SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-6271
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AVEMCO CORPORATION
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-0733935
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 Aviation Way
Frederick, Maryland 21701
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (301) 694-5700
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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: 8,291,370 shares of common
stock were outstanding as
of September 30, 1996.
--------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Note 1)
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 1996, and December 31, 1995
September 30, December 31,
1996 1995
------------- -------------
ASSETS:
Investments...................................... $ 142,539,000 $ 149,544,000
Cash............................................. 7,465,000 3,466,000
Accounts receivable.............................. 35,324,000 24,637,000
Reinsurance recoverable.......................... 14,968,000 14,292,000
Deferred policy acquisition costs................ 6,406,000 5,511,000
Prepaid reinsurance premiums..................... 5,960,000 5,178,000
Net property and equipment....................... 8,029,000 8,051,000
Other assets..................................... 3,074,000 3,123,000
------------- -------------
Total assets $ 223,765,000 $ 213,802,000
============= =============
LIABILITIES:
Unpaid losses and loss adjustment expenses....... $ 45,240,000 $ 42,305,000
Unearned premiums................................ 40,176,000 32,363,000
Accounts payable and accrued expenses............ 18,848,000 17,361,000
Ceded reinsurance premiums payable............... 5,617,000 5,047,000
Notes payable to banks........................... 55,167,000 54,967,000
------------- -------------
Total liabilities 165,048,000 152,043,000
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....... 1,491,000 4,879,000
Foreign currency translation adjustments......... (186,000) (182,000)
Retained earnings................................ 93,354,000 88,184,000
------------- -------------
114,956,000 112,329,000
Treasury stock, at cost, 3,274,441 shares in
1996 and 2,901,741 in 1995..................... (56,239,000) (50,570,000)
------------- -------------
Total stockholders' equity................... 58,717,000 61,759,000
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Contingent liabilities
Total liabilities and stockholders' equity... $ 223,765,000 $ 213,802,000
============= =============
See accompanying notes to condensed consolidated financial statements.
<PAGE>
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
September 30,
1996 1995
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REVENUES:
Premiums earned.................................. $ 62,750,000 $ 60,287,000
Commissions...................................... 6,934,000 5,620,000
Net investment income............................ 6,173,000 6,376,000
Computer products and services................... 7,323,000 7,557,000
Realized investment gains........................ 3,122,000 203,000
Realized gain on subsidiary sale................. 3,307,000 --
Other............................................ 6,306,000 4,905,000
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Total revenues............................... 95,915,000 84,948,000
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EXPENSES:
Losses and loss adjustment expenses.............. 46,937,000 42,951,000
Selling, general, and administrative expenses.... 27,057,000 25,963,000
Commissions...................................... 4,970,000 5,084,000
Cost of computer hardware sold................... 1,156,000 1,591,000
Interest......................................... 2,907,000 3,108,000
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Total expenses............................... 83,027,000 78,697,000
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Earnings before income taxes..................... 12,888,000 6,251,000
Federal and state income taxes................... 3,080,000 694,000
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Net earnings..................................... $ 9,808,000 $ 5,557,000
============= =============
Net earnings per share........................... $ 1.15 $ .63
============= =============
Weighted average number of common and common
equivalent shares outstanding.................... 8,527,283 8,875,400
============= =============
Dividends per share.............................. $ .36 $ .34
============= =============
See accompanying notes to condensed consolidated financial statements.
<PAGE>
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
1996 1995
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REVENUES:
Premiums earned.................................. $ 21,902,000 $ 20,790,000
Commissions...................................... 2,393,000 1,968,000
Net investment income............................ 1,983,000 2,181,000
Computer products and services................... 2,601,000 2,793,000
Realized investment gains (losses)............... (87,000) 210,000
Realized gain on subsidiary sale................. 3,307,000 --
Other............................................ 2,292,000 1,143,000
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Total revenues............................... 34,391,000 29,085,000
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EXPENSES:
Losses and loss adjustment expenses.............. 19,647,000 17,948,000
Selling, general, and administrative expenses.... 8,719,000 8,123,000
Commissions...................................... 1,754,000 1,801,000
Cost of computer hardware sold................... 393,000 792,000
Interest......................................... 819,000 1,073,000
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Total expenses............................... 31,332,000 29,737,000
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Earnings (loss) before income taxes.............. 3,059,000 (652,000)
Federal and state income tax (benefit)........... 640,000 (726,000)
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Net earnings..................................... $ 2,419,000 $ 74,000
============= =============
Net earnings per share........................... $ .29 $ .01
============= =============
Weighted average number of common and common
equivalent shares outstanding.................... 8,363,119 8,804,944
============= =============
Dividends per share.............................. $ .12 $ .12
============= =============
See accompanying notes to condensed consolidated financial statements.
