<PAGE>
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
Commission File Number 0-14243
ALLIED Group, Inc.
(Exact name of registrant as specified in its charter)
Iowa
(State or other jurisdiction of incorporation or organization)
42-0958655
(I.R.S. Employer Identification No.)
701 Fifth Avenue, Des Moines, Iowa
(Address of principal executive offices)
50391-2000
(Zip Code)
515-280-4211
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 1995:
9,311,402 shares of Common Stock.
<PAGE>
2
PART I
Item 1. Financial Statements
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
---------------- ---------------
<S> <C> <C>
Assets
Investments
Fixed maturities
Held to maturity at amortized cost (fair value
$383,752,263 and $388,486,183) $ 375,320,559 $ 401,716,819
Available for sale at fair value (amortized cost
$327,436,740 and $251,810,148) 336,536,324 243,567,793
Equity securities at fair value (cost $4,385,854
and $4,374,400) 5,002,888 4,507,163
Other investments at equity 2,120 458,187
Short-term investments at cost (note 2 and 3) 24,133,705 5,656,327
---------------- ---------------
Total investments 740,995,596 655,906,289
Cash 1,514,458 1,541,280
Indebtedness from affiliates 646,506 571,725
Accrued investment income 10,991,375 10,348,751
Securities held for sale (note 3) 20,792,403 15,540,332
Accounts receivable (less allowance for doubtful accounts
of $480,651 and $451,089) 75,976,950 68,466,424
Reinsurance receivables for losses and loss settlement expenses 22,175,453 20,935,911
Deferred policy acquisition costs 41,915,218 38,269,534
Prepaid reinsurance premiums 6,890,725 6,380,857
Equipment 10,512,906 8,641,858
Current income taxes recoverable 2,992,105 2,593,629
Deferred income taxes 3,765,657 9,099,807
Other assets 58,069,931 54,454,743
---------------- ---------------
Total assets $ 997,239,283 $ 892,751,140
================ ===============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
3
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
---------------- ---------------
<S> <C> <C>
Liabilities
Losses and loss settlement expenses $ 330,045,404 $ 310,996,429
Unearned premiums 197,508,248 180,112,525
Notes payable to nonaffiliates (note 3) 59,240,424 41,540,782
Notes payable to affiliates (note 2) 540,000 2,000,000
Guarantee of ESOP obligations (note 4) 27,770,000 28,150,000
Outstanding drafts 14,929,581 13,309,164
Other liabilities 40,317,438 34,761,544
---------------- ---------------
Total liabilities 670,351,095 610,870,444
---------------- ---------------
Stockholders' equity
Preferred stock, no par value, issuable in series, authorized
7,500,000 shares
6-3/4% Series, 1,827,222 shares issued and outstanding 37,812,387 37,812,387
ESOP Series, issued and outstanding 3,056,064 shares in
1995 and 3,154,244 shares in 1994 46,279,916 47,753,129
Common stock, no par value, $1 stated value, authorized
40,000,000 shares, issued and outstanding 9,302,089
shares in 1995 and 8,999,661 shares in 1994 9,302,089 8,999,661
Additional paid-in capital 102,924,578 98,926,297
Retained earnings 148,814,524 119,752,032
Unrealized appreciation (depreciation) of investments (net
of deferred income tax (expense) benefit of ($3,428,677)
and $2,868,709) 6,287,940 (5,240,883)
Unearned compensation related to ESOP (24,533,246) (26,121,927)
---------------- ---------------
Total stockholders' equity 326,888,188 281,880,696
---------------- ---------------
Total liabilities and stockholders' equity $ 997,239,283 $ 892,751,140
================ ===============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
4
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1995 1994 1995 1994
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Premiums earned $ 115,767,923 $ 104,762,265 $ 336,831,843 $ 304,856,001
Investment income 12,395,941 10,346,642 35,335,208 30,380,783
Realized investment
(losses) and gains (24,434) 29,719 238,121 3,103,264
Income from affiliates (note 2) 1,443,617 1,205,621 3,748,567 3,564,529
Other income 10,575,825 10,755,496 30,967,027 32,279,613
--------------- --------------- ---------------- ---------------
140,158,872 127,099,743 407,120,766 374,184,190
--------------- --------------- ---------------- ---------------
