Message to
AVEMCO Stockholders
March 19, 1996
[PHOTO APPEARS HERE]
William P. Condon
Chairman of the Board and
Chief Executive Officer
AVEMCO was once again designated by Moody's as a "Dividend Achiever."
WE BEGIN OUR ANNUAL REPORT WITH A TRIBUTE TO THE EAGLES, WHO RETIRED THIS PAST
NOVEMBER AFTER A QUARTER CENTURY AS THE LEADING AEROBATIC TEAM IN SPORT
AVIATION. FOR MUCH OF THEIR LONG CAREER, THEY REPRESENTED AVEMCO--NOT JUST OUR
PRODUCTS AND OUR NAME, BUT OUR COMMITMENT TO TEAMWORK AND SAFETY, OUR PERSONAL
VALUES, AND OUR ETHICS AS A COMPANY. WE ARE PROUD OF THAT ENDURING PARTNERSHIP.
The portrait of the Eagles on our inside front cover says more than any
words about precision formation flying. On pages 8 and 9, the ten-year statutory
summary of AVEMCO Insurance Company's financial results speaks just as
eloquently of our equally disciplined approach to the business of insurance.
Net earnings for the year were $7.9 million or $.90 per share compared to
1994's $10.8 million or $1.20 per share, representing a 14% return on 12-month
average stockholders' equity. While we had another profitable year, our third
quarter results disappointed us for two principal reasons. First, claim activity
on our growing book of aviation business, particularly for higher-valued
aircraft, was much higher than anticipated. Importantly, there was no increase
in claims frequency related to aviation liability, just an increase in some
larger hull claims. Secondly, we had a reduced level of participation on two
short-term health programs. Both of these items negatively impacted our third
quarter performance, and resulted in our reduced level of earnings for the year.
There were, however, several bright spots in 1995. For the year, aviation
premiums written were $69.1 million, increasing by 22% when compared to 1994.
Most of the increase was due to our purchase of a book of aviation business
during the 1995 first quarter. There was also new business growth. Continued
growth in aviation came in the fourth quarter with an increase of $3.4 million
or 41% over 1994's fourth quarter. Additionally, competitors' aviation rates
continued to increase, presenting AVEMCO an opportunity to increase its prices
in 1996.
Most importantly, during the soft market we have maintained a position of
leadership as an aviation insurer, continued to make an underwriting profit, and
have had a consistent favorable development in our loss reserves. Put another
way, we won't be carrying a lot of "old baggage" with us as we move into the
second half of the 90's.
There were positive developments in our non-aviation businesses as well.
During the last several years we have made considerable progress in reshaping
the company's revenue stream during an unparalleled soft market in
1
<PAGE>
Message to
AVEMCO Stockholders
March 19, 1996
Continued
In 1995, Aviation premiums written were $69.1 million, increasing 22% when
compared to 1994.
the aviation insurance sector. As a point of reference, 1995 was the second
highest revenue year and the third highest premium production year in the
company's history, with gross premiums written of $100 million. Our non-aviation
businesses contributed 31% of that premium production. Several years ago, non-
aviation businesses represented only a small fraction of premiums and revenues.
We continue to strive to obtain new sources of specialty businesses.
We are excited about the future prospects of one of our newer growing
businesses, short-term health. These insurance products primarily cover foreign
students who temporarily reside in the United States while attending colleges
and universities. As with all our new niche business development, we continue to
step gingerly, focusing on bottom line development and building a foundation.
During 1996 and forward, we intend to increase participation in short-term
health programs managed by International Group Services, a third party
administrator and producer, which AVEMCO acquired in December of 1994. Starting
late in 1996, we also expect to participate in the short-term health programs
managed by Hinchcliff International, a subsidiary acquired in January 1996.
The future prospects of our lenders single interest business also look
bright. Matterhorn Bank Programs, Inc., our subsidiary that manages this
business, generated $16.7 million in gross premiums written in 1995 despite the
relatively flat sales year for the auto industry. Our colleagues at Matterhorn
likewise emphasize rate discipline and will not write business at what they
consider to be an inadequate rate. Matterhorn is currently in the process of
developing a new "Blanket Plus" automobile insurance product. As it becomes
available we anticipate additional premium growth.
In addition to AVEMCO Insurance Group's activities, the AVEMCO Services
Group made a significant contribution during 1995. In addition to building long-
term, fee-based income, the companies in this group were also responsible for
generating $10.9 million in gross premiums written by the AVEMCO Group.
We continue investing in system improvements and hardware. The result is a
leaner and more efficient company with the ability to increase premiums in all
lines without a significant increase in expenses. Currently we enjoy an expense
advantage in aviation, lenders single interest, and short-term health insurance.
During the 1995 year we repurchased 208,700 shares of our stock. We will no
doubt continue to repurchase shares, but will balance our level of repurchases
against the capital needs of our growing businesses. Through February 20, 1996,
we repurchased an additional 99,800 shares, leaving us with a repurchase
authorization of 124,717 shares. At year-end our book value per share was $7.14,
up 14% over year-end 1994. This
2
<PAGE>
improvement in book value was primarily achieved because of a marked increase in
the value of our investment portfolio. The year-over-year increase in unrealized
appreciation at the end of 1995 was $5.7 million or $.66 per share.
In 1995 AVEMCO was once again designated by Moody's as a "Dividend
Achiever." This is the 20th consecutive year in which we have increased the
dividend paid to shareholders.
At the end of 1995, John "Jack" F. Shettle, Sr., President of our
subsidiaries, Brooks-Shettle Company and MEDEX Corporation, retired.
Jack's contributions to our organization went substantially beyond those
activities. He was also responsible for the addition of the aviation insurance
activity currently carried on by U.S. Specialty Insurance Company, and the
acquisition of Matterhorn Bank Programs, Inc. Jack set a high standard for the
AVEMCO Services Group based on the premium and/or support they provide to the
AVEMCO Insurance Group. We salute Jack and thank him for his numerous
contributions.
As we move into 1996 and into the final half of the 90's, we remain
optimistic about our future. More reasonable pricing has been seen in the market
for the aviation insurance business. Our short-term health insurance program has
planned built-in revenue growth with the managed programs the Group now
controls. We are commencing a specialty automobile insurance program beyond
Matterhorn's blanket bank programs to offer its clients.
It seems fitting that this year's annual report be dedicated to the Eagles,
whose unique and disciplined approach to risk
[GRAPH APPEARS HERE]
[GRAPH APPEARS HERE]
taking was at the heart of their appeal to the public, and to AVEMCO. Although
they were one of the most exciting acts in flying, in three thousand
performances they never experienced a single incident or accident. AVEMCO's
reputation has been built on this same commitment to the highest standards of
professional competence, reliability, and mutual trust; we pick our specialties
and we try to be the best there is.
We appreciate the support of our loyal shareholders.
/s/ William P. Condon
William P. Condon
Chairman of the Board and
Chief Executive Officer
3
<PAGE>
The Year
at a Glance
AVEMCO Corporation
and Subsidiaries
<TABLE>
<CAPTION>
Financial Highlights
- ----------------------------------------------------------------
For the Year: 1995 1994
<S> <C> <C>
Revenues $113,204,000 $104,590,000
- ----------------------------------------------------------------
Net earnings $ 7,918,000 $ 10,833,000
- ----------------------------------------------------------------
Net earnings per share $ .90 $ 1.20
- ----------------------------------------------------------------
Dividends declared per share $ .46 $ .44
- ----------------------------------------------------------------
Weighted average number of common
and common equivalent shares 8,845,857 9,019,322
- ----------------------------------------------------------------
Return on equity 13.5% 19.8%
- ----------------------------------------------------------------
At Year End:
Total assets $213,802,000 $201,350,000
- ----------------------------------------------------------------
Stockholders' equity $ 61,759,000 $ 55,610,000
- ----------------------------------------------------------------
Stockholders' equity per share $ 7.14 $ 6.28
- ----------------------------------------------------------------
Number of employees 454 428
- ----------------------------------------------------------------
</TABLE>
Market Price Range and Dividends
- --------------------------------------------------------------------------------
AVEMCO Corporation's common stock is listed on the New York Stock Exchange under
ticker symbol "AVE." There are approximately 3,500 stockholders.
<TABLE>
<CAPTION>
High Low Dividends
---- --- ---------
<S> <C> <C> <C>
1995
Fourth Quarter $17 1/2 $15 3/4 $.12
- -----------------------------------------------
Third Quarter $ 18 $15 5/8 $.12
- -----------------------------------------------
Second Quarter $18 1/4 $16 1/2 $.11
- -----------------------------------------------
First Quarter $17 5/8 $14 5/8 $.11
- -----------------------------------------------
1994
Fourth Quarter $17 3/8 $13 3/8 $.11
- -----------------------------------------------
Third Quarter $16 3/8 $13 3/4 $.11
- -----------------------------------------------
Second Quarter $16 1/2 $13 7/8 $.11
- -----------------------------------------------
First Quarter $20 1/4 $14 1/2 $.11
</TABLE>
4
<PAGE>
Table of Contents
1 Message to
AVEMCO Stockholders
4 The Year at a Glance
Review of
Operations:
6 Insurance
11 Services
14 Additional Notes of Interest
15 Consolidated Financial Information
42 Independent Auditors' Report
43 AVEMCO Corporation
Board of Directors
44 AVEMCO Corporation Officers
Review of Operations
Insurance
AVEMCO Insurance Company
411 Aviation Way
Frederick, MD 21701
National Aviation Underwriters, Inc.
National Assurance Underwriters, Inc.
U.S. Specialty Insurance Company
255 Spencer Road
St. Peters, MO 63376
Matterhorn Bank Programs, Inc.
Timonium Corporate Center
9515 Deereco Road
Timonium, MD 21094
Services
Loss Management Services, Inc.
411 Aviation Way
Frederick, MD 21701
MEDEX Assistance Corporation
Brooks-Shettle Company
Timonium Corporate Center
9515 Deereco Road
Timonium, MD 21094
International Group Services
10530 Rosehaven Street
Suite 350
Fairfax, VA 22030
The Wheatley Group, Ltd.
Stamford Harbor Park
333 Ludlow Street
Stamford, CT 06902
5
<PAGE>
Review of Operations
Insurance
[PHOTO APPEARS HERE]
Ray C. Hall
President
AVEMCO Insurance
Company
The AVEMCO Insurance Group underwrites aviation and other specialty insurance
products. Non-aviation specialty lines include lenders single interest, short-
term health, and pleasure marine.
The specialty lines of business, particularly the aviation and pleasure
marine, are volatile from both a rate and claims perspective. The company has
and continues to emphasize rate discipline in all lines of its business. As a
result, the company's operating results are subject to significant fluctuations
from year to year due to the impact of competition on policy pricing, the
frequency and severity of its claim activity, weather-related catastrophes, and
general economic conditions.
Insurance products are distributed on a direct basis to policyholders, and
also through the agent/broker community. AVEMCO Insurance Company (AIC) and its
subsidiary, National Assurance Underwriters, Inc., are direct writers of
aviation business, and AIC of pleasure marine business. U.S. Specialty Insurance
Company, another subsidiary of AIC, writes aviation, lenders single interest,
and pleasure marine products through independent agents.
Matterhorn Bank Programs, Inc., a general agency, underwrites lenders single
interest and related financial institution insurance business primarily through
independent agents. Brooks-Shettle Company produces primarily short-term health
and pleasure marine, as well as other business directly and through the
agent/broker community.
Approximately 70% of the AVEMCO Group's insurance products are distributed
on a direct basis and 30% through the agent/broker community.
AVEMCO Insurance Company (AIC), in addition to its direct-writing
capability, serves as the reinsurer of much of the business produced by other
members of the AVEMCO Group. A ten-year summary of statutory financial results
for AVEMCO Insurance Company and its subsidiaries, National Assurance
Underwriters, Inc., and U.S. Specialty Insurance Company, is detailed on pages 8
and 9.
Various types of aviation insurance are underwritten for owners and pilots
of general aviation aircraft, including commercial coverages for fixed base
operations. General aviation encompasses private business aircraft, air taxi
services, recreational flying, fixed-base operations, and similar activities. It
excludes military and scheduled commercial airline operations. Other aviation-
related commercial insurance coverages are written for lending institutions and
leasing companies on aviation aircraft. Two primary aviation insurance products
available include Direct Approach(R)/Flight Path(R) 2000, the Group's state-of-
the-art policy with enhanced coverage features, and a Personal Aircraft
Insurance Policy, which provides a lower-cost, less full-featured insurance
alternative.
Statutory gross premiums written increased in 1995 over 1994 as follows:
<TABLE>
<CAPTION>
(000's)
Line of Business 1995 1994
- ---------------- ---- ----
<S> <C> <C>
Aviation $68,718 $56,812
Non-Aviation 31,072 33,840
------- -------
Gross Premiums
Written $99,790 $90,652
======= =======
Net Premiums
Written $85,242 $73,450
======= =======
</TABLE>
Statutory gross premiums written during 1995 for aviation business were
$68.7
6
<PAGE>
[PHOTO APPEARS HERE]
Ronald H. Wilson
President
National Aviation
Underwriters, Inc.
National Assurance
Underwriters, Inc.
U.S. Specialty Insurance
Company
[PHOTO APPEARS HERE]
Harry C. Walker
President
Matterhorn Bank
Programs, Inc.
1995 marks the 21st consecutive year, and the 32nd in 35 years in business,
wherein AVEMCO achieved an underwriting profit.
million, compared to the $56.8 million written for 1994. The increase resulted
principally from the purchase of the aviation business of Aviation Underwriting
Specialists (AUS) during the 1995 first quarter. In addition, there was new
business growth. The acquired book of aviation business continues to be
transitioned to AVEMCO. Certain classes of aviation business not meeting
AVEMCO's underwriting guidelines are being directed elsewhere.
Market rates continued to improve during 1995, with more significant
increases in the areas of high-valued aircraft hulls and with pilots who are
transitioning to larger or more complex aircraft. Current expectations are that
market rates will continue to rise, due in part to higher expenses and less
available reinsurance.
Gross premiums written for the non-aviation business were $31.1 million,
compared to $33.8 million in 1994. The drop in premium was principally
attributable to the short-term health business, where there was 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 targeted
underwriting objectives.
The short-term health programs primarily cover foreign students who
temporarily reside in the United States while attending colleges and
universities. The company intends to selectively develop this business,
internally and through acquisition, recognizing that it will take time to
identify programs meeting our underwriting objectives.
The company will increase its participation in certain short-term health
programs managed by International Group Services (IGS), a third party
administrator and producer, acquired by the company in December of 1994.
Additionally, the company expects late in 1996 to participate in short-term
health programs managed by Hinchcliff International, a subsidiary acquired by
the company in January of 1996.
Lenders single interest gross premiums written were $16.6 million for 1995,
compared to $16.3 million written in 1994. This particular insurance product,
managed by Matterhorn Bank Programs, Inc., protects a lenders retail installment
portfolio primarily against risk of physical loss of or damage to property
securing their installment loans should the borrower fail to maintain the
required insurance to cover such events.
Matterhorn's business principally covers automobile loans and is, therefore,
closely linked to automobile sales, which were relatively flat in 1995.
Matterhorn emphasizes rate discipline and will not write business at what it
believes to be an inadequate rate.
Matterhorn continues as a dominant force in the blanket automobile single
interest business, serving more than 700 financial institutions around the
nation through a network of more than 150 independent property and casualty
insurance agents. For 1995, most of Matterhorn's business was written through
the Group's independent agency insurer, U.S. Specialty Insurance Company.
