallich hinted these concerns persist but could not be determing factors. "The question of degree of quality of investment in the sister companies," the order said, "may not be considered by the Superintendent of Insurance to disapprove the acquisition since it is not contained in the six situations referred to above."