SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
--------------
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------- ---------------------
Commission File Number 1-6271
------
AVEMCO CORPORATION
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-0733935
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 Aviation Way
Frederick, Maryland 21701
------------------- -----
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (301)694-5700
-------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 8,348,870 shares of
-------------------
common stock were outstanding as of June 30, 1996.
- --------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Note 1)
<TABLE>
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 1996, and December 31, 1995
<CAPTION>
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS:
Investments........................................................ $ 141,278,000 $ 149,544,000
Cash............................................................... 4,509,000 3,466,000
Accounts receivable................................................ 31,993,000 24,637,000
Reinsurance recoverable............................................ 16,992,000 14,292,000
Deferred policy acquisition costs.................................. 6,031,000 5,511,000
Prepaid reinsurance premiums....................................... 5,987,000 5,178,000
Net property and equipment......................................... 8,189,000 8,051,000
Other assets....................................................... 3,107,000 3,123,000
----------------- -----------------
...........Total assets............................................ $ 218,086,000 $ 213,802,000
================= =================
LIABILITIES:
Unpaid losses and loss adjustment expenses......................... $ 43,654,000 $ 42,305,000
Unearned premiums.................................................. 38,519,000 32,363,000
Accounts payable and accrued expenses.............................. 19,418,000 17,361,000
Ceded reinsurance premiums payable................................. 5,911,000 5,047,000
Notes payable to banks............................................. 52,667,000 54,967,000
----------------- -----------------
...........Total liabilities....................................... 160,169,000 152,043,000
----------------- -----------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value, $10.00 per share; 500,000
shares authorized; none issued.................................. -- --
Common stock, par value, $.10 per share;
....20,000,000 shares authorized; 11,565,811 issued
in 1996 and 11,551,161 in 1995.................................. 1,157,000 1,155,000
Additional paid-in capital......................................... 19,140,000 18,293,000
Net unrealized appreciation on investments......................... 1,244,000 4,879,000
Foreign currency translation adjustments........................... (196,000) (182,000)
Retained earnings.................................................. 91,930,000 88,184,000
----------------- -----------------
113,275,000 112,329,000
Treasury stock, at cost, 3,216,941 shares
in 1996 and 2,901,741 in 1995................................... (55,358,000) (50,570,000)
----------------- -----------------
Total stockholders' equity.............................. 57,917,000 61,759,000
----------------- -----------------
Contingent liabilities
Total liabilities and stockholders' equity.............. $ 218,086,000 $ 213,802,000
================= =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
---------------------
1996 1995
---- ----
<S> <C> <C>
REVENUES:
Premiums earned................................... $ 40,848,000 $ 39,497,000
Commissions....................................... 4,541,000 3,652,000
Net investment income............................. 4,190,000 4,195,000
Computer products and services.................... 4,722,000 4,764,000
Realized investment gains (losses)................ 3,209,000 (7,000)
Other............................................. 4,014,000 3,762,000
------------ ------------
Total revenues................................. 61,524,000 55,863,000
------------ ------------
EXPENSES:
Losses and loss adjustment expenses............... 27,290,000 25,003,000
Selling, general, and administrative expenses..... 18,338,000 17,840,000
Commissions....................................... 3,216,000 3,283,000
Cost of computer hardware sold.................... 763,000 799,000
Interest.......................................... 2,088,000 2,035,000
------------ ------------
Total expenses................................. 51,695,000 48,960,000
------------ ------------
Earnings before income taxes...................... 9,829,000 6,903,000
Federal and state income taxes.................... 2,440,000 1,420,000
------------ ------------
Net earnings...................................... $ 7,389,000 $ 5,483,000
============ ============
Net earnings per share............................ $ .86 $ .62
============ ============
Weighted average number of common and common
equivalent shares outstanding................... 8,612,073 8,913,400
============ ============
Dividends per share............................... $ .24 $ .22
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
---------------------
1996 1995
---- ----
<S> <C> <C>
REVENUES:
Premiums earned.................................... $ 21,155,000 $20,774,000
Commissions........................................ 2,568,000 2,069,000
Net investment income.............................. 2,154,000 2,141,000
Computer products and services..................... 2,461,000 2,813,000
Realized investment gains (losses)................. 2,696,000 102,000
Other.............................................. 2,112,000 1,960,000
------------ -----------
Total revenues.................................. 33,146,000 29,859,000
------------ -----------
EXPENSES:
Losses and loss adjustment expenses................ 14,293,000 14,481,000
