GEICO Fairness Opinion Material 1995

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GEICO Fairness Opinion Material

Text of GEICO Fairness Opinion Material 1995

If your word processor does not honor RTF margins, you must manually set them to these to get good results: Left - .75"; Right - .50"; Top - .75"; Bottom - .50". ________________________________________________________________________________ HPKF Inc, et al. SC 13E3 Geico Corp On 10/6/95 Document 2 of 3 EX-22 Exhibit (B)(2) -- Fairness Opinion Material ________________________________________________________________________________ Exhibit (b)(2) PROJECT AUTO Fairness Opinion Presentation August 24, 1995

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PROJECT AUTO Fairness Opinion Presentation Table of Contents SECTION SECTION Tab Tab Tab Tab I II A B C D EXECUTIVE SUMMARY COMPANY OVERVIEW Profile of Auto Corporation Stock Market Analysis Shareholder Analysis Summary of Wall Street Research SUMMARY OF ANALYSIS Summary Multiple Matrix Trading Comparison of Selected Companies Premiums Paid Summary of Discounted Cash Flow Analysis OPERATING COMPARISON OF SELECTED COMPANIES WEIGHTED AVERAGE COST OF CAPITAL

SECTION III Tab Tab Tab Tab Tab A B C D E

APPENDIX A APPENDIX B

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SECTION 1

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PROJECT AUTO Executive Summary 1. Transaction o Value: $70/share cash offer by Parent Co. for the 49.3% of Auto shares not owned by Parent Co., including management options and performance shares Structure: Cash-out merger of a special purpose wholly-owned subsidiary of Parent Co. into Auto Corporation. Conditions: Approval by holders representing eighty percent of the outstanding stock (including, therefore, approval of a majority of the shares other than those of the Parent Co.); regulatory approvals; bring down of reps and warranties, including no material adverse change, to closing Other terms: Fiduciary out at discretion of the Board of Auto Corporation; no break-up fee Timing: Offer expected to be reviewed by the Board on August 24 and 25; Definitive Agreement to be agreed and signed at such time; announcement to follow Closing expected early in first quarter 1996 -1-

o o

o o

o

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PROJECT AUTO Executive Summary (continued) 2. Auto Corporation o Auto Corporation is a publicly-traded holding company which is principally engaged in private automobile insurance private auto line represents 93% of premiums original focus was government employees now focused on preferred market growing in standard and non-standard lines distribution via direct advertising (cable tv), direct mail, and a limited number of agents focused on Eastern US, particularly New York, Florida and Mid-Atlantic states; growing in Midwest sixth largest private auto insurer in US with 2% market share nationwide; much smaller than State Farm, Allstate

o

Market value of $3.8 billion or $56.50 per share at 8/21/95 trades at premium to comparables thin volume

o

Parent Co. established initial large minority shareholding in 1976 when Auto experienced financial difficulties -2-

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PROJECT AUTO Executive Summary (continued) 3. Parent Co. o Holding Company with widely diverse interests, including insurance National Indemnity subsidiary and other subsidiaries of Holding Company hold approximately 50.7% of GEICO shares However, Parent and subsidiaries do not vote Auto shares (which are voted by NationsBank as a result of an agreement with state insurance regulators)

o

Parent is a financially strong enterprise Market value of $29 billion Very strong balance sheet AAA/AA1 rated

4.

Morgan Stanleys Role o Retained by the Board of Directors of Auto Corporation to render a fairness opinion on the transaction We have not solicited interest from any other party

Question to be answered: Is the consideration to be received by the shareholders of Auto, other than Parent Co., fair from a financial point of view? -3-

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SECTION II

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A

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[Flowchart depicting Corporate Structure of GEICO Corporation] -4-

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PROJECT AUTO Line of Business Profile 1994 Revenue ($MM) P&C Insurance $2,662.7 o o Private automobile insurance represents approximately 93% of premiums Homeowners insurance represents approximately 6% of premiums $200 million gross loss in Hurricane Andrew Ceased marketing for own account in 1995 Renewal rights sold to Aetna in March 1995 Auto Corporation to exit in 3 years Substantial catastrophe exposure remains until exit In run-off since 1986 About $60 million in reserves, $20 million in GAAP equity Latent liability exposure Structured settlements provided to Autos P&C companies GAAP shareholders equity of $7.9 million; total assets of $68 million, in process of winding down Includes earnings on parent company investments

P&C Reinsurance ("Resolute Group")

0.2

o o o

Life Insurance ("Criterion Life") Consumer Finance ("GEFCO")

9.8

o

12.0

o

Other & Misc.

