USAA 2010 Report to Members

CONSOLIDATED STATEMENTS OF INCOMECommitting to qualityA continued focus on member experience, proactive expense control and rigorousmanagement of risk contributed to a highly successful year financially, with a netincome of $2.6 billion.Revenue of $18 billion came mostly from strong product sales and retention. Inaddition to members turning to us as a provider for their financial assets, more newmembers looked to USAA to help meet their financial needs. A record 617,000 netnew members joined USAA in 2010.Never forgetting that we are stewards of the membership’s assets, USAA continuedto practice exceptional expense control, evident in our property and casualty insuranceoperation delivering an industry-leading operating expense ratio of 23.6 percent,our lowest in more than 50 years.PRE-TAX INCOME (in millions)Years Ended December 31 (Dollars in millions) 2010 2009 2008REVENUEInsurance premiums $ 11,205 $ 10,363 $ 9,641Investment returns:Interest and dividends earned, net 1,715 1,667 1,517Realized gains on securities sold, net 346 183 584Unrealized gains (losses) on securitiesunsold, net 653 2,090 (1,847)Total investment return 2,714 3,940 254Fees, sales and loan income, net 3,422 2,408 2,008Real estate investment income 190 146 171Servicing and contractual income onsecuritizations — 385 368Other revenue 415 316 470Total revenue 17,946 17,558 12,912$2,090LOSSES, BENEFITS AND EXPENSESNet losses, benefits and settlement expenses 9,160 8,340 8,353$2,917$2,388$2,238$2,221$653$2,928Deferred policy acquisition costs 556 495 471Real estate investment expenses 153 116 110Interest expense 604 516 688Dividends to policyholders 223 196 114Other operating expenses 3,669 3,584 2,785Total losses, benefits and expenses 14,365 13,247 12,521Pre-tax income 3,581 4,311 391Income tax expense (benefit) 944 1,291 (32 )20062007200820092010NET INCOME $ 2,637 $ 3,020 $ 423ALL OTHER INCOMEUNREALIZED GAINS (LOSSES)ON SECURITIES UNSOLD, NET*($1,847)*In 2008, USAA modified the presentation of unrealized gains (losses) from net worth to income.CONSOLIDATED STATEMENTS OF CASH FLOWSMaintaining our focusUSAA produced positive operating cash flows of $4.9 billion due to strongoperational performance, prudent expense management and continued growth inproduct volumes.Every month in 2010, USAA saw positive net cash flows coming from our memberinvestment activities, evidence of members’ trust in the financial stability of USAA.As we continue to build our member insight and understanding, USAA will remainsteadfast in our commitment to quality and member satisfaction.This level of member trust is not something we take lightly, and USAA will continueto be here for our members in their search for financial solutions and stability.CASH FLOWS FROM OPERATING ACTIVITIES (in billions)$4.9Years Ended December 31 (Dollars in millions) 2010 2009 2008CASH FLOWS FROM OPERATING ACTIVITIESNet income $ 2,637 $ 3,020 $ 423Adjustments to reconcile net income to net cashprovided by operating activities:Increase in insurance reserves 645 581 508Interest credited on policyholder deposits 574 524 427Net realized gains (346) (183) (584)Unrealized (gains) losses on securitiesunsold, net (648) (1,920) 1,710Increase in premiums due from policyholders (147) (164) (120)Depreciation and amortization 173 143 189Equity loss (earnings) in real estatepartnerships 5 7 (3)Decrease (increase) in loans held for sale 1,137 (351) 1,387Change in other assets/liabilities 835 1,337 (655)Net cash provided by operating activities 4,865 2,994 3,282$2.8$2.3$3.3$3.0CASH FLOWS FROM INVESTING ACTIVITIESProceeds from investments sold or matured 4,283 4,360 14,244Cost of investments acquired (7,381) (8,399) (16,894)Net increase in bank loans (1,010) (2,568 ) (2,367 )20062007200820092010Other uses (421) (407) (421)Net cash used in investing activities (4,529) (7,014) (5,438)CASH FLOWS FROM FINANCING ACTIVITIESSubscriber’s Account distributions (687) (595 ) (373 )Net (repayment) borrowing of debt (5,527) (76 ) 161Net increase in bank deposits 6,309 4,513 2,068Other 920 1,336 997Net cash provided by financing activities 1,015 5,178 2,853Net increase in cash and cash equivalents 1,351 1,158 697CASH AND CASH EQUIVALENTS —BEGINNING OF YEAR 7,435 6,277 5,580CASH AND CASH EQUIVALENTS —END OF YEAR$ 8,786 $ 7,435 $ 6,27716 USAA 2010 REPORT TO MEMBERS