Losses and expenses
Losses and loss settlement
expenses 82,399,795 74,859,727 234,378,450 210,417,623
Amortization of deferred policy
acquisition costs 25,444,716 23,070,337 74,072,535 67,222,087
Other underwriting expenses 3,667,624 5,708,256 15,632,530 19,073,244
Other expenses 9,380,423 7,868,546 27,672,317 24,951,505
Interest expense 250,307 477,206 1,174,801 1,867,244
--------------- --------------- ---------------- ---------------
121,142,865 111,984,072 352,930,633 323,531,703
--------------- --------------- ---------------- ---------------
Income before income taxes 19,016,007 15,115,671 54,190,133 50,652,487
--------------- --------------- ---------------- ---------------
Income taxes
Current 4,967,790 3,445,782 16,607,719 14,681,675
Deferred 643,059 857,129 (963,236) (149,097)
--------------- --------------- ---------------- ---------------
5,610,849 4,302,911 15,644,483 14,532,578
--------------- --------------- ---------------- ---------------
Net income $ 13,405,158 $ 10,812,760 $ 38,545,650 $ 36,119,909
=============== =============== ================ ===============
Net income applicable to
common stock $ 11,603,985 $ 8,988,874 $ 33,114,945 $ 30,633,562
=============== =============== ================ ===============
Earnings per share
Primary $ 1.25 $ 1.00 $ 3.62 $ 3.40
=============== =============== ================ ===============
Fully diluted $ .90 $ .72 $ 2.59 $ 2.42
=============== =============== ================ ===============
</TABLE>
<PAGE>
5
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1995 1994
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 38,545,650 $ 36,119,909
Adjustments to reconcile net income to net cash provided by
operating activities
Losses and loss settlement expenses 19,048,975 18,938,996
Unearned premiums, net 16,885,855 18,103,426
Deferred policy acquisition costs (3,645,684) (4,024,918)
Accounts receivable, net (8,750,068) (11,196,966)
Depreciation and amortization 6,807,646 5,429,581
Realized investment gains (238,121) (3,103,264)
Securities held for sale, net (372,429) 6,735,091
Indebtedness with affiliates (74,781) 2,364,803
Accrued investment income (642,624) (1,119,236)
Other assets (2,932,892) (9,853,784)
Unearned compensation related to ESOP 1,588,681 1,272,719
Income taxes
Current (398,476) (1,219,600)
Deferred (963,236) (149,097)
Other, net 4,294,207 1,572,444
---------------- ---------------
Net cash provided by operating activities 69,152,703 59,870,104
---------------- ---------------
Cash flows from investing activities
Purchase of fixed maturities
Held to maturity --- (104,232,247)
Available for sale (119,214,779) (50,775,328)
Purchase of equity securities (260,334) (778,898)
Purchase of equipment (5,713,664) (3,890,004)
Sale of fixed maturities
Held for maturity --- 5,732,673
Available for sale 32,322,910 40,414,145
Maturities, calls, and principal reductions of fixed maturities
Held to maturity 25,509,953 37,978,096
Available for sale 11,350,364 17,506,066
Sale of equity securities 238,890 ---
Short-term investments, net (18,477,378) 104,570
Sale of other investment --- 9,395,168
Sale of equipment 360,175 262,281
---------------- ---------------
Net cash used in investing activities (73,883,863) (48,283,478)
---------------- ---------------
Cash flows from financing activities
Notes payable to nonaffiliates, net 12,820,000 275,000
Notes payable to affiliates, net (1,460,000) (300,000)
Issuance of common stock 2,827,496 890,659
Repurchase of common stock --- (5,143,003)
Dividends paid to stockholders, net of income tax benefit (9,483,158) (8,851,466)
---------------- ---------------
Net cash provided by (used in) financing activities 4,704,338 (13,128,810)
---------------- ---------------
Net decrease in cash (26,822) (1,542,184)
Cash at beginning of year 1,541,280 2,843,220
---------------- ---------------
Cash at end of quarter $ 1,514,458 $ 1,301,036
================ ===============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
6
ALLIED Group, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
ALLIED Group, Inc. (the Company) and its property-casualty, excess & surplus
lines, and noninsurance subsidiaries on a consolidated basis.
