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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File Number 1-6271
AVEMCO CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 52-0733935
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
411 AVIATION WAY, FREDERICK, MARYLAND 21701
(Address of principal executive offices)
(Zip Code)
(301) 694-5700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
(Title of class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing:
ON MARCH 1, 1997, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-
AFFILIATES OF THE REGISTRANT WAS $187,298,000.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: THE NUMBER OF COMMON SHARES
OUTSTANDING AT MARCH 1, 1997, WAS 8,375,712.
<PAGE>
PART I
ITEM 1. BUSINESS
- ------
RECENT DEVELOPMENT
On January 17, 1997, AVEMCO Corporation ("AVEMCO"), Registrant, and HCC
Insurance Holdings, Inc., ("HCCH") jointly announced that they had signed a
Letter of Intent to merge AVEMCO with a wholly-owned subsidiary of HCCH in a
stock-for-stock transaction, with AVEMCO becoming a wholly-owned subsidiary of
HCCH. On February 28, 1997, AVEMCO and HCCH jointly announced that the Boards
of Directors of AVEMCO and HCCH had executed an Agreement and Plan of
Reorganization (the "Agreement"). Pursuant to the terms of the Agreement, each
share of AVEMCO's common stock will be exchanged for one share of HCCH's common
stock.
The proposed transaction is intended to be accounted for as a pooling of
interests and to be a nontaxable exchange to AVEMCO's shareholders. It is
subject to various conditions, including receipt of required regulatory
approvals and the approval of the transaction by shareholders of both AVEMCO and
HCCH. A special shareholders' meeting is anticipated to be held in the second
quarter of 1997, and a proxy statement describing the transaction in detail is
expected to be submitted to the shareholders shortly. There can be no assurance
that the conditions to the proposed merger will be satisfied or that the
shareholders will approve the transaction.
GENERAL
AVEMCO is an insurance holding company organized in 1959, that coordinates the
activities of its subsidiaries and provides them with management, business
planning, investment, human resource, marketing, and financial services. The
subsidiaries of AVEMCO are engaged in the business of providing specialty
property and casualty insurance products and services, principally involving
aviation. Non-aviation specialty lines include lenders single interest, short-
term health, and pleasure marine. Insurance products are distributed on a
direct basis nationally and in Canada (except Quebec), and through agency and
brokerage networks nationwide. AVEMCO and its subsidiaries operate together as
the AVEMCO Group. AVEMCO's principal executive offices are located at Frederick
Municipal Airport, 411 Aviation Way, Frederick, Maryland 21701, and its
telephone number is (301) 694-5700.
Since its organization, AVEMCO and its predecessor companies have generally
achieved an underwriting profit (33 out of 36 years). AVEMCO Insurance Company
is rated "A+" (Superior) by A.M. Best, and its policyholders' surplus position
substantially exceeded the minimum requirements as stipulated by insurance
industry risk-based capital regulations.
AVEMCO's principal insurance subsidiary is AVEMCO Insurance Company ("AIC"), a
direct writer of aviation and pleasure marine business. AIC underwrites various
types of aviation insurance for owners and pilots of general aviation aircraft,
including commercial coverages for fixed base operators. General aviation
encompasses private business aircraft, air taxi services, recreational
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flying, fixed-based operations and similar activities. It excludes military and
commercial airline operations. Other aviation-related commercial insurance
coverages are written for lending institutions and leasing companies on both
general aviation and commercial aviation equipment. AIC also serves as the
reinsurer for most of the business produced and managed by other members of the
AVEMCO Group. Other insurance company members of the AVEMCO Group include U.S.
Specialty Insurance Company, a wholly-owned subsidiary of AIC, underwriter of
aviation, pleasure marine, and lenders single interest insurance through
independent agents and brokers, whose business is also reinsured by AIC. The
AVEMCO Group also controls National Insurance Underwriters ("NIU"), a reciprocal
insurance exchange through AVEMCO's ownership of Specialty Insurance
Underwriters, Inc. ("SIUI"), the attorney-in-fact for the exchange. NIU is
currently writing a limited amount of aviation and automobile insurance in a few
states. AIC also owned National Assurance Underwriters, Inc. ("NAUI"), an
insurer that was sold in August 1996, but whose business (aviation insurance)
was retained by AIC as part of the sale transaction.
Other insurance producers (non-insurers) in the AVEMCO Group include: (i)
Matterhorn Bank Programs, Inc., a wholly-owned subsidiary of AVEMCO and its
wholly-owned subsidiary, KFA, Inc., which are general agencies that market
blanket lenders single interest coverage for banks and other financial
institutions covering risks of physical loss or damage to the property securing
their installment loans (primarily automobiles) and other insurance products to
financial institutions, through independent agents and brokers. Matterhorn's
business is primarily written by U.S. Specialty Insurance Company; and (ii)
Brooks-Shettle Company, a wholly-owned subsidiary of AVEMCO, which is an
insurance and reinsurance broker specializing in short-term health and travel
insurance programs on an international basis, as well as marine insurance within
the United States. The business and operations of Hinchcliff International,
Inc. ("Hinchcliff"), acquired by AVEMCO in January 1996, and International Group
Services, Inc. ("IGS"), acquired by AVEMCO in December 1994, were merged into
Brooks-Shettle Company under which names Brooks-Shettle Company also continues
to do business. The businss of both Hinchcliff and IGS includes short-term
student health insurance. Much of Brooks-Shettle Company's business is
reinsured by AIC.
The AVEMCO Group's insurance operations are complemented by its insurance
service group operations, which are largely focused in areas that offer AVEMCO
opportunities to generate additional specialty insurance premiums. Currently,
the Group's service operations are conducted by the following companies and
concentrated in the following areas: (i) Loss Management Services, Inc., a
wholly-owned subsidiary of AVEMCO, provides claims management and related
subrogation and salvage services for the Group's insurers, as well as other
insurance companies and financial institutions; (ii) MEDEX Assistance
Corporation, a wholly-owned subsidiary of AVEMCO, 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; and (iii) The Wheatley Group, Ltd., a wholly-owned subsidiary of
AVEMCO, which provides computer products, software, and related services for
property and casualty insurance companies in the United States.
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UNDERWRITING RATIOS
The following table sets forth certain information (statutory basis) with
respect to the underwriting results of AVEMCO Insurance Company and Subsidiaries
for each of the last three years.
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Premiums written $106,965 $99,795 $90,651
======== ======= =======
Premiums earned $ 85,115 $80,135 $75,559
======== ======= =======
Loss ratio 73.1% 69.4% 61.2%
Expense ratio 23.0% 25.5% 28.6%
-------- ------- -------
Combined ratio 96.1% 94.9% 89.8%
======== ======= =======
</TABLE>
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Management's Discussion and Analysis - Loss Reserves on page 10, and Note 4,
Unpaid Losses and Loss Adjustment Expenses, of the Notes to Consolidated
Financial Statements on pages 55 and 56 are incorporated herein.
INVESTMENTS
Management's Discussion and Analysis - Investments on pages 9 and 10, and Note
2, Investments, of the Notes to Consolidated Financial Statements on pages 52
through 54 are incorporated herein.
REINSURANCE
Management's Discussion and Analysis - Reinsurance on pages 10 and 11, and Note
9, Reinsurance, of the Notes to Consolidated Financial Statements on page 61 are
incorporated herein.
REGULATION
AVEMCO Insurance Company and its subsidiary are subject to regulation and
supervision of their operations in each of the jurisdictions where they conduct
business. Regulations vary from jurisdiction to jurisdiction, but generally,
they provide regulatory authorities with broad supervisory, regulatory and
administrative powers over such matters as licenses, standards of solvency,
premium rates, policy forms, investments, security deposits, methods of
accounting, form and content of financial statements, reserves for unpaid losses
and loss adjustment expenses, reinsurance, minimum capital and surplus
requirements, dividends and other distributions, periodic examinations and
annual and other report filings. In general, regulations exist for the
protection of policyholders rather than the shareholders. Congress has been
considering whether it is appropriate to modify or repeal the McCarran-Ferguson
Act, which grants to the states the responsibility for regulating the insurance
industry and provides limited exemption to the "business of insurance" from
federal anti-trust laws. Bills have been introduced in Congress from time to
time, but whether any changes in the current statute will be made, or the effect
of such changes, if any, cannot presently be determined.
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In 1988, California voters passed an initiative known as Proposition 103. The
Proposition provides, among other things, that rates for most insurance policies
issued or renewed between November 8, 1988, and November 8, 1989, be rolled back
to the levels of November 8, 1987, and then reduced an additional 20%. In
addition, rates for most California insurance policies issued or renewed after
November 8, 1989, are subject to prior approval by the California Department of
Insurance (the Department). The implementation of Proposition 103 by the
Registrant's insurance subsidiaries, as well as other California licensed
insurers, was complicated by numerous legal challenges and uncertainties since
its passage. AVEMCO's insurance subsidiaries settled their outstanding
Proposition 103 matters with the California Department of Insurance during 1995.
AVEMCO and its affected subsidiaries had previously provided for a potential
rollback impact in prior years. Refund payments were made in 1996.
COMPETITION
The property/casualty insurance industry is highly competitive and many
insurance companies offer the same specialty lines of business as AVEMCO's
subsidiaries. Insurance products are distributed on a direct basis to
policyholders and also through the agent/broker community. In the direct
writing of aviation insurance, historically, there have been few insurers which
act as direct writers. AVEMCO's principal subsidiary, AIC, is currently the
largest if measured by the number of insurance policies issued. In the agency
distribution of aviation insurance, market share is highly fragmented, and
AVEMCO competes against numerous managing general agencies, independent
agencies, and pools and syndicates. In recognition that the aviation insurance
sector has been engaged in an extremely competitive price environment, AVEMCO
has continued to emphasize rate discipline and has been unwilling to write
aviation business at what it considers inadequate rates. It also attempts to
compete on the basis of policy provisions, quality and timely service, including
accessible personnel, application turnaround, and expeditious claims settlement.
AVEMCO's other specialty insurance lines, including the lenders single interest,
short-term health and pleasure marine lines, are highly competitive as its
subsidiaries compete with many specialty insurers, as well as multi-line
insurance companies, many of which have more experience, larger volumes of
business, and greater financial resources than the resources of AVEMCO and its
subsidiaries. They compete primarily on the basis of both price and service.
EMPLOYEES
At December 31, 1996, the Registrant employed 482 people.
ITEM 2. PROPERTIES
- ------
AVEMCO's activities are carried out from its 40,000 square foot headquarters,
owned by AVEMCO and located adjacent to the Frederick Municipal Airport in
Frederick, Maryland. AVEMCO also owns and occupies a 48,200 square foot office
building and storage complex in St. Peters, Missouri, a two-story 12,000 square
foot office building in Ithaca, New York, and a one-story building in Fort
Worth, Texas, containing approximately 2,500 square feet. AVEMCO leases
approximately 64,000 square feet of office space at 20 other locations
throughout the United States, Canada, China, and the United Kingdom.
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ITEM 3. LEGAL PROCEEDINGS
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None, except routine litigation incidental to the business, in connection with
the insurance subsidiaries' operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------
None during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------ MATTERS
The Registrant'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>
1996
Fourth Quarter $16 1/8 $15 $ .12
Third Quarter $16 1/2 $13 5/8 $ .12
Second Quarter $16 $11 3/4 $ .12
First Quarter $16 $14 5/8 $ .12
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
</TABLE>
Note 7, Debt on page 59, and Note 10, Stockholders' Equity and Capital
Transactions, of the Notes to Consolidated Financial Statements on pages 61 and
62 are incorporated herein.
As part of the "Agreement," referred to in Part I, Item 1, Business, Recent
Development, AVEMCO agreed not to declare a dividend with a record date prior to
June 1, 1997, without the written consent of HCCH or subsequently if a
shareholders' meeting to consider the merger has been fixed and announced by the
AVEMCO Board of Directors and the Joint Proxy Statement/Prospectus has been
distributed to the shareholders of AVEMCO.
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<TABLE>
<CAPTION>
ITEM 6. FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
- ------
(In thousands, except per share data and ratios)
SUMMARY OF OPERATIONS: 1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Premiums earned $ 86,170 $ 80,458 $ 75,518 $ 62,702 $ 57,385
Commissions 8,819 7,046 6,418 5,909 6,145
Net investment income 8,223 8,498 8,245 9,004 9,218
Computer products and services 9,913 10,188 9,185 11,129 4,836
Realized gain (loss) on sale of
investments 3,244 575 (248) 9,634 2,742
Realized gain on subsidiary sale 3,307 -- -- -- --
Other revenues 8,214 6,439 5,472 5,523 6,597
-------- -------- -------- -------- --------
Total revenues 127,890 113,204 104,590 103,901 86,923
-------- -------- -------- -------- --------
EXPENSES:
Losses and loss adjustment
expenses 62,866 55,605 46,310 41,502 36,783
Commissions 7,092 6,513 7,159 5,716 6,966
Other expenses 41,970 41,984 37,582 37,830 32,387
-------- -------- -------- -------- --------
Total expenses 111,928 104,102 91,051 85,048 76,136
-------- -------- -------- -------- --------
Earnings before income taxes $ 15,962 $ 9,102 $ 13,539 $ 18,853 $ 10,787
======== ======== ======== ======== ========
Net earnings/1/ $ 12,288 $ 7,918 $ 10,833 $ 15,572 $ 9,603
======== ======== ======== ======== ========
PER SHARE DATA:
Net earnings/1, 2/ $ 1.45 $ .90 $ 1.20 $ 1.41 $ .82
-------- -------- -------- -------- --------
Dividends declared $ .48 $ .46 $ .44 $ .42 $ .40
-------- -------- -------- -------- --------
Stockholders' equity per share/3,4/ $ 7.33 $ 7.14 $ 6.28 $ 5.92 $ 7.76
-------- -------- -------- -------- --------
Weighted average number of
of common and common
equivalent shares 8,478 8,846 9,019 11,041 11,734
-------- -------- -------- -------- --------
Common shares outstanding 8,264 8,649 8,850 9,109 11,493
-------- -------- -------- -------- --------
OTHER FINANCIAL DATA:
Investments /4/ $149,238 $149,544 $136,378 $139,384 $151,013
-------- -------- -------- -------- --------
Total assets /4/ $217,666 $213,802 $201,350 $210,693 $231,621
-------- -------- -------- -------- --------
Debt $ 56,667 $ 54,967 $ 54,600 $ 54,500 $ 39,000
-------- -------- -------- -------- --------
Stockholders' equity /4/ $ 60,572 $ 61,759 $ 55,610 $ 53,930 $ 89,215
-------- -------- -------- -------- --------
Return on equity 20.1% 13.5% 19.8% 21.8% 11.1%
-------- -------- -------- -------- --------
</TABLE>
/1/1993 includes cumulative effect of the adoption of FASB Statement No. 109,
"Accounting for Income Taxes."
/2/Based on weighted average number of common and common equivalent shares.
/3/Based on common shares outstanding.
/4/Certain investments since January 1994 are presented on a different basis
from December 31, 1993, and prior, due to the January 1, 1994, adoption of
FASB Statement No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." FASB Statement No. 115 prohibits restatement of prior
years' financial statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ RESULTS OF OPERATIONS
OVERVIEW OF BUSINESS
The Registrant's insurance subsidiaries underwrite aviation and other specialty
line insurance products. Non-aviation lines include lenders single interest,
short-term health and pleasure marine. The insurance services businesses
complement the insurance operations.
The specialty insurance lines of business, particularly the aviation and
pleasure marine, are volatile from both a rate and claims perspective. As a
result, the Registrant'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 Registrant has and continues to emphasize rate discipline in all lines of
its business. The aviation insurance sector, the Registrant's primary line of
business, has been engaged in an extremely competitive rate environment for
quite some time. There continues to be some improvement of competitive rates in
the aviation insurance sector, especially in the areas of higher-valued aircraft
hulls and pilots, who are transitioning to larger or more complex aircraft.
To augment the aviation business, the Registrant continues to develop, both
internally and through acquisition, the growth of its other specialty lines and
its insurance services business.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY--
The Registrant's Consolidated Statements of Cash Flows on page 49 detail the net
cash provided and used by operating, investment, and financing activities. The
Registrant'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 $5.8 million, $11.1 million, and $11.8
million of net cash flow in 1996, 1995, and 1994, 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 of $5.8 million for 1996 was below that of 1995. 1996
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, 1996 operating cash flow was further impacted by one-
time refund payments of $2.4 million related to the settlement of California
Proposition 103 matters. The Registrant's insurance subsidiaries had fully
provided for such refund amounts in prior years. Net operating cash
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flow for 1995 decreased from that of 1994 primarily because of increased paid
claims activity in 1995 and the effect of reinsurance recoverables received in
1994.
Capital expenditures for property and equipment additions were $700,000, $1.9
million, and $700,000, in 1996, 1995, and 1994, respectively. 1996 additions
were mainly computer equipment upgrades. 1995 expenditures consisted primarily
of costs associated with two subsidiary office relocations and assets acquired
through two acquisitions. 1994 additions were primarily comprised of computer
hardware upgrades. The Registrant does not anticipate a significant level of
property and equipment capital expenditures during 1997. 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. All expenditures were financed principally by
internally-generated funds.
At December 31, 1996, the Registrant had $31.6 million in cash and short-term
investments. Additionally, $3.3 million of its fixed income portfolio is
scheduled to mature in 1997. A further source of short-term liquidity includes
a credit facility with a bank. $7.0 million is available under that commitment
to address short-term cash needs. The Registrant's investment portfolio is
highly liquid, consisting principally of readily marketable securities. In
developing its investment strategy, the Registrant 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 Registrant's investment portfolio represents 69% of its total assets. The
Registrant 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 obligations, and maintain what is
considered an ample margin of capital and surplus to sustain planned writings of
insurance. At December 31, 1996, 76% of the Registrant's investments were in
fixed income securities, 7% in equities, and 17% in short-term investments. The
Registrant'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 eight years. The Registrant does not use
derivative instruments, such as mortgage derivatives, options and structured
notes, to leverage its investment portfolio.
At December 31, 1996, the Registrant's $149.2 million investment portfolio
reflected after-tax appreciation of $2.3 million above its cost basis.
The Registrant has classified its investments as available for sale. While the
Registrant 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.
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The Registrant had $3.2 million of realized investment gains in 1996 compared to
a nominal realized investment gain of $575,000 in 1995. 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. The majority of
the 1996 realized investment gains arose from the Registrant's decision to
liquidate its common equity portfolio. Additional information regarding the
Registrant's investment portfolio is detailed on pages 52 through 54, and page
66.
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 Registrant's
loss reserve developments is included in Note 4 to the consolidated financial
statements on pages 55 and 56, and is incorporated herein.
The development of unpaid loss and loss adjustment expense refers to 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 1996, the Registrant experienced overall favorable development of $3.3
million on gross unpaid losses and loss adjustment expenses. The 1996 favorable
development compares with favorable development of $2.5 million and $3.2 million
in 1995 and 1994, respectively.
The Registrant 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 $1.1 million for 1995
and $2.9 million for 1994. 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 Registrant'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 Registrant'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 Registrant did not experience any significant environmental claim activity
during 1996, 1995 or 1994, and currently anticipates that activity in the future
should not have a material adverse effect on the overall consolidated financial
position of the Registrant.
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REINSURANCE--
The Registrant'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 Registrant 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 Registrant 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 Registrant's
retention on its aviation business varies according to policy limits. The
largest net aggregate amount retained in any one risk is $1.6 million. The
Registrant 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 Registrant
absorbs the first $2.5 million in losses, with catastrophe reinsurance
protection to $10.5 million. The lenders single interest and short-term health
business participate in proportional treaty reinsurance. For 1996, the
Registrant retained 86% of its premium production and ceded 14% to reinsurers
under its various reinsurance arrangements. Approximately 63% of the net amounts
recoverable from reinsurers at December 31, 1996, are attributable to
reinsurance arrangements with three 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 on page 61 and is incorporated herein
by reference.
CAPITAL RESOURCES--
The annual dividends for 1996 and 1995 were $.48 per share and $.46 per share,
respectively, marking the twenty-first and twentieth years in which the
Registrant has paid an increased dividend.
The Registrant'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 Registrant acquired
520,000 of its common shares during 1996. Since inception of its stock
repurchase program in the 1987 fourth quarter through the end of 1996, the
Registrant has repurchased 6,727,380 shares of its stock at prices ranging from
$9.75 to $22.00 per share.
The Registrant 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 Registrant's principal subsidiary, AVEMCO Insurance
Company, were paid through dividends. Regulatory restrictions on such dividends
are detailed in Note 10 of the Registrant's consolidated financial statements.
