Nestled between the runways of the Frederick Municipal Airport and the fields of corn ripening in the summer sun is the glass-walled headquarters of Avemco Insurance Co., a rapidly expanding company that writes insurance on private planes and general aviation facilities.
Avemco, which once had its home in the Air Rights Building in Bethesda, moved to Frederick in 1982 to find a less competitive labor market and get closer to its flying constituency.
Avemco's new home stands next to a similar building that is the headquarters of the Aircraft Owners and Pilots Association (AOPA), which has 270,000 members. AOPA also had been located in the Air Rights Building but wanted to move near an airport.
"We actually made the decision to move together," recalls Avemco President William P. Condon.
The adjacent buildings symbolize the close relationship between Avemco and the AOPA. For 23 years, Avemco has been the official insurer for AOPA. Policies written for AOPA members still account for a significant, if shrinking, portion of Avemco's premiums.
Being AOPA's official insurer gives Avemco a number of benefits, including the right to place ads in AOPA publications. For that, Avemco pays AOPA a fee, which Avemco does not disclose for competitive reasons. Avemco also provides members with an accidental death policy. They can upgrade the policy and many members buy Avemco aircraft protection policies.
As Avemco's business grows, the percentage of premiums contributed by AOPA diminishes. It was 50 percent in 1983, 40 percent in 1984 and will be 25 percent by 1986, Condon says.
When they decided to move, Avemco and AOPA bought a 15-acre site from the City of Frederick. Avemco helped AOPA by guaranteeing 50 percent of a $4.8 million loan that AOPA used to build its building. The loan guarantee prevents AOPA from canceling its business arrangement with Avemco so long as the guarantee is in force.
Condon said that the desire to keep that relationship alive had been "a major influence" in keeping Avemco on its toes when handling claims and keeping AOPA members happy.
"The name of the game in aviation insurance is to survive," Condon says. A scrappy 48-year-old executive, Condon has been with Avemco since 1961 and its president since 1973. Survival in the property-casualty business has not been easy, especially during the rate wars of recent years.
The technique used by some companies was to keep rates low to get volume and improve their market share, then to raise rates in the hopes of keeping most of their new clients. Companies that did this for too long fell by the wayside. Over the years, the number of aviation insurers shrank from 53 to 14, and three of the 14 are in the Avemco Group.
Charting an independent course, Avemco raised its rates when other companies did not (1985 rates will be up 12 percent over 1984). The rate increases are an integral part of Avemco's basic determination to make an underwriting profit, meaning a profit on its insurance business. Many companies lose money on the insurance business but try to make it up on their investments.
Avemco's combined ratio, a complicated but key measure of underwriting success or failure, stood at 82 percent in 1984. The lower the number, the better. Combined ratios over 100, or losses, were common in the industry.
Condon takes a conservative approach to the investments in his $80 million portfolio. Preservation of capital is his first priority and he eschews the total-return philosophy favored by others in the industry. His thinking is colored, he admits, by the fact that when he became president of Avemco, the company's portfolio was suffering a $5.7 million loss. He likes short-term investments, meaning those in the three- to 10-year range.
Avemco, which has $110 million in assets, had a difficult year in 1983. Heavy competition prevented it from implementing its program to issue policies that provided higher limits of coverage. The problem cost Avemco some money and net earnings per share fell 11 percent.
Avemco decided, even before that, to expand the company's capital base and widen its business opportunities through acquisitions. It sold an additional 422,000 shares to Geico for $8.4 million, and Geico now has 33.3 percent of the stock. Avemco picked up another $1.3 million by selling one of its equity investments.
Condon also began to bite into the problem of sales by making several key acquisitions. Avemco long has been a direct writer of aviation insurance in an industry dominated by brokers and independent agents. "We figured that we could fight all we wanted to, market all we wanted to," he says, and still would not overtake the other sales forces. So Avemco acquired Eastern Aviation & Marine Underwriters Inc., a small company using an independent agent system. Doing $5 million a year in premiums at the time, Eastern is on its way to a $14 million year in 1985.
Early this year, Avemco also acquired National Aviation Underwriters, a company with a system of exclusive agents. With NAU's help, Avemco's gross premiums -- which were at the $60 million level in 1984, up 33 percent over 1983 -- should hit $90 million to $100 million in 1986, even if there is no growth in Avemco's business.
Today, Avemco sells insurance through direct writing, exclusive agents and independent agents.
With all the emphasis on earnings these days, does Condon feel under pressure to keep the earnings growing quarter by quarter? He says he does not. "We don't try to manage our earnings," he says, "we try to manage our business. And if we manage our business properly, over time, we're going to generate the earnings."
"We don't always have a big year every year," Condon notes. "We'll have flat years." But then, he points out, the company can't control the amount of flying people do.
"The thing that is the most devastating to us actually is daylight-saving time, the long days. Our losses start to pick up when DST comes in and start to go down when DST goes out," Condon said. The longer the day, the more flying, the more accidents, the more claims, and the greater the potential impact on earnings.
At the moment, Avemco's financial picture has been strengthening. Net earnings dropped from $1.69 a share in 1982 to $1.50 a share in 1983; jumped to $1.97 in 1984, and rose again to $1.11 for the first half of 1985, compared with $1.01 for the same period a year ago.
Avemco shares also have strengthened in recent months. Quoted at $19 on Jan. 4, the stock closed Friday at $30.50, an increase of 60.5 percent.
Condon, like most chief executives, would like to see his shares "fully priced." The stock now sells for about 14 times earnings of the past 12 months. Condon said a price-to-earnings ratio of 15 to 18 would make the stock "fully priced." That would be $32 to $38. With Avemco book value at $16 a share, Condon thinks a price of twice to three times book value -- $32 to $48 -- would be fine.
Perhaps the most interesting statistic at Avemco headquarters is the number of employes who have learned to fly. Among the 300 employes, Condon says, there are about 100 pilots. That includes Condon, who says he spends so much time piloting the company, he doesn't have much time to fly.