Continued on page 10
7
<PAGE>
<TABLE>
<CAPTION>
Ten-Year Summary
AVEMCO INSURANCE COMPANY
AND SUBSIDIARIES
(Statutory Basis)
(All figures in thousands
except ratios) 1995 1994 1993 1992
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct premiums written $ 78,796 $ 74,849 $ 73,759 $ 62,014
- -------------------------------------------------------------------------
Reinsurance assumed 20,999 15,802 8,496 17,446
- -------------------------------------------------------------------------
Gross premiums written $ 99,795 $ 90,651 $ 82,255 $ 79,460
- -------------------------------------------------------------------------
Net premiums written,
after reinsurance $ 85,241 $ 73,449 $ 62,456 $ 57,560
- -------------------------------------------------------------------------
Net premiums earned $ 80,135 $ 75,559 $ 62,724 $ 57,429
- -------------------------------------------------------------------------
Losses and expenses
incurred 77,336 67,279 59,929 54,825
- -------------------------------------------------------------------------
Underwriting profit before
tax $ 2,799 $ 8,280 $ 2,795 $ 2,604
- -------------------------------------------------------------------------
Loss ratio 69.4% 61.2% 66.2% 64.6%
- -------------------------------------------------------------------------
Expense ratio 25.5% 28.6% 29.4% 30.8%
- -------------------------------------------------------------------------
Underwriting ratio 94.9% 89.8% 95.6% 95.4%
- -------------------------------------------------------------------------
Underwriting profit $ 2,799 $ 8,280 $ 2,795 $ 2,604
- -------------------------------------------------------------------------
Investment income before
taxes 6,993 6,910 7,432 7,894
- -------------------------------------------------------------------------
Realized investment gains
(losses) 389 (301) 7,294 2,410
- -------------------------------------------------------------------------
Earnings before taxes 10,181 14,889 17,521 12,908
- -------------------------------------------------------------------------
Income taxes 2,083 3,138 3,041 2,829
- -------------------------------------------------------------------------
Net earnings $ 8,098 $ 11,751 $ 14,480 $ 10,079
- -------------------------------------------------------------------------
Investments $125,399 $114,104 $118,004 $127,102
- -------------------------------------------------------------------------
Total assets $147,394 $137,436 $138,935 $153,662
- -------------------------------------------------------------------------
Unearned premiums $ 27,185 $ 22,079 $ 24,189 $ 24,454
- -------------------------------------------------------------------------
Unpaid losses and loss
adjustment expenses $ 32,935 $ 31,137 $ 29,958 $ 27,563
- -------------------------------------------------------------------------
Policyholders' surplus $ 73,808 $ 72,133 $ 72,833 $ 77,662
- -------------------------------------------------------------------------
Ratio of net premiums
written to policyholders'
surplus 1.15/1 1.0/1 .86/1 .74/1
- -------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
8
<PAGE>
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987 1986
- -------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 55,086 $ 47,906 $ 44,396 $ 54,126 $ 67,251 $ 68,849
- -------------------------------------------------------------------
14,833 16,744 23,740 38,728 46,853 58,188
- -------------------------------------------------------------------
$ 69,919 $ 64,650 $ 68,136 $ 92,854 $114,104 $127,037
- -------------------------------------------------------------------
$ 53,668 $ 53,088 $ 57,690 $ 77,229 $ 93,277 $ 98,247
- -------------------------------------------------------------------
$ 51,888 $ 54,512 $ 67,068 $ 85,572 $ 96,278 $ 76,921
- -------------------------------------------------------------------
46,012 45,695 57,926 64,286 74,645 71,156
- -------------------------------------------------------------------
$ 5,876 $ 8,817 $ 9,142 $ 21,286 $ 21,633 $ 5,765
- -------------------------------------------------------------------
54.7% 52.7% 60.6% 47.8% 52.5% 60.5%
- -------------------------------------------------------------------
32.8% 31.9% 30.0% 30.3% 25.8% 25.0%
- -------------------------------------------------------------------
87.5% 84.6% 90.6% 78.1% 78.3% 85.5%
- -------------------------------------------------------------------
$ 5,876 $ 8,817 $ 9,142 $ 21,286 $ 21,633 $ 5,765
- -------------------------------------------------------------------
8,007 8,580 9,468 8,056 7,410 5,611
- -------------------------------------------------------------------
4,493 1,587 1,921 202 1,480 1,523
- -------------------------------------------------------------------
18,376 18,984 20,531 29,544 30,523 12,899
- -------------------------------------------------------------------
4,915 4,433 4,656 8,004 10,067 3,746
- -------------------------------------------------------------------
$ 13,461 $ 14,551 $ 15,875 $ 21,540 $ 20,456 $ 9,153
- -------------------------------------------------------------------
$127,349 $125,268 $128,792 $137,732 $120,505 $100,546
- -------------------------------------------------------------------
$139,765 $134,669 $142,898 $153,997 $146,704 $127,436
- -------------------------------------------------------------------
$ 24,322 $ 22,542 $ 23,965 $ 33,344 $ 41,686 $ 44,686
- -------------------------------------------------------------------
$ 25,487 $ 33,676 $ 39,485 $ 38,296 $ 41,620 $ 35,153
- -------------------------------------------------------------------
$ 76,049 $ 74,766 $ 77,153 $ 78,433 $ 57,619 $ 41,421
- -------------------------------------------------------------------
.71/1 .71/1 .75/1 1.0/1 1.6/1 2.4/1
- -------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
9
<PAGE>
Continued from page 7
AVEMCO also maintained its A+ (Superior) rating from A.M. Best.
Pleasure marine gross premiums written for 1995 were $3.5 million, similar
to that of 1994. The company continued to emphasize movement away from coastal
exposures. Rates in the pleasure marine market improved. The company plans to
retain 100% of the pleasure marine business that it writes with the exception of
reinsurance for potential catastrophic marine losses.
From a claims perspective, the AVEMCO Group's statutory loss ratio for all
lines of business was 69.4% compared to 61.3% for 1994.
<TABLE>
<CAPTION>
Line of Business Net Loss Ratio
---------------- --------------
1995 1994
---- ----
<S> <C> <C>
Aviation 69.0% 62.8%
Non-Aviation 70.0% 59.2%
All Lines 69.4% 61.3%
</TABLE>
Net incurred losses for all lines of business were $55.6 million, versus
$46.3 million in 1994. Net incurred losses on aviation claims increased compared
to 1994. Claim activity on the growing book of higher-valued aircraft was one
principal reason for the increase. Claims also increased due to the added claim
activity on the aviation book of business acquired during the first quarter of
1995.
There were no significant weather-related losses during 1995 or 1994. The
company did not incur any significant losses associated with the "Blizzard of
1996," which occurred shortly after the end of the year. The loss ratio
increased on the non-aviation lines, principally in the short-term health
business discussed previously.
The company's insurance specialty businesses are mostly short-tail in
nature, meaning that claims are paid or settled in a relatively short time frame
from the time the claims are reported. Given the volatility of its specialty
businesses, the company utilizes a variety of reinsurance protections to assist
in limiting loss, provide greater diversification of risk, reduce exposures on
larger risks and provide a level of protection from catastrophic events.
The company in 1995 experienced overall favorable development of $1.1
million on net unpaid and loss and loss adjustment expenses after deducting
reinsurance protections. This compares with favorable development of $2.9
million for 1994 and $2.4 million for 1993.
Historical experience, judgmental factors, adherence to a strategy of
targeting rate adequacy, continual monitoring of reserve levels, and paying
claims in a prompt fashion have all contributed to a favorable development of
loss reserves during the last several years. A historical perspective of the
company's loss reserve developments is included in Note 4 to the consolidated
financial statements.
The expense ratio for all lines of business was 25.5% in 1995, decreasing
from 1994's 28.6%. We have in the past and plan in the future to invest our
resources where we have an opportunity to earn acceptable long-term returns. The
investment to build our prospect lists, development of information systems, and
the progress of our Services Group have resulted in growing our premium base.
The principal objective of the AVEMCO Group's insurance and service
activities remains to produce and support an underwriting profit for AVEMCO
Insurance Company and its insurance subsidiaries. The underwriting ratio was
94.9% for 1995 versus 89.9% in 1994. 1995 marks the 21st consecutive year, and
the 32nd in 35 years in business, where an underwriting profit was achieved.
AVEMCO also maintained its A+ (Superior) rating from A.M. Best, and was
included in the 1995 "Ward's 50." This represents the third consecutive year
that AVEMCO was named to the Ward's group of top property and casualty
companies. The "Ward's 50" is developed by The Ward Financial Group and is
composed of those companies that have been able to balance safety, performance,
and consistency over the past five-year period.
10
<PAGE>
REVIEW OF OPERATIONS
Continued
Services
During 1995, AVEMCO Insurance Company participated as a reinsurer in certain
programs managed by IGS, and will expand its underwriting participation in these
programs in 1996 and beyond.
[PHOTO APPEARS HERE]
John H. Ballard
President
Loss Management Services, Inc.
The AVEMCO Group's insurance services businesses were developed primarily to
complement its insurance operations and are therefore largely focused in areas
that offer AVEMCO opportunities to generate additional specialty insurance
premiums. These service activities, wherever feasible, are further designed to
better differentiate the Group's insurance products from those of its
competitors and create added value for its customers.
In addition to generating $10.9 million in gross premiums written by the
AVEMCO Group, these companies are also striving to build long-term fee based
income.
Currently, the Group's services are concentrated in the following four
areas:
1. Claims management and related litigation and salvage services for the
Group's insurers, as well as for other insurance companies and financial
institutions;
2. Administration of specialty insurance and reinsurance brokerage and
underwriting, principally in the marine and short-term health insurance
fields;
3. Worldwide emergency assistance services for travelers outside their home
countries, and
4. Computer systems for the property/casualty insurance industry.
Claims Management Services
Loss Management Services, Inc.'s (LMS) primary function is to provide prompt
and efficient claims adjustment and risk management services for member insurers
of the AVEMCO Group. During the last several years, LMS began assuming
management of a substantial portion of the claims work related to the Group's
short-term health and travel assistance businesses. It further broadened its
activities in that area in 1995.
The LMS salvage and litigation storage facility in St. Peters, Missouri,
operated at or near capacity throughout 1995 and generated increased revenues,
particularly for aircraft wreckage storage, layout and ancillary testing
services. This facility serves AVEMCO Group insurers as well as outside clients.
LMS continued to develop business from non-Group clients related primarily
to services it provides to financial institutions. As a result of the
specialized systems and skills LMS has developed in the aviation insurance
business, the company has become the provider of choice to many major aviation
lenders for collateral inspections, appraisals, and salvage disposal services.
During 1995, LMS' revenue base grew principally as a result of AVEMCO's
acquisitions of both Aviation Underwriting Specialists (AUS) and International
Group Services (IGS). The claims staffs of both these organizations were
consolidated within LMS. Of important note is LMS' emerging focus on the
handling of health claims for foreigners
11
<PAGE>
[PHOTO APPEARS HERE]
Gerald W. Hopkins
President
Brooks-Shettle Company
while visiting the United States for academic, travel or business-related
pursuits. In concert with MEDEX, LMS' services now include an array of related
claims services including case management and medical bill review, as well as
access to national and regional preferred provider organizations for pre-
negotiated hospital cost savings on behalf of its clients.
Specialty Insurance and
Third Party Administration
Brooks-Shettle Company is an insurance and reinsurance brokerage
specializing in short-term health and travel insurance programs on an
international basis, as well as yacht insurance primarily in the Mid-Atlantic
region of the U.S.
The company markets its TravMed(R) travel insurance product to U.S. citizens
traveling abroad and also acts as the broker for several similar short-term
health insurance programs. This business also generates revenues for MEDEX
Assistance Corporation and Loss Management Services, Inc., as the respective
assistance coordinator and claims administrator of many of these programs.
Brooks-Shettle Company's yacht insurance business remains focused in the
Mid-Atlantic region of the U.S. The agency represents several major specialty
marine insurers, including U.S. Specialty Insurance Company, a member of the
AVEMCO Group. Brooks-Shettle Company also assists clients of the Group who have
unique marine insurance needs outside the scope of the AVEMCO Group's current
marine underwriting guidelines. During 1995, the yacht insurance business
experienced revenue growth for Brooks-Shettle as a result of a continued
increase in new yacht sales, an acquisition of a book of yacht insurance
business in Maryland and an increased commitment to advertising and other market
initiatives.
In December of 1994, Brooks-Shettle Company acquired certain assets of
International Group Services, Inc., (IGS.) This third party administrator
specializes in the design, marketing, and administration of health insurance
programs for foreign students while attending U.S. colleges and universities. At
the end of 1995, IGS had approximately $8.5 million in short-term health
premiums under management. During 1995, AVEMCO Insurance Company participated as
a reinsurer in certain programs managed by IGS and will expand its underwriting
participation in these programs in 1996 and beyond.
IGS currently operates as a division of Brooks-Shettle Company following a
consolidation which took place at the end of 1995. IGS' major thrust in 1995 was
the development of its own direct sales force to market its products and
services in regions of the country where the company was not represented by
independent agents. By year end 1995, the majority of the company's business was
directly produced.
Worldwide Emergency
Assistance Services
MEDEX Assistance Corporation provides worldwide, multilingual emergency
assistance services on a 24-hour basis for individuals who become sick or
injured primarily while traveling outside their home countries.
Emergency assistance services include locating the nearest medical facility
for the sick or injured person and then establishing and maintaining
communications with that person's family, personal physician, and
employer during the term of the medical emergency. MEDEX also verifies insurance
coverage, arranges emergency evacuation when necessary, and can provide for the
transfer of funds for payment of required medical services.
The company continues to place particular emphasis on the marketing of its
MEDEX "Plus" product principally to U.S.-based corporations with employees
12
<PAGE>
[PHOTO APPEARS HERE]
Thomas L. Hudson
President
MEDEX Assistance Corporation
traveling or stationed abroad. The "Plus" product provides an insured evacuation
benefit in addition to MEDEX's standard services, and fills an important need
for the corporate risk or travel manager, particularly when a corporation's
employees are traveling in less accessible or underdeveloped parts of the world.
This benefit is insured by AVEMCO Insurance Company.
During 1995, all of MEDEX's major business segments showed growth. In late
1995, MEDEX and LMS developed a new and broader product offering to MEDEX's non-
U.S. insurance company clients that provides health insurance for individuals of
their nationality while temporarily residing in the United States. In addition
to 24-hour assistance services, MEDEX can now offer these clients a more
complete spectrum of health claims services including preferred provider access
under a single program. MEDEX plans to aggressively market these expanded
services in 1996 to its existing client base as well as prospective new clients.
[PHOTO APPEARS HERE]
Daniel J. Dolcetti
President
The Wheatley Group, Ltd.
Computer Systems
and Software
The Wheatley Group, Ltd. (Wheatley) provides a complete software system for
U.S. property and casualty insurance companies. The WINS(R) product is a full-
function processing system that supports more than 30 lines of insurance, with
minimal modifications needed for most clients. The system continues to evolve
and capitalize on the advancing technology of the IBM AS/400* mid-range family
of computers.
In late 1992, Wheatley was approved as an authorized IBM Industry
Remarketer, and most recently has expanded its role to become an IBM Business
Partner. These developments strengthened Wheatley's capability to provide
integrated software, hardware, and service solutions to meet the ever changing
needs of property and casualty insurers.
During 1995, Wheatley completed a relocation from Long Island, New York, to
Stamford, Connecticut. Revenues grew modestly in 1995, as completion of several
contracts were delayed by the relocation and by the loss of some staff members.
In addition, a significant number of Wheatley's resources were committed to one
major customized contract that was completed and delivered in the fall of 1995.
New client signings, as well as client renewal contracts, were strong
throughout 1995 and these positive trends are expected to continue into 1996.
The company's emphasis in 1996 will be to sell software systems to property and
casualty insurers in lines of business where minimal modifications to the system
are required for successful implementation.
*IBM and AS/400 are registered trademarks of International Business Machines
Corporation.
The Wheatley Group, Inc., provides software systems for U.S. property and
casualty insurance companies.
13
<PAGE>
Additional
Notes of Interest
[PHOTO APPEARS HERE]
John F. Shettle, Sr.
[PHOTO APPEARS HERE]
Thomas L. Hudson
[PHOTO APPEARS HERE]
Gerald W. Hopkins
Management Developments
At the end of 1995, John F. "Jack" Shettle, Sr., retired from AVEMCO after
serving the company in many capacities for 12 years, culminating a successful
40-year career in the insurance industry. Jack will be Chairman of MEDEX
Assistance Corporation and Brooks-Shettle Company during 1996 and will act as a
consultant to both companies on a part-time basis.
Jack's positions as President of MEDEX Assistance Corporation and Brooks-
Shettle Company have been filled, respectively, by Thomas L. "Tom" Hudson and
Gerald W. "Jerry" Hopkins.
Tom Hudson joined AVEMCO in July 1994 as Executive Vice President, MEDEX
Assistance Corporation, and Vice President-Business Development, AVEMCO
Corporation. Prior to that he was a partner in the Baltimore-based law firm of
Venable, Baetjer and Howard. Tom assumed the duties of President and Chief
Operating Officer of MEDEX Assistance Corporation in June 1995.
Jerry Hopkins joined the AVEMCO management team in December 1994 when AVEMCO
acquired the assets of International Group Services, Inc., where he served as
President since 1992. His employment history includes many years in the health
insurance field. He is a graduate of Davidson College and the Princeton
Theological Seminary, and is a member of the Virginia Bar Association. Hopkins
will also serve as President of the newly acquired Hinchcliff International,
Inc.
Aviation and Community Involvement
In honor of the Eagles Aerobatic Flight Team's contributions to aviation,
AVEMCO has established a scholarship fund in their name, to be administered by
the EAA Aviation Foundation. The scholarship is designed to aid worthy students
in studying for a career in aviation.
