SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-6271
AVEMCO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-0733935
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 Aviation Way
Frederick, Maryland 21701
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (301) 694-5700
N/A
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 8,688,320 shares of common
stock were outstanding as of September 30, 1995.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Note 1)
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 1995, and December 31, 1994
September 30, December 31,
1995 1994
ASSETS:
Investments . . . . . . . . . . . . . . . . . $147,903,000 $136,378,000
Cash. . . . . . . . . . . . . . . . . . . . . 4,959,000 5,191,000
Accounts receivable . . . . . . . . . . . . . 32,112,000 23,874,000
Reinsurance recoverable . . . . . . . . . . . 17,841,000 16,903,000
Deferred policy acquisition costs . . . . . . 6,228,000 4,922,000
Prepaid reinsurance premiums. . . . . . . . . 5,906,000 4,924,000
Net property and equipment. . . . . . . . . . 8,242,000 7,532,000
Other assets. . . . . . . . . . . . . . . . . 3,612,000 5,468,000
Total assets. . . . . . . . . . . . $226,803,000 $205,192,000
LIABILITIES:
Unpaid losses and loss adjustment expenses. . $ 43,759,000 $ 41,202,000
Unearned premiums . . . . . . . . . . . . . . 35,613,000 27,001,000
Accounts payable and accrued expenses . . . . 23,129,000 21,248,000
Ceded reinsurance premiums payable . . . . . 5,895,000 5,531,000
Notes payable to banks . . . . . . . . . . . 57,967,000 54,600,000
Total liabilities . . . . . . . . . 166,363,000 149,582,000
STOCKHOLDERS' EQUITY:
Preferred stock, par value, $10.00 per share;
500,000 shares authorized; none issued . . -- --
Common stock, par value, $.10 per share;
20,000,000 shares authorized; 11,549,061
issued in 1995 and 11,543,361 in 1994 . . . 1,155,000 1,154,000
Additional paid-in capital . . . . . . . . . 18,260,000 18,206,000
Net unrealized appreciation (depreciation) on
investments . . . . . . . . . . . . . . . . 4,124,000 (842,000)
Foreign currency translation adjustments . . (88,000) (205,000)
Retained earnings . . . . . . . . . . . . . . 86,861,000 84,285,000
110,312,000 102,598,000
Treasury stock, at cost, 2,860,741 shares
in 1995 and 2,693,041 in 1994 . . . . . . . (49,872,000) (46,988,000)
Total stockholders' equity . . . . 60,440,000 55,610,000
Contingent liabilities
Total liabilities and stockholders'
equity . . . . . . . . . . . . . . $226,803,000 $205,192,000
See accompanying notes to condensed consolidated financial statements.
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
September 30,
1995 1994
REVENUES:
Premiums earned . . . . . . . . . . . . . . . $ 60,287,000 $ 57,461,000
Commissions . . . . . . . . . . . . . . . . . 5,620,000 4,995,000
Net investment income . . . . . . . . . . . . 6,376,000 6,308,000
Computer products and services . . . . . . . 7,557,000 6,330,000
Realized investment gains (losses) . . . . . 203,000 (18,000)
Other . . . . . . . . . . . . . . . . . . . . 4,905,000 4,007,000
Total revenues . . . . . . . . . . 84,948,000 79,083,000
EXPENSES:
Losses and loss adjustment expenses . . . . . 42,951,000 35,141,000
Selling, general, and administrative expenses 25,963,000 23,941,000
Commissions . . . . . . . . . . . . . . . . . 5,084,000 6,076,000
Cost of computer hardware sold . . . . . . . 1,591,000 844,000
Interest . . . . . . . . . . . . . . . . . . 3,108,000 2,566,000
Total expenses . . . . . . . . . . 78,697,000 68,568,000
Earnings before income taxes . . . . . . . . 6,251,000 10,515,000
Federal and state income taxes . . . . . . . 694,000 2,259,000
Net earnings . . . . . . . . . . . . . . . . $ 5,557,000 $ 8,256,000
Net earnings per share . . . . . . . . . . . $ .63 $ .91
Weighted average number of common and common
equivalent shares outstanding . . . . . . . 8,875,400 9,059,591
Dividends per share . . . . . . . . . . . . . $ .34 $ .33
See accompanying notes to condensed consolidated financial statements.