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The Registrant'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 1.19 to 1; a general maximum regulatory guideline is 3 to 1. The
ratio of unpaid losses and expenses to surplus was .46 to 1. 1996 marked the
22nd consecutive year and the 33rd in 36 years in business where an underwriting
profit was achieved. The Registrant 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, 1996, policyholders' surplus position substantially exceeded the
minimum requirements as stipulated by insurance industry risk-based capital
regulations.
SUBSEQUENT EVENT
On January 17, 1997, AVEMCO and HCC Insurance Holdings, Inc., ("HCCH") jointly
announced that they had signed a Letter of Intent to merge AVEMCO with a wholly-
owned subsidiary of HCCH in a stock-for-stock transaction, with AVEMCO becoming
a wholly-owned subsidiary of HCCH. On February 28, 1997, AVEMCO and HCCH
jointly announced that the Boards of Directors of AVEMCO and HCCH had executed
an Agreement and Plan of Reorganization (the "Agreement"). Pursuant to the
terms of the Agreement, each share of AVEMCO's common stock will be exchanged
for one share of HCCH's common stock.
The proposed transaction is intended to be accounted for as a pooling of
interests and to be a nontaxable exchange to AVEMCO's shareholders. It is
subject to various conditions, including receipt of required regulatory
approvals and the approval of the transaction by shareholders of both AVEMCO and
HCCH. A special shareholders' meeting is anticipated to be held in the second
quarter of 1997, and a proxy statement describing the transaction in detail is
expected to be submitted to the shareholders shortly. There can be no assurance
that the conditions to the proposed merger will be satisfied or that the
shareholders will approve the transaction.
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
1996 marks the sixth consecutive year that the Registrant has grown its gross
premiums writing base. Gross premiums written for 1996 increased over 1995 as
follows:
<TABLE>
<CAPTION>
(000's)
Line of Business 1996 1995
- ---------------------------- -------- ---------
<S> <C> <C>
Aviation $ 69,474 $ 69,076
Non-aviation 37,491 31,072
-------- --------
Gross Premiums Written $106,965 $100,148
======== ========
</TABLE>
Gross premiums written for the aviation line were $69.5 million in 1996 compared
to $69.1 million in 1995. Included in 1995 gross premiums written, however, were
$4 million of non-recurring premiums associated with the January 1995
acquisition of the aviation business from Aviation Underwriting Specialists.
Excluding those non-recurring premiums, gross aviation premiums written
increased 7% over 1995 due to a combination of rate improvement and unit growth.
12
<PAGE>
Gross premiums written on the non-aviation insurance lines increased 21% over
1995 to $37.5 million. Particularly noteworthy was the lenders single interest
production. This particular insurance product, managed by Matterhorn Bank
Programs, Inc., a consolidated subsidiary, protects a lender's retail
installment portfolio primarily against risk of physical loss of or damage to
property securing its installment loans should the borrower fail to maintain the
required insurance. Strong new business growth pushed 1996 lenders single
interest gross premiums written 38% to $22.9 million as compared to $16.6
million in 1995.
Gross premiums written for short-term health insurance programs were $10.2
million in 1996 compared to $10.9 million in 1995. The decline was principally
impacted by the Registrant's decision to discontinue as a reinsurer of a trip-
travel program that represented $6.3 million of gross premiums written in 1995,
when it was unable to negotiate satisfactory renewal terms. That decline was
largely offset with increased participation in short-term health programs
managed and underwritten by the Registrant's International Group Services
division of Brooks-Shettle Company, a consolidated subsidiary, and participation
late in 1996 on short-term programs managed and underwritten by its Hinchcliff
International division.
Pleasure marine gross premiums written increased to $4.4 million in 1996 versus
$3.5 million in 1995 through improved new business production by the
Registrant's independent agency insurer, U.S. Specialty Insurance Company. The
Registrant is continuing to develop this product gradually by stressing
conservative underwriting guidelines. In addition, the Registrant continues to
retain 100% of the pleasure marine risks it writes, with the exception of
reinsurance coverage for catastrophic marine losses.
Net premiums written for all lines of business reflect the business retained by
the Registrant after its reinsurance arrangements are considered. Net premiums
written increased over 1995 primarily because of the growth in the lenders
single interest business. 1996 earned premium revenues of $86.2 million
increased over 1995's $80.5 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
their agents, increased to $8.8 million in 1996 as compared to $7.0 million in
1995. The increase is mainly attributed to commissions generated by the
Hinchcliff International division of Brooks-Shettle Company.
Net investment income in 1996 was $8.2 million compared to $8.5 million in 1995.
The slight decrease is principally attributed to a lower average invested asset
base during 1996. The Registrant sold its common equity securities in 1996.
Computer product and service revenues generated by The Wheatley Group, Ltd., a
consolidated subsidiary, was $9.9 million in 1996, slightly behind 1995's $10.2
million. Hardware equipment sales declined by $800,000, while Wheatley's core
software revenues increased by $500,000. Hardware sales can vary significantly
from period to period.
13
<PAGE>
Realized gains on the sale of investments were $3.2 million in 1996 as compared
to $600,000 in 1995. The majority of the 1996 gains arose from the Registrant's
decision to sell its common equities.
The Registrant sold a subsidiary, National Assurance Underwriters, Inc., during
1996, while retaining all that subsidiary's insurance business. The sale
generated a realized gain of $3.3 million.
Other revenues increased to $8.2 million in 1996 as compared to $6.4 million in
1995. $1.0 million of the increase is directly attributed to MEDEX Assistance
Corporation, a consolidated subsidiary that improved its revenue performance by
30% over 1995.
From a claims perspective, the net loss ratio for 1996 was 73.0% compared to
69.1% in 1995.
<TABLE>
<CAPTION>
Net Loss Ratios
Line of Business 1996 1995
- --------------------- ---------------- --------
<S> <C> <C>
Aviation 76.1% 68.7%
Non-aviation 67.9% 70.0%
All Lines 73.0% 69.1%
</TABLE>
Net incurred losses and loss adjustment expenses were as follows:
<TABLE>
<CAPTION>
(000's)
Line of Business 1996 1995
- ---------------------- ------- -------
<S> <C> <C>
Aviation $40,387 $36,575
Non-aviation 22,479 19,030
------- -------
Net Incurred Losses $62,866 $55,605
======= =======
</TABLE>
Net aviation incurred losses in 1996 increased over 1995, principally due to
increased physical damage claims activity on higher-valued aircraft. In
addition, earlier in 1996 there was a higher than usual increase in reported
small claims activity. Non-aviation losses in 1996 were $22.4 million compared
to $19.0 million in 1995 as an increase in lenders single interest insurance
claims commensurate with their new business growth was partially offset by
improved loss performance by the short-term health programs.
Incurred losses in 1996 were also affected by Hurricane Fran which struck the
eastern portion of the United States in September. This storm resulted in an
after-tax earnings reduction of $548,000 or $.07 per share. There were no
significant weather-related losses in 1995.
Commission expense, representing costs incurred to generate insurance business
through the assumed reinsurance and independent agency markets increased to $7.1
million in 1996 as compared to $6.5 million in 1995. This increase is
consistent with the upward trend in reinsurance assumed production.
14
<PAGE>
Lower variable interest rates combined with a lower level of bank borrowings
during 1996 decreased interest expense to $3.8 million in 1996 from $4.2 million
in 1995.
Selling, general, and administrative costs increased a modest 2.5% in 1996 as
the Registrant incurred additional operating costs from the recently acquired
Hinchcliff International, Inc. subsidiary while supporting increased revenue
activities in its other business units without a significant increase in
operating costs.
Income tax expense increased in 1996 to $3.7 million as compared to $1.2 million
in 1995, mainly as the result of the increased realized investment gains and the
realized gain on the sale of National Assurance Underwriters, Inc. Both of
these items were fully taxable.
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-based Compensation." This Statement establishes an
alternative fair value-based method of accounting for all employee stock
compensation plans in addition to the intrinsic value-based method. The
Registrant has elected to continue to use the intrinsic value method as
permitted by the Statement. The Registrant has made the necessary disclosures
as required by the Statement in its Notes to Consolidated Statements.
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 remained competitive, there was 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.
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 program that was not meeting the Registrant's underwriting objectives.
These actions had the effect of reducing earned premium revenues when compared
to 1994. The
15
<PAGE>
Registrant plans to continue to build its participation in certain short-term
health programs managed by International Group Services (IGS), which it acquired
in December of 1994. The Registrant also expects to begin participating late in
1996 on short-term health programs managed by Hinchcliff International
(Hinchcliff), a subsidiary acquired in January 1996. 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
compared to $16.3 million written in 1994. This business principally covers
automobile loans and is thereby closely linked to automobile sales, which had a
downturn 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 Registrant continues to emphasize movement away from coastal
exposures, given the frequency of weather-related events over the last several
years. The Registrant 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 Registrant 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 premium written.
Commission revenues 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%
</TABLE>
16
<PAGE>
Net incurred losses and loss adjustment expenses were as follows;
<TABLE>
<CAPTION>
(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 one principal reason
for the increase. The Registrant 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 Registrant incurred several
large hull claims during that period. The Registrant 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 additional 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 Registrant did not incur significant losses associated with
the "Blizzard of 1996," which occurred shortly after the end of the year.
Commission expense declined to $6.5 million in 1995 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 predominantly comprised of non-taxable investment
income in relation to income from fully taxable sources, such as underwriting
and realized investment gains.
The Registrant's principal subsidiary, AVEMCO Insurance Company, settled its
outstanding Proposition 103 matters with the California Department of Insurance
during 1995. The Registrant had previously provided for a potential rollback
impact in prior years such that the effect on 1995 net earnings of the ultimate
settlement was not material.
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.
17
<PAGE>
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 Registrant strengthened underwriting criteria on certain
classes of aviation business to increase its underwriting profitability.
Additionally, the Registrant 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 Registrant has 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 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 Registrant'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 Registrant
participated as an assuming reinsurer in that business during 1994. Toward the
end of 1994, the Registrant 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 Registrant 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.
18
<PAGE>
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, net of amounts paid to agents, 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 Registrant'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 Loss $46,310 $41,502
======= =======
</TABLE>
Net incurred losses on aviation claims declined compared to 1993. During 1994,
the Registrant strengthened underwriting criteria on certain classes of aviation
business to increase underwriting profitability. Additionally, the Registrant
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
19
<PAGE>
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 is 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 Registrant'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 Registrant's continuing efforts to
attain efficient operating cost structures throughout its various business
units. The Registrant also incurred approximately $600,000 in non-recurring
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>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------
The consolidated financial statements and notes to the consolidated financial
statements of the Registrant and subsidiaries on pages 45 through 64, and the
Independent Auditors' Report on page 65 are incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ FINANCIAL DISCLOSURE
None
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------
DIRECTORS OF REGISTRANT
The following table lists certain information with respect to the Registrant's
directors:
<TABLE>
<CAPTION>
Other Positions and Offices with the Registrant,
Principal Occupation, Business Experience During
Name, Age, and Year Past Five Years and Other Directorships in Public Term
First Served as a Director Companies Expires
- --------------------------------------------------------------------------------------------
<S> <C> <C>
H. Lowell Davis (a)(c)(d) Vice Chairman and Director, Potomac Electric 1997
Age: 64 Power Company. Former Chief Financial Officer
Director since 1985 of that company.
Paul J. Hanna (a)(c) Until retirement in 1986, Vice Chairman and 1997
Age: 81 Director, GEICO Corporation.
Director since 1980
Steven A. Markel (b)(d) Vice Chairman, Markel Corporation; Director: 1997
Age: 48 Fairfax Financial Holdings, Ltd. (Canada);
Director since 1994 Director: Morden & Helwig Group, Inc. (Canada);
Director: S&K Famous Brands, Inc.
Michael Collins (a)(b)(d) President, Michael Collins Associates 1998
Age: 66 (consulting firm); Trustee: National Geographic
Director since 1986 Society; Former Astronaut; Vice President,
Washington Operations of LTV Aerospace and Defense
Company (1980-85).
John F. Shettle, Jr. (c) President and Chief Executive Officer of the 1998
Age: 42 Registrant; Chairman, Eastern Aviation & Marine
Director since 1993 Underwriters, Inc., a subsidiary of the Registrant;
Board member and officer of various other
subsidiaries of the Registrant.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Other Positions and Offices with the Registrant,
Principal Occupation, Business Experience During
Name, Age, and Year Past Five Years and Other Directorships in Public Term
First Served as a Director Companies Expires
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Rachel B. Trinder (b)(d) Attorney; partner with law firm of Zuckert, Scoutt 1998
Age: 42 & Rasenberger LLP since 1985; associate from
Director since 1996 1978-1985.
William P. Condon (a)(c) Chairman of the Board of Directors of the 1999
Age: 59 Registrant; Chairman of the Boards of various
Director since 1973 subsidiaries of the Registrant; Chief Executive
Officer of the Registrant until March 1, 1997.
Arnold H. Johnson (a)(c) Until retirement in 1982, Chairman of the Board 1999
Age: 79 of Directors and Chief Executive Officer of the
Director since 1965 Registrant and Chairman of the Boards of its
subsidiaries.
Thomas J. Schwab (b)(c) Attorney; partner with law firm of Wald, 1999
Age: 69 Harkrader and Ross until 1984; Secretary of the
Director since 1987 Registrant until April 1987.
</TABLE>
(a) Member of the Executive Committee
(b) Member of the Audit Committee
(c) Member of the Investment Committee
(d) Member of the Compensation and Stock Option Committee
The Board of Directors of the Registrant met six times during 1996. In
addition, the Registrant has the following standing committees of the Board:
. EXECUTIVE COMMITTEE. The Executive Committee has the authority to act during
intervals between meetings of the Board of Directors and to exercise all
powers of the Board except those reserved to the Board by statute, the
Certificate of Incorporation or Bylaws. It also functions to advise the Board
on all matters pertaining to Board nominations and membership. The Executive
Committee will not consider nominations for Board membership from
shareholders. The Committee met two times during 1996.
22
<PAGE>
. AUDIT COMMITTEE. The Audit Committee, composed entirely of outside directors,
serves as a liaison between the Board and the Registrant's auditors, to
discuss with the auditors before their examination its scope and approach,
and to discuss with them after their examination the results of the audit.
The Committee met three times in 1996.
. INVESTMENT COMMITTEE. The Investment Committee serves to review the
investment policy and investment guidelines of the Registrant, and makes
recommendations to the Board of Directors. The Committee met four times
during 1996.
. COMPENSATION AND STOCK OPTION COMMITTEE. The Compensation and Stock Option
Committee is responsible for recommendations to the Board in decisions
affecting compensation to employees, including salaries of officers and
allocation of awards under the Executive Performance Compensation Plan, and
is responsible for the awarding of stock options under the Registrant's stock
option plans. The Committee met two times in 1996.
All directors attended at least 75 percent of the meetings of the Board and
Committees of which they were members.
The Registrant's current arrangement for compensation of directors is that those
directors who are not employees of the Registrant, or a subsidiary, receive an
annual retainer of $18,000. For each Board and Executive Committee meeting
attended, non-employee members receive $1,200 ($1,400 for the Chairman of the
Executive Committee). For all other Committee meetings attended, members
receive $900 ($1,000 if Chairman of the Committee). The Registrant also
reimburses directors for travel expenses incurred in attending meetings.
The Registrant has a plan whereby non-employee directors may defer their annual
retainer fees until age 70-1/2 or until their service with the Board terminates.
The Registrant also has a consulting plan for directors, pursuant to which
directors retiring from the Board after age 65 and after at least ten years of
service on the Board may continue to receive between 50% and 100% of the annual
retainer (but not the per meeting fees) they would receive as active directors,
the percentage depending on years of active service as a director. The fee at
the 50% level would be payable for a minimum of 10 years of active service on
the Board, 75% for a minimum of 15 years of active service, and 100% fee for a
minimum of 20 years of active service.
Arnold H. Johnson also serves as consultant to the Registrant under the terms of
a consulting agreement which provides for payments of an annual consulting fee
of $37,000. All payments under the agreement are deferred for five years from
the time earned, and such deferrals accrue interest at the rate of 8% per annum.
The agreement may be terminated prior to its May 1, 1997, expiration by either
party for cause, upon 90 days' notice.
23
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information regarding executive officers of the Registrant.
Each officer holds such office until the next annual election of officers, which
is held at the first meeting of the Board of Directors after the annual meeting
of shareholders, and until his/her successor is elected.
In conjunction with the signing of the "Agreement," referred to in Part I, Item
1, Business, Recent Development, William P. Condon, Chairman of the Board and
Chief Executive Officer of AVEMCO, stepped down as Chief Executive Officer of
AVEMCO effective March 1, 1997. He will continue as Chairman of the Board of
AVEMCO until the merger is consummated. Effective March 1, 1997, John F.
Shettle, Jr., President of AVEMCO, assumed the additional duties of Chief
Executive Officer of AVEMCO.
William P. Condon, 59, has been Chairman of the Board of the Registrant since
1982, and until March 1, 1997, was also Chief Executive Officer. He was
President and Chief Operating Officer of the Registrant from 1973 until May
1994. He also is, or has served as, Chairman of the Board, a director and/or an
officer of various subsidiaries of the Registrant, having been employed by the
Registrant, or one or more of its subsidiaries, since 1961.
John F. Shettle, Jr., 42, has been President and Chief Operating Officer of the
Registrant, since 1994, and has been a director of the Registrant since July
1993. As of March 1, 1997, he has also been Chief Executive Officer. He was
Executive Vice President of the Registrant from 1991 until May 1994. He was
Senior Vice President-Business Development and Planning of the Registrant from
1988 through May 1991. He was President of Eastern Aviation and Marine
Underwriters, Inc., a wholly-owned subsidiary of the Registrant, from the
Registrant's acquisition of that subsidiary in 1983 to 1987. He also is, or has
served as, a director and/or an officer of various subsidiaries of the
Registrant.
John R. Yuska, 52, has been Senior Vice President and Chief Financial Officer of
the Registrant since 1988. He was Vice President-Finance of the Registrant from
1986 through 1987, and Treasurer of the Registrant from 1978 through 1985. He
also is, or has served as, a director and/or an officer of various subsidiaries
of the Registrant, having been employed by the Registrant since 1978.
Thomas H. Chero, 46, has been Senior Vice President-Legal of the Registrant
since 1988 and Corporate Secretary of the Registrant since 1987. He was Vice
President-Legal of the Registrant from 1986 through 1987. He also is, or has
served as, a director and/or an officer of various subsidiaries of the
Registrant, having been employed by the Registrant, or one or more of its
subsidiaries, since 1976.
Thomas L. Hudson, 48, has been Vice President-Business Development of the
Registrant since 1994. He was elected President of MEDEX Assistance
Corporation, a wholly-owned subsidiary of the Registrant, in 1995. Mr. Hudson
was previously a Partner with the law firm of Venable, Baejter and Howard,
having been employed there from 1977 until 1994, when he left to join the
Registrant.
24
<PAGE>
John E. Sweeney, 46, has been Vice President-Marketing since 1993. He was
Assistant Vice President-Sales from 1987 through 1992, and has been employed by
the Registrant, or one or more of its subsidiaries, since 1974.
Jon R. Harden, 41, has been Vice President-Sales since 1993. He was Assistant
Vice President-Sales from February 1989 through 1992, and has been employed by
the Registrant, or one or more of its subsidiaries, since 1981.
Thomas E. Lentz, 38, has been Treasurer of the Registrant since 1988. He also
is an officer of various subsidiaries of the Registrant, having been employed by
the Registrant, or one or more of its subsidiaries, since 1985.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16 of the Securities Exchange Act of 1934, as amended, requires the
Registrant's officers, directors and persons who own greater than 10% of a
registered class of the Registrant's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and New York Stock Exchange. Based on a review of the Forms 3, 4, and 5 it has
received, and/or on written representations from certain reporting persons that
no Form 5 was required for them, the Registrant believes that all Section 16
filing requirements applicable to its officers, directors and 10% beneficial
owners were complied with by such persons with the following exceptions which
were reported on Form 5 by each individual for the year ended 1996:
. Arnold H. Johnson, director, gifted 2,300 shares of AVEMCO common stock in
one transaction on February 14, 1994.
. John Sweeney, Vice President-Marketing, sold 300 shares of AVEMCO common
stock in one transaction on September 1, 1996.
ITEM 11. EXECUTIVE COMPENSATION
- -------
The following table sets forth the annual and long-term compensation for the
Registrant's Chief Executive Officer and the four highest-paid executive
officers, as well as all other compensation paid or awarded to each such
individual for the Registrant's last three fiscal years.