AVEMCO was honored by the Maryland State Special Olympics as a 1995
Outstanding Area Sponsor for volunteer and monetary support to that
organization. We also salute our employees for their volunteer efforts to many
other organizations that provide services to those in need.
We're grateful to have people in our work force who willingly donate their
time and talents to assist these organizations, and to our Board of Directors
for providing a budget that allows us to contribute to the human services groups
in our communities.
14
<PAGE>
Index to Consolidated
Financial Information
AVEMCO CORPORATION AND SUBSIDIARIES
16 Five-Year Consolidated Summary
of Selected Financial Data
17 Management's Discussion
and Analysis
26 Consolidated Investment
Portfolio Summary
Consolidated
Financial Statements
27 Consolidated Statements of Income
28 Consolidated Balance Sheets
30 Consolidated Statements
of Stockholders' Equity
31 Consolidated Statements
of Cash Flows
32 Notes to Consolidated
Financial Statements
42 Independent Auditors' Report
15
<PAGE>
Five-Year Consolidated
Summary of Selected
Financial Data
<TABLE>
<CAPTION>
(In thousands, except per share data and ratios)
-----------------------------------------------------
Summary of Operations: 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums earned $ 80,458 $ 75,518 $ 62,702 $ 57,385 $ 51,874
- --------------------------------------------------------------------------------------------------------
Commissions 7,046 6,418 5,909 6,145 5,280
- --------------------------------------------------------------------------------------------------------
Net investment income 8,498 8,245 9,004 9,218 9,332
- --------------------------------------------------------------------------------------------------------
Computer products and services 10,188 9,185 11,129 4,836 5,556
- --------------------------------------------------------------------------------------------------------
Realized gain (loss) on sale of investments .575 (248) 9,634 2,742 6,820
- --------------------------------------------------------------------------------------------------------
Other revenues 6,439 5,472 5,523 6,597 5,678
- --------------------------------------------------------------------------------------------------------
Total revenues 113,204 104,590 103,901 86,923 84,540
- --------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 55,605 46,310 41,502 36,783 28,402
- --------------------------------------------------------------------------------------------------------
Commissions 6,513 7,159 5,716 6,966 5,614
- --------------------------------------------------------------------------------------------------------
Other expenses 41,984 37,582 37,830 32,387 31,747
- --------------------------------------------------------------------------------------------------------
Total expenses 104,102 91,051 85,048 76,136 65,763
- --------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 9,102 $ 13,539 $ 18,853 $ 10,787 $ 18,777
========================================================================================================
Net earnings/1/ $ 7,918 $ 10,833 $ 15,572 $ 9,603 $ 15,410
========================================================================================================
Per share data:
Net earnings/1,2/ $ .90 $ 1.20 $ 1.41 $ .82 $ 1.34
- --------------------------------------------------------------------------------------------------------
Dividends declared $ .46 $ .44 $ .42 $ .40 $ .3733
- --------------------------------------------------------------------------------------------------------
Stockholders' equity per share/3/ $ 7.14 $ 6.28 $ 5.92 $ 7.76 $ 7.36
- --------------------------------------------------------------------------------------------------------
Weighted average number of common
and common equivalent shares 8,846 9,019 11,041 11,734 11,511
- --------------------------------------------------------------------------------------------------------
Common shares outstanding 8,649 8,850 9,109 11,493 11,417
========================================================================================================
Other financial data:
Investments $149,544 $136,378 $139,384 $151,013 $150,719
- --------------------------------------------------------------------------------------------------------
Total assets $213,802 $201,350 $210,693 $231,621 $214,502
- --------------------------------------------------------------------------------------------------------
Debt $ 54,967 $ 54,600 $ 54,500 $ 39,000 $ 35,732
- --------------------------------------------------------------------------------------------------------
Stockholders' equity $ 61,759 $ 55,610 $ 53,930 $ 89,215 $ 84,065
- --------------------------------------------------------------------------------------------------------
Return on equity 13.5% 19.8% 21.8% 11.1% 20.2%
========================================================================================================
Statutory insurance indicators/4/:
Loss ratio 69.4% 61.2% 66.2% 64.6% 54.7%
- --------------------------------------------------------------------------------------------------------
Expense ratio 25.5% 28.6% 29.4% 30.8% 32.8%
- --------------------------------------------------------------------------------------------------------
Underwriting ratio 94.9% 89.8% 95.6% 95.4% 87.5%
========================================================================================================
Ratio of net premiums written to surplus 1.15/1 1.0/1 .86/1 .74/1 .71/1
- --------------------------------------------------------------------------------------------------------
Ratio of loss reserves to surplus .45/1 .43/1 .41/1 .35/1 .34/1
- --------------------------------------------------------------------------------------------------------
Policyholders' surplus $ 73,837 $ 72,133 $ 72,833 $ 77,662 $ 76,049
========================================================================================================
</TABLE>
/1/ 1993 includes cumulative effect of the adoption of FASB Statement No. 109,
"Accounting for Income Taxes" (see notes 1 and 6).
/2/ Based on weighted average number of common and common equivalent shares.
/3/ Based on common shares outstanding.
/4/ Includes AVEMCO Insurance Company and its subsidiaries.
16
<PAGE>
Management's
Discussion and
Analysis of
Financial
Condition and
Results of
Operations
Overview of Business
The company's insurance subsidiaries underwrite aviation and other specialty
insurance products. Non-aviation lines include lenders single interest, short-
term health and pleasure marine. The insurance services businesses complement
its insurance operations.
The specialty lines of business, particularly the aviation and pleasure
marine, are volatile from both a rate and claims perspective. As a result, the
company's operating results are subject to significant fluctuations from year to
year due to the impact of competition on premium pricing, the frequency and
severity of claims activity, weather-related catastrophes, and general economic
conditions.
The company has and continues to emphasize rate discipline in all lines of
its business. The aviation insurance sector, the company's primary line of
business, has been engaged in an extremely competitive rate environment for
quite some time. Recently, there has been some improvement of rates in the
aviation insurance sector.
To augment the aviation business, the company continues to develop, both
internally and through acquisition, the growth of its non-aviation specialty
lines and its insurance services business. Please refer to the Review of
Operations section of this annual report for additional information on the
company's business.
Liquidity and Capital Resources
Liquidity--(The company's Consolidated Statements of Cash Flows on page 31
detail the net cash provided and used by operating, investment, and financing
activities.) The company's primary sources of operating funds are insurance
premiums, commissions, service fees and investment revenues. Primary uses of
operating funds are for claim payments to insureds, commissions, and other
operating expenses. Operating activities provided $11.1 million, $11.8 million,
and $17.9 million of net cash flow in 1995, 1994, and 1993, respectively. Since
the level of operating cash flow is principally affected by premium production,
paid loss activity, the sale of investment securities, and reinsurance
recoveries received, operating cash flow could vary significantly from period to
period.
Net operating cash flow for 1995 and 1994 were similar. Net operating cash
flow for 1994 decreased from that of 1993 primarily because of increased paid
claims activity in 1994 and the effect of reinsurance recoverables received in
1993.
Capital expenditures for property and equipment additions were $1.9 million,
$700,000, and $1.0 million in 1995, 1994, and 1993, respectively. 1995
expenditures consisted primarily of costs associated with two subsidiary office
relocations, assets acquired through two acquisitions, and the development of
certain proprietary software systems. 1994 and 1993 additions were primarily
comprised of computer hardware upgrades. The company does not anticipate a
significant level of property and equipment capital expenditures during 1996.
Other expenditures include the 1994 $2.0 million acquisition of assets from
International Group Services, Inc., a third party administrator that specializes
in short-term health insurance programs, and the 1993 $300,000 acquisition of
KFA, Inc., an Oklahoma insurance agency that specializes in lenders single
interest programs for financial institutions. The company continues to explore
acquisition opportunities. All expenditures were financed principally by
internally generated funds and incremental borrowing on the company's revolving
credit facility.
At December 31, 1995, the company had $18.4 million in cash and short-term
investments. Additionally, $3.9 million of its fixed income portfolio is
scheduled to mature in 1996. A further source of short-term liquidity includes a
credit facility with a bank. $10.7 million is available under that commitment to
address short-term cash needs. The company's investment portfolio is highly
liquid, consisting principally of readily marketable securities. In developing
its investment strategy, the company establishes a level of cash and highly
liquid short- and intermediate-term securities which, combined with expected
cash flow, is believed adequate to meet anticipated payment obligations. While
short-term liquidity is considered adequate, long-term liquidity will be
primarily dependent upon premium production and paid loss activity.
Investments--The company's investment portfolio represents 70% of its total
assets. 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 obliga-
17
<PAGE>
Management's
Discussion and
Analysis
Continued
tions, and maintain what is considered an ample margin of capital and surplus to
sustain planned writings of insurance. At December 31, 1995, 75% of the
company's investments were in fixed income securities, 15% in equities, and 10%
in short-term investments. The company's only real estate investments are in its
operating facilities. Fixed income securities consist principally of high
investment grade securities with an average maturity of about nine years. The
company does not use derivative instruments, such as mortgage derivatives,
options and structured notes, to leverage its investment portfolio. The company
does not have any exposure to Orange County, California, obligations nor any
investments in the obligations of the participants in the Orange County
Investment Pool.
In May 1993, the Financial Accounting Standards Board issued Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
Statement, as it impacts the company, requires fixed maturities to be reported
at fair value on the balance sheet with unrealized appreciation or depreciation,
net of deferred tax effect, if any, charged or credited directly to
stockholders' equity. The company prospectively implemented Statement No. 115
during the first quarter of 1994. Prior to the implementation, fixed maturities
were reported at the lower of aggregate amortized cost or market.
At December 31, 1995, the company's $149.5 million investment portfolio
reflected after-tax appreciation of $4.9 million above its cost basis. This
increase was prompted primarily by the decline in interest rates during the
course of 1995.
The company has classified its investments as available for sale. While the
company has the ability to hold its investments until maturity, these securities
may be sold prior to maturity in response to changing market and economic
conditions or to maximize after-tax returns.
The company had nominal realized investment gains and losses in 1995 and
1994, respectively. Realized investment gains of $9.6 million were generated in
1993. Decisions to sell securities are governed by considerations such as
surplus exposure, tax consequences and investment opportunities. As a result,
realized investment gains or losses can vary significantly from period to
period. Most realized gains in 1993 arose as a result of selling equity
securities. Additional realized gains were achieved in 1993 by changing the
maturity target of the fixed income securities responding to changing market
conditions. Funds provided from the sale and maturity of investment securities
have been generally reinvested in other investment securities, thereby remaining
in the investment portfolio. In 1993, $15 million of the $23 million of funds
provided from the sale of equity securities was utilized to repurchase shares of
the company's common stock as more fully described under Capital Resources.
Additional information regarding the company's investment portfolio is detailed
on page 26 and pages 33 and 34 of this annual report.
Loss Reserves--Historical experience, judgmental factors, adherence to a
strategy of targeting rate adequacy, continual monitoring of reserve levels, and
paying claims in a prompt fashion have all contributed to a favorable
development of loss reserves during the past several years. A historical
perspective of the company's loss reserve developments is included in Note 4 to
the consolidated financial statements.
The development of unpaid loss and loss adjustment expense refers to
18
<PAGE>
the difference between original estimates for unpaid losses and loss adjustment
expenses and the re-evaluation of those estimates in subsequent years as loss
payments are made and open claims adjusted to reflect current information.
Redundant or favorable development occurs when original estimates are higher
than subsequently paid or adjusted.
During 1995, the company experienced overall favorable development of $2.5
million on gross unpaid losses and loss adjustment expenses. The 1995 favorable
development compares with favorable development of $3.2 million and $700,000 in
1994 and 1993, respectively.
The company experienced overall favorable development of $1.1 million on net
unpaid loss and loss adjustment expenses after deducting reinsurance
protections. This compares with favorable development of $2.9 million for 1994
and $2.4 million for 1993. The gross loss reserve development and net loss
reserve development can vary significantly, as the level of reinsurance carried
on any one risk is dependent upon several factors.
The company's insurance specialty businesses are mostly short-tail in
nature, meaning that claims are paid or settled in a relatively short time frame
from the time reported. Nonetheless, the nature of the company's principal
insurance specialty line, aviation, consists of low frequency, high severity
claims, which can result in significant changes in the development of unpaid
losses and loss adjustment expenses from period to period. The timing of salvage
and subrogation recoveries could likewise affect the loss reserve development.
The company did not experience any significant environmental claim activity
during 1995, 1994 or 1993, and currently anticipates that activity in the future
should not have a material adverse effect on the overall consolidated financial
position of the company.
Reinsurance--The company's specialty lines of business, particularly aviation
and pleasure marine, are volatile from both a rate and a claims perspective,
leading to potentially wide swings in underwriting results. Accordingly, the
company is a party to several reinsurance arrangements. These reinsurance
arrangements are utilized to assist in limiting maximum loss, provide greater
diversification of risk, reduce exposures on larger risks, and provide a level
of protection from catastrophic events. The company routinely reviews and
adjusts its reinsurance strategy, taking into account the anticipated future
direction of its business, underwriting considerations such as rate and risk
levels, conditions in the reinsurance marketplace and the cost-benefit
relationship expected to be derived from such reinsurance arrangements. Most of
the aviation business is covered under a quota share/surplus share reinsurance
arrangement. Facultative reinsurance placements are also used, primarily on
policies with limits larger than are covered by treaty reinsurance. The
company's retention on its aviation business varies according to policy limits.
The largest net aggregate amount retained in any one risk is $3.614 million. The
company currently retains all of the pleasure marine business that it writes,
subject to catastrophic reinsurance protections. Under its catastrophe
reinsurance, which also covers the aviation business line, the company absorbs
the first $2 million in losses, with catastrophe reinsurance protection to $10
million. The lenders single interest and short-term health business participate
in proportional treaty reinsurance. For 1995, the company retained 85% of its
premium production and ceded 15% to reinsurers under its various reinsurance
arrangements. Twenty-six reinsurers participated in the 1995 reinsurance
programs. Approximately 33% of amounts recoverable from reinsurers at December
31, 1995, are attributable to reinsurance arrangements with two reinsurers. No
significant amounts recoverable from reinsurers have been written off as
uncollectible in the past three years. Additional information regarding
reinsurance is detailed in Note 9 to the consolidated financial statements.
Capital Resources--The annual dividends for 1995 and 1994 were $.46 per share
and $.44 per share, respectively, marking the twentieth and nineteenth years in
which the company has paid an increased dividend.
The company's common stock repurchase program reflects continued efforts to
effectively manage its capital base and enhance shareholder value. Its capital
needs vary from period to period recognizing the volatility in the underwriting
of its specialty insurance products. The aviation insurance industry continues
in the longest competitive cycle in its history. The company acquired 208,700 of
its common shares during 1995. Since inception of its stock repurchase program
in the 1987 fourth quarter, the company has repurchased 6,207,380 shares of its
stock at prices ranging from $9.75 to $22.00 per share. The Board of Directors'
authorization at February 20, 1996, allows the company to repurchase an
additional 124,717 shares should it so elect.
On October 1, 1993, the company announced the sale by GEICO Corporation of
3.29 million of its 3.89 million shares of AVEMCO common stock. AVEMCO
repurchased 2.3 million of these shares, a group of two institutional investors
and their affiliates purchased 850,300 shares and
19
<PAGE>
Management's
Discussion and
Analysis
Continued
AVEMCO's directors, officers, and profit sharing plan purchased 140,000 shares.
The sale price was $17.50 per share. Consistent with the transaction, GEICO's
two directors relinquished their seats on AVEMCO's board. AVEMCO financed its
$40.2 million share of the purchase with its bank line of credit and with $15
million in proceeds generated from the sale of equity securities. The company
also repurchased 110,000 additional shares during the course of 1993.
The company utilized a combination of its revolving credit facility, a
portion of the proceeds from the sale of investments, and funds generated by its
subsidiaries operating activities to finance its capital management program.
Funds provided by the company's principal subsidiary, AVEMCO Insurance Company,
were paid through dividends. Regulatory restrictions on such dividends are
detailed in Note 10 of the company's consolidated financial statements.
The company's ability to support substantial future growth is reflected in
its insurance subsidiary's ratio of net premiums written to statutory
policyholders' surplus, a measure used by insurance regulators and analysts to
evaluate liquidity and capital resources. The insurance subsidiary's ratio is
currently 1.15 to 1; a general regulatory guideline is 3 to 1. The ratio of
unpaid losses and expenses to surplus was .45 to 1. 1995 marked the 21st
consecutive year and the 32nd in 35 years in business where an underwriting
profit was achieved. The company currently is adequately capitalized to support
future planned activities. The insurance subsidiary continues its "A+"
(Superior) rating from A.M. Best. In addition, the insurance subsidiary's
December 31, 1995, policyholders' surplus position substantially exceeded the
minimum requirements as stipulated by insurance industry risk-based capital
regulations.