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
1995 1994
REVENUES:
Premiums earned . . . . . . . . . . . . . . . $ 20,790,000 $ 19,891,000
Commissions . . . . . . . . . . . . . . . . . 1,968,000 1,644,000
Net investment income . . . . . . . . . . . . 2,181,000 2,235,000
Computer products and services . . . . . . . 2,793,000 2,174,000
Realized investment gains . . . . . . . . . . 210,000 48,000
Other . . . . . . . . . . . . . . . . . . . . 1,143,000 1,377,000
Total revenues . . . . . . . . . . 29,085,000 27,369,000
EXPENSES:
Losses and loss adjustment expenses . . . . . 17,948,000 13,998,000
Selling, general, and administrative expenses 8,123,000 7,489,000
Commissions . . . . . . . . . . . . . . . . . 1,801,000 2,014,000
Cost of computer hardware sold . . . . . . . 792,000 294,000
Interest . . . . . . . . . . . . . . . . . . 1,073,000 971,000
Total expenses . . . . . . . . . . 29,737,000 24,766,000
Earnings before income taxes . . . . . . . . (652,000) 2,603,000
Federal and state income taxes (benefit) . . (726,000) 316,000
Net earnings . . . . . . . . . . . . . . . . $ 74,000 $ 2,287,000
Net earnings per share . . . . . . . . . . . $ .01 $ .26
Weighted average number of common and common
equivalent shares outstanding . . . . . . . 8,804,944 8,945,353
Dividends per share . . . . . . . . . . . . . $ .12 $ .11
See accompanying notes to condensed consolidated financial statements.
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1995 1994
OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . $ 5,557,000 $ 8,256,000
Charges (credits) to operations not affecting
cash . . . . . . . . . . . . . . . . . . . 1,988,000 1,042,000
Net cash flows provided from operations . . . 7,545,000 9,298,000
INVESTMENT ACTIVITIES:
Proceeds from sale or maturity of investments 33,176,000 29,259,000
Purchase of investments . . . . . . . . . . . (36,814,000) (34,487,000)
Proceeds from sale of property and equipment 39,000 9,000
Purchase of property and equipment . . . . . (1,734,000) (548,000)
Net cash flows used by investment activities (5,333,000) (5,767,000)
FINANCING ACTIVITIES:
Proceeds from borrowings . . . . . . . . . . 9,500,000 10,000,000
Principal payments on debt . . . . . . . . . (6,133,000) (5,700,000)
Exercise of common stock options . . . . . . 54,000 72,000
Dividends to stockholders . . . . . . . . . . (2,982,000) (2,956,000)
Repurchase of common stock . . . . . . . . . (2,883,000) (4,133,000)
Net cash flows used by financing activities . (2,444,000) (2,717,000)
Net increase (decrease) in cash . . . . . . . (232,000) 814,000
Cash, beginning of year . . . . . . . . . . . 5,191,000 2,918,000
Cash, end of period . . . . . . . . . . . . . $ 4,959,000 $ 3,732,000
See accompanying notes to condensed consolidated financial statements.
AVEMCO CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q
and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine
months ended September 30, 1995, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1995.
These statements should be read in conjunction with the financial
statements and notes thereto included in the company's annual report
to shareholders and Form 10-K for the year ended December 31, 1994.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
The company's primary sources of operating funds are insurance
premiums, investment income, reinsurance recoveries on paid losses,
computer product sales and other service revenues. Principal uses of
operating funds include claim payments to insureds, commissions, and
other operating expenses. Overall, these operating activities
produced positive cash flow of $7.5 million for the first nine months
of 1995. Since the level of operating cash flow is highly affected by
premium production, paid loss activity, the sale of investment
securities, and reinsurance recoveries received, operating cash flow
can vary significantly from period to period.