At September 30, 1995, The ALLIED Group Employee Stock Ownership Trust (ESOP
Trust) owned 27.6% of the outstanding voting stock of the Company. ALLIED Mutual
Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance
company, controlled 18.2% of the voting stock of the Company.
The accompanying interim consolidated financial statements should be read in
conjunction with the following notes and with the Notes to Consolidated
Financial Statements included in the ALLIED Group, Inc. 1994 Annual Report to
Stockholders. The interim consolidated financial statements have been prepared
in conformity with generally accepted accounting principles (GAAP) and include
all adjustments which are in the opinion of management necessary for fair
presentation of the results for the interim periods. In the opinion of
management, all such adjustments are of a normal and recurring nature. All
significant intercompany balances and transactions have been eliminated. Certain
amounts have been reclassified to conform to current-period presentation.
(2) Transactions with Affiliates
The Company leases employees to its subsidiaries and ALLIED Mutual and certain
of ALLIED Mutual's subsidiaries pursuant to the terms of the Intercompany
Operating Agreement. Each company that leases employees is charged a fee based
upon costs incurred for salaries, related benefits, taxes, and expenses
associated with the employees it leases. The Company received revenues of
$1,877,808 and $1,766,606 for employees leased to affiliates for the nine months
ended September 30, 1995 and 1994, respectively, which are included in income
from affiliates.
ALLIED Group Information Systems, Inc. provides data processing and other
services for ALLIED Mutual and its subsidiaries. Included in income from
affiliates are revenues of $1,870,759 and $1,797,923 relating to services
performed for ALLIED Mutual and subsidiaries for the first three quarters of
1995 and 1994, respectively.
ALLIED Mutual participates with a nonaffiliated reinsurance company in a
property catastrophe reinsurance agreement that covers the property-casualty
segment's share of pooled losses up to $5,000,000 in excess of $5,000,000.
ALLIED Mutual's and the reinsurance company's participations in such agreement
are 90% and 10%, respectively. Premiums paid by the property-casualty segment to
ALLIED Mutual were $1,675,627 and $1,461,348 in the first nine months of 1995
and 1994, respectively. There were recoveries of $2,432,437 and $2,043,773 from
ALLIED Mutual under the agreement in the first nine months of 1995 and 1994,
respectively.
The Company and its affiliates pool their excess cash into a short-term
investment fund (the fund), pursuant to the Intercompany Cash Concentration Fund
Agreement. The fund also issues short-term loans (30 days or less) to affiliated
companies in accordance with the current intercompany borrowing policy. The
Company and its affiliates pay a management fee (5 basis points of invested
assets) to the fund administrator, which is offset against investment income.
The fund administrator is AID Finance Services, Inc., an affiliate of the
Company and a wholly owned subsidiary of ALLIED Mutual.
<PAGE>
7
ALLIED Group, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
At September 30, 1995, the Company had $4,183,383 invested in the fund and had
several unsecured notes payable to the fund totaling $540,000. The interest
rates on the borrowings range from 6.0% to 9.0%.
The Company had interest income from affiliates of $259,195 and $215,294 in the
first nine months of 1995 and 1994, respectively. Interest expense with
affiliates was $88,803 and $80,219 in the first three quarters of 1995 and 1994,
respectively.