Results of
Operations
1995 COMPARED TO 1994
Gross premiums written for 1995
increased over 1994 as follows:
<TABLE>
<CAPTION>
(000's)
Line of Business 1995 1994
- ---------------- ------- ------
<S> <C> <C>
Aviation $ 69,076 $56,812
Non-Aviation 31,072 33,840
-------- -------
Gross Premiums
Written $100,148 $90,652
======== =======
Net Premiums
Written $ 85,540 $73,450
======== =======
</TABLE>
Gross premiums written for aviation during 1995 increased by 22% over 1994.
That increase resulted principally from the purchase of the aviation business of
Aviation Underwriting Specialists (AUS) during the 1995 first quarter. In
addition, there was new business growth. While the rate situation in the
aviation insurance sector remains competitive, there has been some improvement.
Market rates continued to rise during 1995, with more significant increases in
the areas of high-valued aircraft hulls and with pilots who are transitioning to
larger or more complex aircraft. Current expectations are that, due in part to
more expensive and less available reinsurance, market rates will continue to
rise.
Gross premiums written on non-aviation lines were $31.1 million compared to
$33.8 million in 1994. The drop in premium was principally attributable to the
short-term health business, where there was 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. These
actions had the effect of reducing earned premium revenues when compared to
1994. The company plans to continue to build its participation in certain short-
20
<PAGE>
term health programs managed by International Group Services (IGS), which it
acquired in December of 1994. The company also expects to begin participating
late in 1996 on short-term health programs managed by Hinchcliff International
(Hinchcliff), a subsidiary acquired in January 1996 for 120,000 shares of the
company's stock. IGS and Hinchcliff are third-party administrators and producers
of short-term health insurance programs, primarily covering foreign students who
temporarily reside in the United States while attending colleges and
universities.
Lenders single interest gross premium writings were $16.6 million for 1995
contrasted to $16.3 million written in 1994. This particular insurance product,
managed by Matterhorn Bank Programs, Inc., a consolidated subsidiary, protects a
lenders retail installment portfolio primarily against risk of physical loss of
or damage to property securing their installment loans should the borrower fail
to maintain the required insurance. This business principally covers automobile
loans and is thereby closely linked to automobile sales, which were relatively
flat in 1995. Additionally, Matterhorn emphasizes rate discipline and will not
write business at what it believes to be an inadequate rate.
Pleasure marine gross premiums written for 1995 were $3.5 million, similar
to that of 1994. The company continues to emphasize movement away from coastal
exposures, given the frequency of weather-related events over the last several
years. The company continues to retain 100% of the pleasure marine business it
writes with the exception of reinsurance for catastrophic marine losses.
Net premiums written for all lines of business reflect the business retained
by the company after its reinsurance arrangements are considered. Net premiums
written increased over 1994 because of the growth in the aviation business.
Earned premium revenues of $80.5 million increased over 1994's $75.5 million,
consistent with the increase in net premiums written.
Commission revenues, consisting primarily of commissions received on
reinsurance ceded and commissions produced by agency operations, net of amounts
paid to agents, increased to $7.0 million in 1995 as compared to $6.4 million in
1994, primarily as a result of the IGS acquisition.
Net investment income of $8.5 million was slightly above 1994's $8.2
million, principally due to an increase in average invested assets.
Computer product and service revenues generated by The Wheatley Group, Ltd.,
a consolidated subsidiary, amounted to $10.2 million compared to $9.2 million
for 1994. The revenue increase is principally attributable to an increase in
hardware equipment sales.
Realized investment gains and/or losses for 1995 and 1994 were nominal.
From a claims standpoint, the net loss ratio for 1995 was 69.1% compared to
61.3% for 1994.
<TABLE>
<CAPTION>
Net Loss Ratios
-----------------
Line of Business 1995 1994
------------------ ------ ------
<S> <C> <C>
Aviation 68.7% 62.8%
Non-Aviation 70.0% 59.2%
All Lines 69.1% 61.3%
Net incurred losses and loss adjustment expenses were as follows:
(000's)
Line of Business 1995 1994
-------------------- -------- --------
<S> <C> <C>
Aviation $36,575 $27,460
Non-Aviation 19,030 18,850
------- -------
Net Incurred
Losses $55,605 $46,310
======= =======
</TABLE>
Net incurred losses on aviation claims increased compared to 1994. Claim
activity on the growing book of higher-valued aircraft was a principal reason
for the increase. The company experienced a difficult third quarter from a
claims perspective. Historically, that quarter can be volatile since it is the
peak season for aircraft and watercraft use. The company incurred several large
hull claims during that period. The company did not experience an increase in
claims frequency or severity on the liability side. Another reason for the
increase in net incurred losses was due to the added claim activity on the
aviation book of business acquired from AUS during the first quarter of 1995.
There were no significant weather-related losses during 1995 or 1994.
Additionally, the company has not incurred significant losses associated with
the "Blizzard of 1996," which occurred shortly after the end of the year.
Commission expense, representing costs incurred to generate business through
the assumed reinsurance and agency markets, declined to $6.5 million in 1995, as
compared to $7.2 million in 1994. This decrease is principally attributable to
the decline in premiums related to the short-term health plans.
Higher variable interest rates and a slightly higher level of bank
borrowings increased interest expense to $4.2 million in 1995 from $3.7 million
in 1994.
Selling, general, and administrative expenses for 1995 increased over the
prior year, primarily due to the acquisition of the AUS book of aviation
business, the acquisition of the IGS business and additional costs incurred with
the software business.
Income tax expense decreased to $1.2 million in 1995 from $2.7 million in
1994 as pre-tax earnings were pre-
21
<PAGE>
Management's
Discussion and
Analysis
Continued
dominantly comprised of non-taxable investment income in relation to income from
fully taxable sources, such as underwriting and realized investment gains.
The company's two California-licensed insurers settled their outstanding
Proposition 103 matters with the California Department of Insurance during 1995.
The company had previously provided for a potential rollback impact in prior
years. Refund payments are expected to be made in 1996.
In summary, increased claims activity in the aviation business and a reduced
level of participation in two short-term health programs were the principal
factors for the reduced level of earnings when compared to 1994.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation." This Statement establishes a
fair value-based method of accounting for all employee stock compensation plans.
The company has elected to use the intrinsic value-based method of accounting,
as permitted by the Statement.
In May 1993, the Financial Accounting Standards Board issued Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
Statement, as it affects the company, requires fixed maturities to be reported
at fair value on the balance sheet with unrealized appreciation or depreciation,
net of deferred tax effect, if any, charged or credited directly to
stockholders' equity. The company implemented Statement No. 115 during the first
quarter of 1994. Prior to the implementation, fixed maturities were reported at
the lower of aggregate amortized cost or market.
The company implemented Financial Accounting Standards Board Statement No.
109, "Accounting for Income Taxes," in the first quarter of 1993 without
restating prior years' financial statements. The adoption of Statement No. 109
resulted in a catch-up benefit of $943,000 or $.08 per share, which was reported
separately as a cumulative effect of a change in accounting method in the
consolidated statement of income for the year ended December 31, 1993.
Results of
Operations
1994 COMPARED TO 1993
Gross premiums written for 1994 increased over 1993 as follows:
<TABLE>
<CAPTION>
(000's)
Line of Business 1994 1993
- ---------------- ------- -------
<S> <C> <C>
Aviation $56,812 $58,239
Non-Aviation 33,840 24,016
------- -------
Gross Premiums
Written $90,652 $82,255
======= =======
Net Premiums
Written $73,450 $62,456
======= =======
</TABLE>
Gross premiums written for aviation during 1994 were 2% under the prior
year. During 1994, the company strengthened underwriting criteria on certain
classes of aviation business to increase its underwriting profitability.
Additionally, the company continued to emphasize rate discipline, recognizing
that the aviation insurance sector had been engaged in an extremely competitive
rate environment for quite some time. The company had been unwilling to write
aviation business at what it considers inadequate rates.
Lenders single interest gross premium writings were $16.3 million for 1994,
reflecting a 22% increase over that of 1993. Matterhorn's business principally
covers automobile loans and is thereby closely linked to automobile
22
<PAGE>
sales, which continued to show upward trends in 1994. Additional growth in
Matterhorn's business came from the previous acquisition by Matterhorn of KFA,
Inc., in Oklahoma.
Gross premiums written for short-term health programs were $13.9 million in
1994 versus $5.8 million for 1993. The company's experience in this market began
a number of years ago with the development of the TravMed(R) product for United
States citizens traveling abroad. In 1991 a similar product was developed for
foreign students studying aviation curriculums in the United States. As an
outgrowth of that activity, Brooks-Shettle Company, a consolidated subsidiary,
with long-standing involvement in short-term health coverages, established an
underwriting and reinsurance program for foreign nationals attending a broader
range of studies in American colleges and universities. The company participated
as an assuming reinsurer in that business during 1994. Toward the end of 1994,
the company acquired certain assets of International Group Services, Inc. This
third party administrator had approximately $12.3 million in short-term student
health premiums under administration. The company plans to increase its
insurance participation in this line of business through the acquisition.
Pleasure marine gross premiums written for 1994 were $3.6 million compared
to $4.4 million in 1993. That decline was expected because of the rate increases
and the continued movement away from coastal exposures. Prior to 1994,
underwriting results were adversely impacted by catastrophes that included
Hurricanes Bob and Andrew and a few other coastal storms.
Net premiums written increased over 1993 because of continued growth in the
lenders single interest and short-term health lines and increased retention on
the pleasure marine line. Earned premium revenues of $75.5 million increased
over 1993's $62.7 million, consistent with the increase in net premiums written.
Commission revenues increased over 1993 primarily because of the substantial
growth in the lenders single interest and short-term health businesses.
Net investment income of $8.2 million was under 1993's $9.0 million,
principally due to a decline in average invested assets. During the 1993 second
half, $15 million of equity securities were sold; the proceeds from those sales
were used to repurchase a block of the company's common stock.
Computer products and services revenues generated by The Wheatley Group,
Ltd., a consolidated subsidiary, amounted to $9.2 million contrasted to $11.1
million for 1993. The revenue decline is principally attributable to a decrease
in hardware equipment sales. Software revenues and services increased from $6.1
million in 1993 to $7.8 million in 1994. Wheatley contributed $1.7 million and
$1.4 million to pre-tax operating earnings for 1994 and 1993, respectively.
Realized losses on the sale of investments were $248,000 in 1994; realized
gains on the sale of investments were $9.6 million in 1993. The majority of the
1993 gains arose from the sale of equity securities.
From a claims standpoint, the net loss ratio for 1994 was 61.3% compared to
66.2% for 1993.
<TABLE>
<CAPTION>
Net Loss Ratios
-----------------
Line of Business 1994 1993
- ------------------ ------ ------
<S> <C> <C>
Aviation 62.8% 71.1%
Non-Aviation 59.2% 56.1%
All Lines 61.3% 66.2%
</TABLE>
Net incurred losses and loss adjustment expenses were
as follows:
<TABLE>
<CAPTION>
(000's)
Line of Business 1994 1993
---------------- ------- -------
<S> <C> <C>
Aviation $27,460 $30,055
Non-Aviation 18,850 11,447
------- -------
Net Incurred
Losses $46,310 $41,502
======= =======
</TABLE>
Net incurred losses on aviation claims declined compared to 1993. During
1994, the company strengthened underwriting criteria on certain classes of
aviation business to increase underwriting profitability. Additionally, the
company did not incur any significant weather-related losses. Weather-related
losses for 1993, after reinsurance recoveries, amounted to $1.2 million and were
principally related to the "Blizzard of 1993" and the "Midwest Flooding." Net
incurred losses on the non-aviation lines of business were $18.9 million versus
$11.4 million for 1993, principally due to increased claims on the lenders
single interest and short-term health lines of business. Those increases are
consistent with the premium growth in those businesses during the course of
1994.
Commission expense increased to $7.2 million in 1994, as compared to $5.7
million in 1993. This increase was primarily attributable to the increase in
assumed reinsurance business, particularly the short-term health programs.
Higher variable interest rates, coupled with a larger average outstanding
debt balance on the company's credit facility, increased interest expense to
$3.7 million in 1994 from $2.3 million in 1993. Selling, general, and
administrative expenses increased a modest 3% reflecting the company's
continuing efforts to attain efficient operating cost structures throughout its
various business units. The company also incurred approximately $600,000 in non-
recur-
23
<PAGE>
Management's
Discussion and
Analysis
Continued
ring advisory expenses related to a share repurchase transaction with GEICO in
1993.
Income tax expense decreased in 1994 to $2.7 million from $4.2 million in
1993, principally as a result of the decline in realized investment gains from
1993's level. Those 1993 gains were taxed at the full 34% tax rate.
Composition of net earnings was as follows:
<TABLE>
<CAPTION>
(000's)
1994 1993
------- -------
<S> <C> <C>
Operations $10,997 $ 8,270
Realized Investment
Gains (Losses) (164) 6,359
FASB Tax
Implementation -- 943
------- -------
Net earnings $10,833 $15,572
======= =======
</TABLE>
Results of
Operations
1993 COMPARED TO 1992
Premium production for 1993 increased over 1992 as follows:
<TABLE>
<CAPTION>
(000's)
Line of Business 1993 1992
- ---------------- ------- -------
<S> <C> <C>
Aviation $58,239 $57,899
Non-Aviation 24,016 21,561
------- -------
Gross Premiums
Written $82,255 $79,460
======= =======
Net Premiums
Written $62,456 $57,560
======= =======
</TABLE>
Gross premiums written for aviation during 1993 were slightly above the
prior year. The rate situation in the aviation insurance sector remained
competitive. While there were instances of rate increases, they appeared to be
limited adjustments in prices by product or aircraft type, and not abrupt
shifts.
Lenders single interest gross premium writings were $13.3 million for 1993,
reflecting a 24% increase over 1992. During the summer of 1993 Matterhorn
acquired KFA, Inc., of Oklahoma City, Oklahoma. This business closely parallels
that of Matterhorn, with most of the premiums generated from programs designed
to protect automobile retail installment loan portfolios.
Gross premiums written for short-term health programs (primarily covering
foreign students temporarily residing in the United States) were $5.8 million in
1993 versus $3.6 million for 1992. This particular insurance product line
commenced during the 1992 second half.
Pleasure marine gross premiums written for 1993 were $4.4 million compared
to $6.6 million in 1992. During the past two years, underwriting performance had
been adversely impacted by catastrophes from Hurricanes Bob and Andrew, and a
few other coastal storms. This increased claim activity prompted significant
increases in the Group's marine reinsurance costs, and, as a result, the company
modified its operations for 1993. Rates were increased, coastal underwriting
exposure was reduced, and proportional treaty reinsurance was eliminated with
100% of the business retained, but covered by catastrophe reinsurance.
Net premiums written increased over 1992 because of continued growth in the
lenders single interest and short-term health lines and increased retention on
the pleasure marine line. Earned premium revenues of $62.7 million increased
over 1992's $57.4 million, consistent with the increase in net premiums written.
Commission revenues were under that of 1992 because of the increased
retention on the pleasure marine business in 1993.
24
<PAGE>
Net investment income of $9.0 million was slightly under 1992's $9.2 million
due to a decline in average invested assets as well as investment yields. $15
million of equity securities were sold in the 1993 third quarter; the proceeds
from those sales were used to repurchase a block of the company's common stock.
Computer products and services revenues increased to $11.1 million in 1993
compared to 1992's $4.8 million. The increase is principally attributable to
hardware equipment sales. Wheatley became an IBM authorized industry remarketer
of IBM's AS/400 mid-range computers in the fall of 1992. Wheatley contributed
$1.4 million to pre-tax operating earnings in 1993; for 1992, it had an
operating loss of $132,000.
Realized gains on the sales of investments were $9.6 million in 1993 versus
$2.7 million in 1992. The majority of the gains arose from the sale of equity
securities during the 1993 third quarter. The company used $15 million in
proceeds from those sales to repurchase a block of its common stock more fully
discussed elsewhere in this report.
From a claims standpoint, the net loss ratio for 1993 was 66.2% compared to
64.1% for 1992.