25
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
------------
Awards
------
Name and Annual Compensation Securities All Other
Principal ------------------------ Underlying Compensation
Position Year Salary($) Bonus($)/(1)/ Options/SARs(#) ($)/(2)/
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William P. Condon 1996 400,000 192,000 0 7,071
Chairman of the Board 1995 390,000 92,000 0 6,382
Age: 59 1994 390,000 155,000 7,500 10,237
John F. Shettle, Jr. 1996 165,000 89,000 0 6,027
President and Chief 1995 157,000 43,000 0 5,338
Executive Officer 1994 145,500 76,000 5,000 9,193
Age: 42
John R. Yuska 1996 134,000 68,000 0 6,585
Senior Vice President and 1995 128,000 30,000 0 5,896
Chief Financial Officer 1994 123,000 61,000 3,000 9,409
Age: 52
Thomas H. Chero 1996 105,000 67,000 0 2,544
Senior Vice President - 1995 100,000 31,000 0 522
Legal and Corporate 1994 95,000 58,000 3,000 9,193
Secretary
Age: 46
Thomas L. Hudson 1996 115,000 26,000 8,000 5,423
Vice President - 1995 113,000 13,000 1,000 2,435
Business Development 1994 55,423 12,000 1,000 0
Age: 48
- -------------------------------------------------------------------------------------------------
</TABLE>
/(1)/"Bonus" consists of Performance Compensation awarded for 1996 performance,
but which was paid in early 1997. Similar timing also applies for the
previous two years shown.
/(2)/"All Other Compensation" consists of the employer contribution to the
defined contribution Profit Sharing Plan and Group Term Life Plan for
Messrs. Condon, Shettle, Jr., Yuska, Chero, and Hudson respectively, as
follows: (i) Profit Sharing: $5,721, $5,721, $5,721, $2,022, and $4,901;
(ii) Term Life: $1,350, $306, $864, $522, and $522.
Note: All of the executive officers listed have been with the Registrant, or a
subsidiary of the Registrant, for more than five years except Mr. Hudson, who
was a partner with the law firm of Venable, Baetjer and Howard, having been
employed there from 1977 until 1994, when he left to join the Registrant. Mr.
Hudson also serves as President of the Registrant's subsidiary, MEDEX Assistance
Corporation.
26
<PAGE>
OPTION/SAR GRANTS
The following table sets forth certain information concerning options/SARs
granted during 1996 to the named executives:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- ---------------------------------------------------------------------- Potential Realizable
% of Total Value of Assumed
Number of Options/SARs Annual Rates of Stock
Securities Granted Exercise Price Appreciation
Underlying to Employees or Base for Option Term/(1)/
Options/SARs in Fiscal Price Expiration -------------------
Name Granted/(2)/ Year ($/Sh) Date 5%($) 10%($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William P. Condon 0 -- -- -- -- --
John F. Shettle, Jr. 0 -- -- -- -- --
John R. Yuska 0 -- -- -- -- --
Thomas H. Chero 0 -- -- -- -- --
Thomas L. Hudson 8,000 17.5 15.25 12/12/2006 76,725 194,437
- --------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/Potential realizable value is the net gain realizable based on an
assumption that the price of the Common Stock appreciates at the annual
compounded rate shown from the date of grant until the end of the ten-year
option term. These numbers are calculated based upon the requirements
promulgated by the Securities and Exchange Commission and do not reflect
the Registrant's estimate of future stock price growth.
/(2)/Options granted were under the Registrant's Nonstatutory Stock Option Plan
and vest at the rate of 25% each year, commencing on the one-year
anniversary of the date of grant.
27
<PAGE>
OPTION/SAR EXERCISES AND VALUES
The following table summarizes options/SARs exercised during 1996 and presents
the value of unexercised options/SARs held by the named executives at fiscal
year end:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money/(1)/
Unexercised Options/SARs Options/SARs
Shares Value at Fiscal Year-End (#) at Fiscal Year-End ($)
Acquired on Realized Exercisable(E)/ Exercisable(E)/
Name Exercise (#) ($) Unexercisable(U) Unexercisable(U)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William P. Condon -0- -0- 97,000 E 231,977 E
13,750 U 7,500 U
John F. Shettle, Jr. -0- -0- 58,000 E 85,298 E
4,000 U 5,000 U
John R. Yuska 11,700 81,409 68,600 E 125,505 E
2,500 U 3,000 U
Thomas H. Chero -0- -0- 44,450 E 14,408 E
2,500 U 3,000 U
Thomas L. Hudson -0- -0- 750 E 1,000 E
9,250 U 4,000 U
- ------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/In-the-money option value is the fair market share value at fiscal 1996
year-end ($15.625 per share) less the option exercise price times the
number of shares.
PROFIT SHARING PLAN
The Registrant has a qualified defined contribution Profit Sharing Plan, which
became effective October 1, 1969, and in which substantially all employees of
the Registrant and its subsidiaries who have completed a qualifying year of
service may participate. The Registrant and its subsidiaries contribute each
year 5% of "consolidated net profits before taxes," as defined in the Plan, (but
not in excess of 15% of the compensation paid to participating employees during
the year), to a trust fund. The Registrant's contribution each year is
allocated to active participants on a pro rata basis based upon W-2 compensation
for the year (excluding compensation from stock option exercises), subject to
individual compensation limits imposed by the federal government ($150,000 for
1996). The entire amount in the Profit Sharing Plan to the employee's credit is
distributable to the employee upon retirement or to the employee's designee upon
death. Upon withdrawal as a participant prior to retirement, the employee
receives amounts contributed by the employee, if any, adjusted for investment
results on such amounts, plus 20% of the remaining amount to the employee's
credit for each year of employment after the third year of employment, not to
exceed 100% of such amount at the end of the seventh year of employment. The
total Registrant's contribution to the Profit Sharing
28
<PAGE>
Plan for the year ended December 31, 1996, was $491,000. The Registrant's
contribution with respect to the five named executive officers is shown in the
Summary Compensation Table.
PENSION PLAN
The Registrant has a noncontributory defined benefit Pension Plan covering
substantially all employees of the Registrant and its subsidiaries who have
attained age 21 and have completed one year of qualifying service. The Pension
Plan, funded through an insurance company, provides for a retirement benefit at
age 65, which is integrated with Social Security, based upon the employee's
highest five consecutive years average W-2 compensation at the rate of .6% of
such five-year average up to "covered compensation" as defined in the Plan plus
1.1% of such five-year average compensation in excess of "covered compensation",
all multiplied by years of credited service. W-2 compensation used to calculate
an employee's final average compensation was capped by federal law at $150,000
for Plan year 1996, but is indexed for inflation for subsequent plan years.
Compensation attributable to the exercise of stock options is not includable for
benefit determinations. Vesting for Plan benefits is 100% after five years of
service with 0% for less than five years of service.
PENSION PLAN TABLE
------------------
YEARS OF SERVICE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Remuneration 15 20 25 30 35
-------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 125,000 $18,557 $24,742 $30,928 $37,113 $43,299
150,000 22,682 30,242 37,803 45,363 52,924
* 175,000 22,682 30,242 38,803 45,363 52,924
* 200,000 22,682 30,242 38,803 45,363 52,924
* 225,000 22,682 30,242 38,803 45,363 52,924
* 250,000 22,682 30,242 38,803 45,363 52,924
* 300,000 22,682 30,242 38,803 45,363 52,924
* 400,000 22,682 30,242 38,803 45,363 52,924
* 450,000 22,682 30,242 38,803 45,363 52,924
* 500,000 22,682 30,242 38,803 45,363 52,924
- --------------------------------------------------------------------------------
</TABLE>
* The 1996 compensation is limited to $150,000 for the benefit determinations.
The Registrant does not have a nonqualified or other pension plan that would
apply in excess of the remuneration shown.
- --------------------------------------------------------------------------------
The pension table shows maximum annual benefits which would be payable for a
person retiring in 1996 at age 65 calculated in accordance with the current Plan
provisions on a straight life annuity basis, with average earnings shown as
"Remuneration".
A retiree's Social Security benefit is integrated into the Plan's step-rate
formula and there is no additional reduction to the amount shown in the table as
a result of Social Security payments. The
29
<PAGE>
Plan's "covered compensation" level for 1996 utilized in the table was $27,580
for a person retiring at age 65.
For 1996, the Registrant's pension contribution was approximately 1.9% of
covered annual payroll of Plan participants covered by the Plan. The amount
expended by the Registrant for financial reporting purposes for the Pension Plan
is excluded from the Summary Compensation Table because the contribution with
respect to a specified person cannot be readily separated or individually
calculated by the actuary of the Plan.
The compensation of Messrs. Condon, Shettle, Jr., Yuska, Chero, and Hudson
covered by the Pension Plan in 1996 was $493,350, $208,306, $164,864, $136,522,
and $128,522 respectively; however, no compensation in excess of $150,000 is
considered in calculating benefits for 1996 for any of these individuals. These
amounts are based upon W-2 compensation for 1996 as provided for by the Plan,
whereas the Summary Compensation Table includes the executive officers'
performance compensation paid early in 1997 for fiscal 1996 work performed,
which award will not be included in the Plan computation until 1997. As of
December 31, 1996, Messrs. Condon, Shettle, Jr., Yuska, Chero, and Hudson had
credited service under the Plan of 35, 13, 19, 20, and 2 years, respectively.
Effective December 31, 1996, the Board approved a curtailment to the Pension
Plan. The Registrant currently intends to continue to allow benefits to accrue
under the Plan through December 31, 1998, utilizing some of the Plan's excess
assets, and then terminate the Plan, allowing participant balances to be rolled
over into a 401(k) plan. The Registrant currently intends to convert its Profit
Sharing Plan into a 401(k) plan. The Registrant has reserved its right to
alter, amend, and/or terminate any of its defined benefits and defined
contribution plans at any time as it may see fit, however.
PERFORMANCE COMPENSATION PLAN
Under the Performance Compensation Plan for officers of the Registrant and of
its subsidiaries (including executive officers, but excluding the CEO), between
7% and 9% of the Registrant's annual net earnings (as defined in the Plan), in
excess of a minimum earnings deductible amount (determined by formula in the
Plan), is set aside in a pool each year. No performance compensation may be
awarded under the Plan for any year during which a dividend is not paid to the
shareholders, and no performance compensation is available for award until after
the minimum earnings deductible amount is achieved. Net earnings as defined in
the Plan include the Registrant's consolidated profit after tax, but before the
allocation of performance compensation under any of the Registrant's performance
compensation plans (officer, employee, and CEO plans). The minimum earnings
deductible amount is calculated as the product of the weighted average number of
the Registrant's common stock and common stock equivalents for the Plan year
times the larger of: (i) one-third the average of the Registrant's consolidated
earnings per share as reported to the shareholders for the immediately preceding
three Plan years, or, (ii) the per share amount calculated in (i), for any Plan
year after 1973, prior to the current Plan year, if greater than the current
Plan year's per share amount. For 1996, 47 officers participated in and
received awards under the Plan.
30
<PAGE>
STOCK OPTION PLANS
The Registrant's Nonstatutory Stock Option (NSO) Plan, adopted in 1990,
authorizes the grant from time to time of NSOs on the Registrant's Common Stock
to eligible employees, up to a total of 375,000 shares. 8,000 NSOs were granted
to one named executive officer for 1996 performance out of a total of 45,600
NSOs awarded during the year. As of March 1, 1997, NSOs representing 356,400
shares of Common Stock were outstanding. The Plan is administered by the
Compensation and Stock Option Committee of the Registrant's Board of Directors,
which Committee determines which employees are to be granted NSOs and the number
of shares covered by the award. Any employee of the Registrant or a subsidiary
who owns less than 10% of the Registrant's outstanding Common Stock may be
granted an NSO.
The exercise price of shares covered by NSOs must be 100% of the fair market
value of such shares on the date of grant. The NSO exercise period is
determined by the Committee, but may not exceed ten years from the date of
grant. NSOs are not exercisable during the first year after grant, and the Plan
states that NSOs may provide that only a portion of the shares covered by an NSO
may be exercisable during each year after the first year after grant. Option
vesting is normally over a four-year period (25% per year), but the Committee
may reduce or extend the period from between one and ten years. There are
exceptions to the rules on exercise pertaining to such matters as
reorganization, mergers, and changes of control of the Registrant.
The Registrant had an Incentive Stock Option (ISO) Plan which expired in
December 1992 with respect to new grants. ISOs representing 387,300 shares of
Common Stock were outstanding as of March 1, 1997.
Neither the NSO nor the ISO Plan provides for the issuance of SARs, nor does the
Registrant have a separate SAR Plan. Any reference to "Options/SARs" herein is
to options granted under the stock option plans.
EMPLOYMENT CONTRACTS
1. EXECUTIVE OFFICERS (OTHER THAN THE CHIEF EXECUTIVE OFFICER). Executive
officers are under written contract with the Registrant for their employment
services. Such contracts provide for a fixed salary subject to annual review
for potential increase. In addition, such contracts provide that such
officers are eligible to participate in the Performance Compensation Plan
and Stock Option Plans described elsewhere herein. No award is guaranteed
under any such plan and such plans may be modified or terminated by the
Board of Directors at any time. While the employment agreements generally
cover terms from one to three years, each of them is terminable by either
the officer or the Registrant upon 30 to 90 days' written notice, with or
without cause. After the effective date of termination by either party, no
additional compensation is payable regardless of the term. On December 31,
1996, the employment agreements of Messrs. Chero, Shettle, Jr., and Yuska
expired and the parties are under no written employment agreements with the
Registrant as of the date hereof.
In order to be eligible to participate in the Performance Compensation Plan
and Stock Option Plans, executive officers must agree not to compete with
the Registrant for two years after
31
<PAGE>
employment is terminated. This noncompete applies if employment is
terminated by the executive officer for any reason, or by the Registrant for
cause. The agreements also provide that in the event of a change of control
of the Registrant, being the acquisition of 40% or more of the Registrant's
voting stock by another entity and its affiliates, not approved by two-
thirds of the directors who are not affiliated with the party attempting to
change control ("disinterested directors"), the two-year noncompete does not
apply. In the event of such a change in control of the Registrant, stock
option awards also become fully vested and exercisable as provided for in
the Plans.
2. CHIEF EXECUTIVE OFFICER. Mr. Condon is employed under written contract with
the Registrant which was entered into in 1993 and expires on December 31,
1997. It provides for a fixed base annual salary subject to annual review
for potential increase and/or the addition of other compensation as may be
deemed appropriate by the Board of Directors. Mr. Condon's salary for 1996
was $400,000. In addition, such contract provides for an annual performance
compensation of 2% of net earnings above a minimum earnings deductible
amount calculated as set forth in the agreement. Net earnings and the
minimum earnings deductible amount are calculated for the purposes of the
agreement in the same manner as described in the Performance Compensation
Plan for officers. The contract provides that Mr. Condon's total
compensation from salary and performance compensation for any calendar year
is limited to one million dollars, but it also provides that the Board, in
its sole discretion, may award some or all of the additional performance
compensation that would cause total compensation to exceed one million
dollars, whether tax deductible or not. Mr. Condon also participates in the
Registrant's stock option plans.
The employment agreement provides for termination by Mr. Condon upon 180
days' notice, with or without cause, or by the Registrant upon breach by Mr.
Condon of his obligations under the agreement or for cause. In addition, the
Registrant may terminate his services at any time if it agrees to pay him
the base salary and annual performance compensation he would otherwise have
been entitled to receive had the contract not been terminated. In this
event, the noncompetition provision described below would apply during the
remainder of the term.
The agreement contains a two-year noncompetition provision which the Board
of Directors may elect to invoke subsequent to the expiration of the
Agreement provided it gives at least 12 months' prior notice and agrees to
continue to pay Mr. Condon one-half of his base salary during that two-year
period. The Board may also invoke this provision if Mr. Condon elects to
terminate prior to expiration.
The contract also has a provision that, in the event of a change of control
of the Registrant of more than 30% of the Registrant's outstanding voting
stock that is not approved by two-thirds of the disinterested directors (as
described above), Mr. Condon may elect to terminate the contract upon 30
days' written notice, in which event the two-year noncompete would not apply
and Mr. Condon would receive such salary and performance compensation as he
would otherwise be entitled to receive for the remaining term. In the event
of a change in control of the Registrant of 40% or more of the Registrant's
voting stock by another entity and its affiliates that is not approved by
two-thirds of the disinterested directors, stock option awards also become
fully
32
<PAGE>
vested and exercisable as provided for in the Plans. The Registrant elected
in 1996 to invoke Mr. Condon's noncompete for a two-year period commencing
December 31, 1997, the date his employment agreement expires.
On March 1, 1997, Mr. Condon stepped down as Chief Executive Officer, but
remains as the Chairman of the Board. Mr. John F. Shettle, Jr., President,
assumed the additional office of Chief Executive Officer. AVEMCO on such
date also agreed to transfer to Mr. Condon certain programs currently in the
concept stage, which do not involve any of AVEMCO's current business
activities, and related items, subject to the agreement not to compete and a
first right of refusal with respect to insurance products related to such
programs.
3. CHIEF EXECUTIVE OFFICER AND EXECUTIVE OFFICERS. All employees of the
Registrant, including executive officers, whether under written employment
contract or not, are eligible to participate in the Registrant's group life,
health, disability, and retirement programs, including the AVEMCO
Corporation Pension Plan (defined benefit plan) and the AVEMCO Corporation
Profit Sharing Plan (defined contribution plan) according to the terms of
those plans. Both retirement plans are described elsewhere herein.
COMPENSATION COMMITTEE INTERLOCKS AND/OR INSIDER PARTICIPATION. None
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE
1. EXECUTIVE OFFICERS (OTHER THAN CHIEF EXECUTIVE OFFICER "CEO"). The cash
compensation of executive officers consists of annual salary and performance
compensation, pursuant to a contract (described elsewhere herein) which each
executive officer has with the Registrant.
SALARIES. The salaries of executive officers are based upon the officer's
current position(s) in the Registrant and the officer's responsibilities.
Prior experience in the executive's field, as well as with the Registrant,
is also taken into consideration. The Committee, in establishing salary
recommendations, also looks at prevailing salaries of executive officers of
other companies, particularly insurance companies, having comparable
positions, but in making those comparisons it takes into consideration the
fact that the Registrant's compensation policy since adoption of the
Performance Compensation Plan (initially adopted as the Executive Bonus Plan
in 1974) has been that performance compensation should constitute a
significant portion of total cash compensation of the Registrant's executive
officers. Accordingly, salaries are generally set at levels that are
substantially less than what total compensation, including performance
compensation, is expected to be.
With respect to annual salary adjustments including those made for 1996, the
Committee gives substantial consideration to the recommendations of the CEO
and considers each executive officer's salary in relationship to certain
factors, including the officer's prior year's salary, prior years' salary
increases, changes in the cost of living, changes in responsibilities, and
how such officer was rated by the CEO and by other officers in an annual
superior and peer review evaluation process that has been utilized by the
Registrant for many years. The Committee does not use any specific corporate
performance measures or weighting, and determination is therefore largely
subjective in nature.
33
<PAGE>
PERFORMANCE COMPENSATION. The Committee's initial role in setting
performance compensation, which constitutes a significant portion of total
cash compensation, is to recommend to the Board of Directors the percentage
of from 7% to 9% of net earnings as defined in the Plan in excess of the
Plan's formula earnings deductible (which earnings deductible was $3,561,000
for 1996) to be used to create the performance compensation pool. For 1996,
the percentage recommended by the Committee to the Board, and accepted by
the Board, was 9%, which resulted in a performance compensation pool from
1996 earnings of $843,000 for the 47 officer participants. This compares to
$413,000 for 46 participants in 1995, at which time the percentage was also
9%.
In determining the percentage of net earnings comprising the pool each year,
the Committee, pursuant to the terms of the Plan, considers certain factors
including net earnings, return on equity, the Registrant's Common Stock
dividend and its market price over time, the number of participants in the
Plan (the Plan covers generally all officers of the Registrant, excluding
the CEO, and its subsidiaries and not just executive officers), the total
compensation of participants, both base and performance, compensation for
comparable employees in other firms, particularly insurance-related firms,
market and economic conditions, cycles of the Registrant's business, and
employee morale. In determining individual awards and, in particular, awards
to the executive officers from such pool, the Committee considers a proposal
given to it by the CEO for allocating the pool, and also considers each
executive's duties and responsibilities, total compensation, evaluations by
both the CEO and by the executive officer's superiors and peers,
contributions to the financial success of the Registrant, and years of
service. While the Committee looks at the factors set forth, its
determination is largely subjective in nature.
STOCK OPTIONS. The Committee administers the Registrant's stock option
plans. Its policy has been to utilize the benefits it believes accrue to the
Registrant and its stockholders by the grant of stock options to executive
officers and others. All stock options require that the underlying Common
Stock be purchased at 100% of its market value on the grant date of the
options, and no exercise price of an outstanding option has ever been
lowered. The Committee determines the number of options to be granted each
year, taking into consideration the amount of stock available under the
stock option plans, as well as the general performance criteria described
elsewhere with respect to performance compensation. The CEO's
recommendations as to the allocation of stock options among executive
officers, which takes into consideration an evaluation of each executive's
contribution to the Registrant's overall performance, as well as the
evaluation given to the executive under the annual superior and peer review
process referred to above, are normally accepted by the Committee. As with
performance compensation, while the Committee looks at these factors, its
determination is largely subjective in nature, except that a numerical
superior and peer evaluation score cutoff is used by the Committee, below
which no stock option awards are made. For 1996, awards were principally
targeted toward participants who received fewer awards in the past,
particularly in light of the relatively low level of options remaining in
the Plan for award. Accordingly, only one named executive officer was
awarded stock options for 1996.