<PAGE>
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1996 1995
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OPERATING ACTIVITIES:
Net earnings..................................... $ 9,808,000 $ 5,557,000
Charges (credits) to operations not affecting
cash........................................... (7,961,000) 1,988,000
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Net cash flows provided from operations.......... 1,847,000 7,545,000
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INVESTMENT ACTIVITIES:
Proceeds from sale or maturity of investments.... 43,649,000 33,176,000
Purchase of investments.......................... (44,934,000) (36,814,000)
Proceeds from sale of property and equipment..... 179,000 39,000
Proceeds from sale of subsidiary................. 13,957,000 --
Purchase of property and equipment............... (516,000) (1,734,000)
------------- -------------
Net cash flows provided from (used by)
investment activities.......................... 12,335,000 (5,333,000)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from borrowings......................... 29,000,000 9,500,000
Principal payments on debt....................... (28,800,000) (6,133,000)
Exercise of common stock options................. 125,000 54,000
Dividends to stockholders........................ (3,030,000) (2,982,000)
Repurchase of common stock....................... (7,478,000) (2,883,000)
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Net cash flows used by financing activities...... (10,183,000) (2,444,000)
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Net increase (decrease) in cash.................. 3,999,000 (232,000)
Cash, beginning of year.......................... 3,466,000 5,191,000
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Cash, end of period.............................. $ 7,465,000 $ 4,959,000
============= =============
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 nine months
ended September 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 $1.8 million for the first nine 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. 1996 year-to-date operating cash
flow was affected by the realized gains on the sale of investments and
the realized gain on the sale of a subsidiary, which were excluded
from operating activities and included in cash flow from investment
activities. In addition, the 1996 year-to-date operating cash flow was
also 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 September 30, 1996, the company
has repurchased 492,700 shares of its common stock. The Board of
Directors' current authorization allows the company to repurchase an
additional 231,817 shares.
Results of Operations
Net earnings for the third quarter of 1996 were $2.4 million or $.29
per share compared to $74,000 or $.01 per share for the same period of
1995. The improvement in net earnings over the 1995 third quarter was
due to the net after-tax gain recognized on the sale of a subsidiary,
which amounted to $2.2 million or $.26 per share, and an improvement
in net operating earnings. 1996 third quarter operating earnings were
affected by claims activity associated with Hurricane Fran, which
resulted in an after-tax earnings reduction of $548,000 or $.07 per
share. Historically, the third quarter has been the company's most
volatile from a claims perspective. It is not only the peak season for
aircraft and watercraft claims due to increased use, but it is also
the peak season for hurricanes, tornadoes and hail storms. There were
no significant weather-related losses during the 1995 third quarter.
The company had a positive quarter from a premium production
standpoint with an overall increase of 14.5%. Aviation gross premiums
written in the third quarter were $18.1 million versus $16.1 million
in the same period of 1995, reflecting a 12.4% increase. There
continues to be some improvement of competitive rates in the aviation
insurance sector primarily in the areas of higher-valued aircraft
hulls and pilots who are transitioning to larger or more complex
aircraft. Gross premiums written on the company's non-aviation lines
were $9.6 million for the quarter, increasing by 19.2% over 1995.
Particularly noteworthy was the company's lenders single interest
performance. Premiums written on that line were close to $6.0 million
compared to $4.6 million in 1995, a 31% increase. Premiums on the
short-term health business were $2.3 million, slightly under that of
1995's third quarter. The decline was principally the result of the
company's earlier decision to discontinue as a reinsurer on a
trip-travel insurance program. The company continues, however, to
increase its participation in short-term health plans managed and
underwritten by its IGS affiliate. Also in the third quarter the
company commenced participation in the Hinchcliff International
business it acquired in January 1996. Pleasure marine premiums written
in the third quarter were up 24% over 1995.
The company completed the sale of its subsidiary National Assurance
Underwriters, Inc., in the third quarter. As part of the sale the
company retained all of that subsidiary's insurance business. As
mentioned earlier, this sale generated 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
None
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: November 12, 1996 /s/ William P. Condon
-----------------------------------
William P. Condon
Chairman of the Board and
Chief Executive Officer
Date: November 12, 1996 /s/ John F. Shettle, Jr.
-----------------------------------
John F. Shettle, Jr.
President and
Chief Operating Officer
Date: November 12, 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 September 30, 1996 Form 10-Q financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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<PERIOD-END> SEP-30-1996
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