Selling, general, and administrative expenses...... 9,215,000 8,948,000
Commissions........................................ 1,750,000 1,517,000
Cost of computer hardware sold..................... 348,000 557,000
Interest........................................... 1,120,000 914,000
------------ -----------
Total expenses.................................. 26,726,000 26,417,000
------------ -----------
Earnings before income taxes....................... 6,420,000 3,442,000
Federal and state income taxes..................... 1,718,000 773,000
------------ -----------
Net earnings....................................... $ 4,702,000 $ 2,669,000
============ ===========
Net earnings per share............................. $ .55 $ .30
============ ===========
Weighted average number of common and common
equivalent shares outstanding.................... 8,477,796 8,896,246
============ ===========
Dividends per share................................ $ .12 $ .11
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
---------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings........................................$ 7,389,000 $ 5,483,000
Charges (credits) to operations not affecting cash.. (1,332,000) 3,238,000
------------ ------------
Net cash flows provided from operations............. 6,057,000 8,721,000
------------ ------------
INVESTMENT ACTIVITIES:
Proceeds from sale or maturity of investments....... 33,232,000 22,449,000
Purchase of investments............................. (27,134,000) (29,368,000)
Proceeds from sale of property and equipment........ 38,000 21,000
Purchase of property and equipment.................. (342,000) (1,497,000)
------------ ------------
Net cash flows provided from (used by)
investment activities........................... 5,794,000 (8,395,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings............................ 12,000,000 5,800,000
Principal payments on debt.......................... (14,300,000) (4,500,000)
Exercise of common stock options.................... 125,000 54,000
Dividends to stockholders........................... (2,036,000) (1,939,000)
Repurchase of common stock.......................... (6,597,000) (1,380,000)
------------ ------------
Net cash flows provided from (used by)
financing activities............................ (10,808,000) (1,965,000)
------------ ------------
Net increase (decrease) in cash..................... 1,043,000 (1,639,000)
Cash, beginning of year............................. 3,466,000 5,191,000
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Cash, end of period................................. $ 4,509,000 $ 3,552,000
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
AVEMCO CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the instructions
to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 1996, are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1996. These statements should be read in
conjunction with the financial statements and notes thereto
included in the company's annual report to shareholders and Form
10-K for the year ended December 31, 1995.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
----------------------
Liquidity and Capital Resources
-------------------------------
The company's primary sources of operating funds are insurance
premiums, investment income, reinsurance recoveries on paid
losses, computer product sales and other service revenues.
Principal uses of operating funds include claim payments to
insureds, commissions, and other operating expenses. Overall,
these operating activities produced positive cash flow of $6.1
million for the first six months of 1996. Since the level of
operating cash flow is highly affected by premium production, paid
loss activity, the sale of investment securities, and reinsurance
recoveries received, operating cash flow can vary significantly
from period to period. In addition, the 1996 year-to-date
operating cash flow was impacted by one-time refund payments of
$2.4 million related to the settlement of California Proposition
103 matters. The company's insurance subsidiaries had fully
provided for such amounts in prior years.
The company follows investment guidelines, which, in addition to
providing for an acceptable after-tax return on its investments,
are structured to preserve capital, maintain sufficient liquidity
to meet anticipated obligations, and retain an ample margin of
capital and surplus to assure the unimpaired ability to write
insurance. The company's fixed income portfolio holdings consist
primarily of high investment grade securities. Currently, the
largest single portion of the investment portfolio is invested in
tax-advantaged securities.
In developing its investment strategy, the company establishes a
level of cash and highly liquid short and intermediate term
securities which, when combined with expected cash flow, is
believed adequate to meet anticipated payment obligations.
<PAGE>
The company's common stock repurchase program reflects continued
efforts to effectively manage its capital base and enhance
shareholder value. For the year-to-date through June 30, 1996, the
company has repurchased 435,200 shares of its common stock. The
Board of Directors' current authorization allows the company to
repurchase an additional 289,317 shares.
<PAGE>
Results of Operations
---------------------
Net earnings for the second quarter of 1996 were $4.7 million, or
$.55 per share, compared to $2.7 million or $.30 per share for the
same period of 1995. Second quarter 1996 net earnings included
after-tax realized investment gains of $1.8 million or $.20 per
share. Excluding the realized investment gains, 1996 net earnings
were $2.9 million or $.35 per share increasing over 1995's $2.6
million or $.29 per share, principally as a result of an improved
underwriting ratio. The underwriting ratio for the 1996 second
quarter was 87.5 percent versus 90.3 percent for 1995.