2. CHIEF EXECUTIVE OFFICER. The cash compensation of the Chief Executive
Officer consists of an annual salary and an annual performance compensation
of 2% of defined net earnings in excess
34
<PAGE>
of a minimum earnings level, pursuant to a contract (previously described)
which Mr. Condon has with the Registrant.
SALARY. In recommending Mr. Condon's salary increase, if any, to the Board,
the Committee considers his past salary, past salary increases, salaries of
CEOs of comparable insurance companies, the cost of living, and the
Registrant's net earnings. As it does in setting the percentage under the
Performance Compensation Plan for executives, the Committee considers the
performance of the Registrant, in absolute terms and relative to its
competitors, how it considers the CEO has dealt with competitive factors
compared with other CEOs in the industry, and how shareholders have fared.
It also considers the CEO's performance in planning for ways of enhancing
the future earnings and value of the Registrant. The Committee does not use
any specific corporate performance measures or weighting, but return on
equity is given significant consideration. Determination is thus largely
subjective in nature.
For 1996, based upon these factors, the Committee chose not to increase Mr.
Condon's salary above its 1995 level.
PERFORMANCE COMPENSATION. Pursuant to the terms of the Registrant's contract
with Mr. Condon, described under "Employment Contracts", Mr. Condon's
performance compensation is determined strictly by formula based upon
earnings, except when total compensation from salary and performance
compensation would exceed one million dollars. Since it did not for 1996,
the Committee made no additional decisions regarding Mr. Condon's
performance compensation.
STOCK OPTIONS. The Committee determines the stock options to be awarded to
Mr. Condon. It considers the same factors that are utilized in its review
for salary increase. While the Committee looks at these factors, its
determination is largely subjective in nature. For 1996, the Committee chose
to principally target awards to participants who received fewer options in
the past, particularly in light of the relatively low level of options
remaining in the Plan for award. Accordingly, no award was made to Mr.
Condon for 1996.
3.GENERAL CONSIDERATIONS. Salary recommendations for each year are made
prior to the beginning of the year, while performance compensation and stock
options awards are determined at the end of the year and are based on the
financial and other results for that year. Accordingly, changes in salaries
do not necessarily coincide with changes in performance compensation or
stock option awards.
The Committee's approach to executive compensation as described above has
been in effect for many years. The Committee believes that this approach,
which blends the objective determinations, such as formulas and peer and
superior evaluations, with the subjective determinations described above,
provides a flexibility that is in the best interests of the Registrant and
its shareholders.
The Compensation and Stock Option Committee
H. Lowell Davis, Chairman
Michael Collins
Steven A. Markel
Rachel B. Trinder
35
<PAGE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
AMONG AVEMCO CORPORATION, THE S&P 500 INDEX
AND THE S&P PROPERTY-CASUALTY INSURANCE INDEX
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
(dollars)
- --------------------------------------------------------------------------
Company/Index 12/91 12/92 12/93 12/94 12/95 12/96
- ---------------------------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
AVEMCO Corporation.......... 100 95 78 66 70 71
S&P 500..................... 100 108 118 120 165 203
S&P Property-Casualty Ins... 100 112 115 121 163 199
</TABLE>
* $100 invested on 12/31/91 in stock or Index, including reinvestment of
dividends.
Fiscal year ending December 31.
36
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------
PRINCIPAL SHAREHOLDERS
The following table sets forth information based upon the records of the
Registrant and filings with the Securities and Exchange Commission with respect
to each beneficial owner of more than 5% of the Registrant's outstanding voting
stock as of March 1, 1997.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
- ---------------- ----------------------------------- ----------------------- ---------
<S> <C> <C> <C>
Common Stock Vanguard/PRIMECAP Fund, Inc. 650,000 shares(1) 7.8%
P.O. Box 2600
Valley Forge, PA 19482
Common Stock Markel Corporation and Subsidiaries 855,500 shares(2) 10.2%
4551 Cox Road
Glen Allen, VA 23060
Common Stock David L. Babson & Co., Inc. 580,650 shares(3) 6.9%
One Memorial Drive
Cambridge, MA 02142
</TABLE>
/(1)/ Vanguard/PRIMECAP Fund, Inc. reported that it has sole voting power and
shared dispositive power over 650,000 shares of Common Stock of the
Registrant.
/(2)/ Markel Corporation reported that it has sole voting power and sole
dispositive power over 855,500 shares of Common Stock of the Registrant
through its ownership and control of various subsidiaries of Markel which
hold the stock directly.
/(3)/ David L. Babson & Co., Inc. reported that it is an investment advisor with
sole dispositive power over 580,650 shares of Common Stock of the
Registrant with sole voting power over 385,350 of those shares and shared
voting power over the remaining 195,300 shares.
37
<PAGE>
MANAGEMENT OWNERSHIP
The following is a table showing the shares of the Registrant's Common Stock
beneficially owned as of March 1, 1997, by each director and nominee, each of
the executive officers named below, and directors and officers of the Registrant
as a group.
<TABLE>
<CAPTION>
Name of Amount Percent
Title of Class Beneficial Owner Owned of Class
- --------------------------------------- ----------------------- ------------------------ --------
<S> <C> <C> <C>
Common Stock Michael Collins 9,000 shares *
Common Stock William P. Condon 235,804 shares/(1)(4)/ 2.7
Common Stock H. Lowell Davis 9,507 shares *
Common Stock Paul J. Hanna 25,950 shares/(5)/ *
Common Stock Arnold H. Johnson 81,950 shares *
Common Stock Steven A. Markel 5,000 shares/(3)/ *
Common Stock Thomas J. Schwab 8,751 shares/(2)/ *
Common Stock John F. Shettle, Jr. 174,641 shares /(1)(4)/ 2.0
Common Stock Rachel B. Trinder 200 shares *
Common Stock Thomas H. Chero 46,900 shares/(1)/ *
Common Stock Thomas L. Hudson 1,086 shares/(1)/ *
Common Stock John R. Yuska 98,451 shares/(1)(4)/ 1.1
All Directors and Officers as a Group 744,737 shares(6) 8.7
(15 in number) ======= ===
</TABLE>
* less than 1%
/(1)/ Includes shares of Common Stock which as of March 1, 1997, were subject to
outstanding stock options exercisable within 60 days, held by the named
executive officers as follows: Condon 67,000, Shettle, Jr. 43,000, Yuska
53,600, Chero 44,450, and Hudson 750.
/(2)/ Includes 814 shares owned by Mr. Schwab's wife.
/(3)/ Mr. Markel's shares do not include 855,500 shares owned by Markel
Corporation and subsidiaries, of which Mr. Markel is Vice Chairman. Mr.
Markel disclaims beneficial ownership of these shares.
/(4)/ Includes shares of Common Stock held by the AVEMCO Corporation Profit
Sharing Trust that each of the following individuals who serve as Trustee
are deemed to own indirectly by virtue of being a beneficiary of the
Trust, calculated on the basis of his proportional beneficial interest in
the Trust, as follows: Condon 39,061, Shettle, Jr. 6,216, Yuska 13,151.
The Trust holds 297,500 shares in the aggregate, over which the three
Trustees share voting and dispositive power.
/(5)/ Includes 450 shares owned by the Hanna Foundation Trust.
/(6)/ Includes 255,250 shares of Common Stock which as of March 1, 1997, were
subject to outstanding stock options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------
None.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------
<TABLE>
<CAPTION>
(A) (1) INDEX TO FINANCIAL STATEMENTS PAGE
<S> <C>
December 31, 1996 and 1995:
Consolidated Balance Sheets..................................... 45
For the Years Ended December 31, 1996, 1995 and 1994:
Consolidated Statements of Income............................... 47
Consolidated Statements of Stockholders' Equity................. 48
Consolidated Statements of Cash Flows........................... 49
Notes to Consolidated Financial Statements...................... 50
Independent Auditors' Report......................................... 65
(A) (2) INDEX TO FINANCIAL STATEMENT SCHEDULES
AVEMCO Corporation and Subsidiaries:
Schedule I - Summary of Investments - Other than
Investments in Related Parties................................ 66
Schedule II - Condensed Financial Information of Registrant..... 67
Schedule V - Valuation and Qualifying Accounts.................. 71
AVEMCO Insurance Company and Subsidiaries:
Schedule IV - Reinsurance....................................... 72
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations........................ 73
</TABLE>
All other schedules are omitted as the required information is inapplicable or
is presented in the Consolidated Financial Statements or related notes.
39
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- (CONT.)
<TABLE>
<CAPTION>
(A) (3) EXHIBITS
Number Description Reference
- ------ ----------- ---------
<S> <C> <C>
. Plan of acquisition, reorganization,
------------------------------------
arrangement, liquidation or succession............ Exhibit 1 to Form 8-K filed
-------------------------------------- March 6, 1997, incorporated herein
by reference
. Articles of Incorporation and Bylaws
------------------------------------
3.1 Articles of Incorporation, as amended......... Exhibit 3.1 to AVEMCO
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1989, and
incorporated herein by reference.
3.2 Bylaws, as amended........................... Exhibit 3.2 to AVEMCO Corporation's
Annual Report on Form 10-K for the
year ended December 31, 1989, and
incorporated herein by reference.
. Instruments Defining the Rights of Security
-------------------------------------------
Holders, Including Indentures
-----------------------------
4.1 Specimen certificate representing
the common stock, $.10 par value............. Exhibit 4.1 to AVEMCO
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1989, and
incorporated herein by reference.
. Voting Trust Agreement............................ N/A
----------------------
. Material Contracts
------------------
10.1 Incentive stock option plan, as amended...... Exhibit 28.A. to Form S-8
Registration Statement, File
No. 33-22520, and incorporated
herein by reference.
</TABLE>
40
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- (CONT.)
<TABLE>
<CAPTION>
Number Description Reference
- ------ ----------- ---------
<S> <C> <C>
10.2 Non-statutory stock option plan............. Exhibit 10.2 to AVEMCO
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1990, and
incorporated herein by reference.
10.3 Management contracts:
. Five most highly compensated executive officers:
a. Chairman and Chief Executive Officer... Exhibit 10.3.a to AVEMCO
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1993, and
incorporated herein by reference.
b. President and Chief Operating Officer.. Exhibit 10.3.b to AVEMCO
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1994, and
incorporated herein by reference.
c. Senior Vice President and
Chief Financial Officer................ Page 75
d. Senior Vice President - Legal.......... Page 89
e. Vice President - Business Development . Exhibit 10.3.e to AVEMCO
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1995, and
incorporated herein by reference.
. Directors:
f. Consulting agreement................... Exhibit 10.3.f to AVEMCO
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1992, and
incorporated herein by reference.
</TABLE>
41
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- (CONT.)
<TABLE>
<CAPTION>
Number Description Reference
- ------ ----------- ---------
<S> <C> <C>
g. Deferred compensation
agreement.............................. Exhibit 10.2.g to AVEMCO
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1989, and
incorporated herein by reference.
10.4 Executive Performance Compensation Plan...... Exhibit 10.4 to AVEMCO
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1992, and
incorporated herein by reference.
. Statement Regarding Computation of Per
--------------------------------------
Share Earnings
--------------
11.1 Computation/Statement................. Page 103
. Statement Regarding Computation of Ratios N/A
-----------------------------------------
. Annual Report to Security Holders, Form
---------------------------------------
10-Q or Quarterly Reports to Shareholders N/A
-----------------------------------------
. Letter Regarding Change in Accounting
-------------------------------------
Principles................................. N/A
----------
. Previously Unfiled Documents................ N/A
----------------------------
. Subsidiaries of the Registrant
------------------------------
21.1 Organizational chart................... Page 104
. Published Report Regarding Matters
----------------------------------
Submitted to Vote to Security Holders N/A
-------------------------------------
. Consent of Experts and Counsel
------------------------------
23.1 Accountants' Consent Page 105
. Power of Attorney N/A
-----------------
</TABLE>
42
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- (CONT.)
<TABLE>
<CAPTION>
Number Description Reference
- ------ ----------- ---------
<S> <C> <C>
. Information from Reports Furnished to
-------------------------------------
State Regulatory Authorities N/A
----------------------------
. Additional Exhibits
-------------------
None
(B) Reports on Form 8-K
-------------------
Letter of Intent.............................. AVEMCO Corporation Report on
Form 8-K filed January 22, 1997.
Agreement and Plan of Reorganization.......... AVEMCO Corporation Report on
Form 8-K filed March 6, 1997, and
Exhibit 1 thereto.
(C) See 14 (a)
(D) See 14 (a)
</TABLE>
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ William P. Condon /s/ John F. Shettle, Jr.
---------------------------------- -------------------------------
William P. Condon John F. Shettle, Jr.
Director and Chairman of the Board Director, President, and Chief
Date: March 25, 1997 Executive Officer
----------------------------- Date: March 25, 1997
--------------------------
/s/ John R. Yuska
----------------------------------
John R. Yuska
Senior Vice President and
Chief Financial Officer
Date: March 25, 1997
----------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Michael Collins /s/ Paul J. Hanna /s/ Thomas J. Schwab
- -------------------------- ------------------------------ -----------------------------
Michael Collins Paul J. Hanna Thomas J. Schwab
Director Director Director
Date: March 25, 1997 Date: March 25, 1997 Date: March 25, 1997
-------------------- ------------------------ -----------------------
/s/ William P. Condon /s/ Arnold H. Johnson /s/ John F. Shettle, Jr.
- -------------------------- ------------------------------ -----------------------------
William P. Condon Arnold H. Johnson John F. Shettle, Jr.
Director and Chairman Director Director, President, and
of the Board Date: March 25, 1997 Chief Executive Officer
Date: March 25, 1997 ------------------------ Date: March 25, 1997
-------------------- -----------------------
/s/ H. Lowell Davis /s/ Steven A. Markel /s/ Rachel B. Trinder
- -------------------------- ------------------------------ -----------------------------
H. Lowell Davis Steven A. Markel Rachel B. Trinder
Director Director Director
Date: March 25, 1997 Date: March 25, 1997 Date: March 25, 1997
-------------------- ------------------------ -----------------------
</TABLE>
44
<PAGE>
AVEMCO CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
- -------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Investments (note 2):
Fixed maturities,
at fair value (amortized cost $109,177,000;
$107,068,000 in 1995)....................................... $112,828,000 $112,136,000
Equity securities, at fair value (cost $10,953,000;
$20,199,000 in 1995)........................................ 10,817,000 22,524,000
Short-term investments, at cost which approximates
fair value................................................. 25,593,000 14,884,000
------------ ------------
Total investments......................................... 149,238,000 149,544,000
Cash.......................................................... 5,959,000 3,466,000
Receivables:
Premiums...................................................... 21,267,000 16,406,000
Reinsurance recoverable (note 9).............................. 9,503,000 14,292,000
Other, net.................................................... 8,341,000 8,231,000
------------ ------------
Total receivables......................................... 39,111,000 38,929,000
Deferred policy acquisition costs............................. 6,071,000 5,511,000
Prepaid reinsurance premiums (note 9)......................... 5,913,000 5,178,000
Property and equipment, at cost, less accumulated
depreciation (note 3)......................................... 7,886,000 8,051,000
Other assets, net............................................. 3,488,000 3,123,000
------------ ------------
Total assets.............................................. $217,666,000 $213,802,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1996 1995
- -------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Liabilities:
Unpaid losses and loss adjustment expenses (note 4)........... $ 43,227,000 $ 42,305,000
Unearned premiums............................................. 37,201,000 32,363,000
Accounts payable, accrued expenses, and other liabilities..... 17,797,000 16,009,000
Ceded reinsurance premiums payable............................ 1,549,000 5,047,000
Deferred income tax liabilities (note 6)...................... 653,000 1,352,000
Debt (note 7)................................................. 56,667,000 54,967,000
------------ ------------
Total liabilities......................................... 157,094,000 152,043,000
------------ ------------
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; 11,565,811 issued;
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.................... 2,320,000 4,879,000
Foreign currency translation adjustments...................... (218,000) (182,000)
Retained earnings............................................. 94,843,000 88,184,000
------------ ------------
117,242,000 112,329,000
Less treasury stock, 3,301,741 shares in 1996 and
2,901,741 in 1995, at cost.................................. (56,670,000) (50,570,000)
------------ ------------
Total stockholders' equity 60,572,000 61,759,000
------------ ------------
Contingent liabilities (note 9)
Total liabilities and stockholders' equity $217,666,000 $213,802,000
============ ============
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
AVEMCO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------- ------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Premiums earned (note 9)...................... $ 86,170,000 $ 80,458,000 $ 75,518,000
Commissions................................... 8,819,000 7,046,000 6,418,000
Net investment income (note 2)................ 8,223,000 8,498,000 8,245,000
Computer products and services................ 9,913,000 10,188,000 9,185,000
Realized gain (loss) on sale of investments
(note 2)................................... 3,244,000 575,000 (248,000)
Realized gain on subsidiary sale (note 11).... 3,307,000 -- --
Other revenues................................ 8,214,000 6,439,000 5,472,000
------------ ------------ ------------
Total revenues............................. 127,890,000 113,204,000 104,590,000
------------ ------------ ------------
Expenses:
Losses and loss adjustment expenses
(notes 4 and 9)............................ 62,866,000 55,605,000 46,310,000
Commissions (note 11)......................... 7,092,000 6,513,000 7,159,000
Interest (note 7)............................. 3,827,000 4,224,000 3,725,000
Cost of computer hardware sold................ 1,442,000 1,961,000 1,032,000
Selling, general and administrative expenses.. 36,701,000 35,799,000 32,825,000
------------ ------------ ------------
Total expenses............................. 111,928,000 104,102,000 91,051,000
------------ ------------ ------------
Earnings before income taxes.................. 15,962,000 9,102,000 13,539,000
Income taxes (note 6):
Current provision............................. 3,054,000 1,287,000 2,679,000
Deferred provision (benefit).................. 620,000 (103,000) 27,000
------------ ------------ ------------
Total income taxes......................... 3,674,000 1,184,000 2,706,000
------------ ------------ ------------
Net earnings............................... $ 12,288,000 $ 7,918,000 $ 10,833,000
============ ============ ============
Earnings per common and common
equivalent share (note 10):
Net earnings............................... $1.45 $.90 $1.20
============ ============ ============
Weighted average number of common
and common equivalent shares................. 8,478,393 8,845,857 9,019,322
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE>
AVEMCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NET
COMMON STOCK UNREALIZED FOREIGN
---------------------- ADDITIONAL APPRECIATION/ CURRENCY TOTAL
SHARES PAR PAID-IN (DEPRECIATION) TRANSLATION RETAINED TREASURY STOCKHOLDERS'
ISSUED VALUE CAPITAL ON INVESTMENTS ADJUSTMENTS EARNINGS STOCK EQUITY
---------- ---------- ----------- -------------- ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1994
Balance at beginning of
year...................... 11,534,861 $1,153,000 $18,136,000 $ 284,000 $(169,000) $77,381,000 $(42,855,000) $53,930,000
Net earnings............... -- -- -- -- -- 10,833,000 -- 10,833,000
Dividends declared ($.44
per share)................ -- -- -- -- -- (3,929,000) -- (3,929,000)
Cumulative net unrealized
appreciation on
fixed maturities at
January 1, 1994......... -- -- -- 4,922,000 -- -- -- 4,922,000
Change in net unrealized
appreciation
(depreciation) on
investments............. -- -- -- (6,048,000) -- -- -- (6,048,000)
Exercise of common stock
options................... 8,500 1,000 70,000 -- -- -- -- 71,000
Repurchase of common stock. -- -- -- -- -- -- (4,133,000) (4,133,000)
Foreign currency
translation adjustments... -- -- -- -- (36,000) -- -- (36,000)
---------- --------- --------- ---------- ----------- ----------- ---------- -----------
Balance at end of year..... 11,543,361 1,154,000 18,206,000 (842,000) (205,000) 84,285,000 (46,988,000) 55,610,000
---------- --------- --------- ---------- ----------- ----------- ---------- -----------
Year ended December 31,
1995
Net earnings............... -- -- -- -- -- 7,918,000 -- 7,918,000
Dividends declared ($.46
per share)................ -- -- -- -- -- (4,019,000) -- (4,019,000)
Change in net unrealized
appreciation on
investments.............. -- -- -- 5,721,000 -- -- -- 5,721,000
Exercise of common stock
options................... 7,800 1,000 87,000 -- -- -- -- 88,000
Repurchase of common stock. -- -- -- -- -- -- (3,582,000) (3,582,000)
Foreign currency
translation adjustments... -- -- -- -- 23,000 -- -- 23,000
---------- --------- --------- ---------- ----------- ----------- ---------- -----------
Balance at end of year..... 11,551,161 1,155,000 18,293,000 4,879,000 (182,000) 88,184,000 (50,570,000) 61,759,000
---------- --------- --------- ---------- ----------- ----------- ---------- -----------
Year ended December 31,
1996
Net earnings............... -- -- -- -- -- 12,288,000 -- 12,288,000
Dividends declared ($.48
per share)................ -- -- -- -- -- (4,022,000) -- (4,022,000)
Change in net unrealized
appreciation on
investments........ -- -- -- (2,559,000) -- -- -- (2,559,000)
Issuance of common stock... 120,000 12,000 913,000 -- -- -- -- 925,000
Exercise of common stock
options................... 14,650 2,000 124,000 -- -- -- -- 126,000
Repurchase of common stock. -- -- -- -- -- -- (7,909,000) (7,909,000)
Retirement of treasury
stock..................... (120,000) (12,000) (190,000) -- -- (1,607,000) 1,809,000 --
Foreign currency
translation adjustments... -- -- -- -- (36,000) -- -- (36,000)
---------- --------- --------- ---------- ----------- ----------- ---------- -----------
Balance at end of year..... 11,565,811 $1,157,000 $19,140,000 $ 2,320,000 $(218,000) $94,843,000 $(56,670,000) $60,572,000
========== ========== =========== =========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE>
<TABLE>
<CAPTION>
AVEMCO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 12,288,000 $ 7,918,000 $ 10,833,000
Adjustments to reconcile net earnings to cash
flows from operating activities:
Depreciation and amortization 1,679,000 1,604,000 1,348,000
Deferred tax expense (benefit) 620,000 (103,000) 27,000
Realized (gain) loss on sale of investments (3,244,000) (575,000) 248,000
Realized (gain) loss on sale of property
and equipment (128,000) 14,000 (4,000)
Realized gain on sale of subsidiary (3,307,000) -- --
Change in:
Receivables (22,000) (1,994,000) 5,329,000
Deferred policy acquisition costs (560,000) (589,000) 70,000
Prepaid reinsurance premiums (735,000) 254,000 1,626,000
Unpaid losses and loss adjustment expenses 922,000 1,103,000 (4,577,000)
Unearned premiums 4,838,000 5,362,000 (3,737,000)
Ceded reinsurance premiums payable (3,498,000) (484,000) (1,617,000)
Accounts payable, accrued expenses and other (3,071,000) (1,448,000) 2,249,000
------------ ------------ ------------
Net cash flows provided from operating
activities 5,782,000 11,062,000 11,795,000
------------ ------------ ------------
INVESTMENT ACTIVITIES:
Proceeds from sale of fixed maturities 20,934,000 23,318,000 22,747,000
Proceeds from redemption of fixed maturities 9,288,000 13,227,000 13,036,000
Proceeds from sale of equity securities 22,991,000 14,692,000 7,711,000
Purchase of fixed maturities (38,372,000) (45,225,000) (26,673,000)
Purchase of equity securities (10,729,000) (5,181,000) (14,270,000)
Net purchase of short-term investments (10,709,000) (4,614,000) (1,494,000)
Proceeds from sale of subsidiary 13,957,000 -- --
Proceeds from sale of property and equipment 185,000 9,000 11,000
Purchase of property, equipment, and long-term assets (728,000) (1,867,000) (2,699,000)
------------ ------------ ------------
Net cash flows provided from (used by)
investment activities 6,817,000 (5,641,000) (1,631,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 44,000,000 11,700,000 12,700,000
Principal payments on debt (42,300,000) (11,333,000) (12,600,000)
Proceeds from exercise of common stock options 125,000 88,000 71,000
Dividends to stockholders (4,022,000) (4,019,000) (3,929,000)
Repurchase of common stock (7,909,000) (3,582,000) (4,133,000)
------------ ------------ ------------
Net cash flows used by financing activities (10,106,000) (7,146,000) (7,891,000)
------------ ------------ ------------
Net increase (decrease) in cash 2,493,000 (1,725,000) 2,273,000
Cash, beginning of year 3,466,000 5,191,000 2,918,000
------------ ------------ ------------
Cash, end of year $ 5,959,000 $ 3,466,000 $ 5,191,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
AVEMCO CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(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.