<TABLE>
<CAPTION>
Net Loss Ratios
-----------------
Line of Business 1993 1992
- ---------------- -------- -------
<S> <C> <C>
Aviation 71.1% 69.0%
Non-Aviation 56.1% 49.1%
All Lines 66.2% 64.1%
</TABLE>
Net incurred losses and loss adjustment expenses were as follows:
<TABLE>
<CAPTION>
(000's)
Line of Business 1993 1992
------------------ -------- -------
<S> <C> <C>
Aviation $30,055 $29,842
Non-Aviation 11,447 6,941
-------- -------
Net Incurred
Losses $41,502 $36,783
======= =======
</TABLE>
Net incurred losses on the non-aviation lines of business moved from $6.9
million in 1992 to $11.4 million in 1993, due to increased claims on the lenders
single interest and short-term health lines of business. Those increases were
consistent with the premium growth in those businesses during the course of
1993. Aviation claims increased slightly over 1992 due to large aviation claims
incurred. These claims were partially offset by salvage and subrogation
recoveries. Weather-related losses for 1993, after reinsurance recoveries,
amounted to $1.2 million and were principally related to the "Blizzard of 1993"
and the "Midwest Flooding" during the third quarter of 1993. Weather-related
losses for 1992 aggregated $1.1 million and involved Hurricane Andrew and a
"Nor'easter" which struck in the 1992 fourth quarter. The company did not
experience any significant claims activity related to the earthquake which
struck southern California shortly after year end 1993.
Commission expense decreased to $5.7 million in 1993 as compared to $7.0
million in 1992. This decrease is primarily attributed to the company's
consolidation of its AVEMCO Insurance Company and National Aviation
Underwriters, Inc., sales and marketing operations into one unit during 1993.
This consolidation had the effect of eliminating commissions paid to non-
consolidated group insurance companies by issuing policies directly through
AVEMCO Insurance Company and National Assurance Underwriters, Inc.
Selling, general, and administrative expenses for 1993 amounted to $31.8
million versus $29.8 million in 1992. Wheatley had increased costs consistent
with its revenue growth for the year. In addition, the company incurred
approximately $600,000 in non-recurring advisory expenses related to a share
repurchase transaction with GEICO.
Income tax expense increased in 1993 to $4.2 million compared to $1.2
million in 1992, principally as a result of the increase in realized investment
gains which were fully taxable.
Net earnings in 1993 were also impacted by the continuing uncertainties
regarding the implementation of California Proposition 103. Numerous legal
challenges and complex issues remained unresolved at December 31, 1993. The
company's requests for the California Department of Insurance's approval of its
pre-Proposition 103 rates were delayed and a hearing set for some indefinite
date. As a result, net earnings for the year ended December 31, 1993, were
reduced by $99,000 to reflect an estimated potential impact on 1993 net earnings
resulting from Proposition 103, should the company's filings not be approved.
25
<PAGE>
Consolidated Investment
Portfolio Summary
AVEMCO Corporation
and Subsidiaries
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------------------
Amortized Fair Carrying
Cost Value Amount Percent
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Maturities:
Bonds
Federal Government $ 9,946,000 $ 10,280,000 $ 10,280,000 6.8
- ----------------------------------------------------------------------------------------------------
State and Municipal 20,505,000 21,344,000 21,344,000 14.3
- ----------------------------------------------------------------------------------------------------
Revenue Authority 71,688,000 75,454,000 75,454,000 50.4
- ----------------------------------------------------------------------------------------------------
Industrial 237,000 241,000 241,000 .2
- ----------------------------------------------------------------------------------------------------
Redeemable preferred stocks 4,692,000 4,817,000 4,817,000 3.2
- ----------------------------------------------------------------------------------------------------
Total fixed maturities 107,068,000 112,136,000 112,136,000 74.9
- ----------------------------------------------------------------------------------------------------
Equity Securities:
Common stocks
Bank and Insurance Companies 393,000 535,000 535,000 .4
- ----------------------------------------------------------------------------------------------------
Industrial 5,765,000 8,218,000 8,218,000 5.5
- ----------------------------------------------------------------------------------------------------
Nonredeemable preferred stocks 14,041,000 13,771,000 13,771,000 9.2
- ----------------------------------------------------------------------------------------------------
Total equity securities 20,199,000 $ 22,524,000 22,524,000 15.1
- ----------------------------------------------------------------------------------------------------
Short Term Investments, at Cost 14,884,000 14,884,000 10.0
- ----------------------------------------------------------------------------------------------------
Total Investment Portfolio $142,151,000 $149,544,000 100.0
- ----------------------------------------------------------------------------------------------------
</TABLE>
Consolidated
Fixed Maturities
Portfolio
Maturity Table
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------
Amortized Fair
Maturity Cost Percent Value Percent
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than one year $ 3,909,000 3.7 $ 3,953,000 3.5
- ----------------------------------------------------------------------------------------
1 to 3 years 8,755,000 8.2 9,094,000 8.1
- ----------------------------------------------------------------------------------------
3 to 5 years 13,593,000 12.7 14,191,000 12.7
- ----------------------------------------------------------------------------------------
5 to 10 years 29,352,000 27.4 31,366,000 28.0
- ----------------------------------------------------------------------------------------
Over 10 years 51,459,000 48.0 53,532,000 47.7
- ----------------------------------------------------------------------------------------
$107,068,000 100.0 $112,136,000 100.0
========================================================================================
</TABLE>
26
<PAGE>
Consolidated
Statements of
Income
AVEMCO Corporation
and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums earned (note 9) $ 80,458,000 $ 75,518,000 $ 62,702,000
- ------------------------------------------------------------------------------------
Commissions 7,046,000 6,418,000 5,909,000
- ------------------------------------------------------------------------------------
Net investment income (note 2) 8,498,000 8,245,000 9,004,000
- ------------------------------------------------------------------------------------
Computer products and services 10,188,000 9,185,000 11,129,000
- ------------------------------------------------------------------------------------
Realized gain (loss) on sale of
investments (note 2) 575,000 (248,000) 9,634,000
- ------------------------------------------------------------------------------------
Other revenues 6,439,000 5,472,000 5,523,000
- ------------------------------------------------------------------------------------
Total revenues 113,204,000 104,590,000 103,901,000
====================================================================================
Expenses:
Losses and loss adjustment
expenses (notes 4 and 9) 55,605,000 46,310,000 41,502,000
- ------------------------------------------------------------------------------------
Commissions 6,513,000 7,159,000 5,716,000
- ------------------------------------------------------------------------------------
Interest (note 7) 4,224,000 3,725,000 2,338,000
- ------------------------------------------------------------------------------------
Cost of computer hardware sold 1,961,000 1,032,000 3,676,000
- ------------------------------------------------------------------------------------
Selling, general and
administrative expenses 35,799,000 32,825,000 31,816,000
- ------------------------------------------------------------------------------------
Total expenses 104,102,000 91,051,000 85,048,000
====================================================================================
Earnings before income taxes and cumulative
effect of a change in accounting principle 9,102,000 13,539,000 18,853,000
- ------------------------------------------------------------------------------------
Income taxes (note 6):
Current provision 1,287,000 2,679,000 3,457,000
- ------------------------------------------------------------------------------------
Deferred provision (benefit) (103,000) 27,000 767,000
- ------------------------------------------------------------------------------------
Total income taxes 1,184,000 2,706,000 4,224,000
====================================================================================
Earnings before cumulative effect of
a change in accounting principle 7,918,000 10,833,000 14,629,000
- ------------------------------------------------------------------------------------
Cumulative effect of change in
accounting for income taxes (note 6) -- -- 943,000
- ------------------------------------------------------------------------------------
Net earnings $ 7,918,000 $ 10,833,000 $ 15,572,000
====================================================================================
Earnings per common and common
equivalent share (note 10):
Earnings before cumulative effect of
a change in accounting principle $ .90 $ 1.20 $ 1.33
- ------------------------------------------------------------------------------------
Cumulative effect of change in
accounting for income taxes -- -- .08
- ------------------------------------------------------------------------------------
Net earnings $ .90 $ 1.20 $ 1.41
====================================================================================
Weighted average number of common
and common equivalent shares 8,845,857 9,019,322 11,041,447
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
Consolidated
Balance Sheets
AVEMCO Corporation
and Subsidiaries
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
====================================================================================
<S> <C> <C>
Investments (note 2):
Fixed maturities,
at fair value (amortized cost $107,068,000;
$104,601,000 in 1994) $112,136,000 $104,489,000
- ------------------------------------------------------------------------------------
Equity securities, at fair value (cost
$20,199,000; $22,783,000 in 1994) 22,524,000 21,619,000
- ------------------------------------------------------------------------------------
Short-term investments, at cost which
approximates fair value 14,884,000 10,270,000
- ------------------------------------------------------------------------------------
Total investments 149,544,000 136,378,000
- ------------------------------------------------------------------------------------
Cash 3,466,000 5,191,000
- ------------------------------------------------------------------------------------
Receivables:
Premiums 16,406,000 13,248,000
- ------------------------------------------------------------------------------------
Reinsurance recoverable (note 9) 14,292,000 16,903,000
- ------------------------------------------------------------------------------------
Other, net 8,231,000 6,784,000
- ------------------------------------------------------------------------------------
Total receivables 38,929,000 36,935,000
- ------------------------------------------------------------------------------------
Deferred policy acquisition costs 5,511,000 4,922,000
- ------------------------------------------------------------------------------------
Prepaid reinsurance premiums (note 9) 5,178,000 4,924,000
- ------------------------------------------------------------------------------------
Property and equipment, at cost, less accumulated
depreciation (note 3) 8,051,000 7,532,000
- ------------------------------------------------------------------------------------
Deferred income tax assets (note 6) -- 1,492,000
- ------------------------------------------------------------------------------------
Other assets, net 3,123,000 3,976,000
- ------------------------------------------------------------------------------------
Total assets $213,802,000 $201,350,000
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Unpaid losses and loss adjustment expenses (note 4) $ 42,305,000 $ 41,202,000
- ------------------------------------------------------------------------------------
Unearned premiums 32,363,000 27,001,000
- ------------------------------------------------------------------------------------
Accounts payable, accrued expenses, and
other liabilities 16,009,000 17,406,000
- ------------------------------------------------------------------------------------
Ceded reinsurance premiums payable 5,047,000 5,531,000
- ------------------------------------------------------------------------------------
Deferred income tax liabilities (note 6) 1,352,000 --
- ------------------------------------------------------------------------------------
Debt (note 7) 54,967,000 54,600,000
- ------------------------------------------------------------------------------------
Total liabilities 152,043,000 145,740,000
- ------------------------------------------------------------------------------------
Stockholders' Equity (notes 2, 5, 7, and 10):
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; 11,551,161
issued; 11,543,361 in 1994 1,155,000 1,154,000
- ------------------------------------------------------------------------------------
Additional paid-in capital 18,293,000 18,206,000
- ------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
on investments 4,879,000 (842,000)
- ------------------------------------------------------------------------------------
Foreign currency translation adjustments (182,000) (205,000)
- ------------------------------------------------------------------------------------
Retained earnings 88,184,000 84,285,000
- ------------------------------------------------------------------------------------
112,329,000 102,598,000
- ------------------------------------------------------------------------------------
Less treasury stock, 2,901,741 shares in 1995
and 2,693,041 in 1994, at cost (50,570,000) (46,988,000)
- ------------------------------------------------------------------------------------
Total stockholders' equity 61,759,000 55,610,000
- ------------------------------------------------------------------------------------
Contingent liabilities (note 9)
Total liabilities and
stockholders' equity $213,802,000 $201,350,000
====================================================================================
</TABLE>
29
<PAGE>
Consolidated
Statements of
Stockholders' Equity
AVEMCO Corporation
and Subsidiaries
Three Years Ended December 31, 1995
<TABLE>
<CAPTION>
Common Stock Net Unrealized Foreign
------------------------ Additional Appreciation/ Currency
Shares Par Paid-in (Depreciation) Translation Retained
Issued Value Capital on Investments Adjustments Earnings
========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Balance at beginning of year 11,508,811 $1,151,000 $17,786,000 $ 4,644,000 $(110,000) $ 66,103,000
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings -- -- -- -- -- 15,572,000
- ----------------------------------------------------------------------------------------------------------------------------
Dividends declared
($.42 per share) -- -- -- -- -- (4,294,000)
- ----------------------------------------------------------------------------------------------------------------------------
Change in net unrealized
appreciation on equity securities -- -- -- (4,360,000) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 26,050 2,000 350,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Repurchase of common stock -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Foreign currency translation
adjustments -- -- -- -- (59,000) --
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year 11,534,861 1,153,000 18,136,000 284,000 (169,000) 77,381,000
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1994
Net earnings -- -- -- -- -- 10,833,000
- ----------------------------------------------------------------------------------------------------------------------------
Dividends declared
($.44 per share) -- -- -- -- -- (3,929,000)
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative net unrealized
appreciation on fixed
maturities at January 1, 1994 -- -- -- 4,922,000 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation
(depreciation) on investments -- -- -- (6,048,000) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 8,500 1,000 70,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Repurchase of common stock -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Foreign currency translation
adjustments -- -- -- -- (36,000) --
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year 11,543,361 1,154,000 18,206,000 (842,000) (205,000) 84,285,000
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995
Net earnings -- -- -- -- -- 7,918,000
- ----------------------------------------------------------------------------------------------------------------------------
Dividends declared
($.46 per share) -- -- -- -- -- (4,019,000)
- ----------------------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation
(depreciation) on investments -- -- -- 5,721,000 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 7,800 1,000 87,000 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Repurchase of common stock -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Foreign currency translation
adjustments -- -- -- -- 23,000 --
- ----------------------------------------------------------------------------------------------------------------------------
Balance at end of year 11,551,161 $1,155,000 $18,293,000 $4,879,000 $(182,000) $88,184,000
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Stockholders'
Stock Equity
=============================
<S> <C> <C>
Year ended December 31, 1993
Balance at beginning of year $ (359,000) $89,215,000
- ----------------------------------------------------------------------------
Net earnings -- 15,572,000
- ----------------------------------------------------------------------------
Dividends declared
($.42 per share) -- (4,294,000)
- ----------------------------------------------------------------------------
Change in net unrealized
appreciation on equity securities -- (4,360,000)
- ----------------------------------------------------------------------------
Exercise of common stock options -- 352,000
- ----------------------------------------------------------------------------
Repurchase of common stock (42,496,000) (42,496,000)
- ----------------------------------------------------------------------------
Foreign currency translation
adjustments -- (59,000)
- ----------------------------------------------------------------------------
Balance at end of year (42,855,000) 53,930,000
- ----------------------------------------------------------------------------
Year ended December 31, 1994
Net earnings -- 10,833,000
- ----------------------------------------------------------------------------
Dividends declared
($.44 per share) -- (3,929,000)
- ----------------------------------------------------------------------------
Cumulative net unrealized
appreciation on fixed
maturities at January 1, 1994 -- 4,922,000
- ----------------------------------------------------------------------------
Change in net unrealized appreciation
(depreciation) on investments -- (6,048,000)
- ----------------------------------------------------------------------------
Exercise of common stock options -- 71,000
- ----------------------------------------------------------------------------
Repurchase of common stock (4,133,000) (4,133,000)
- ----------------------------------------------------------------------------
Foreign currency translation
adjustments -- (36,000)
- ----------------------------------------------------------------------------
Balance at end of year (46,988,000) 55,610,000
- ----------------------------------------------------------------------------
Year ended December 31, 1995
Net earnings -- 7,918,000
- ----------------------------------------------------------------------------
Dividends declared
($.46 per share) -- (4,019,000)
- ----------------------------------------------------------------------------
Change in net unrealized appreciation
(depreciation) on investments -- 5,721,000
- ----------------------------------------------------------------------------
Exercise of common stock options -- 88,000
- ----------------------------------------------------------------------------
Repurchase of common stock (3,582,000) (3,582,000)
- ----------------------------------------------------------------------------
Foreign currency translation
adjustments -- 23,000
- ----------------------------------------------------------------------------
Balance at end of year $(50,570,000) $61,759,000
============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
Consolidated
Statements of
Cash Flows
AVEMCO Corporation
and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31,
===========================================
1995 1994 1993
<S> <C> <C> <C>
Operating Activities:
Net earnings $ 7,918,000 $ 10,833,000 $ 15,572,000
- ----------------------------------------------------------------------------------
Adjustments to reconcile net earnings
to cash flows from operating activities:
Depreciation and amortization 1,604,000 1,348,000 1,318,000
- ----------------------------------------------------------------------------------
Deferred tax expense (benefit) (103,000) 27,000 767,000
- ----------------------------------------------------------------------------------
Realized (gain) loss on sale of
investments (575,000) 248,000 (9,634,000)
- ----------------------------------------------------------------------------------
Realized (gain) loss on sale of
property and equipment 14,000 (4,000) 37,000
- ----------------------------------------------------------------------------------
Cumulative effect of change in
accounting for income taxes -- -- (943,000)
- ----------------------------------------------------------------------------------
Change in:
Receivables (1,994,000) 5,329,000 9,606,000
- ----------------------------------------------------------------------------------
Deferred policy acquisition costs (589,000) 70,000 462,000
- ----------------------------------------------------------------------------------
Prepaid reinsurance premiums 254,000 1,626,000 1,070,000
- ----------------------------------------------------------------------------------
Unpaid losses and loss
adjustment expenses 1,103,000 (4,577,000) (1,727,000)
- ----------------------------------------------------------------------------------
Unearned premiums 5,362,000 (3,737,000) (1,336,000)
- ----------------------------------------------------------------------------------
Ceded reinsurance premiums payable (484,000) (1,617,000) 927,000
- ----------------------------------------------------------------------------------
Accounts payable, accrued
expenses and other (1,448,000) 2,249,000 1,775,000
- ----------------------------------------------------------------------------------
Net cash flows provided from
operating activities 11,062,000 11,795,000 17,894,000
- ----------------------------------------------------------------------------------
Investment Activities:
Proceeds from sale of fixed maturities 23,318,000 22,747,000 63,574,000
- ----------------------------------------------------------------------------------
Proceeds from redemption of fixed
maturities 13,227,000 13,036,000 14,870,000
- ----------------------------------------------------------------------------------
Proceeds from sale of equity securities 14,692,000 7,711,000 23,044,000
- ----------------------------------------------------------------------------------
Purchase of fixed maturities (45,225,000) (26,673,000) (66,639,000)
- ----------------------------------------------------------------------------------
Purchase of equity securities (5,181,000) (14,270,000) (18,577,000)
- ----------------------------------------------------------------------------------
Net purchase of short-term investments (4,614,000) (1,494,000) (1,457,000)
- ----------------------------------------------------------------------------------
Proceeds from sale of property and
equipment 9,000 11,000 51,000
- ----------------------------------------------------------------------------------
Purchase of property, equipment, and
long-term assets (1,867,000) (2,699,000) (1,262,000)
- ----------------------------------------------------------------------------------
Net cash flows provided from
(used by) investment activities (5,641,000) (1,631,000) 13,604,000
- ----------------------------------------------------------------------------------
Financing Activities:
Proceeds from borrowings 11,700,000 12,700,000 49,251,000
- ----------------------------------------------------------------------------------
Principal payments on debt (11,333,000) (12,600,000) (33,751,000)
- ----------------------------------------------------------------------------------
Proceeds from exercise of common
stock options 88,000 71,000 352,000
- ----------------------------------------------------------------------------------
Dividends to stockholders (4,019,000) (3,929,000) (4,294,000)
- ----------------------------------------------------------------------------------
Repurchase of common stock (3,582,000) (4,133,000) (42,496,000)
- ----------------------------------------------------------------------------------
Net cash flows used by
financing activities (7,146,000) (7,891,000) (30,938,000)
- ----------------------------------------------------------------------------------
Net increase (decrease) in cash (1,725,000) 2,273,000 560,000
- ----------------------------------------------------------------------------------
Cash, beginning of year 5,191,000 2,918,000 2,358,000
- ----------------------------------------------------------------------------------
Cash, end of year $ 3,466,000 $ 5,191,000 $ 2,918,000
==================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
Notes to Consolidated
Financial Statements
AVEMCO Corporation and Subsidiaries
December 31, 1995, 1994, and 1993
1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements include the accounts of AVEMCO
Corporation and all of its subsidiaries ("the company"). All material
intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to conform to the
1995 presentation.