Gross premiums written for all lines of business during the 1996
second quarter were $33.2 million, compared to $31.7 million in
1995. Aviation gross premiums written in the second quarter were
$24.4 million versus $23.8 million in the same period of 1995.
1995's second quarter and year-to-date aviation premiums included
certain non-recurring premiums associated with the purchase of a
book of aviation business. Excluding the nonrecurring premiums,
the company's aviation premiums represented growth of about six
percent.
As to the company's other lines of business, lenders single
interest insurance, principally automobile physical damage,
continues to show excellent growth and profitability. For the
quarter ended 6/30/96, lenders single interest premiums written
were $5.8 million compared to $4.2 million for the same period of
1995. Year to date, lenders single interest premiums in 1996 were
$10.9 million compared to $7.4 million in 1995, an increase of 47
percent. Pleasure marine premiums are also up for the year and are
expected to continue at a respectable level of growth for the
foreseeable future. Premiums written for short-term health
programs were $1.4 million versus $2.2 million for 1995. The
decline was principally the result of the company's decision to
discontinue as a reinsurer of a trip-travel insurance program
which represented $6 million of annualized premium in 1995, when
the company was unable to negotiate satisfactory renewal terms.
The company continues, however, to increase its participation in
short-term health plans managed and underwritten by its
International Group Services affiliate, and will also commence
participation in the Hinchcliff International business (acquired
in January of 1996) later in 1996.
Year-to-date, net earnings for the period ending June 30, 1996,
were $7.4 million or $.86 per share, compared to $5.5 million or
$.62 per share for 1995. Net earnings for 1996 include after-tax
realized investment gains of $2.1 million or $.25 per share. The
realized gains arose principally as a result of the company's
decision to sell its common equities and use the proceeds
primarily to pay down on its bank line, as well as for other
corporate purposes.
As reported in a press release dated June 10, 1996, the company
expects to close on the sale of its insurer, National Assurance
Underwriters, Inc., during the third quarter of 1996. As part of
the transaction, the company will retain all of the insurance
business in that subsidiary, as well as rights to its name. This
transaction, when completed, is expected to generate an after-tax
gain of $2.2 million or $.26 per share.
<PAGE>
AVEMCO CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None, except in the ordinary course of business in connection with
the insurance subsidiaries' operations.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Annual Meeting of Stockholders held on May 2, 1996, the
Stockholders were asked: (1) to elect four directors, three of
whom will serve for a term of three years each, expiring in 1999,
and one of whom will serve for a term of two years, or until their
successors are elected and have qualified; and (2) to consider and
act upon a proposal to ratify the selection of KPMG Peat Marwick
as independent auditors for the company for 1996. The results of
the voting on each of these proposals were as follows:
(1) Election of Directors:
---------------------
Shares as to Which
Director Nominee Shares Voted For Authority Was Withheld
---------------- ---------------- ----------------------
William P. Condon 6,878,509 39,744
Arnold H. Johnson 6,875,955 42,298
Thomas J. Schwab 6,878,530 39,723
Rachel B. Trinder 6,877,655 40,598
(2) Proposal to Ratify Selection of Independent Auditors:
Shares Voted For: 6,891,161
Shares Voted Against: 15,774
Shares Abstaining: 11,318
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVEMCO CORPORATION
(Registrant)
Date: August 13, 1996 /s/ William P. Condon
----------------------- -------------------------
William P. Condon
Chairman of the Board and
Chief Executive Officer
Date: August 13, 1996 /s/ John F. Shettle, Jr.
----------------------- -------------------------
John F. Shettle, Jr.
President and
Chief Operating Officer
Date: August 13, 1996 /s/ John R. Yuska
----------------------- -------------------------
John R. Yuska
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's June 30, 1996 Form 10-Q financial statements and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 141,278
<CASH> 4,509
<RECOVER-REINSURE> 16,992
<DEFERRED-ACQUISITION> 6,031
<TOTAL-ASSETS> 218,086
<POLICY-LOSSES> 43,654
<UNEARNED-PREMIUMS> 38,519
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 52,667
0
0
<COMMON> 1,157
<OTHER-SE> 56,760
<TOTAL-LIABILITY-AND-EQUITY> 218,086
40,848
<INVESTMENT-INCOME> 4,190
<INVESTMENT-GAINS> 3,209
<OTHER-INCOME> 13,277
<BENEFITS> 27,290
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 21,554
<INCOME-PRETAX> 9,829
<INCOME-TAX> 2,440
<INCOME-CONTINUING> 7,389
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,389
<EPS-PRIMARY> .86
<EPS-DILUTED> .86
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