31.3 -------$2,716.0 ======== -5-

o

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PROJECT AUTO Private Passenger Automobile Market Share Overview 1993 NPW 1 2 3 4 5 6 7 8 9 10 State Farm Group Allstate Farmers Group Nationwide Group USAA Group GEICO Liberty Mutual Prudential Progressive American Family Total Industry $20,757,846 11,301,012 5,758,223 3,494,766 3,223,235 1,871,475 1,841,066 1,532,554 1,509,151 1,485,352 93,375,607 22.23% 12.10% 6.17% 3.74% 3.45% 2.00% 1.97% 1.64% 1.62% 1.59% 100.00%

Source: A.M. Bests Aggregates and Averages, 1994 -6-

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PROJECT AUTO Private Auto Customer Segment Composition of Premiums 1994 -------------Existing New ---------91% 71% 5 3 ---100% -722 7 ---100% Expected Growth --------------P-I-F Premiums -----------6% 10% 25 48 --8% 29 53 --12%

Customer Segment Preferred Risk Standard Risk Non-Standard Risk

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PROJECT AUTO 1994 Direct Premiums Written By State(1) ($ in thousands) Direct Premiums Written $ 541,352 335,778 286,505 217,765 161,041 100,942 95,991 92,456 67,910 51,896 ---------1,951,636 537,377 ---------$2,489,013 ========== % of Total 21.7% 13.5 11.5 8.7 6.5 4.1 3.9 3.7 2.7 2.1 ---78.4 21.6 ----100.0% =====

Rank 1 2 3 4 5 6 7 8 9 10

State New York Florida Maryland Virginia Texas California Connecticut Georgia Louisiana District of Columbia Total Top 10 States All Other States Total 1994 Direct Premiums Written Note:

(1) Source: Schedule T - 1994 Statutory Annual Statement. -8-

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PROJECT AUTO Private Auto Distribution Distribution Channel Direct -Referrals -Mail -TV (Cable) -Internet Agent -"GFR"s o o o o o Comments 60% of new sales are from referral Engine of growth in 80s; response rate slowed in early 90s New program in 1994; very successful. Could allow faster growth Experimental stages, but interesting long-term prospects 97 GFRs operate in 33 states: focused on military and related civilian populations -9-

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PROJECT AUTO Summary Financial Information ($MM) Average/CAGR to 1994 ---------------10-Year 5-Year -----------8.9% 7.4 7.0 13.4 4.9 17.3 10.0% 9.2% 1.3 11.2 10.5 14.9 P&C Company Plan ------------Early Later --------12.0% -----6.0% ------

GAAP-Aggregate -------------Net Premiums Earned Total Revenues Net Operating Earnings(1) Common Book Value Long-Term Debt ROAE(%) GAAP-Per Share -------------Net Operating Earnings (1)(2) Dividends Common Book Value Statutory Summary --------Loss Ratio Expense Ratio Combined Ratio NPW/Surplus Notes: (1) (2)

12/31/94 -------$2,476.3 2,716.0 199.4 1,445.9 391.4 13.4

6/30/95 ------$1,347.6 1,470.2 109.9 1658.1 431.2 13.3

$

2.85 1.00 21.17

$

1.62 0.54 24.44

10.2% 18.2 16.5

3.3% 25.0 13.1

----

----

82.1% 14.3 96.4 2.45x

83.8% 13.1 96.9 N.A.

82.4% 15.6 98.0 2.11x

81.7% 15.6 97.3 2.12x

82.6% 13.2 95.8 2.50x

85.8% 10.0 95.8 2.70x

Realized gains have been subtracted using a 35% tax rate. Computed using weighted average shares. -10-

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PROJECT AUTO Opportunities and Risks vs. Plan OPPORTUNITIES TO EXCEED PLAN Growth o o o o Fully leverage cable-TV Fine-tune programs to "quote all callers" Establish new geographies In long-term future, new electronic distribution RISKS TO ACHIEVING PLAN Limitations on growth as public company o o o o 1% faster growth cuts EPS by about 2.5% in year one Acceleration imperils control of overall business Constraints on senior claims personnel Investment spending required to boost growth more than 2-3%

Competitive Environment o Competitors may not achieve rate reductions as a result of expense reductions assumed in plan, allowing Auto to achieve better loss ratios

Achievement of expense reductions o Plan calls for 10% expense ratio vs. 13.2% today

Control of fast-growing standard/ non-standard segments Industry environment now unusually favorable o o Regulation Inflation

Catastrophes in next 2-3 years -11-

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B

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[Graph depicting GEICO Corporations Annotated Trading History from 1994-Present] -12-

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[Graph depicting GEICO Corporations Ten Year Trading History, charted against the S&P 500] -13-

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[Graph depicting GEICO Corporations Historical Price/Volume Analysis] -14-

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[Graph depicting the Ten Year Price/Earnings Analysis for the Property & Casualty Insurance Industry] -15-

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[Graph depicting GEICO Corporations Relative Price/Earnings Ratio v. an index of Property & Casualty Insurers and the S&P 500 Index Price/Earnings Ratio] -16-

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[Graph depicting the Ten Year Price