(3) Notes Payable to Nonaffiliates
At September 30, 1995, ALLIED Group Mortgage Company (ALLIED Mortgage) had
borrowed $30,740,424 under the terms of three separate mortgage loan warehousing
agreements with different commercial banks. Under the terms of the agreements,
ALLIED Mortgage can borrow up to the lesser of $67,000,000 or 98% of the
mortgage credit base. At September 30, 1995, the outstanding borrowings of
ALLIED Mortgage were secured by $20,792,403 of pledged mortgage loans held for
sale. Interest rates applicable to ALLIED Mortgage's borrowing arrangements vary
with the level of investable deposits maintained at the respective commercial
banks.
On June 28, 1995, ALLIED Mortgage entered into an Investment and Security
Agreement with a commercial bank to borrow up to $15,000,000. The borrowings are
reinvested in certificates of deposit issued by the lender or obligations issued
or guaranteed by the United States Government. ALLIED Mortgage had an
outstanding balance of $15,000,000 at the end of the third quarter of 1995.
Interest on the outstanding balance is due and payable upon maturity of the
investments which were purchased with the debt proceeds. All borrowings and
investments mature within 30 days after acquisition.
ALLIED Mortgage had $13,500,000 of 8.4% senior secured notes outstanding as of
September 30, 1995. The notes are payable to a nonaffiliated life insurance
company and are secured by pledged mortgage servicing rights. The notes are
payable in equal annual installments of $1,500,000 each September 1, with
interest payable semi-annually. The final installment and interest is due
September 1, 2004.
The Federal Home Loan Bank of Des Moines provides a $3,000,000 committed credit
facility through a line of credit agreement with AMCO Insurance Company that
expires March 1996. Interest on any outstanding borrowings is payable at an
annual rate equal to the federal funds unsecured rate for Federal Reserve member
banks. There was no outstanding balance at September 30, 1995. All borrowings
with the Federal Home Loan Bank of Des Moines are secured by United States
Government securities.
(4) Guarantee of ESOP Obligations
Effective March 13, 1995, the ESOP Trust refinanced its $28,150,000 Remarketed
Floating Rate Notes under the terms of a Term Credit Agreement and Guaranty (the
Agreement) with two separate commercial banks. The notes under the Agreement
mature July 12, 2005 and interest rates applicable to the borrowings are
adjusted at the beginning of each interest period. The interest periods may
range from one to three months depending on the interest rate selected. The
Company has guaranteed the ESOP Trust's obligations under the terms of the
Agreement. The Agreement includes various financial and operating covenants with
which the Company must comply. At September 30, 1995 the Company's guarantee of
ESOP obligations was $27,770,000.
<PAGE>
8
ALLIED Group, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
(5) Segment Information
The Company's operations include two major segments: property-casualty and
excess & surplus lines. Their principal products, services, and effect on
revenues, income before income taxes, and assets are identified by segment.
Property-casualty--Predominantly private passenger automobile, homeowners, and
small commercial lines of insurance. Excess & surplus lines--Primarily
commercial casualty and commercial property lines of insurance coverages that
standard insurers are unable or unwilling to provide.
Eliminations and other--Eliminations between segments plus other noninsurance
operations not reported as segments (including investment services, data
processing, and employee leasing).
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1995 1994
---------------- ---------------
<S> <C> <C>
Revenues (1)
Property-casualty $ 349,250,660 $ 319,659,178
Excess & surplus lines 26,185,400 22,872,712
Eliminations and other (2) 31,684,706 31,652,300
---------------- ---------------
Total $ 407,120,766 $ 374,184,190
================ ===============
Income before income taxes (1)
Property-casualty $ 47,984,963 $ 41,758,464
Excess & surplus lines 3,367,582 4,025,395
Eliminations and other (2) 2,837,588 4,868,628
---------------- ---------------
Total $ 54,190,133 $ 50,652,487
================ ===============
September 30, December 31,
1995 1994
---------------- ---------------
Assets
Property-casualty $ 820,515,059 $ 749,759,680
Excess & surplus lines 116,726,564 105,721,707
Eliminations and other (2) 59,997,660 37,269,753
---------------- ---------------
Total $ 997,239,283 $ 892,751,140
================ ===============
</TABLE>
(1) Including realized investment gains or losses.