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 software 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,
1996 and 1995, 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).
50
<PAGE>
(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
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
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. 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
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. 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.
(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.
51
<PAGE>
(2) INVESTMENTS
The following summarizes the amortized cost, unrealized gains and losses, and
fair value of investments in fixed income securities at December 31, 1996, 1995,
and 1994. 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, 1996:
Bonds $101,117,000 $3,910,000 $ 309,000 $104,718,000
Redeemable
preferred stocks 8,060,000 81,000 31,000 8,110,000
------------ ---------- ---------- ------------
Total $109,177,000 $3,991,000 $ 340,000 $112,828,000
============ ========== ========== ============
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
============ ========== ========== ============
</TABLE>
The amortized cost and estimated fair value of fixed income securities at
December 31, 1996, 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, 1996
--------------------------
Amortized Fair
Maturity Cost Value
- -------------------- ------------ ------------
<S> <C> <C>
Less than one year $ 3,344,000 $ 3,356,000
1 to 3 years 6,215,000 6,366,000
3 to 5 years 12,519,000 12,881,000
5 to 10 years 45,986,000 47,661,000
Over 10 years 41,113,000 42,564,000
------------ ------------
Total $109,177,000 $112,828,000
============ ============
</TABLE>
52
<PAGE>
The company has $7,268,000 of fixed income securities at December 31, 1996,
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.
The following summarizes the cost, unrealized gains and losses, and fair value
of investments in equity securities at December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
Unrealized
------------------------------------------------
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1996:
Common stocks $ -- $ -- $ -- $ --
Preferred stocks 10,953,000 122,000 258,000 10,817,000
----------- ---------- ---------- -----------
Total $10,953,000 $ 122,000 $ 258,000 $10,817,000
=========== ========== ========== ===========
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
=========== ========== ========== ===========
</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, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Fixed maturities $ (936,000) $3,419,000 $(4,995,000)
Equity securities (1,623,000) 2,302,000 (1,053,000)
----------- ---------- -----------
Net change for year (2,559,000) 5,721,000 (6,048,000)
Cumulative net unrealized
appreciation on fixed matu-
rities at January 1, 1994 -- -- 4,922,000
Net unrealized appreciation,
beginning of year 4,879,000 (842,000) 284,000
----------- ---------- -----------
Net unrealized appreciation
(depreciation), end of year $ 2,320,000 $4,879,000 $ (842,000)
=========== ========== ===========
</TABLE>
53
<PAGE>
Net investment income consists of the following for the years ended December 31,
1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- -----------
<S> <C> <C> <C>
Fixed maturities $ 6,616,000 $6,496,000 $ 7,125,000
Equity securities 984,000 1,225,000 998,000
Short-term investments 1,083,000 1,177,000 522,000
----------- ---------- -----------
Gross investment income 8,683,000 8,898,000 8,645,000
Investment expenses (460,000) (400,000) (400,000)
----------- ---------- -----------
Net investment income $ 8,223,000 $8,498,000 $ 8,245,000
=========== ========== ===========
</TABLE>
Realized gains (losses), before taxes, on the sale of investment securities are
as follows for the years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- ----------
<S> <C> <C> <C>
Fixed maturities $ 230,000 $382,000 $(147,000)
Equity securities 3,014,000 193,000 (101,000)
---------- -------- ---------
Net realized gains (losses) $3,244,000 $575,000 $(248,000)
========== ======== =========
</TABLE>
Proceeds from the sale and redemption of fixed income securities during 1996,
1995, and 1994, were $30,222,000, $36,545,000, and $35,783,000, respectively.
Gross gains of $523,000, $492,000, and $452,000 in 1996, 1995, and 1994,
respectively, and gross losses of $293,000, $110,000, and $599,000, in 1996,
1995, and 1994, respectively, were realized from these transactions.
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995, consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Buildings and improvements $ 6,583,000 $ 6,128,000
Furniture, fixtures, and equipment 9,841,000 9,819,000
----------- -----------
16,424,000 15,947,000
Less accumulated depreciation (8,538,000) (7,896,000)
----------- -----------
Property and equipment, net $ 7,886,000 $ 8,051,000
=========== ===========
</TABLE>
For the years ended December 31, 1996, 1995, and 1994, depreciation expense was
$1,284,000, $1,221,000, and $1,091,000, respectively.
54
<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, 1987 through 1996,
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 1987 through 1995, and
supplemental gross unpaid losses and loss adjustment expense information.
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net unpaid losses and loss
adjustment expenses $41,170,000 $37,846,000 $38,955,000 $33,146,000 $24,957,000
Cumulative paid losses and
loss adjustment expenses:
One year later 20,932,000 17,689,000 17,145,000 16,350,000 14,137,000
Two years later 26,950,000 25,364,000 26,118,000 22,766,000 17,524,000
Three years later 29,483,000 30,043,000 30,015,000 24,516,000 21,791,000
Four years later 31,463,000 32,107,000 30,671,000 27,415,000 23,063,000
Five years later 32,538,000 31,822,000 33,300,000 27,969,000 23,952,000
Six years later 31,844,000 33,580,000 33,803,000 28,373,000
Seven years later 33,485,000 33,862,000 34,128,000
Eight years later 33,739,000 33,940,000
Nine years later 33,801,000
Net unpaid losses and loss
adjustment expenses
re-estimated as of:
One year later 37,447,000 36,147,000 36,145,000 27,373,000 23,624,000
Two years later 36,000,000 35,483,000 32,946,000 27,728,000 24,066,000
Three years later 34,884,000 34,013,000 33,464,000 27,904,000 23,886,000
Four years later 33,817,000 34,531,000 33,458,000 28,277,000 24,061,000
Five years later 34,365,000 34,106,000 33,958,000 28,384,000 24,443,000
Six years later 33,985,000 34,178,000 34,092,000 28,669,000
Seven years later 34,069,000 34,050,000 34,401,000
Eight years later 33,927,000 34,179,000
Nine years later 34,039,000
Net cumulative redundancy
(deficiency) $ 7,131,000 $ 3,667,000 $ 4,554,000 $ 4,477,000 $ 514,000
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net unpaid losses and loss
adjustment expenses $26,663,000 $29,958,000 $31,137,000 $32,933,000 $35,349,000
Cumulative paid losses and
loss adjustment expenses:
One year later 12,263,000 16,897,000 20,786,000 22,216,000
Two years later 19,262,000 22,805,000 27,052,000
Three years later 21,298,000 25,676,000
Four years later 22,557,000
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 24,299,000 27,011,000 29,989,000 31,799,000
Two years later 22,903,000 27,535,000 31,520,000
Three years later 22,949,000 28,614,000
Four years later 23,284,000
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Net cumulative redundancy (deficiency) $ 3,379,000 $ 1,344,000 $ (383,000) $ 1,134,000
============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Gross unpaid losses and loss adjustment
expenses.......................................... $41,202,000 $42,305,000 $43,227,000
Reinsurance recoverable on unpaid losses
and loss adjustment expenses....................... 10,065,000 9,372,000 7,878,000
----------- ----------- -----------
Net unpaid losses and loss adjustment
expenses.......................................... $31,137,000 $32,933,000 $35,349,000
=========== =========== ===========
Re-estimated gross unpaid losses and loss adjustment
expenses.......................................... $39,067,000 $38,997,000
Re-estimated reinsurance recoverable on unpaid
losses and loss adjustment expenses................ 7,547,000 7,198,000
----------- -----------
Re-estimated net unpaid losses and loss adjustment
expenses.......................................... $31,520,000 $31,799,000
=========== ===========
Gross cumulative redundancy........................ $ 2,135,000 $ 3,308,000
=========== ===========
</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.
55
<PAGE>
(4) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (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,
--------------------------------------
1996 1995 1994
----------- ------------ ----------
<S> <C> <C> <C>
Net unpaid losses and loss adjustment
expenses, beginning of year............. $32,933,000 $31,137,000 $29,958,000
----------- ----------- -----------
Losses and loss adjustment expenses:
Provision for insured events of
the current year...................... 64,000,000 56,753,000 49,257,000
Decrease in provision for insured
events of prior years................. (1,134,000) (1,148,000) (2,947,000)
----------- ----------- -----------
Total losses and loss adjustment
expenses........................... 62,866,000 55,605,000 46,310,000
----------- ----------- -----------
Payments:................................
Losses and loss adjustment expenses
attributable to insured events of
the current year...................... 38,234,000 33,023,000 28,234,000
Losses and loss adjustment expenses
attributable to insured events of
prior years........................... 22,216,000 20,786,000 16,897,000
----------- ----------- -----------
Total payments....................... 60,450,000 53,809,000 45,131,000
----------- ----------- -----------
Net unpaid losses and loss adjustment
expenses, end of year................... 35,349,000 32,933,000 31,137,000
Reinsurance recoverable on unpaid
losses and loss adjustment expenses,
end of year............................. 7,878,000 9,372,000 10,065,000
----------- ----------- -----------
Gross unpaid losses and loss adjustment
expenses, end of year................... $43,227,000 $42,305,000 $41,202,000
=========== =========== ===========
</TABLE>
(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
56
<PAGE>
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 not to voluntarily terminate emloyment without
the consent 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, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------- ------------------------------ ------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ---------------- --------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 899,300 $ 17.19 910,025 $ 17.18 877,925 $ 17.33
Granted 45,600 15.25 9,000 16.4375 51,000 13.625
Exercised (14,650) 8.54 (7,800) 11.15 (8,500) 8.42
Cancelled (61,850) 20.02 (11,925) 20.10 (10,400) 19.51
------------ ------- -------
Outstanding at
year-end 868,400 $ 17.03 899,300 $ 17.19 910,025 $ 17.18
============ ======= =======
Exercisable at
year-end 769,650 $ 17.03 747,200 $ 16.67 629,725 $ 16.07
============ ======= =======
</TABLE>
The fair value of options granted during 1996, 1995, and 1994 were $4.69, $4.91,
and $5.39, respectively.
Outstanding options at December 31, 1996, consist of the following:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Range of Number Weighted-Avg. Number
Exercise Outstanding Remaining Weighted-Avg Exercisable Weighted-Avg.
Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.00-13.99 234,075 1.94 $ 11.95 215,075 $ 11.80
14.00-17.99 407,575 3.84 16.12 355,675 16.22
18.00-21.99 52,600 6.92 18.50 39,250 18.50
$22.00-26.00 174,150 5.25 25.55 159,650 25.53
-------- -------
868,400 3.80 $ 17.03 769,650 $ 17.03
======== =======
</TABLE>
57
<PAGE>
The intrinsic value method was applied in accounting for stock option activity.
Accordingly, no compensation cost is recognized in the consolidated statements
of income. Had compensation cost been determined consistent with the fair value
method, the proforma net earnings and earnings per share impact, if any, would
have been immaterial.
(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>
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Expected tax rate 35.0% 35.0% 35.0%
Effect on tax rate resulting from:
Tax exempt income on securities (11.3) (18.8) (13.7)
Allowable dividend exclusion (2.0) (3.7) (2.3)
Other 1.3 .5 1.0
---------- ----------- ----------
Effective tax rate 23.0% 13.0% 20.0%
========== =========== ==========
</TABLE>
Deferred income tax assets and liabilities are comprised of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Deferred income tax assets:
Discounted unpaid loss and loss adjustment
expenses $ 841,000 $ 1,120,000 $1,059,000
Unearned premiums reduction 2,151,000 1,849,000 1,501,000
California Proposition 103 deferral 105,000 132,000 1,016,000
Alternative minimum tax credit carryforwards 653,000 927,000 121,000
Unrealized depreciation on investments -- -- 434,000
Other 172,000 262,000 254,000
---------- ----------- ----------
Gross deferred income tax assets 3,922,000 4,290,000 4,385,000
---------- ----------- ----------
Deferred income tax liabilities:
Deferred policy acquisition costs 2,064,000 1,874,000 1,674,000
Property and equipment 856,000 859,000 860,000
Investments 459,000 395,000 359,000
Unrealized appreciation on investments 1,196,000 2,514,000 --
---------- ----------- ----------
Gross deferred income tax liabilities 4,575,000 5,642,000 2,893,000
---------- ----------- ----------
Net deferred income tax assets (liabilities) $ (653,000) $(1,352,000) $1,492,000
========== =========== ==========
</TABLE>
A valuation allowance as of December 31, 1996 and 1995, 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 deferred income tax assets.
State income taxes, which are included in the current income tax provisions,
were $780,000, $405,000, and $395,000 in 1996, 1995, and 1994, respectively.
Federal and state income taxes paid in 1996, 1995, and 1994 were $2,686,000,
$944,000, and $2,801,000, respectively.
58
<PAGE>
(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, 1996, was 7.08%. 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. $53,000,000 was
drawn under this credit facility at December 31, 1996.
The revised credit facility requires the company to maintain a consolidated net
worth, as defined, of $48,895,000. Dividends to stockholders in any one year
may not exceed 53% 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, 1996, was 7.28%. At December 31, 1996, the
outstanding principal amount of the loan was $3,667,000. Principal payments for
the next two years ending December 31, 1998, are $2,167,000 in 1997, and
$1,500,000 in 1998.
Interest paid on all debt in 1996, 1995, and 1994, was $3,918,000, $4,031,000,
and $3,915,000, 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 (credit) amounted to $(590,000), $512,000, and $430,000 in
1996, 1995, and 1994, respectively. A curtailment gain of $1,044,000 was
recognized in 1996 as a result of the
59
<PAGE>
company's decision to eliminate certain future service time credits. The
following summarizes the plan's status at December 31:
Actuarial present value of pension benefit obligations:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Vested benefit obligation $(4,352,000) $(4,383,000) $(3,930,000)
Non-vested benefit obligation (277,000) (191,000) (93,000)
----------- ----------- -----------
Accumulated benefit obligation (4,629,000) (4,574,000) (4,023,000)
Effect of projected future
compensation increases (458,000) (2,013,000) (1,414,000)
----------- ----------- -----------
Projected benefit obligation (5,087,000) (6,587,000) (5,437,000)
Fair value of plan assets 6,995,000 5,613,000 4,296,000
Unrecognized net prior obligation 53,000 209,000 236,000
Unrecognized prior service cost 27,000 497,000 557,000
Unrecognized net (gain) loss (1,423,000) 147,000 248,000
----------- ----------- -----------
Prepaid (accrued) pension cost $ 565,000 $ (121,000) $ (100,000)
=========== =========== ===========
</TABLE>
Net periodic pension expense (credit) for the years ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Service cost $ 459,000 $ 378,000 $ 328,000
Interest cost 481,000 422,000 376,000
Actual return on plan assets (534,000) (376,000) (362,000)
Amortization of prior service cost 21,000 61,000 61,000
Amortization of net prior obligation 27,000 27,000 27,000
Gain from curtailment (1,044,000) -- --
----------- ----------- -----------
Net periodic pension expense (credit) $ (590,000) $ 512,000 $ 430,000
=========== =========== ===========
Rate assumptions:
1996 1995 1994
----------- ----------- -----------
Average discount rate 8.0% 7.25% 7.5%
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, 1996, 1995, and 1994, the company's contribution to the plan
was $491,000, $420,000, and $709,000 respectively.
60
<PAGE>
(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.
A summary of reinsurance activity follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Direct premiums written $ 94,487,000 $ 79,602,000 $ 74,850,000
Assumed premiums written 12,478,000 20,546,000 15,802,000
Ceded premiums written (14,719,000) (14,608,000) (17,202,000)
------------ ------------ ------------
Net premiums written $ 92,246,000 $ 85,540,000 $ 73,450,000
============ ============ ============
Direct earned premiums $ 90,093,000 $ 76,218,000 $ 77,521,000
Assumed earned premiums 12,070,000 18,580,000 16,806,000
Ceded earned premiums (15,993,000) (14,340,000) (18,809,000)
------------ ------------ ------------
Net earned premiums $ 86,170,000 $ 80,458,000 $ 75,518,000
============ ============ ============
Losses and loss adjustment expenses $ 72,607,000 $ 64,418,000 $ 57,668,000
Reinsurance recoveries (9,741,000) (8,813,000) (11,358,000)
------------ ------------ ------------
Net losses and loss adjustment expenses $ 62,866,000 $ 55,605,000 $ 46,310,000
============ ============ ============
</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
$9,285,000 and $8,498,000 of irrevocable letters of credit and other funds from
reinsurers at December 31, 1996 and 1995, 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, 1996, the
company had repurchased 6,727,380 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 8,264,070 shares of its common stock
outstanding on December 31, 1996.