The company's insurance subsidiaries underwrite aviation and other specialty
insurance products. Non-aviation lines include lenders single interest,
short-term health and pleasure marine. The insurance service businesses
complement the insurance operations and are concentrated in claims
management, specialty insurance administration, reinsurance brokerage,
worldwide emergency assistance, and computer systems for the
property/casualty insurance industry.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(b) Insurance Premiums and Commissions
Premiums on insurance policies written are recognized, net of ceded
premiums, principally on a monthly pro rata basis over the terms of
individual policies. Commissions on reinsurance are included in the
computation of deferred policy acquisition costs and thereby are partially
deferred (see note 1(e)).
(c) Computer Products and Services
Revenue from custom software products is recognized using the percentage of
completion method of accounting. Other software contracts are recognized
when delivery has occurred, other remaining vendor obligations are no longer
significant, and collectibility is probable. Computer hardware is recognized
when delivery has occurred. Maintenance support is recognized pro rata over
the term of the maintenance agreement.
(d) Unpaid Losses and Loss Adjustment Expenses
The liability for insurance losses is determined by aggregating the
estimated liability on both individually reported and incurred but not
reported claims. The liability for adjustment expenses on losses incurred
but not settled is determined on the basis of historical experience of
adjustment expenses in relation to losses incurred. Estimated amounts of
salvage recoverable on paid and unpaid losses are recorded as a reduction of
unpaid losses. Claims are continually monitored and management believes that
the liability for losses and loss adjustment expenses at December 31, 1995
and 1994, is adequate to cover the ultimate liability. However, such
estimates may be more or less than the amount ultimately paid when the
claims are settled (see note 4).
(e) Deferred Policy Acquisition Costs
Policy acquisition costs (such as premium taxes, commissions paid on
reinsurance assumed, and a portion of other underwriting expenses) incurred
in the writing of insurance business are deferred and amortized over the
terms of the insurance policies. Anticipated losses and loss expenses, based
on historical and current experience, are considered in determining the
recoverability of deferred acquisition costs.
(f) Investments
In May 1993, the Financial Accounting Standards Board issued Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
Statement, as it impacts the company, requires fixed maturities to be
reported at fair value on the balance sheet with unrealized appreciation or
depreciation, net of deferred tax effect, if any, charged or credited
directly to stockholders' equity. The company prospectively implemented
Statement No. 115 during the first quarter of 1994. Prior to the
implementation, fixed maturities were reported at the lower of aggregate
amortized cost or market.
Investments in fixed maturities (bonds and redeemable preferred stock) are
considered as available for sale and are carried at fair value, as
determined by quoted market prices. The company has the ability to hold all
fixed maturity investments until their maturity. However, securities may be
sold to take advantage of market and economic conditions or as part of the
company's investment strategy. Equity securities (common stock and non-
redeemable preferred stock) are classified as available for sale and are
carried at fair value, as determined by quoted market prices. Gain or loss
on securities transactions are recognized as realized, or when other than
temporary declines occur, and are determined by the identified certificate
method. Unrealized appreciation or depreciation of equity securities and,
beginning in 1994, fixed maturity investments, net of deferred tax effect,
if any, are excluded from net earnings and credited or charged directly to
stockholders' equity (see note 2).
(g) Depreciation and Amortization
Property and equipment are depreciated by straight-line and accelerated
methods over their useful lives, which range from three years for certain
equipment to 45 years for certain buildings.
32
<PAGE>
Intangible costs of acquisitions, included in other assets, are amortized on
a straight-line basis over their useful lives ranging from three to 15
years.
(h) Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Statement No. 109 requires a change from the deferred method of accounting
for income taxes of APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method of
Statement No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under Statement No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
Effective January 1, 1993, the company implemented Statement No. 109 and has
reported the cumulative effect of that change in the method of accounting
for income taxes in the 1993 consolidated statement of income.
(i) Earnings Per Share
Earnings per share are based on the weighted average number of common and
common equivalent shares outstanding during the year. Outstanding common
stock options, when dilutive, are considered to be common stock equivalents
for the purpose of this calculation. The weighted average number of common
and common equivalent shares has been impacted by the company's continuing
common stock repurchase program implemented in 1987.
2
INVESTMENTS
In May 1993, the Financial Accounting Standards Board issued Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Statement, as it affects the company, requires fixed maturities to be reported
at fair value on the balance sheet with unrealized appreciation or depreciation,
net of deferred tax effect, if any, charged or credited directly to
stockholders' equity. The company implemented Statement No. 115 during the first
quarter of 1994. Prior to the implementation, fixed maturities were reported at
the lower of aggregate amortized cost or market.
The following summarizes the amortized cost, unrealized gains and losses, and
fair value of investments in fixed income securities at December 31, 1995, 1994,
and 1993. Bonds consist primarily of debt securities issued by states and
political subdivisions.
<TABLE>
<CAPTION>
Unrealized
----------------
Amortized
Cost Gains Losses Fair Value
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995:
Bonds $102,376,000 $5,219,000 $ 276,000 $107,319,000
- ------------------------------------------------------------------------
Redeemable
preferred
stocks 4,692,000 145,000 20,000 4,817,000
- ------------------------------------------------------------------------
Total $107,068,000 $5,364,000 $ 296,000 $112,136,000
========================================================================
December 31, 1994:
Bonds $ 96,114,000 $2,830,000 $2,794,000 $ 96,150,000
- ------------------------------------------------------------------------
Redeemable
preferred
stocks 8,487,000 10,000 158,000 8,339,000
- ------------------------------------------------------------------------
Total $104,601,000 $2,840,000 $2,952,000 $104,489,000
========================================================================
December 31, 1993:
Bonds $113,887,000 $7,755,000 $ 298,000 $121,344,000
========================================================================
</TABLE>
The amortized cost and estimated fair value of fixed income securities at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1995
--------------------------
Amortized Fair
Maturity Cost Value
- ------------------------------------------------
<S> <C> <C>
Less than one year $ 3,909,000 $ 3,953,000
- ------------------------------------------------
1 to 3 years $ 8,755,000 $ 9,094,000
- ------------------------------------------------
3 to 5 years $ 13,593,000 $ 14,191,000
- ------------------------------------------------
5 to 10 years $ 29,352,000 $ 31,366,000
- ------------------------------------------------
Over 10 years $ 51,459,000 $ 53,532,000
- ------------------------------------------------
Total $107,068,000 $112,136,000
================================================
</TABLE>
The company has $10,161,000 of fixed income securities at December 31, 1995,
pledged with regulators and treasurers of various states and the Canadian
national government for protection of its policyholders and creditors as
required by various state and Canadian national government insurance
regulations.
33
<PAGE>
Notes to Consolidated
Financial Statements
Continued
The following summarizes the cost, unrealized gains and losses, and fair value
of investments in equity securities at December 31, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
Unrealized
----------------------
Cost Gains Losses Fair Value
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1995:
Common
stocks $ 6,158,000 $2,609,000 $ 14,000 $ 8,753,000
- ----------------------------------------------------------------------
Preferred
stocks 14,041,000 243,000 513,000 13,771,000
- ----------------------------------------------------------------------
Total $20,199,000 $2,852,000 $ 527,000 $22,524,000
======================================================================
December 31, 1994:
Common
stocks $ 6,871,000 $ 371,000 $ 180,000 $ 7,062,000
- ----------------------------------------------------------------------
Preferred
stocks 15,912,000 6,000 1,361,000 14,557,000
- ----------------------------------------------------------------------
Total $22,783,000 $ 377,000 $1,541,000 $21,619,000
======================================================================
December 31, 1993:
Common
stocks $ 858,000 $ 279,000 $ 63,000 $ 1,074,000
- ----------------------------------------------------------------------
Preferred
stocks $15,432,000 $ 252,000 37,000 $15,647,000
- ----------------------------------------------------------------------
Total $16,290,000 $ 531,000 $ 100,000 $16,721,000
======================================================================
</TABLE>
Below are the changes, as reflected in stockholders' equity, in net unrealized
appreciation (depreciation) in fair value, net of applicable income taxes, of
investments in fixed maturities and equity securities for the years ended
December 31, 1995 and 1994, and investments in equity securities for the year
ended December 31, 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------
<S> <C> <C> <C>
Fixed maturities $3,419,000 $(4,995,000) $ --
- --------------------------------------------------------------------------
Equity securities 2,302,000 (1,053,000) (4,360,000)
- --------------------------------------------------------------------------
Net change for year 5,721,000 (6,048,000) (4,360,000)
- --------------------------------------------------------------------------
Cumulative net unrealized
appreciation on fixed
maturities at January 1, 1994 -- 4,922,000 --
- --------------------------------------------------------------------------
Net unrealized appreciation
(depreciation), beginning of
year (842,000) 284,000 4,644,000
- --------------------------------------------------------------------------
Net unrealized appreciation
(depreciation), end of year $4,879,000 $ (842,000) $ 284,000
==========================================================================
</TABLE>
The unrealized decrease in the fair value of investments in fixed maturities was
$42,000 for the year ended December 31, 1993.
Net investment income consists of the following for the years ended December 31,
1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------------
<S> <C> <C> <C>
Fixed maturities $6,496,000 $7,125,000 $8,327,000
- ----------------------------------------------------------------
Equity securities 1,225,000 998,000 707,000
- ----------------------------------------------------------------
Short-term investments 1,177,000 522,000 370,000
- ----------------------------------------------------------------
Gross investment income 8,898,000 8,645,000 9,404,000
- ----------------------------------------------------------------
Investment expenses (400,000) (400,000) (400,000)
- ----------------------------------------------------------------
Net investment income $8,498,000 $8,245,000 $9,004,000
================================================================
</TABLE>
Realized gains (losses), before taxes, on the sale of investment securities are
as follows for the years ended December 31, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------
<S> <C> <C> <C>
Fixed maturities $ 382,000 $(147,000) $3,810,000
- ----------------------------------------------------------------
Equity securities 193,000 (101,000) $5,824,000
- ----------------------------------------------------------------
Net realized gains (losses) $ 575,000 $(248,000) $9,634,000
================================================================
</TABLE>
Proceeds from the sale and redemption of fixed income securities during 1995,
1994, and 1993, were $36,545,000, $35,783,000, and $78,444,000, respectively.
Gross gains of $492,000, $452,000, and $3,855,000 in 1995, 1994, and 1993,
respectively, and gross losses of $110,000, $599,000, and $45,000, in 1995,
1994, and 1993, respectively, were realized from these transactions.
3
PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1994, consists of the following:
<TABLE>
<CAPTION>
1995 1994
--------------------------
<S> <C> <C>
Buildings and improvements $ 6,128,000 $ 6,128,000
- ----------------------------------------------------------------
Furniture, fixtures, and equipment 9,819,000 8,291,000
- ----------------------------------------------------------------
15,947,000 14,419,000
- ----------------------------------------------------------------
Less accumulated depreciation (7,896,000) (6,887,000)
- ----------------------------------------------------------------
Property and equipment, net $ 8,051,000 $ 7,532,000
================================================================
</TABLE>
For the years ended December 31, 1995, 1994, and 1993, depreciation expense was
$1,221,000, $1,091,000, and $1,000,000, respectively.
34
<PAGE>
4
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table presents the net liability for unpaid losses and loss
adjustment expenses as originally estimated at December 31, 1986 through 1995,
the cumulative amounts paid with respect to the liability for each subsequent
year, the re-estimated liability at each subsequent year-end, the resulting
development of original liability estimates for 1986 through 1994, and
supplemental gross unpaid losses and loss adjustment expense information.