(2) Segment information for 1994 was restated to conform to 1995 presentation.
<PAGE>
9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the interim
consolidated financial statements and related footnotes included elsewhere
herein, and with the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
ALLIED Group, Inc. (the Company) is a regional holding company. Its largest
segment includes three property-casualty insurance companies that write
primarily personal lines of insurance in the central and western states. The
Company's other reportable segment is excess & surplus lines insurance.
Property-casualty insurance was the most significant segment, accounting for
85.8% of consolidated revenues for the nine months ended September 30, 1995. The
property-casualty segment participates in a reinsurance pooling agreement with
ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty
insurance company. The agreement generally provides that the property-casualty
insurance business is combined and then prorated among the participants
according to predetermined percentages. Participation percentages are based on
certain factors such as capitalization and business produced by the respective
companies. The segment's participation is currently 64% in the reinsurance pool.
As of September 30, 1995, The ALLIED Group Employee Stock Ownership Trust (ESOP
Trust) owned 27.6% of the outstanding voting stock, and ALLIED Mutual controlled
18.2% of the voting stock of the Company.
The operating results of the property-casualty insurance industry are subject to
significant fluctuations from quarter to quarter and from year to year due to
the effect of competition on pricing, the frequency and severity of losses
incurred in connection with weather-related and other catastrophic events,
general economic conditions, and other factors such as changes in tax laws and
the regulatory environment.
Results of Operations
Consolidated revenues for the nine months ended September 30, 1995 were $407.1
million, up 8.8% over the $374.2 million reported for the first nine months of
1994. Excluding the effects of the 1994 sale of MidAmerica Financial Corporation
(MidAmerica), the growth in consolidated revenues for the nine months ended
September 30, 1995 was 9.7%. Consolidated revenues for the third quarter of 1995
increased 10.3% to $140.2 million from $127.1 million for the same quarter in
1994. The increase in consolidated revenues was primarily because of the 10.5%
growth in premiums earned for the nine months ended September 30, 1995.
Income before income taxes for the first nine months of 1995 was up to $54.2
million from $50.7 million for the same period in 1994. For the third quarter
only, income before income taxes was up 25.8% to $19 million from $15.1 million
for the same quarter in 1994. Income before income taxes was up primarily due to
the growth in premiums earned and improved underwriting results. The
property-casualty segment was the dominant contributor to improved operating
results with an increase of $6.2 million.
Net income was up 6.7% to $38.5 million, bringing fully diluted earnings per
share to $2.59 for the nine months ended September 30, 1995, from $36.1 million
for the corresponding period in 1994. Fully diluted earnings per share before
net realized gains were $2.58 for the first nine months of 1995 compared with
$2.27 for the same period of 1994. Book value per share increased to $22.58 from
$21.81 and $19.68 at June 30, 1995 and December 31, 1994, respectively.
<PAGE>
10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The statutory combined ratio for the Company's insurance operation improved to
95.8 from 96.8 for the nine months ended September 30, 1994. The improvement was
due to a 1.5 point improvement in the underwriting expense ratio that more than
offset the increase in the loss and loss adjusting expense ratio. For the nine
months ended September 30, 1995, the loss and loss adjusting ratio increased 0.6
points to 69.6 from 69.0 for the same period last year.
Property-casualty
Revenues for the property-casualty segment increased to $349.3 million from
$319.7 million for the nine months ended September 30, 1995 and 1994,
respectively. Realized investment gains for the first nine months of 1994
includes a pretax gain of $3 million from the sale of MidAmerica. For the third
quarter only, revenues increased to $119.6 million from $108.6 million for the
same quarter in 1994. Direct premiums earned for the segment were $321.1 million
for the first nine months of 1995 compared with $282.6 million one year earlier.
Premiums earned increased 10.2% for the first nine months of 1995 to $315
million from $285.9 million; premiums earned for the quarter ended September 30,
1995 increased 10.2% to $108 million from $98.1 million for the same quarter in
1994. The increase in premiums earned resulted primarily from growth in
insurance exposure.