61
<PAGE>
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, 1996, the maximum dividend payout which could be made during
1997 without prior approval is $7,667,000. During 1996 and 1995, the company
received annual dividends of $7,400,000 and $7,200,000, respectively, 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, 1996 and 1995, was $76,669,000 and $73,808,000, respectively.
(11) SUMMARY SUPPLEMENTAL FINANCIAL DATA WITH RESPECT TO INSURANCE SUBSIDIARY
Following are the consolidated financial summaries of the AVEMCO Insurance
Company and subsidiaries, which is the principal subsidiary of AVEMCO
Corporation.
AVEMCO Insurance Company and Subsidiaries
Consolidated Summaries of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Revenues:
Premiums earned $ 86,170,000 $80,458,000 $75,518,000
Net investment income 6,638,000 6,988,000 6,952,000
Commissions on reinsurance ceded 3,969,000 3,586,000 4,624,000
Realized investment gains (losses) 2,218,000 390,000 (301,000)
Realized gain on subsidiary sale 3,307,000 -- --
Other revenues 145,000 152,000 65,000
------------ ----------- -----------
Total revenues 102,447,000 91,574,000 86,858,000
------------ ----------- -----------
Expenses:
Losses and loss adjustment expenses 62,866,000 55,605,000 46,310,000
Commissions 9,599,000 8,495,000 9,142,000
Other expenses 15,179,000 15,882,000 16,480,000
------------ ----------- -----------
Total expenses 87,644,000 79,982,000 71,932,000
------------ ----------- -----------
Earnings before income taxes 14,803,000 11,592,000 14,926,000
Income taxes 3,705,000 2,426,000 3,251,000
------------ ----------- -----------
Net earnings $ 11,098,000 $ 9,166,000 $11,675,000
============ =========== ===========
</TABLE>
62
<PAGE>
AVEMCO Insurance Company and Subsidiaries
Consolidated Summary Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Assets:
Investments $125,555,000 $125,399,000 $114,104,000
Cash 895,000 86,000 460,000
Premiums and other receivables 28,723,000 23,113,000 17,488,000
Reinsurance recoverable 9,503,000 14,292,000 16,903,000
Deferred policy acquisition costs 6,071,000 5,511,000 4,922,000
Prepaid reinsurance premiums 5,913,000 5,178,000 4,924,000
Other assets 183,000 137,000 2,217,000
------------ ------------ ------------
Total assets $176,843,000 $173,716,000 $161,018,000
============ ============ ============
Liabilities and Stockholder's Equity:
Unpaid losses and expenses $ 43,227,000 $ 42,305,000 $ 41,202,000
Unearned premiums 37,201,000 32,363,000 27,001,000
Ceded reinsurance payable 1,549,000 5,045,000 5,503,000
Other liabilities 4,208,000 4,977,000 4,855,000
------------ ------------ ------------
Total liabilities 86,185,000 84,690,000 78,561,000
Total stockholder's equity 90,658,000 89,026,000 82,457,000
------------ ------------ ------------
Total liabilities and stockholder's equity $176,843,000 $173,716,000 $161,018,000
============ ============ ============
</TABLE>
Policy acquisition costs amortized for the years ended December 31, 1996, 1995,
and 1994, were $16,421,000, $14,722,000, and $15,488,000, respectively, which
includes $2,782,000, $1,982,000, and $1,983,000 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 $10,439,000, $8,098,000, and
$11,751,000 for the years ended December 31, 1996, 1995, and 1994, 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 sold its National Assurance Underwriters, Inc.,
subsidiary during 1996 while retaining all that subsidiary's insurance business.
The sale generated a $3.3 million realized gain.
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 were made in 1996.
63
<PAGE>
(12) SUBSEQUENT EVENT
On January 17, 1997, AVEMCO and HCC Insurance Holdings, Inc., ("HCCH") jointly
announced that they had signed a Letter of Intent to merge AVEMCO with a wholly-
owned subsidiary of HCCH in a stock-for-stock transaction, with AVEMCO becoming
a wholly-owned subsidiary of HCCH. On February 28, 1997, AVEMCO and HCCH
jointly announced that the Boards of Directors of AVEMCO and HCCH had executed
an Agreement and Plan of Reorganization (the "Agreement"). Pursuant to the
terms of the Agreement, each share of AVEMCO's common stock will be exchanged
for one share of HCCH's common stock.
The proposed transaction is intended to be accounted for as a pooling of
interests and to be a nontaxable exchange to AVEMCO's shareholders. It is
subject to various conditions, including receipt of required regulatory
approvals and the approval of the transaction by shareholders of both AVEMCO and
HCCH. A special shareholders' meeting is anticipated to be held in the second
quarter of 1997, and a proxy statement describing the transaction in detail is
expected to be submitted to the shareholders shortly. There can be no assurance
that the conditions to the proposed merger will be satisfied or that the
shareholders will approve the transaction.
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The quarterly results for the three years ended December 31, 1996, 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>
1996 by Quarter
- ---------------
First $ 28,378,000 $ 3,409,000 $ 2,687,000 $ .31
Second 33,146,000 6,420,000 4,702,000 .55
Third 34,391,000 3,059,000 2,419,000 .29
Fourth 31,975,000 3,074,000 2,480,000 .30
------------ ----------- ----------- -----
Annual $127,890,000 $15,962,000 $12,288,000 $1.45
============ =========== =========== =====
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
============ =========== =========== =====
</TABLE>
64
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
AVEMCO Corporation:
We have audited the consolidated financial statements of AVEMCO Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
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."
/s/KPMG Peat Marwick LLP
Washington, D.C.
January 31, 1997 (February 28, 1997, as to Note 12)
65
<PAGE>
<TABLE>
<CAPTION>
AVEMCO Corporation and Subsidiaries Schedule I
Summary of Investments-Other Than Investments in Related Parties
December 31, 1996
- --------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D
- --------------------------------------------------------------------------------------------------------------
Amount at which
Fair shown in the
Type of Investment Cost Value balance sheet
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
Federal government and government
agencies and authorities $ 8,570,000 $ 8,769,000 $ 8,769,000
States, municipalities and political subdivisions 92,441,000 $ 95,843,000 $ 95,843,000
Foreign governments -- -- --
Public utilities -- -- --
Convertibles and bonds with warrants attached -- -- --
All other corporate bonds 106,000 106,000 106,000
Certificates of deposit -- -- --
Redeemable preferred stocks 8,060,000 8,110,000 8,110,000
------------ ----------- -----------
Total fixed maturities 109,177,000 112,828,000 112,828,000
Equity Securities:
Common Stocks:
Public utilities -- -- --
Banks, trust, and insurance companies -- -- --
Industrial, miscellaneous, and all other -- -- --
Nonredeemable preferred stocks 10,953,000 10,817,000 10,817,000
------------ ----------- -----------
Total equity securities 10,953,000 10,817,000 10,817,000
Mortgage loans on real estate -- XXXXXXXXXXX --
Real estate, at cost -- XXXXXXXXXXX --
Policy loans -- XXXXXXXXXXX --
Other long-term investments -- XXXXXXXXXXX --
Short-term investments, at cost which approximates fairs value 25,593,000 XXXXXXXXXXX 25,593,000
------------ ----------- -----------
Total investments $145,723,000 $149,238,000
------------ ------------
</TABLE>
Fixed maturities and equity securities are carried at fair value.
66
<PAGE>
<TABLE>
<CAPTION>
AVEMCO Corporation SCHEDULE II
(Parent Company) 1/4
Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31, 1996 and 1995
ASSETS 1996 1995
------------- -------------
<S> <C> <C>
Fixed maturities,
at fair value (amortized cost $19,585,000, $18,877,000 in 1995)................ $ 20,320,000 $ 19,816,000
Equity securities, at fair value (cost $1,273,000, $2,446,000 in 1995)............ 1,313,000 3,089,000
Short-term investments, at cost, which approximates fair value.................... 1,043,000 546,000
Cash (overdraft).................................................................. (32,000) 181,000
Property and equipment, at cost, less accumulated depreciation of
$5,026,000 in 1996 and $4,776,000 in 1995..................................... 3,593,000 4,032,000
Investment in subsidiaries........................................................ 103,430,000 105,480,000
Other assets, net................................................................. 1,347,000 725,000
------------ ------------
TOTAL ASSETS................................................................ $131,014,000 $133,869,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accrued expenses and other liabilities............................................ $ 5,505,000 $ 5,095,000
Amounts due to subsidiaries....................................................... 8,270,000 12,048,000
Debt.............................................................................. 56,667,000 54,967,000
------------ ------------
TOTAL LIABILITIES........................................................... 70,442,000 72,110,000
------------ ------------
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; 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........................................ 2,320,000 4,879,000
Foreign currency translation adjustments.......................................... (218,000) (182,000)
Retained earnings................................................................. 94,843,000 88,184,000
------------ ------------
117,242,000 112,329,000
Less treasury stock, 3,301,741 shares in 1996; 2,901,741 shares in 1995, at cost.. 56,670,000 (50,570,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY........................................................ 60,572,000 61,759,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................ $131,014,000 $133,869,000
============ ============
See accompanying note to condensed financial statements
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
AVEMCO Corporation SCHEDULE II
(Parent Company) 2/4
Condensed Financial Information of Registrant
Condensed Statements of Income
Years ended December 31,
REVENUES 1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net investment income.................................................... $ 1,395,000 $ 1,412,000 $ 1,372,000
Realized gain on sale of investments..................................... 1,027,000 186,000 52,000
Management fees from subsidiaries........................................ 800,000 600,000 1,000,000
Other charges to subsidiaries............................................ 563,000 542,000 555,000
Other income (loss)...................................................... 173,000 (11,000) 4,000
----------- ----------- -----------
TOTAL REVENUES....................................................... 3,958,000 2,729,000 2,983,000
----------- ----------- -----------
EXPENSES
General and administrative............................................... 3,003,000 2,796,000 2,945,000
Depreciation and amortization............................................ 593,000 551,000 558,000
Interest................................................................. 3,859,000 4,507,000 3,827,000
----------- ----------- -----------
TOTAL EXPENSES....................................................... 7,455,000 7,854,000 7,330,000
----------- ----------- -----------
Loss before income tax benefit and equity in net earnings of subsidiaries.. (3,497,000) (5,125,000) (4,347,000)
Income tax benefit......................................................... 1,674,000 1,977,000 1,574,000
----------- ----------- -----------
Loss before equity in net earnings of subsidiaries......................... (1,823,000) (3,148,000) (2,773,000)
Equity in net earnings of subsidiaries..................................... 14,111,000 11,066,000 13,606,000
----------- ----------- -----------
NET EARNINGS......................................................... $12,288,000 $ 7,918,000 $10,833,000
=========== =========== ===========
See accompanying note to condensed financial statements
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
AVEMCO Corporation SCHEDULE II
(Parent Company) 3/4
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
Years ended December 31,
OPERATING ACTIVITIES 1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net earnings........................................................ $ 12,288,000 $ 7,918,000 $ 10,833,000
Adjustments to reconcile net earnings to cash flows provided
from (used by) operating activities:
Equity in net earnings of subsidiaries............................ (14,111,000) (11,066,000) (13,606,000)
Dividends received from subsidiary companies...................... 15,025,000 7,575,000 7,200,000
Other............................................................. (4,253,000) 3,307,000 6,056,000
------------ ------------ ------------
Net cash flows provided from operating activities............. 8,949,000 7,734,000 10,483,000
------------ ------------ ------------
INVESTMENT ACTIVITIES
Sale or maturity of investments................................... 10,268,000 6,997,000 3,372,000
Purchase of investments........................................... (9,251,000) (6,994,000) (3,988,000)
Net purchase of property, equipment, and long-term assets......... (73,000) (471,000) (2,028,000)
------------ ------------ ------------
Net cash flows provided from (used by) investment activities.. 944,000 (468,000) (2,644,000)
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from borrowings.......................................... 44,000,000 11,700,000 12,700,000
Principal payments on debt........................................ (42,300,000) (11,333,000) (12,600,000)
Proceeds from issuance of common stock............................ 125,000 88,000 71,000
Dividends to stockholders......................................... (4,022,000) (4,019,000) (3,929,000)
Repurchase of common stock........................................ (7,909,000) (3,582,000) (4,133,000)
------------ ------------ ------------
Net cash flows used by financing activities................... (10,106,000) (7,146,000) (7,891,000)
------------ ------------ ------------
Net increase (decrease) in cash..................................... (213,000) 120,000 (52,000)
Cash, beginning of year............................................. 181,000 61,000 113,000
------------ ------------ ------------
Cash (overdraft), end of year....................................... $ (32,000) $ 181,000 $ 61,000
============ ============ ============
See accompanying note to condensed financial statements
</TABLE>
69
<PAGE>
AVEMCO Corporation SCHEDULE II
(Parent Company) 4/4
Condensed Financial Information of Registrant
Note to Condensed Financial Statements
December 31, 1996
The condensed financial statements of AVEMCO Corporation (parent company) should
be read in conjunction with the consolidated financial statements and
accompanying notes thereto of AVEMCO Corporation and subsidiaries on pages 45
through 64.
70
<PAGE>
Schedule V
AVEMCO Corporation and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------
Additions
--------
Charged Charged/
Balance at to costs credited Balance at
beginning and to other close
Description of period expenses accounts Deductions of period
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVEMCO Corporation and Subsidiaries
DECEMBER 31, 1996:
Net unrealized appreciation
on investments $4,879,000 $ -0- $ -0- $ (2,559,000) $2,320,000
========== ============ ============= =============== ==========
DECEMBER 31, 1995:
Net unrealized appreciation
(depreciation) on investments $ (842,000) $ -0- $5,721,000/2/ $ -0- $4,879,000
========== ============ ============= =============== ==========
DECEMBER 31, 1994:
Net unrealized appreciation
(depreciation) on investments $ 284,000 $ -0- $4,922,000/1/ $(6,048,000)/2/ $ (842,000)
========== ============ ============= =============== ==========
</TABLE>
/1/ Cumulative net unrealized appreciation on fixed maturities at January 1,
1994
/2/ Increase (Decrease) of Stockholders' Equity
71
<PAGE>
<TABLE>
<CAPTION>
Schedule IV
AVEMCO Insurance Company and Subsidiaries
(a Wholly-owned Subsidiary of AVEMCO Corporation)
REINSURANCE
Years Ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed Net of amount
Gross other from other amount assumed
amount companies companies earned to net
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996:
Life insurance in force $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
Premiums:
Life insurance $ -- $ -- $ -- $ -- --
Accident and health insurance 715,000 41,000 8,855,000 9,529,000 93%
Property and liability insurance 89,378,000 15,952,000 3,215,000 76,641,000 4%
Title insurance -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total premiums $90,093,000 $15,993,000 $12,070,000 $86,170,000 14%
========== ========== ========== ========== ==========
1995:
Life insurance in force $ -- $ -- $ -- $ -- --
========== ========== ========== ========== ==========
Premiums:
Life insurance $ -- $ -- $ -- $ -- --
Accident and Health insurance 471,000 103,000 8,684,000 9,052,000 96%
Property and liability insurance 75,747,000 14,237,000 9,896,000 71,406,000 14%
Title insurance -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total premiums $76,218,000 $14,340,000 $18,580,000 80,458,000 23%
========== ========== ========== ========== ==========
1994:
Life insurance in force $ -- $ -- $ -- $ -- --
========== ========== ========== ========== ==========
Premiums:
Life insurance $ -- $ -- $ -- $ -- --
Accident and Health insurance 24,000 1,408,000 15,089,000 13,705,000 110%
Property and liability insurance 77,497,000 17,401,000 1,717,000 61,813,000 3%
Title insurance -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total premiums $77,521,000 $18,809,000 $16,806,000 $75,518,000 22%
========== ========== ========== ========== ==========
</TABLE>
Note: Summary financial data with respect to the insurance subsidiary is
presented in Note 11 to the consolidated financial statements of AVEMCO
Corporation and Subsidiaries.
72
<PAGE>
Schedule VI
<TABLE>
<CAPTION>
AVEMCO Insurance Company and Subsidiaries
(a Wholly-owned Subsidiary of AVEMCO Corporation)
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
Years ended December 31, 1996, 1995 and 1994
- ------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- ------------------------------------------------------------------------------------------
Unpaid Discount
Deferred losses and if any
Policy Loss Deducted
Acquisition Adjustment in Unearned Earned
Segment Cost Expenses Column C Premiums Premiums
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Property and liability
insurance $6,071,000 $43,227,000 $-0- $37,201,000 $86,170,000
========== =========== ======== =========== ===========
1995
Property and liability
insurance $5,511,000 $42,305,000 $-0- $32,363,000 $80,458,000
========== =========== ======== =========== ===========
1994
Property and liability
insurance $4,922,000 $41,202,000 $-0- $27,001,000 $75,518,000
========== =========== ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Column G Column H Column I Column J Column K
- ----------------------------------------------------------------------------------------------------------
Amortization Net
of Paid
Losses and Deferred Losses
Net Loss Adjustment Policy and Loss Net
Investment Expense Incurred Acquisition Adustment Premiums
Segment Income Related to Costs Expenses Written
- ----------------------------------------------------------------------------------------------------------
(1) (2)
Current Prior
Year Year
------- ------
<S> <C> <C> <C> <C> <C> <C>
1996
Property and liability
insurance $6,638,000 $64,000,000 $(1,134,000) $16,421,000 $60,450,000 $92,246,000
========== =========== =========== =========== =========== ===========
1995
Property and liability
insurance $6,988,000 $56,753,000 $(1,148,000) $14,722,000 $53,809,000 $85,540,000
========== =========== =========== =========== =========== ===========
1994
Property and liability
insurance $6,952,000 $49,257,000 $(2,947,000) $15,488,000 $45,131,000 $73,450,000
========== =========== =========== =========== =========== ===========
</TABLE>
Note:Column I, Amortization of Deferred Policy Acquisition Costs, includes
$2,782,000, $1,982,000, and $1,983,000 of commission expense paid to affiliates
for the years ended December 31, 1996, 1995, and 1994, respectively, which were
eliminated in consolidation.
73
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- -------------- ----------------------------------------------------- ----
<S> <C> <C>
10.3 Management Contracts:
c. Senior Vice President and Chief Financial Officer. 75
d. Senior Vice President - Legal..................... 89
11.1 Statement Regarding Computation of per Share Earnings 103
21.1 Organizational Chart................................. 104
23.1 Independent Auditors' Consent........................ 105
</TABLE>
74
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT dated January 1, 1996, by and between AVEMCO
---------------
CORPORATION, a Delaware corporation ("AVEMCO"), for itself and on behalf of its
subsidiaries, and John R. Yuska ("Employee").
-------------
In consideration of the covenants, agreements and representations
hereinafter contained, AVEMCO and Employee hereby agree as follows:
1. EMPLOYMENT. AVEMCO hereby employs Employee as Senior Vice President
---------- ---------------------
and Chief Financial Officer, AVEMCO Corporation, and/or any other reasonably
- -----------------------------------------------
equivalent or additional position with AVEMCO as AVEMCO may require. Employee
accepts employment upon the terms and conditions of this Employment Agreement.
2. TERM. The term of this Employment Agreement shall begin on
----
January 1, 1996, and shall end on December 31, 1996.
- --------------- -----------------
3. COMPENSATION. During the term of this Employment Agreement, AVEMCO
------------
shall pay Employee a base annual salary of One Hundred Thirty-Four Thousand
--------------------------------
($134,000) payable on a bi-weekly basis. Such base annual salary shall be
- ---------
subject to discretionary, periodic review for potential increase by AVEMCO and
shall be prorated for any portion of a year employed, if less than a full annual
period. In addition, Employee shall be eligible to participate in AVEMCO's
Pension Plan, Profit Sharing Plan, and other employee benefit plans including
life, health and disability insurance plans, vacation plans, and disability
leave plans. Employee acknowledges that Employee has received, read, and
understands said plans and, further, understands that such plans may be modified
or terminated at any time by the Board of Directors of AVEMCO, without affecting
the validity of this Employment Agreement.
-1-
<PAGE>
Employee further acknowledges receipt of the Employee Handbook, AVEMCO AND YOU.
4. DUTIES. Employee agrees to faithfully perform the duties normally
------
attendant upon Employee's position with AVEMCO, as set forth in Section 1
hereof, in accordance with guidelines as may be issued by AVEMCO from time to
time. Employee shall devote Employee's entire business time, attention, and
energies to AVEMCO's business and shall not, during the term of this Employment
Agreement, be engaged in any other business activity, whether or not such
business activity is pursued for gain, profit, or other pecuniary advantage.