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net unpaid losses
and loss
adjustment
expenses $34,803,000 $41,170,000 $37,846,000 $38,955,000 $33,146,000 $24,957,000 $26,663,000 $29,958,000
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative paid losses and loss adjustment expenses:
One year later 17,955,000 20,932,000 17,689,000 17,145,000 16,350,000 14,137,000 12,263,000 16,897,000
- -----------------------------------------------------------------------------------------------------------------------------------
Two years later 25,045,000 26,950,000 25,364,000 26,118,000 22,766,000 17,524,000 19,262,000 22,805,000
- -----------------------------------------------------------------------------------------------------------------------------------
Three years later 27,698,000 29,483,000 30,043,000 30,015,000 24,516,000 21,791,000 21,298,000
- -----------------------------------------------------------------------------------------------------------------------------------
Four years later 29,013,000 31,463,000 32,107,000 30,671,000 27,415,000 23,063,000
- -----------------------------------------------------------------------------------------------------------------------------------
Five years later 29,336,000 32,538,000 31,822,000 33,300,000 27,969,000
- -----------------------------------------------------------------------------------------------------------------------------------
Six years later 29,802,000 31,844,000 33,580,000 33,803,000
- -----------------------------------------------------------------------------------------------------------------------------------
Seven years later 28,810,000 33,485,000 33,862,000
- -----------------------------------------------------------------------------------------------------------------------------------
Eight years later 30,067,000 33,739,000
- -----------------------------------------------------------------------------------------------------------------------------------
Nine years later 30,259,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net unpaid losses and loss adjustment expenses re-estimated as of:
One year later 35,205,000 37,447,000 36,147,000 36,145,000 27,373,000 23,624,000 24,299,000 27,011,000
- -----------------------------------------------------------------------------------------------------------------------------------
Two years later 32,390,000 36,000,000 35,483,000 32,946,000 27,728,000 24,066,000 22,903,000 27,535,000
- -----------------------------------------------------------------------------------------------------------------------------------
Three years later 30,755,000 34,884,000 34,013,000 33,464,000 27,904,000 23,886,000 22,949,000
- -----------------------------------------------------------------------------------------------------------------------------------
Four years later 31,182,000 33,817,000 34,531,000 33,458,000 28,277,000 24,061,000
- -----------------------------------------------------------------------------------------------------------------------------------
Five years later 30,770,000 34,365,000 34,106,000 33,958,000 28,384,000
- -----------------------------------------------------------------------------------------------------------------------------------
Six years later 30,890,000 33,985,000 34,178,000 34,092,000
- -----------------------------------------------------------------------------------------------------------------------------------
Seven years later 30,348,000 34,069,000 34,050,000
- -----------------------------------------------------------------------------------------------------------------------------------
Eight years later 30,481,000 33,927,000
- -----------------------------------------------------------------------------------------------------------------------------------
Nine years later 30,447,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net cumulative
redundancy $ 4,356,000 $ 7,243,000 $ 3,796,000 $ 4,863,000 $ 4,762,000 $ 896,000 $ 3,714,000 $ 2,423,000
Gross unpaid losses and loss adjustment expenses $45,779,000
- -----------------------------------------------------------------------------------------------------------------------------------
Reinsurance recoverable on unpaid losses and loss adjustment expenses 15,821,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net unpaid losses and loss adjustment expenses $29,958,000
===================================================================================================================================
Re-estimated gross unpaid losses and loss adjustment expenses $42,935,000
- -----------------------------------------------------------------------------------------------------------------------------------
Re-estimated reinsurance recoverable on unpaid losses and loss adjustment expenses 15,400,000
- -----------------------------------------------------------------------------------------------------------------------------------
Re-estimated net unpaid losses and loss adjustment expenses $27,535,000
===================================================================================================================================
Gross cumulative redundancy $ 2,844,000
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1994 1995
=========================================================================================================
<S> <C> <C>
Net unpaid losses
and loss
adjustment
expenses $31,137,000 $32,933,000
- ---------------------------------------------------------------------------------------------------------
Cumulative paid losses and loss adjustment expenses:
20,786,000
One year later
- -----------------------------------------------------------------------------------------------------------------------------------
Two years later
- -----------------------------------------------------------------------------------------------------------------------------------
Three years later
- -----------------------------------------------------------------------------------------------------------------------------------
Four years later
- -----------------------------------------------------------------------------------------------------------------------------------
Five years later
- -----------------------------------------------------------------------------------------------------------------------------------
Six years later
- -----------------------------------------------------------------------------------------------------------------------------------
Seven years later
- -----------------------------------------------------------------------------------------------------------------------------------
Eight years later
- -----------------------------------------------------------------------------------------------------------------------------------
Nine years later
Net unpaid losses and loss adjustment expenses re-estimated as of:
One year later 29,989,000
- -----------------------------------------------------------------------------------------------------------------------------------
Two years later
- -----------------------------------------------------------------------------------------------------------------------------------
Three years later
- -----------------------------------------------------------------------------------------------------------------------------------
Four years later
- -----------------------------------------------------------------------------------------------------------------------------------
Five years later
- -----------------------------------------------------------------------------------------------------------------------------------
Six years later
- -----------------------------------------------------------------------------------------------------------------------------------
Seven years later
- -----------------------------------------------------------------------------------------------------------------------------------
Eight years later
- -----------------------------------------------------------------------------------------------------------------------------------
Nine years later
Net cumulative
redundancy $ 1,148,000
==========================================================================================================
Gross unpaid losses and loss adjustment expenses $41,202,000 $42,305,000
- ----------------------------------------------------------------------------------------------------------
Reinsurance recoverable on unpaid losses and loss adjustment expenses 10,065,000 9,372,000
- ----------------------------------------------------------------------------------------------------------
Net unpaid losses and loss adjustment expenses $31,137,000 $32,933,000
==========================================================================================================
Re-estimated gross unpaid losses and loss adjustment expenses $38,731,000
- ----------------------------------------------------------------------------------------------------------
Re-estimated reinsurance recoverable on unpaid losses and loss adjustment
expenses 8,742,000
- ----------------------------------------------------------------------------------------------------------
Re-estimated net unpaid losses and loss adjustment expenses $29,989,000
==========================================================================================================
Gross cumulative redundancy $ 2,471,000
==========================================================================================================
</TABLE>
The development of unpaid losses and loss adjustment expenses refers to the
difference between original estimates for unpaid losses and loss adjustment
expenses and the re-evaluation of these estimates in subsequent years as loss
payments are made and open claims adjusted to reflect current information.
Redundant or favorable development occurs when original estimates are higher
than subsequently indicated, whereas deficient development occurs when original
estimates are lower than subsequently indicated.
35
<PAGE>
Notes to Consolidated
Financial Statements
Continued
The following table sets forth a reconciliation of beginning and ending net
unpaid losses and loss adjustment expenses and additional supplemental gross
unpaid loss and loss adjustment expense information. Net unpaid losses and loss
adjustment expenses reflect unpaid losses and loss adjustment expenses after
reinsurance arrangements have been considered.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1995 1994 1993
---------------------------------------
<S> <C> <C> <C>
Net unpaid losses and loss
adjustment expenses,
beginning of year $31,137,000 $29,958,000 $26,663,000
- -------------------------------------------------------------------------------
Losses and loss adjustment expenses:
Provision for insured events
of the current year 56,753,000 49,257,000 43,866,000
- -------------------------------------------------------------------------------
Decrease in provision for insured
events of prior years (1,148,000) (2,947,000) (2,364,000)
- -------------------------------------------------------------------------------
Total losses and loss
adjustment expenses 55,605,000 46,310,000 41,502,000
- -------------------------------------------------------------------------------
Payments:
Losses and loss adjustment
expenses attributable to
insured events of the
current year 33,023,000 28,234,000 25,944,000
- -------------------------------------------------------------------------------
Losses and loss adjustment
expenses attributable to
insured events of prior
years 20,786,000 16,897,000 12,263,000
- -------------------------------------------------------------------------------
Total payments 53,809,000 45,131,000 38,207,000
- -------------------------------------------------------------------------------
Net unpaid losses and loss
adjustment expenses,
end of year 32,933,000 31,137,000 29,958,000
- -------------------------------------------------------------------------------
Reinsurance recoverable on
unpaid losses and loss
adjustment expenses,
end of year 9,372,000 10,065,000 15,821,000
- -------------------------------------------------------------------------------
Gross unpaid losses and
loss adjustment expenses,
end of year $42,305,000 $41,202,000 $45,779,000
===============================================================================
</TABLE>
Prior to 1993, unpaid losses and loss adjustment expenses prepared in accordance
with generally accepted accounting principles differed from those determined in
accordance with statutory accounting practices by the estimated amount for
salvage recoveries.
5
STOCK OPTIONS
The stockholders approved a 375,000 share non-statutory stock option plan in
1991 and a 1,350,000 share incentive stock option plan in 1982. Both plans are
administered by the Compensation and Stock Option Committee of the Board of
Directors.
Under the non-statutory stock option plan, options may be granted to employees
to purchase shares of the company's common stock. Options are granted at the
fair market value on the date of the grant and, generally, expire ten years from
the date of grant. Generally, options cannot be exercised earlier than one year
after the date on which granted and become exercisable at a rate of 25% per year
provided, however, that an option may be exercised in full in the event of,
among other things, a change in control of the company.
The incentive stock option plan expired December 1992 and no additional grants
can be made under this plan. Major provisions are similar to the non-statutory
stock option plan, except that upon the exercise of an option, an incentive
stock option participant agrees to remain in the employ of the company for a
period of at least two years from the date of such exercise. The actual options
that any participant may annually receive or exercise, including any that may be
accelerated due to a change in control, are limited, however, to the maximum
amount allowable under the Internal Revenue Code.
The following table summarizes stock option activity under these plans for the
years ended December 31, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------------------------
<S> <C> <C> <C>
Outstanding,
beginning of year 910,025 877,925 860,150
- --------------------------------------------------------------------------
Granted 9,000 51,000 68,200
- --------------------------------------------------------------------------
Exercised (7,800) (8,500) (26,050)
- --------------------------------------------------------------------------
Cancelled (11,925) (10,400) (24,375)
- --------------------------------------------------------------------------
Outstanding,
end of year 899,300 910,025 877,925
==========================================================================
Exercisable,
end of year 747,700 629,725 502,775
==========================================================================
Option price
per share:
Granted $16.4375 $13.625 $18.50
- --------------------------------------------------------------------------
Exercised $ 8.417-$16.00 $ 8.417 $ 8.417-$17.33
- --------------------------------------------------------------------------
Cancelled $12.583-$26.00 $12.583-$26.00 $12.583-$26.00
- --------------------------------------------------------------------------
Outstanding,
end of year $ 8.417-$26.00 $ 8.417-$26.00 $ 8.417-$26.00
==========================================================================
</TABLE>
36
<PAGE>
6
INCOME TAXES
The following is a reconciliation of the expected federal income tax rate with
the company's effective tax rate on earnings:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------
<S> <C> <C> <C>
Expected tax rate 35.0% 35.0% 35.0%
- --------------------------------------------------------------
Effect on tax rate resulting from:
Tax exempt income on securities (18.8) (13.7) (12.2)
- --------------------------------------------------------------
Allowable dividend exclusion (3.7) (2.3) (.9)
- --------------------------------------------------------------
Other .5 1.0 .5
- --------------------------------------------------------------
Effective tax rate 13.0% 20.0% 22.4%
==============================================================
</TABLE>
The company implemented Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes," effective January 1, 1993, without restating
prior years' financial statements. The implementation of Statement No. 109
resulted in a catch-up benefit of $943,000 or $.08 per share, which was reported
separately as a cumulative effect of a change in accounting method in the
consolidated statement of income for the year ended December 31, 1993.
Deferred income tax assets and liabilities are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------------
<S> <C> <C> <C>
Deferred income tax assets:
Discounted unpaid loss and loss
adjustment expenses $ 1,120,000 $1,059,000 $1,019,000
- ---------------------------------------------------------------------------------
Unearned premiums reduction 1,849,000 1,501,000 1,645,000
- ---------------------------------------------------------------------------------
California Proposition 103 deferral 132,000 1,016,000 1,016,000
- ---------------------------------------------------------------------------------
Alternative minimum tax
credit carryforwards 927,000 121,000 388,000
- ---------------------------------------------------------------------------------
Unrealized depreciation on investments -- 434,000 --
- ---------------------------------------------------------------------------------
Other 262,000 254,000 94,000
- ---------------------------------------------------------------------------------
Gross deferred income tax assets 4,290,000 4,385,000 4,162,000
- ---------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 1,874,000 1,674,000 1,697,000
- ---------------------------------------------------------------------------------
Property and equipment 859,000 860,000 833,000
- ---------------------------------------------------------------------------------
Investments 395,000 359,000 556,000
- ---------------------------------------------------------------------------------
Unrealized appreciation on
investments 2,514,000 -- 146,000
- ---------------------------------------------------------------------------------
Gross deferred income tax liabilities 5,642,000 2,893,000 3,232,000
- ---------------------------------------------------------------------------------
Net deferred income tax assets (liabilities)$(1,352,000) $1,492,000 $ 930,000
=================================================================================
</TABLE>
A valuation allowance as of December 31, 1995 and 1994, has not been recognized
as it appears more likely than not that the combination of carryback potential
and estimated future taxable income should be sufficient to allow for the
realization of the gross deferred income tax assets.
State income taxes, which are included in the current income tax provisions,
were $405,000, $395,000, and $414,000 in 1995, 1994, and 1993, respectively.
Federal and state income taxes paid in 1995, 1994, and 1993 were $944,000,
$2,801,000, and $4,069,000, respectively.
7
DEBT
The company has an unsecured revolving credit facility with a bank that allows
it to borrow up to $60,000,000 through April 30, 1997. Interest is payable at
the lower of the bank's floating prime rate or the daily London Interbank
Offered Rate for three month U.S. dollar deposits (LIBOR) plus 1.45%. The
interest rate at December 31, 1995, was 7.14%. The company also has the option,
at any time, to convert any portion of the outstanding principal balance of the
loan into term notes, which may be amortized over any period not to extend
beyond December 31, 2000. Interest would be based on the revolving credit
facility's fluctuating rate. However, the company may, at its option, convert
the fluctuating rate to a negotiated fixed rate by executing an interest rate
swap agreement. The revised credit agreement provides for a commitment fee of
one half of 1% per annum of the average daily unused credit. $49,300,000 was
drawn under this credit facility at December 31, 1995.
The revised credit facility requires the company to maintain a consolidated net
worth, as defined, of $50,661,000. Dividends to stockholders in any one year may
not exceed 50% of the prior year's net earnings. Other significant covenants in
the credit facility provide for certain limitations on the company's liability
to net worth ratio, cash flow to current portion of long term debt, the
acquisition, disposition and pledging of assets, incurring of indebtedness, and
require its insurance subsidiary to maintain a certain statutory policyholders'
surplus and net premium written to policyholders' surplus ratio.
The company also has a $10,000,000 unsecured five-year term loan with a bank.
The loan will be repaid in 60 monthly principal installments of $166,667, plus
interest. Interest is payable on a fluctuating basis equal to LIBOR plus 1.65%.
The company may, however, at its option, convert the fluctuating rate to a
negotiated fixed rate by executing an interest rate swap agreement. The interest
rate at December 31, 1995, was 7.34%. At December 31, 1995, the out-
37
<PAGE>
Notes to Consolidated
Financial Statements
Continued
standing principal amount of the loan was $5,667,000. Principal payments for the
next three years ending December 31, 1998, are $2,167,000 in 1996, $2,000,000 in
1997, and $1,500,000 in 1998.
Interest paid on all debt in 1995, 1994, and 1993, was $4,031,000, $3,915,000,
and $1,934,000, respectively.
8
EMPLOYEE BENEFITS
The company has a non-contributory defined benefit retirement plan covering
substantially all employees who meet specified age and service requirements.
Benefits are based on years of service, final average compensation and are
integrated with the provisions of the Federal Insurance Compensation Act (Social
Security), as provided for in the plan. Pension plan assets are primarily
invested in immediate participation guaranteed contracts and pooled separate
investment accounts of a life insurance company. The company's funding policy is
to contribute amounts that meet minimum funding requirements, but which do not
exceed the maximum funding limits as currently determined under applicable tax
regulations.
Total pension expense amounted to $512,000, $430,000, and $492,000 in 1995,
1994, and 1993, respectively. The following summarizes the plan's status at
December 31:
Actuarial present value of pension benefit obligations:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
Vested benefit obligation $(4,383,000) $(3,930,000) $(4,158,000)
- -------------------------------------------------------------------------------
Non-vested benefit obligation (191,000) (93,000) (65,000)
- -------------------------------------------------------------------------------
Accumulated benefit obligation (4,574,000) (4,023,000) (4,223,000)
- -------------------------------------------------------------------------------
Effect of projected future
compensation increases (2,013,000) (1,414,000) (1,838,000)
- -------------------------------------------------------------------------------
Projected benefit obligation (6,587,000) (5,437,000) (6,061,000)
- -------------------------------------------------------------------------------
Fair value of plan assets 5,613,000 4,296,000 4,147,000
- -------------------------------------------------------------------------------
Unrecognized net prior obligation 209,000 236,000 263,000
- -------------------------------------------------------------------------------
Unrecognized prior service cost 497,000 557,000 618,000
- -------------------------------------------------------------------------------
Unrecognized net loss 147,000 248,000 1,081,000
- -------------------------------------------------------------------------------
Prepaid (accrued) pension cost $ (121,000) $ (100,000) $ 48,000
===============================================================================
<CAPTION>
Net periodic pension expense for the years ended December 31,
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
Service cost $ 378,000 $ 328,000 $ 353,000
- -------------------------------------------------------------------------------
Interest cost $ 422,000 $ 376,000 $ 383,000
- -------------------------------------------------------------------------------
Actual return on plan assets (376,000) (362,000) (348,000)
- -------------------------------------------------------------------------------
Amortization of prior service cost 61,000 61,000 77,000
- -------------------------------------------------------------------------------
Amortization of net prior obligation 27,000 27,000 27,000
- -------------------------------------------------------------------------------
Net periodic pension expense $ 512,000 $ 430,000 $ 492,000
===============================================================================
<CAPTION>
Rate assumptions:
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
Average discount rate 7.25% 7.5% 7.0%
- -------------------------------------------------------------------------------
Expected long-term rate of return 8.5% 8.5% 8.5%
- -------------------------------------------------------------------------------
Compensation increase rate 5.0% 5.0% 5.0%
- -------------------------------------------------------------------------------
</TABLE>
The company also has a trusteed defined contribution profit sharing plan
covering substantially all employees who meet specified service requirements.