The company follows investment guidelines, which, in addition to
providing for an acceptable after-tax return on its investments, are
structured to preserve capital, maintain sufficient liquidity to meet
anticipated obligations, and retain an ample margin of capital and
surplus to assure the unimpaired ability to write insurance. The
company's fixed income portfolio holdings consist primarily of high
investment grade securities. Currently, the largest single portion of
the investment portfolio is invested in tax-advantaged securities.
In developing its investment strategy, the company establishes a level
of cash and highly liquid short and intermediate term securities
which, when combined with expected cash flow, is believed adequate to
meet anticipated payment obligations.
The company's common stock repurchase program reflects continued
efforts to effectively manage its capital base and enhance shareholder
value. During the first nine months of 1995, the company repurchased
167,700 shares of its common stock. The Board of Directors' current
authorization allows the company to repurchase an additional 265,517
shares.
Results of Operations
Net earnings for the third quarter of 1995 were $74,000 or $.01 per
share, compared to $2.3 million or $.26 per share for the same period
of 1994. Increased claim activity on the company's increased book of
aviation business, particularly that acquired earlier this year, a few
large aviation hull claims, and a reduced level of participation in
two short-term health insurance programs were the principal factors
for the reduced level of earnings.
Gross premiums written for all lines of business during the 1995 third
quarter were $24.0 million versus $22.8 million during the same period
of 1994, representing a five percent increase. Aviation gross
premiums written in the third quarter were $15.9 million compared to
$13.7 million in 1994. That 16 percent increase resulted from the
purchase of the aviation business of Aviation Underwriting Specialists
(AUS) in January 1995 and from new business growth.
Gross premiums written on non-aviation lines were $8.0 million
compared to $9.1 million for the 1994 third quarter. That drop in
premium was principally due to a reduced level of participation in one
profitable short-term health program, along with the discontinuance of
another that was not meeting the company's underwriting objectives.
This had the effect of reducing current earned premium revenues for
the short-term health insurance programs when compared to 1994. The
company continues to build its participation in certain other short-
term health insurance programs managed by International Group Services
(IGS), whose assets were acquired in December of 1994.
Net incurred losses for the 1995 third quarter were $17.9 million
compared to $14.0 million for 1994. Claim activity on some of the
company's growing book of higher-valued aircraft and on the book of
AUS aviation business that the company acquired in the first quarter
of 1995 were the principal reasons for the increase. The company
continues to reunderwrite the AUS book of aviation business to conform
to its rating criteria.
Historically, the third quarter has been the company's most volatile
from a claims perspective. It is not only the peak season for
aircraft and watercraft use in both the company's aviation and marine
business, but it is also the prime hurricane season. While the
company did not experience any substantial weather-related losses in
the quarter, it did incur a few large hull claims on its aviation
business. The company did not experience an increase in claims
frequency on the liability side. Losses on non-aviation lines were
$4.7 million versus $4.1 million in 1994. The company's loss ratio on
all lines of business in the quarter was 86.3 percent versus 70.4
percent in the 1994 third quarter.
Selling, general, and administrative expenses were $8.1 million in the
1995 third quarter as compared to $7.5 million for the same period in
1994. Much of this increase is attributed to the operating costs of
AUS and IGS. An income tax benefit of $726,000 was recognized in the
1995 third quarter as contrasted to the $316,000 income tax expense
incurred in the 1994 third quarter. The income tax benefit resulted
primarily from the effects of losses that occurred during the quarter
from fully taxable sources such as underwriting operations.
AVEMCO CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None, except in the ordinary course of business in connection with the
insurance subsidiaries' operations.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVEMCO CORPORATION
(Registrant)
Date: November 13, 1995 /s/ William P. Condon
William P. Condon
Chairman of the Board and
Chief Executive Officer
Date: November 13, 1995 /s/ John F. Shettle, Jr.
John F. Shettle, Jr.
President and
Chief Operating Officer
Date: November 13, 1995 /s/ John R. Yuska
John R. Yuska
Senior Vice President and
Chief Financial Officer