5. BUSINESS PROPERTY/NONDISCLOSURE.
-------------------------------
(a) Employee fully acknowledges that his employment with AVEMCO will
necessarily equip Employee with specialized and confidential knowledge and
information which if divulged and used in competition with AVEMCO will cause
serious harm and disadvantage to AVEMCO. Therefore, Employee agrees that:
(1) All inventions and improvements relating in any manner to
AVEMCO's business during Employee's engagement by AVEMCO, whether said
inventions or improvements were made, conceived, or discovered by Employee as
sole inventor or joint inventor with another or otherwise, or whether made,
conceived, or discovered in or out of usual working hours of or upon the
premises of AVEMCO or elsewhere, together with all patents, copyrights, and
trade secret rights of said inventions and improvements throughout the world,
shall be the sole property of AVEMCO, and Employee hereby assigns all such
rights to AVEMCO;
(2) Employee will hold secret and confidential during and after
his employment by AVEMCO, until disclosed to the public by AVEMCO, all
processes, systems,
-2-
<PAGE>
software, technology, methods, apparatus, products, and any other confidential
disclosures, whether written or otherwise, relating to the business made to
Employee during Employee's engagement by AVEMCO. Employee acknowledges that all
such technical information is confidential and further acknowledges that
financial and business information, whether written or otherwise, regarding the
business, including information regarding customers, customer lists and
prospective customer lists, costs, prices, earnings, formulae, prospective and
executed contracts and other business arrangements, and sources of supply, is
presumed confidential information of AVEMCO for purposes of this Employment
Agreement, and Employee covenants to protect the confidential nature of such
information, and at no time while engaged by AVEMCO or subsequent to such
engagement, will Employee disclose to any person, business entity or individual
any such information or utilize any such information other than in the
furtherance of AVEMCO's business.
(b) Upon request of AVEMCO, Employee will promptly return to AVEMCO
any and all documents, records, reports, data, or other writings made or
obtained by Employee in the course of Employee's engagement by AVEMCO pertaining
to or containing information referred to in subparagraphs (1) and (2) directly
above and Employee agrees to neither make nor retain any copies of such
materials after expiration or termination of this Employment Agreement.
6. DEATH DURING EMPLOYMENT. If Employee dies during the term of this
-----------------------
Employment Agreement, AVEMCO shall pay to the estate of Employee the
compensation for base annual salary which would otherwise be payable to Employee
up to the date of death.
-3-
<PAGE>
7. TERMINATION. This Employment Agreement may be terminated by either
-----------
party, for any reason, with or without cause, at any time during its term by
giving the other at least 90 days written notice stating when thereafter the
termination is to be effective.
(a) By Employee. If Employee gives notice of termination, no
-----------
vacation, or any other paid leave, shall further accrue from the day the notice
was given (or from the day it should have been given if earlier). Further, if
Employee attempts to terminate without giving the required number of days notice
of termination, Employee shall not be eligible to thereafter take, nor to be
compensated for, any previously accrued but unused vacation, or, any other paid
leave.
(b) By AVEMCO. If AVEMCO gives notice of termination, vacation and
---------
any other paid leave will continue to accrue for 90 days after the giving of
such notice. Further, if AVEMCO attempts to terminate without giving the
required number of days notice of termination, Employee shall be eligible to
receive Employee's base annual salary as provided for in paragraph 3 of this
Employment Agreement, for the full 90 days after the giving of such notice by
AVEMCO.
(c) After either party gives notice of termination, AVEMCO may require
that Employee take with pay any available accrued but unused vacation during the
90 day termination period. Further, nothing contained in this paragraph 7 shall
be construed to expand any of the terms of AVEMCO's vacation or other paid leave
plans.
8. NOTICES. Notices shall be given to AVEMCO at its principal office.
-------
Notices shall be given to Employee at Employee's residence. All notices shall be
given in writing and any notice of termination shall be sent by certified mail.
-4-
<PAGE>
9. WAIVER OF BREACH. The waiver by AVEMCO of a breach of any provision
----------------
of this Employment Agreement by Employee shall not operate or be construed as a
waiver of any subsequent breach by Employee. No waiver shall be valid unless in
writing and signed by an authorized officer of AVEMCO.
10. ASSIGNMENT. Employee acknowledges that the services to be rendered by
----------
Employee hereunder are unique and personal. Accordingly, Employee may not
assign any of Employee's rights or delegate any of Employee's duties or
obligations under this Employment Agreement. AVEMCO may assign this Employment
Agreement, providing the employment described in paragraph 1 is not materially
changed thereby, and its rights and obligations shall inure to the benefit of
and shall be binding upon its successors and assigns. In the event of such
assignment, Employee's eligibility to continue participation in all of AVEMCO's
employee benefit plans shall terminate, and the same shall not affect the
validity of this Employment Agreement.
11. ENTIRE AGREEMENT. This Employment Agreement including its Attachments
----------------
contains the entire understanding of the parties with respect to employment. It
may not be changed orally, but only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought. It shall supersede any prior employment agreements
between the parties hereto, except it will not supersede any agreement not-to-
compete for a specified period of time contained in any prior employment
agreement, which period of time has not expired by its own terms, unless this
Employment Agreement, or any Attachment to it, has a provision not-to-compete
for a specified period of time.
-5-
<PAGE>
12. SEVERABILITY. If any provisions of this Employment Agreement are
------------
determined to be invalid under any applicable statute or rule of law, they are,
to that extent, omitted, but the remainder of this Employment Agreement shall
continue to be binding upon parties hereto.
13. LAW/VENUE. This Employment Agreement shall be governed by the laws of
---------
the State of Maryland. In the event of any claim or litigation by either party
against the other arising out of it, the parties agree that the forum for
resolution of such claim or litigation shall be the Circuit Court for Frederick
County, Maryland, and each party consents to personal jurisdiction of said
court.
14. ATTACHMENTS. The following attachments(s) are made a part of this
-----------
Employment Agreement as of the date it is entered into: A, A1, B .
------------
IN WITNESS WHEREOF, the parties have executed this Employment Agreement as
of the date first above written.
EMPLOYEE AVEMCO CORPORATION
/s/ John R. Yuska By /s/ John F. Shettle, Jr.
------------------------------- --------------------------------------------
John F. Shettle, Jr., President
-6-
<PAGE>
ATTACHMENT A
Employee: John R. Yuska
-------------------------
EMPLOYEE SELECTED OPTION
TO EMPLOYMENT AGREEMENT
Employee hereby requests that the Employment Agreement between the parties
as referenced below be amended to include the following provisions, and AVEMCO
hereby agrees:
A. Non-Competition
---------------
(1) During the term of this Employment Agreement and for a period of
two (2) years after the expiration or termination of this Employment Agreement,
except as may otherwise be set forth herein, Employee will not, directly or
indirectly, either individually or as a principal, agent, employee, independent
contractor, stockholder, or otherwise in any capacity whatsoever, engage in any
business, employment, or consulting in the field of the "Business" as defined in
Attachment "A-1" hereto, in any geographic area where AVEMCO does the Business
at the time of expiration or termination of this Employment Agreement, or has
done the Business at any time during the two (2) years directly preceding such
expiration or termination;
(2) During the term of this Employment Agreement and for a period of
two (2) years after the expiration or termination of this Employment Agreement,
except as may otherwise be set forth herein, Employee will not, directly or
indirectly, either individually or as a principal, agent, employee, independent
contractor, stockholder, or otherwise in any capacity whatsoever, engage in any
business, employment, or consulting in the Business, for
A-1
<PAGE>
or on behalf of any person, firm, organization, association, or other entity
with which AVEMCO has, at the time of expiration or termination of this
Employment Agreement, or had at any time during the two (2) years directly
preceding such expiration or termination, a material contractual relationship in
connection with the Business, if Employee's activities would be an appreciable
factor in assisting such firm, organization, association, or other entity to
diminish or eliminate its need for such contractual relationship with AVEMCO.
(3) During the term of this Employment Agreement and for a period of
two (2) years after the expiration or termination of this Employment Agreement,
except as may otherwise be set forth herein, Employee will not, directly or
indirectly, either individually or as a principal, agent, employee, independent
contractor, stockholder, or otherwise in any capacity whatsoever, engage in any
activity which would divert employees, customers, or clients away from AVEMCO.
B. Effect of Termination
---------------------
Should Employee terminate this Employment Agreement prior to its
expiration for any reason, or should AVEMCO terminate for cause, the provisions
of paragraphs A(1), A(2) and A(3) directly above shall survive for two (2) years
from the date it was terminated. Should AVEMCO terminate without cause,
paragraphs A(1), A(2) and A(3) directly above shall not survive notwithstanding
anything to the contrary therein. For the purposes hereof, the term "cause"
shall consist of deficiencies in the conduct reasonably expected of an officer
in Employee's position and including but not limited to fraud, sexual
harassment, habitual drunkenness, drug abuse, or repeated failure or refusal to
carry out the responsibilities of the position.
A-2
<PAGE>
C. Breach
------
In the event of Employee's actual or threatened breach of the
provisions of paragraphs A(1), A(2) or A(3) of this Attachment, AVEMCO shall be
entitled to an injunction restraining Employee therefrom. Nothing shall be
construed as prohibiting AVEMCO from pursuing any other available remedies for
such breach or threatened breach, including the recovery of damages from
Employee.
D. Consideration
-------------
In consideration of Employee's agreements contained herein, AVEMCO
agrees that in addition to the Compensation set forth in paragraph 3 of the
Employment Agreement, Employee shall be entitled to participate in AVEMCO's
Executive Performance Compensation Plan and Nonstatutory Stock Option Plan, to
the extent options may be available for grant. Employee acknowledges that
Employee has received, read, and understands said plans. Employee further
understands and acknowledges that such plans may be modified or terminated, or
Plan Years or award dates changed, at any time by the Board of Directors of
AVEMCO, and that no award is guaranteed thereunder for any period. Regardless
of the contingent nature of such plans, Employee acknowledges that the same
constitute valid consideration for the agreements contained herein.
Fully understanding the nature of said plans, Employee desires to
enter into this optional Attachment to the Employment Agreement, and, agreeing
to be bound hereby, acknowledges that said Employment Agreement is not and was
not offered to Employee contingent upon Employee's entering into the agreements
contained in this Attachment.
Employee understands and agrees that these provisions are fair and
reasonable as to time, geographical scope, and classification of work
prohibited. Employee agrees that the provision of paragraphs A(1), A(2) and
A(3) above shall not be construed as narrowly as
A-3
<PAGE>
a noncompetition provision which may be required as a condition of employment,
as opposed to being additional optional agreements that were specifically
requested by Employee for additional consideration, and, they shall be
distinguishable from such required provision.
E. Event of Death
--------------
In the event of Employee's death during the term of the employment,
Employee's estate shall be entitled to receive any bonus which was awarded prior
to the date of death, but which remained unpaid as of such date.
F. Passive Investments
-------------------
The provisions of paragraphs A(1), A(2) and A(3) hereof which prohibit
Employee from engaging in certain activities shall not be construed to prevent
Employee, as a passive investor, from investing in equity securities, as a
stockholder, of publicly traded companies where such stock ownership would not
be in conflict with Employee's duties, loyalties, and ongoing obligations under
this Employment Agreement. Employee agrees that AVEMCO shall have the right to
decide whether such conflict exists should there be any question regarding the
same.
This Attachment attaches to and forms a part of the Employment Agreement
dated January 1, 1996 , between AVEMCO and Employee.
---------------
EMPLOYEE AVEMCO CORPORATION
/s/ John R. Yuska By /s/ John F. Shettle, Jr.
-------------------------------- -----------------------------------
John F. Shettle, Jr., President
A-4
<PAGE>
ATTACHMENT A-1
EMPLOYER: AVEMCO CORPORATION EMPLOYEE: JOHN R. YUSKA
------------------ -------------
DEFINITION OF BUSINESS
For the purposes of the Employment Agreement referenced below, the
"Business" includes each of the following paragraphs checked below: 1,3,5
-------
[X] 1. AIRCRAFT INSURANCE
Aircraft insurance which shall include liability, hull, accidental death
and dismemberment, medical payments and/or guest voluntary settlements
coverage on general aviation aircraft and/or general aviation pilots;
premises, contractual, products and completed operations, medical
payments, and/or hangar keepers coverage for airports, fixed base and
other commercial operators; general aviation lender's/lessor's broad
form hull and/or liability coverage; total loss only aircraft coverage;
and/or the reinsurance of any of the foregoing coverages.
[_] 2. WATERCRAFT INSURANCE
Watercraft insurance which shall include liability, hull, accidental
death and dismemberment, medical payments and/or guest voluntary
settlements coverage on noncommercial watercraft (but including charter)
and/or watercraft operators; premises, contractual, products and
completed operations, medical payments, and/or hull keepers coverage for
marinas and other commercial operators; noncommercial watercraft
(including charter) lender's/lessor's broad form hull and/or liability
coverage; total loss only watercraft hull coverage; and/or the
reinsurance of any of the foregoing coverages.
A1-1
<PAGE>
[X] 3. COLLATERAL PROTECTION AND
LENDER'S/LESSOR'S SINGLE INTEREST INSURANCE
Insurance and/or insurance tracking for banks and/or other financial
institutions covering their lending and leasing operations and/or
collateral in security thereof, and including, but not limited to,
liability, physical damage, instrument non-filing, confiscation, skip
and/or repossession coverages, and whether or not called lender's or
lessor's single interest or dual interest, and/or collateral protection
insurance, tracking, or otherwise; and/or the reinsurance of any of the
foregoing coverages.
[_] 4. COMPUTER SOFTWARE
Computer software design, modification, implementation, sale and/or
service as used in and/or applied to the property casualty insurance
industry, whether offered for sale to business or other concerns or used
internally by business or other concerns.
[X] 5. MEDICAL ASSISTANCE SERVICES/MEDICAL INSURANCE
Medical assistance services and/or medical insurance, provided to, for
or on behalf of individuals, groups, insurers and/or businesses, to
assist sick or injured travelers, including students while studying
abroad, in locating and/or obtaining medical care and/or emergency
evacuation services and/or reimbursement/indemnification for the same.
In addition to the paragraphs checked above, the "Business" also includes
any other business commenced or acquired by AVEMCO or its subsidiaries during
the term of the Employment Agreement, in which Employee becomes engaged, whether
part or full time.
This Attachment attaches to and forms a part of the Employment Agreement
dated January 1, 1996 , between AVEMCO and Employee.
----------------
EMPLOYEE AVEMCO CORPORATION
/s/ John R. Yuska By:/s/ John F. Shettle, Jr.
------------------------------- ----------------------------------
John F. Shettle, Jr., President
A1-2
<PAGE>
ATTACHMENT B
EMPLOYEE: JOHN R. YUSKA
--------------------
CHANGE IN CONTROL
The undersigned agree that the following provision is added to the
Employment Agreement between the parties, as referenced below:
Change in Control. In the event of a change in control of AVEMCO
-----------------
Corporation, as defined herein, Employee may elect to terminate this Employment
Agreement on thirty (30) days written notice, in which event the provisions of
paragraphs A(1), A(2) and A(3) of Attachment A to the Employment Agreement shall
no longer apply notwithstanding anything to the contrary therein.
For the purposes hereof, a change of control of AVEMCO Corporation shall be
deemed to have taken place upon the occurrence of any of the following events:
A. A merger or consolidation of AVEMCO Corporation with any other entity;
B. A sale, distribution or transfer of all or substantially all of the
assets of AVEMCO Corporation or of its subsidiary, AVEMCO Insurance Company;
C. Acquisition by any one party, or by one or more "affiliated" parties as
defined in Rule 12B-2 under the Securities Exchange Act of 1934, of more than
forty percent (40%) of the outstanding voting stock of AVEMCO Corporation;
D. Any event determined by an arbitrator, as provided below, to be similar
in purpose or effect to those set forth in paragraphs A through C immediately
above, and therefore properly includable under this paragraph D.
B-1
<PAGE>
Anything in this Attachment B to the contrary notwithstanding, no event
shall be deemed a change in control of AVEMCO Corporation for purposes hereof if
such event is approved by two-thirds of those Directors of AVEMCO Corporation at
the time who are neither affiliated with a party to the transaction nor a party
to this Employment Agreement or an employment agreement containing a provision
similar to this termination provision.
The listing of changes in control in paragraphs A through C herein is not
intended as, and cannot be, exhaustive, but it is intended as an example of the
kinds of events which might reasonably cause Employee to wish to terminate
employment with AVEMCO Corporation and under which it is reasonable for Employee
to have the protections afforded by this provision. Accordingly, in the event
Employee contends that Employee has rights resulting from paragraph D hereof and
if AVEMCO Corporation disputes that contention, the issues shall be submitted to
arbitration under the rules and procedures of the American Arbitration
Association. The arbitrator shall find that a change in control is properly
includable under paragraph D if the arbitrator concludes that to do so would
carry out the purpose and intent of this provision. The parties shall be bound
by the decision of the arbitrator so arrived at. The cost of any such
arbitration shall be born by the losing party.
This Attachment attaches to and forms a part of the Employment Agreement
dated January 1, 1996, between AVEMCO and Employee.
-----------------
EMPLOYEE AVEMCO CORPORATION
/s/ John R. Yuska By /s/ John F. Shettle, Jr.
--------------------- ---------------------------------
John F. Shettle, Jr., President
B-2
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT dated January 1, 1996, by and between AVEMCO
--------- --
CORPORATION, a Delaware corporation ("AVEMCO"), for itself and on behalf of its
subsidiaries, and Thomas H. Chero ("Employee").
---------------
In consideration of the covenants, agreements and representations
hereinafter contained, AVEMCO and Employee hereby agree as follows:
1. EMPLOYMENT. AVEMCO hereby employs Employee as Senior Vice President -
---------- ----------------------
Legal, and Secretary, AVEMCO Corporation, and/or any other reasonably equivalent
- ----------------------------------------
or additional position with AVEMCO as AVEMCO may require. Employee accepts
employment upon the terms and conditions of this Employment Agreement.
2. TERM. The term of this Employment Agreement shall begin on
----
January 1, 1996, and shall end on December 31, 1996.
- --------- -----------
3. COMPENSATION. During the term of this Employment Agreement, AVEMCO
------------
shall pay Employee a base annual salary of One Hundred Five Thousand ($105,000)
------------------------- -------
payable on a bi-weekly basis. Such base annual salary shall be subject to
discretionary, periodic review for potential increase by AVEMCO and shall be
prorated for any portion of a year employed, if less than a full annual period.
In addition, Employee shall be eligible to participate in AVEMCO's Pension Plan,
Profit Sharing Plan, and other employee benefit plans including life, health and
disability insurance plans, vacation plans, and disability leave plans.
Employee acknowledges that Employee has received, read, and understands said
plans and, further, understands that such plans may be modified or terminated at
any time by the Board of Directors of AVEMCO, without affecting the validity of
this Employment Agreement.
-1-
<PAGE>
Employee further acknowledges receipt of the Employee Handbook, AVEMCO AND YOU.
4. DUTIES. Employee agrees to faithfully perform the duties
------
normally attendant upon Employee's position with AVEMCO, as set forth in Section
1 hereof, in accordance with guidelines as may be issued by AVEMCO from time to
time. Employee shall devote Employee's entire business time, attention, and
energies to AVEMCO's business and shall not, during the term of this Employment
Agreement, be engaged in any other business activity, whether or not such
business activity is pursued for gain, profit, or other pecuniary advantage.
5. BUSINESS PROPERTY/NONDISCLOSURE.
-------------------------------
(a) Employee fully acknowledges that his employment with AVEMCO will
necessarily equip Employee with specialized and confidential knowledge and
information which if divulged and used in competition with AVEMCO will cause
serious harm and disadvantage to AVEMCO. Therefore, Employee agrees that:
(1) All inventions and improvements relating in any manner to
AVEMCO's business during Employee's engagement by AVEMCO, whether said
inventions or improvements were made, conceived, or discovered by Employee as
sole inventor or joint inventor with another or otherwise, or whether made,
conceived, or discovered in or out of usual working hours of or upon the
premises of AVEMCO or elsewhere, together with all patents, copyrights, and
trade secret rights of said inventions and improvements throughout the world,
shall be the sole property of AVEMCO, and Employee hereby assigns all such
rights to AVEMCO;
(2) Employee will hold secret and confidential during and after
his employment by AVEMCO, until disclosed to the public by AVEMCO, all
processes, systems,
-2-
<PAGE>
software, technology, methods, apparatus, products, and any other confidential
disclosures, whether written or otherwise, relating to the business made to
Employee during Employee's engagement by AVEMCO. Employee acknowledges that all
such technical information is confidential and further acknowledges that
financial and business information, whether written or otherwise, regarding the
business, including information regarding customers, customer lists and
prospective customer lists, costs, prices, earnings, formulae, prospective and
executed contracts and other business arrangements, and sources of supply, is
presumed confidential information of AVEMCO for purposes of this Employment
Agreement, and Employee covenants to protect the confidential nature of such
information, and at no time while engaged by AVEMCO or subsequent to such
engagement, will Employee disclose to any person, business entity or individual
any such information or utilize any such information other than in the
furtherance of AVEMCO's business.