Under the plan, the company contributes 5% of defined net earnings before income
taxes. The company's contribution is limited, however, to the maximum amount
allowable as a tax deduction under the Internal Revenue Code. For the years
ended December 31, 1995, 1994, and 1993, the company's contribution to the plan
was $420,000, $709,000, and $521,000 respectively.
9
REINSURANCE
In the normal course of business, AVEMCO Insurance Company and subsidiaries, the
company's principal insurance subsidiary, assumes and cedes reinsurance as a
party to quota share, surplus share, excess of loss, facultative, and
catastrophe reinsurance agreements. These reinsurance arrangements are utilized
to limit maximum loss, provide greater diversification of risk and to minimize
exposures on larger risks. Accounts in the accompanying consolidated statements
of income are reflected net of the reinsurance ceded.
38
<PAGE>
<TABLE>
<CAPTION>
A summary of reinsurance activity follows:
Years Ended December 31,
--------------------------------------------
1995 1994 1993
--------------------------------------------
<S> <C> <C> <C>
Direct premiums written $ 79,602,000 $ 74,850,000 $ 73,759,000
- ----------------------------------------------------------------------------
Assumed premiums written 20,546,000 15,802,000 8,496,000
- ----------------------------------------------------------------------------
Ceded premiums written (14,608,000) (17,202,000) (19,799,000)
- ----------------------------------------------------------------------------
Net premiums written $ 85,540,000 $ 73,450,000 $ 62,456,000
============================================================================
Direct earned premiums $ 76,218,000 $ 77,521,000 $ 70,472,000
- ----------------------------------------------------------------------------
Assumed earned premiums 18,580,000 16,806,000 13,090,000
- ----------------------------------------------------------------------------
Ceded earned premiums (14,340,000) (18,809,000) (20,860,000)
- ----------------------------------------------------------------------------
Net earned premiums $ 80,458,000 $ 75,518,000 $ 62,702,000
- ----------------------------------------------------------------------------
Losses and loss
adjustment expenses $ 64,418,000 $ 57,668,000 $ 59,207,000
- ----------------------------------------------------------------------------
Reinsurance recoveries (8,813,000) (11,358,000) (17,705,000)
- ----------------------------------------------------------------------------
Net losses and loss
adjustment expenses $ 55,605,000 $ 46,310,000 $ 41,502,000
============================================================================
</TABLE>
The ceding or transfer of business to reinsurers does not discharge the primary
liability of AVEMCO Insurance Company; therefore, the insurance subsidiary is
contingently liable for the estimated amounts recoverable from reinsurers should
reinsurers be unable to meet their obligations. AVEMCO Insurance Company held
$8,498,000 and $10,285,000 of irrevocable letters of credit and other funds from
reinsurers at December 31, 1995, and 1994, respectively.
10
STOCKHOLDERS' EQUITY AND CAPITAL
TRANSACTIONS
The company's stock repurchase program, initially approved by the Board of
Directors in October 1987 and subsequently revised to reflect current
conditions, allows the company to buy back shares of AVEMCO Corporation common
stock from time to time on the open market at prevailing prices and through
private block transactions as may become available. At December 31, 1995, the
company had repurchased 6,207,380 common shares under the stock repurchase
program at prices ranging from $9.75 to $22.00. As a result of the company's
stock repurchase program, there were 8,649,420 shares of its common stock
outstanding on December 31, 1995. The Board of Directors' authorization at that
point allowed for the repurchase of an additional 224,517 shares.
On October 1, 1993, GEICO Corporation (GEICO) sold 3,290,377 of its 3,890,377
shares of the company's common stock. The company repurchased 2,300,077 of its
shares, a group of two institutional investors and their affiliates purchased
850,300 shares, and the company's directors, officers, and profit sharing plan
purchased 140,000 shares. The sale price was $17.50 per share. Consistent with
the transaction, GEICO's two directors relinquished their seats on the company's
Board of Directors. GEICO sold its remaining 600,000 AVEMCO shares during 1994.
AVEMCO Insurance Company is restricted on paying dividends, loans, or advances
by minimum statutory surplus requirements. In addition, state regulatory
restrictions were revised, effective July 1993, to limit the amount of
distribution that may be paid without prior approval by regulatory authorities.
At December 31, 1995, the maximum dividend payout which could be made without
prior approval is $7,380,000. During 1995 and 1994, the company received annual
dividends of $7,200,000 from the principal subsidiary. These dividends have been
eliminated in the accompanying consolidated financial statements.
Policyholders' surplus (stockholder's equity as determined in accordance with
statutory accounting practices) of AVEMCO Insurance Company and subsidiaries, at
December 31, 1995 and 1994, was $73,808,000 and $72,133,000, respectively.
11
RELATED PARTY
National Aviation Underwriters, Inc. (NAU), a consolidated subsidiary, is the
attorney-in-fact for National Insurance Underwriters (NIU), a reciprocal
insurance exchange. Pursuant to a subscriber's agreement, NAU is entitled to
receive an attorney-in-fact fee for directing and supervising the business
affairs of the exchange. At December 31, 1995 and 1994, the unpaid balance of a
surplus note advanced by NAU to NIU was $2,250,000. Interest on the note is
adjusted semi-annually and is based upon the prime rate.
39
<PAGE>
Notes to Consolidated
Financial Statements
Continued
12
SUMMARY SUPPLEMENTAL FINANCIAL DATA
WITH RESPECT TO INSURANCE SUBSIDIARY
Following are the consolidated financial summaries of AVEMCO Insurance Company
and subsidiaries, which is the principal subsidiary of AVEMCO Corporation.
<TABLE>
<CAPTION>
AVEMCO Insurance Company and Subsidiaries
Consolidated Summaries of Operations
Years Ended December 31,
--------------------------------------
1995 1994 1993
--------------------------------------
<S> <C> <C> <C>
REVENUES:
Premiums earned $80,458,000 $75,518,000 $62,702,000
- --------------------------------------------------------------------------------
Net investment income 6,988,000 6,952,000 7,440,000
- --------------------------------------------------------------------------------
Commissions on
reinsurance ceded 3,586,000 4,624,000 4,605,000
- --------------------------------------------------------------------------------
Realized investment gains (losses) 390,000 (301,000) 7,293,000
- --------------------------------------------------------------------------------
Other revenues 152,000 65,000 29,000
- --------------------------------------------------------------------------------
Total revenues 91,574,000 86,858,000 82,069,000
================================================================================
EXPENSES:
Losses and loss adjustment
expenses 55,605,000 46,310,000 41,502,000
- --------------------------------------------------------------------------------
Commissions 8,495,000 9,142,000 7,457,000
- --------------------------------------------------------------------------------
Other expenses 15,882,000 16,480,000 16,183,000
- --------------------------------------------------------------------------------
Total expenses 79,982,000 71,932,000 65,142,000
- --------------------------------------------------------------------------------
Earnings before income taxes and
cumulative effect of a change
in accounting principle 11,592,000 14,926,000 16,927,000
- --------------------------------------------------------------------------------
Income taxes 2,426,000 3,251,000 3,807,000
- --------------------------------------------------------------------------------
Earnings before cumulative
effect of a change in
accounting principle 9,166,000 11,675,000 13,120,000
- --------------------------------------------------------------------------------
Cumulative effect of change in
accounting for income taxes -- -- 696,000
- --------------------------------------------------------------------------------
Net earnings $ 9,166,000 $11,675,000 $13,816,000
================================================================================
</TABLE>
<TABLE>
<CAPTION>
AVEMCO Insurance Company and Subsidiaries
Consolidated Summary Balance Sheets
December 31,
----------------------------------------
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments $125,399,000 $114,104,000 $118,004,000
- ------------------------------------------------------------------------------
Cash 86,000 460,000 49,000
- ------------------------------------------------------------------------------
Premiums and other receivables 23,113,000 17,488,000 16,819,000
- ------------------------------------------------------------------------------
Reinsurance recoverable 14,292,000 16,903,000 23,766,000
- ------------------------------------------------------------------------------
Deferred policy acquisition costs 5,511,000 4,922,000 4,992,000
- ------------------------------------------------------------------------------
Prepaid reinsurance premiums 5,178,000 4,924,000 6,550,000
- ------------------------------------------------------------------------------
Other assets 137,000 2,217,000 1,621,000
- ------------------------------------------------------------------------------
Total assets $173,716,000 $161,018,000 $171,801,000
==============================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Unpaid losses and expenses $ 42,305,000 $ 41,202,000 $ 45,779,000
- ------------------------------------------------------------------------------
Unearned premiums 32,363,000 27,001,000 30,738,000
- ------------------------------------------------------------------------------
Ceded reinsurance payable 5,045,000 5,503,000 7,025,000
- ------------------------------------------------------------------------------
Other liabilities 4,977,000 4,855,000 9,189,000
- ------------------------------------------------------------------------------
Total liabilities 84,690,000 78,561,000 92,731,000
- ------------------------------------------------------------------------------
Total stockholder's equity 89,026,000 82,457,000 79,070,000
- ------------------------------------------------------------------------------
Total liabilities and
stockholder's equity $173,716,000 $161,018,000 $171,801,000
==============================================================================
</TABLE>
Policy acquisition costs amortized for the years ended December 31, 1995, 1994,
and 1993 were $14,722,000, $15,488,000, and $13,050,000, respectively, which
includes $1,982,000, $1,983,000, and $1,741,000 of commission expense paid to
affiliates which were eliminated in consolidation.
Net earnings as determined in accordance with statutory accounting practices for
AVEMCO Insurance Company and subsidiaries were $8,098,000, $11,751,000, and
$14,480,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
Net earnings as determined in accordance with statutory accounting practices
differ from net earnings as prepared in accordance with generally accepted
accounting principles primarily because of deferred policy acquisition costs.
AVEMCO Insurance Company and U.S. Specialty Insurance Company settled their
outstanding Proposition 103 matters with the California Department of Insurance
during 1995. The company had previously provided for a potential rollback impact
in prior years. Refund payments are expected to be made in 1996.
40
<PAGE>
13
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
The quarterly results for the three years ended December 31, 1995, are set forth
in the following tables:
<TABLE>
<CAPTION>
Earnings (Loss) Earnings
Before Net Per
Revenues Income Taxes Earnings Share
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 by Quarter
First $ 26,004,000 $ 3,461,000 $ 2,814,000 $ .32
- -------------------------------------------------------------------
Second 29,859,000 3,442,000 2,669,000 .30
- -------------------------------------------------------------------
Third 29,085,000 (652,000) 74,000 .01
- -------------------------------------------------------------------
Fourth 28,256,000 2,851,000 2,361,000 .27
- -------------------------------------------------------------------
Annual $113,204,000 $ 9,102,000 $ 7,918,000 $ .90
===================================================================
1994 by Quarter
First 22,004,000 2,898,000 2,399,000 $ .26
- -------------------------------------------------------------------
Second 29,710,000 5,014,000 3,570,000 .39
- -------------------------------------------------------------------
Third 27,369,000 2,603,000 2,287,000 .26
- -------------------------------------------------------------------
Fourth 25,507,000 3,024,000 2,577,000 .29
- -------------------------------------------------------------------
Annual $104,590,000 $13,539,000 $10,833,000 $1.20
===================================================================
1993 by Quarter
First $ 25,606,000 $ 5,608,000 $ 5,065,000 $ .43
- -------------------------------------------------------------------
Second 24,433,000 3,347,000 2,822,000 .24
- -------------------------------------------------------------------
Third 28,644,000 6,595,000 4,906,000 .43
- -------------------------------------------------------------------
Fourth 25,218,000 3,303,000 2,779,000 .30
- -------------------------------------------------------------------
Annual $103,901,000 $18,853,000 $15,572,000 $1.41
===================================================================
</TABLE>
1993 first quarter net earnings were impacted by $943,000 or $.08 per share as a
result of the company's adoption of Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes."
41
<PAGE>
Independent
Auditors' Report
[LOGO OF KPMG PEAT MARWICK LLP]
The Board of Directors and Stockholders, AVEMCO Corporation:
We have audited the accompanying consolidated balance sheets of AVEMCO
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AVEMCO
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 2 to the consolidated financial statements, the
company changed its method of accounting for fixed maturity investments in 1994
to adopt the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." As discussed in Notes 1 and 6 to the
consolidated financial statements, the company changed its method of accounting
for income taxes in 1993 to adopt the provisions of SFAS No. 109, "Accounting
for Income Taxes."
/s/ KPMG Peat Marwick LLP
Washington, D.C.
January 26, 1996
42
<PAGE>
Board of Directors
William P. Condon
Mr. Condon is Chairman of the Board of Directors and Chief Executive Officer
of the company, and Chairman of the Boards of certain subsidiaries of the
company. He has been a director of AVEMCO since 1973. (a, c)
Michael Collins
Mr. Collins, a former astronaut, is President of Michael Collins Associates,
an aerospace consulting firm. He is a former Vice President of LTV Aerospace and
Defense Company. He has been a director of AVEMCO since 1986. (a, b, d)
H. Lowell Davis
Mr. Davis is Vice Chairman, Chief Financial Officer and a director of
Potomac Electric Power Company. He has been a director of AVEMCO since 1985. (a,
c, d)
Paul J. Hanna
Mr. Hanna is former Vice Chairman and a former director of GEICO
Corporation. He has been a director of AVEMCO since 1980. (a, c)
Arnold H. Johnson
Mr. Johnson, until his retirement in 1982, was Chairman of the Board of
Directors and Chief Executive Officer of the company, and Chairman of the Boards
of its subsidiaries. He has been a director of AVEMCO since 1965. (a, c)
Steven A. Markel
Mr. Markel is Vice Chairman of and a director of Markel Corporation. He has
been a director of AVEMCO since 1994.
(b, d)
Thomas J. Schwab
Mr. Schwab is a former managing partner with the law firm of Wald, Harkrader
and Ross. He was Secretary of the company before becoming a director in 1987.
(b, c)
John F. Shettle, Jr.
Mr. Shettle is President and Chief Operating Officer of AVEMCO Corporation
and a director and officer of several of its subsidiary companies. He has been a
director of AVEMCO since 1993. (c)
Clifton F. von Kann
Mr. von Kann is a Major General (Ret.), U.S. Army, Chairman of the Board
Emeritus of the National Aeronautic Association and President of Honour of the
Federation Aeronautique Internationale. He has been a director of AVEMCO since
1980. (b, d)
Committees: (a) Executive; (b) Audit; (c) Investment; (d) Compensation and Stock
Option
Corporate Officers
[PHOTO APPEARS HERE]
William P. Condon
Chairman of the Board
and Chief Executive Officer
[PHOTO APPEARS HERE]
John F. Shettle, Jr.
President and Chief Operating Officer
[PHOTO APPEARS HERE]
John R. Yuska
Senior Vice President and Chief Financial Officer
[PHOTO APPEARS HERE]
Thomas H. Chero
Senior Vice President-Legal and Corporate Secretary
[PHOTO APPEARS HERE]
Dan L. Jonson
Senior Vice President-Strategic Systems Development
[PHOTO APPEARS HERE]
Thomas L. Hudson
Vice President-Business Development
[PHOTO APPEARS HERE]
John E. Sweeney
Vice President-Marketing
[PHOTO APPEARS HERE]
Jon R. Harden
Vice President-Sales
[PHOTO APPEARS HERE]
Thomas E. Lentz
Treasurer
[PHOTO APPEARS HERE]
John H. Ballard
Assistant Corporate
Secretary
43
<PAGE>
Of Interest
to Stockholders
Annual Stockholders Meeting
The Annual Meeting of our stockholders will be held at the Corporate
Headquarters, Frederick Municipal Airport, 411 Aviation Way, Frederick,
Maryland, on May 2, 1996, at 8:30 a.m.
Stock Transfer Agent and Registrar
Chemical Mellon Shareholder Services
450 West 33rd St.
New York, New York 10001
Certified Public Accountants
KPMG Peat Marwick LLP
2001 M Street, N.W.
Washington, D.C. 20036
General Counsel
Piper and Marbury
1200 19th Street, N.W.
Washington, D.C. 20036
Form 10-K Report
AVEMCO's Annual Report for 1995 (Form 10-K) as filed with the Securities and
Exchange Commission will be available on or about March 31, 1996, without charge
to stockholders. Write to:
John R. Yuska,
Senior Vice President and
Chief Financial Officer
AVEMCO Corporation
Frederick Municipal Airport
411 Aviation Way
Frederick, Maryland 21701
Stock Listing
New York Stock Exchange
Symbol (AVE)
Bank Arrangements
NationsBank N.A.
44