(b) Upon request of AVEMCO, Employee will promptly return to AVEMCO
any and all documents, records, reports, data, or other writings made or
obtained by Employee in the course of Employee's engagement by AVEMCO pertaining
to or containing information referred to in subparagraphs (1) and (2) directly
above and Employee agrees to neither make nor retain any copies of such
materials after expiration or termination of this Employment Agreement.
6. DEATH DURING EMPLOYMENT. If Employee dies during the term of this
-----------------------
Employment Agreement, AVEMCO shall pay to the estate of Employee the
compensation for base annual salary which would otherwise be payable to Employee
up to the date of death.
-3-
<PAGE>
7. TERMINATION. This Employment Agreement may be terminated by either
-----------
party, for any reason, with or without cause, at any time during its term by
giving the other at least 30 days written notice stating when thereafter the
termination is to be effective.
(a) By Employee. If Employee gives notice of termination, no
-----------
vacation, or any other paid leave, shall further accrue from the day the notice
was given (or from the day it should have been given if earlier). Further, if
Employee attempts to terminate without giving the required number of days notice
of termination, Employee shall not be eligible to thereafter take, nor to be
compensated for, any previously accrued but unused vacation, or, any other paid
leave.
(b) By AVEMCO. If AVEMCO gives notice of termination, vacation and
---------
any other paid leave will continue to accrue for 30 days after the giving of
such notice. Further, if AVEMCO attempts to terminate without giving the
required number of days notice of termination, Employee shall be eligible to
receive Employee's base annual salary as provided for in paragraph 3 of this
Employment Agreement, for the full 30 days after the giving of such notice by
AVEMCO.
(c) After either party gives notice of termination, AVEMCO may require
that Employee take with pay any available accrued but unused vacation during the
30-day termination period. Further, nothing contained in this paragraph 7 shall
be construed to expand any of the terms of AVEMCO's vacation or other paid leave
plans.
8. NOTICES. Notices shall be given to AVEMCO at its principal office.
-------
Notices shall be given to Employee at Employee's residence. All notices shall be
given in writing and any notice of termination shall be sent by certified mail.
-4-
<PAGE>
9. WAIVER OF BREACH. The waiver by AVEMCO of a breach of any provision
----------------
of this Employment Agreement by Employee shall not operate or be construed as a
waiver of any subsequent breach by Employee. No waiver shall be valid unless in
writing and signed by an authorized officer of AVEMCO.
10. ASSIGNMENT. Employee acknowledges that the services to be rendered by
----------
Employee hereunder are unique and personal. Accordingly, Employee may not
assign any of Employee's rights or delegate any of Employee's duties or
obligations under this Employment Agreement. AVEMCO may assign this Employment
Agreement, providing the employment described in paragraph 1 is not materially
changed thereby, and its rights and obligations shall inure to the benefit of
and shall be binding upon its successors and assigns. In the event of such
assignment, Employee's eligibility to continue participation in all of AVEMCO's
employee benefit plans shall terminate, and the same shall not affect the
validity of this Employment Agreement.
11. ENTIRE AGREEMENT. This Employment Agreement including its Attachments
----------------
contains the entire understanding of the parties with respect to employment. It
may not be changed orally, but only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought. It shall supersede any prior employment agreements
between the parties hereto, except it will not supersede any agreement not-to-
compete for a specified period of time contained in any prior employment
agreement, which period of time has not expired by its own terms, unless this
Employment Agreement, or any Attachment to it, has a provision not-to-compete
for a specified period of time.
-5-
<PAGE>
12. SEVERABILITY. If any provisions of this Employment Agreement are
------------
determined to be invalid under any applicable statute or rule of law, they are,
to that extent, omitted, but the remainder of this Employment Agreement shall
continue to be binding upon parties hereto.
13. LAW/VENUE. This Employment Agreement shall be governed by the laws of
---------
the State of Maryland. In the event of any claim or litigation by either party
against the other arising out of it, the parties agree that the forum for
resolution of such claim or litigation shall be the Circuit Court for Frederick
County, Maryland, and each party consents to personal jurisdiction of said
court.
14. ATTACHMENTS. The following attachments(s) are made a part of this
-----------
Employment Agreement as of the date it is entered into: A, A1, B .
----------------
IN WITNESS WHEREOF, the parties have executed this Employment Agreement as
of the date first above written.
EMPLOYEE AVEMCO CORPORATION
/s/ Thomas H. Chero By /s/ John F. Shettle, Jr.
------------------------------- -------------------------------------
John F. Shettle, Jr. President
-6-
<PAGE>
ATTACHMENT A
Employee: Thomas H. Chero
------------------------
EMPLOYEE SELECTED OPTION
TO EMPLOYMENT AGREEMENT
Employee hereby requests that the Employment Agreement between the parties
as referenced below be amended to include the following provisions, and AVEMCO
hereby agrees:
A. Non-Competition
---------------
(1) During the term of this Employment Agreement and for a period of
two (2) years after the expiration or termination of this Employment Agreement,
except as may otherwise be set forth herein, Employee will not, directly or
indirectly, either individually or as a principal, agent, employee, independent
contractor, stockholder, or otherwise in any capacity whatsoever, engage in any
business, employment, or consulting in the field of the "Business" as defined in
Attachment "A-1" hereto, in any geographic area where AVEMCO does the Business
at the time of expiration or termination of this Employment Agreement, or has
done the Business at any time during the two (2) years directly preceding such
expiration or termination;
(2) During the term of this Employment Agreement and for a period of
two (2) years after the expiration or termination of this Employment Agreement,
except as may otherwise be set forth herein, Employee will not, directly or
indirectly, either individually or as a principal, agent, employee, independent
contractor, stockholder, or otherwise in any capacity whatsoever, engage in any
business, employment, or consulting in the Business, for
A-1
<PAGE>
or on behalf of any person, firm, organization, association, or other entity
with which AVEMCO has, at the time of expiration or termination of this
Employment Agreement, or had at any time during the two (2) years directly
preceding such expiration or termination, a material contractual relationship in
connection with the Business, if Employee's activities would be an appreciable
factor in assisting such firm, organization, association, or other entity to
diminish or eliminate its need for such contractual relationship with AVEMCO.
(3) During the term of this Employment Agreement and for a period of
two (2) years after the expiration or termination of this Employment Agreement,
except as may otherwise be set forth herein, Employee will not, directly or
indirectly, either individually or as a principal, agent, employee, independent
contractor, stockholder, or otherwise in any capacity whatsoever, engage in any
activity which would divert employees, customers, or clients away from AVEMCO.
B. Effect of Termination
---------------------
Should Employee terminate this Employment Agreement prior to its
expiration for any reason, or should AVEMCO terminate for cause, the provisions
of paragraphs A(1), A(2) and A(3) directly above shall survive for two (2) years
from the date it was terminated. Should AVEMCO terminate without cause,
paragraphs A(1), A(2) and A(3) directly above shall not survive notwithstanding
anything to the contrary therein. For the purposes hereof, the term "cause"
shall consist of deficiencies in the conduct reasonably expected of an officer
in Employee's position and including but not limited to fraud, sexual
harassment, habitual drunkenness, drug abuse, or repeated failure or refusal to
carry out the responsibilities of the position.
A-2
<PAGE>
C. Breach
------
In the event of Employee's actual or threatened breach of the
provisions of paragraphs A(1), A(2) or A(3) of this Attachment, AVEMCO shall be
entitled to an injunction restraining Employee therefrom. Nothing shall be
construed as prohibiting AVEMCO from pursuing any other available remedies for
such breach or threatened breach, including the recovery of damages from
Employee.
D. Consideration
-------------
In consideration of Employee's agreements contained herein, AVEMCO
agrees that in addition to the Compensation set forth in paragraph 3 of the
Employment Agreement, Employee shall be entitled to participate in AVEMCO's
Executive Performance Compensation Plan and Nonstatutory Stock Option Plan, to
the extent options may be available for grant. Employee acknowledges that
Employee has received, read, and understands said plans. Employee further
understands and acknowledges that such plans may be modified or terminated, or
Plan Years or award dates changed, at any time by the Board of Directors of
AVEMCO, and that no award is guaranteed thereunder for any period. Regardless
of the contingent nature of such plans, Employee acknowledges that the same
constitute valid consideration for the agreements contained herein.
Fully understanding the nature of said plans, Employee desires to
enter into this optional Attachment to the Employment Agreement, and, agreeing
to be bound hereby, acknowledges that said Employment Agreement is not and was
not offered to Employee contingent upon Employee's entering into the agreements
contained in this Attachment.
Employee understands and agrees that these provisions are fair and
reasonable as to time, geographical scope, and classification of work
prohibited. Employee agrees that the provision of paragraphs A(1), A(2) and
A(3) above shall not be construed as narrowly as
A-3
<PAGE>
a noncompetition provision which may be required as a condition of employment,
as opposed to being additional optional agreements that were specifically
requested by Employee for additional consideration, and, they shall be
distinguishable from such required provision.
E. Event of Death
--------------
In the event of Employee's death during the term of the employment,
Employee's estate shall be entitled to receive any bonus which was awarded prior
to the date of death, but which remained unpaid as of such date.
F. Passive Investments
-------------------
The provisions of paragraphs A(1), A(2) and A(3) hereof which prohibit
Employee from engaging in certain activities shall not be construed to prevent
Employee, as a passive investor, from investing in equity securities, as a
stockholder, of publicly traded companies where such stock ownership would not
be in conflict with Employee's duties, loyalties, and ongoing obligations under
this Employment Agreement. Employee agrees that AVEMCO shall have the right to
decide whether such conflict exists should there be any question regarding the
same.
This Attachment attaches to and forms a part of the Employment Agreement
dated January 1, 1996 , between AVEMCO and Employee.
---------------
EMPLOYEE AVEMCO CORPORATION
/s/ Thomas H. Chero By /s/ John F. Shettle, Jr.
------------------------------- -----------------------------------------
John F. Shettle, Jr., President
A-4
<PAGE>
ATTACHMENT A-1
EMPLOYER: AVEMCO CORPORATION EMPLOYEE: THOMAS H. CHERO
------------------ ---------------
DEFINITION OF BUSINESS
For the purposes of the Employment Agreement referenced below, the
"Business" includes each of the following paragraphs checked below: 1,2,3,4,5
----------
[X] 1. AIRCRAFT INSURANCE
Aircraft insurance which shall include liability, hull, accidental death
and dismemberment, medical payments and/or guest voluntary settlements
coverage on general aviation aircraft and/or general aviation pilots;
premises, contractual, products and completed operations, medical
payments, and/or hangar keepers coverage for airports, fixed base and
other commercial operators; general aviation lender's/lessor's broad
form hull and/or liability coverage; total loss only aircraft coverage;
and/or the reinsurance of any of the foregoing coverages.
[X] 2. WATERCRAFT INSURANCE
Watercraft insurance which shall include liability, hull, accidental
death and dismemberment, medical payments and/or guest voluntary
settlements coverage on noncommercial watercraft (but including charter)
and/or watercraft operators; premises, contractual, products and
completed operations, medical payments, and/or hull keepers coverage for
marinas and other commercial operators; noncommercial watercraft
(including charter) lender's/lessor's broad form hull and/or liability
coverage; total loss only watercraft hull coverage; and/or the
reinsurance of any of the foregoing coverages.
A1-1
<PAGE>
[X] 3. COLLATERAL PROTECTION AND
LENDER'S/LESSOR'S SINGLE INTEREST INSURANCE
Insurance and/or insurance tracking for banks and/or other financial
institutions covering their lending and leasing operations and/or
collateral in security thereof, and including, but not limited to,
liability, physical damage, instrument non-filing, confiscation, skip
and/or repossession coverages, and whether or not called lender's or
lessor's single interest or dual interest, and/or collateral protection
insurance, tracking, or otherwise; and/or the reinsurance of any of the
foregoing coverages.
[X] 4. COMPUTER SOFTWARE
Computer software design, modification, implementation, sale and/or
service as used in and/or applied to the property casualty insurance
industry, whether offered for sale to business or other concerns or used
internally by business or other concerns.
[X] 5. MEDICAL ASSISTANCE SERVICES/MEDICAL INSURANCE
Medical assistance services and/or medical insurance, provided to, for
or on behalf of individuals, groups, insurers and/or businesses, to
assist sick or injured travelers, including students while studying
abroad, in locating and/or obtaining medical care and/or emergency
evacuation services and/or reimbursement/indemnification for the same.
In addition to the paragraphs checked above, the "Business" also includes
any other business commenced or acquired by AVEMCO or its subsidiaries during
the term of the Employment Agreement, in which Employee becomes engaged, whether
part or full time.
This Attachment attaches to and forms a part of the Employment Agreement
dated January 1, 1996 , between AVEMCO and Employee.
----------------
EMPLOYEE AVEMCO CORPORATION
/s/ Thomas H. Chero By: John F. Shettle, Jr.
------------------------------ ----------------------------------
John F. Shettle, Jr., President
A1-2
<PAGE>
ATTACHMENT B
EMPLOYEE: THOMAS H. CHERO
----------------------
CHANGE IN CONTROL
The undersigned agree that the following provision is added to the
Employment Agreement between the parties, as referenced below:
Change in Control. In the event of a change in control of AVEMCO
-----------------
Corporation, as defined herein, Employee may elect to terminate this Employment
Agreement on thirty (30) days written notice, in which event the provisions of
paragraphs A(1), A(2) and A(3) of Attachment A to the Employment Agreement shall
no longer apply notwithstanding anything to the contrary therein.
For the purposes hereof, a change of control of AVEMCO Corporation shall be
deemed to have taken place upon the occurrence of any of the following events:
A. A merger or consolidation of AVEMCO Corporation with any other entity;
B. A sale, distribution or transfer of all or substantially all of the
assets of AVEMCO Corporation or of its subsidiary, AVEMCO Insurance Company;
C. Acquisition by any one party, or by one or more "affiliated" parties as
defined in Rule 12B-2 under the Securities Exchange Act of 1934, of more than
forty percent (40%) of the outstanding voting stock of AVEMCO Corporation;
D. Any event determined by an arbitrator, as provided below, to be similar
in purpose or effect to those set forth in paragraphs A through C immediately
above, and therefore properly includable under this paragraph D.
B-1
<PAGE>
Anything in this Attachment B to the contrary notwithstanding, no event
shall be deemed a change in control of AVEMCO Corporation for purposes hereof if
such event is approved by two-thirds of those Directors of AVEMCO Corporation at
the time who are neither affiliated with a party to the transaction nor a party
to this Employment Agreement or an employment agreement containing a provision
similar to this termination provision.
The listing of changes in control in paragraphs A through C herein is not
intended as, and cannot be, exhaustive, but it is intended as an example of the
kinds of events which might reasonably cause Employee to wish to terminate
employment with AVEMCO Corporation and under which it is reasonable for Employee
to have the protections afforded by this provision. Accordingly, in the event
Employee contends that Employee has rights resulting from paragraph D hereof and
if AVEMCO Corporation disputes that contention, the issues shall be submitted to
arbitration under the rules and procedures of the American Arbitration
Association. The arbitrator shall find that a change in control is properly
includable under paragraph D if the arbitrator concludes that to do so would
carry out the purpose and intent of this provision. The parties shall be bound
by the decision of the arbitrator so arrived at. The cost of any such
arbitration shall be born by the losing party.
This Attachment attaches to and forms a part of the Employment Agreement
dated January 1, 1996, between AVEMCO and Employee.
-----------------
EMPLOYEE AVEMCO CORPORATION
/s/ Thomas H. Chero By /s/ John F. Shettle, Jr.
----------------------- ---------------------------------
John F. Shettle, Jr., President
B-2
<PAGE>
EXHIBIT 11.1
AVEMCO Corporation and Subsidiaries
Statement Regarding Computation
Of per Share Earnings
PRIMARY EARNINGS PER SHARE/1/
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net earnings $12,288,000 $7,918,000 $10,833,000
=========== ========== ===========
Average shares outstanding 8,478,393 8,845,857 9,019,322
=========== ========== ===========
Net earnings per share $ 1.4493 $ .8951 $ 1.2011
=========== ========== ===========
</TABLE>
FULLY DILUTED EARNINGS PER SHARE/2/
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net earnings $12,288,000 $7,918,000 $10,833,000
=========== ========== ===========
Average shares outstanding 8,481,303 8,845,857 9,019,322
=========== ========== ===========
Net earnings per share $ 1.4488 $ .8951 $ 1.2011
=========== ========== ===========
</TABLE>
/1/ Primary earnings per share are based on the weighted average number of
common and common equivalent shares outstanding during the year. Outstanding
common stock options are considered to be common stock equivalents (based
upon the average market price of the Registrant's common stock) for the
purpose of this calculation, when their impact is dilutive.
/2/ Fully diluted earnings per share are based on the weighted average number of
common and common equivalent shares outstanding during the year. Outstanding
common stock options are considered to be common stock equivalents (based
upon the higher of the ending market price or the average market price of
the Registrant's common stock) for the purpose of this calculation, when
their impact is dilutive.
103
<PAGE>
[AVEMCO CORPORATION ORGANIZATIONAL CHART APPEARS HERE]
March 24, 1997
AVEMCO CORPORATION
Parent Holding Company
(New York Stock Exchange)
(Delaware)
100% Stock
AVEMCO INSURANCE COMPANY
(Maryland)
100% Stock
U.S. SPECIALTY INSURANCE COMPANY
(Maryland)
100% Stock
SPECIALTY INSURANCE UNDERWRITERS, INC.
Attorney-In-Fact for NIU
(Missouri)
Attorney-In-Fact
Contract
NATIONAL INSURANCE UNDERWRITERS, (NIU)
A Reciprocal Insurance Exchange
(Missouri)
100% Stock
BROOKS-SHETTLE COMPANY
dba International Group Services
dba Hinchcliff International
(Maryland)
100% Stock
LOSS MANAGEMENT SERVICES, INC.
(Maryland)
100% Stock
MATTERHORN BANK PROGRAMS, INC.
(Maryland)
100% Stock
Matterhorn Bank Programs of Georgia, Inc.
(Georgia)
100% Stock
KFA HOLDINGS, INC.
(Maryland)
100% Stock
KFA, INC.
(Oklahoma)
100% Stock
THE WHEATLEY GROUP, LTD.
(New York)
100% Stock
EASTERN AVIATION AND MARINE UNDERWRITERS, INC.
(Maryland)
100% Stock
MEDEX ASSISTANCE CORPORATION
(Maryland)
100% Stock
MEDEXPRESS, INC.
(Maryland)
100% Stock
TRAVEL EXPRESS, INC.
(Maryland)
100% Stock
MEDEX ASSISTANCE (EUROPE) PLC
(U.K.)
99.9% Stock
AIRWAY ASSOCIATES, INC.
(Michigan)
100% Stock
AIRWAY UNDERWRITERS, INC.
(Texas)
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
AVEMCO Corporation:
We consent to incorporation by reference in the registration statement No.
33-41930 and registration statement No. 33-22520 on Forms S-8 of AVEMCO
Corporation of our report dated January 31, 1997 (February 28, 1997, as to Note
12), relating to the consolidated balance sheets of AVEMCO Corporation and
subsidiaries as of December 31, 1996 and 1995, 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, 1996, and all the related schedules,
which report appears in the December 31, 1996, annual report and Form 10-K of
AVEMCO Corporation. Our report refers to a change in the method of accounting
for investments in fixed maturities.
/s/ KPMG Peat Marwick LLP
Washington, D.C.
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S DECEMBER 31, 1996, 1996 FORM 10-K FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 112,828
<EQUITIES> 10,817
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 149,238
<CASH> 5,959
<RECOVER-REINSURE> 14,292
<DEFERRED-ACQUISITION> 9,503
<TOTAL-ASSETS> 217,666
<POLICY-LOSSES> 43,227
<UNEARNED-PREMIUMS> 37,201
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 56,667
0
0
<COMMON> 1,157
<OTHER-SE> 59,415
<TOTAL-LIABILITY-AND-EQUITY> 217,666
86,170
<INVESTMENT-INCOME> 8,223
<INVESTMENT-GAINS> 3,244
<OTHER-INCOME> 26,946
<BENEFITS> 62,866
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 45,235
<INCOME-PRETAX> 15,962
<INCOME-TAX> 3,674
<INCOME-CONTINUING> 12,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,288
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.45
<RESERVE-OPEN> 32,933
<PROVISION-CURRENT> 64,000
<PROVISION-PRIOR> (1,134)
<PAYMENTS-CURRENT> 38,234
<PAYMENTS-PRIOR> 22,216
<RESERVE-CLOSE> 35,349
<CUMULATIVE-DEFICIENCY> (1,134)
</TABLE>