Pooled net premiums written (including ALLIED Mutual) totaled $519.8 million, a
9.2% increase over production in the first nine months of 1994. The average
premium per policy for personal lines was up 3% from the first nine months of
1994 to $581 while the policy count grew 7.2%. The average premium per policy
for commercial lines excluding crop-hail increased 3.1% from the first nine
months of 1994 to $1,078 and the policy count was up 4.6%. Premiums earned for
the property-casualty segment were 65.7% personal lines and 34.3% commercial
lines in the first nine months of 1995. The business mix for the first nine
months of 1994 was 65.3% personal lines and 34.7% commercial lines.
Income before income taxes increased to $48 million from $41.8 million in the
first nine months of 1994 primarily due to improved underwriting results and
increased premiums earned. Income before income taxes for the third quarter only
increased 32.3% to $15.6 million from $11.8 milion in 1994. The increase in the
third quarter income before income taxes was primarily due to a $4.4 million
decrease in wind and hail losses. Investment income for the first nine months of
1995 was $28.9 million compared to $26.1 million for the same period in 1994.
The pretax yield on invested assets was 6.5% for the nine months ended September
30, 1995 and 1994. Realized investment gains were $245,000 compared with $3.2
million in the first nine months of 1994. Other income for the first nine months
of 1995 increased to $5.1 million from $4.6 million for the same period in 1994.
The statutory combined ratio (after policyholder dividends) for the first nine
months of 1995 improved to 95.2 from the 96.7 reported in the first nine months
of 1994. Improvement in the combined ratio was primarily attributed to a 1.5
point decrease in the underwriting expense ratio. Wind and hail losses for the
first nine months of 1995 increased to $24.6 million from $21.7 million for the
same period of 1994, but for the third quarter, wind and hail losses decreased
34.2% to $8.4 million in 1995 from $12.8 million in 1994. The impact of wind and
hail losses on the combined ratio was 7.8 points and 7.6 points for the nine
months ended September 30, 1995 and 1994, respectively. The underwriting gain
(on a generally accepted accounting principles basis) was $13.7 million compared
with a gain of $8 million for the first nine months of 1994. On a third quarter
basis, the underwriting gain for 1995 was $4.0 million compared to $1.3 million
in 1994 primarily due to lower wind and hail losses. On a fully diluted basis,
<PAGE>
11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
wind and hail losses cost the Company $1.16 per share versus $1.02 per share in
the first nine months of 1994. For the quarter ended September 30, 1995, the
effect of wind and hail losses on fully diluted earnings was $0.39 per share
compared to $0.61 per share for the same quarter in 1994.
The following table presents the property-casualty's statutory combined ratio by
line of business for the three and nine months ended September 30, 1995 and
1994:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Personal automobile 95.9 97.6 94.9 95.8
Homeowners 103.2 115.5 103.8 110.0
Personal lines 97.9 102.0 97.2 99.2
Commercial automobile 93.6 99.2 93.4 96.8
Workers' compensation 81.4 72.9 73.7 77.2
Other property/liability 99.2 99.1 97.9 96.7
Other lines 48.8 46.5 50.1 58.6
Commercial lines 94.0 92.4 91.5 91.9
Total 96.5 98.6 95.2 96.7
</TABLE>
The private passenger auto statutory combined ratio improved to 94.9 for the
first nine months of 1995 from 95.8 for the same period in 1994. The improvement
in the combined ratio for the private passenger auto was primarily due to a 1.4
point reduction in the underwriting expense ratio. The statutory combined ratio
for the homeowners line was 103.8 for the first nine months of 1995 compared
with 110.0 for the same period of 1994. The improvement in the combined ratio
for homeowners was primarily due to a 4.3 point improvement in the loss and loss
adjusting expense ratio. The impact of wind and hail losses on the combined
ratio for the homeowners line increased slightly to 25.1 points from 25.0 points
for the first nine months of 1994. For the third quarter ended September 30,
1995, the statutory combined ratio for homeowner lines improved 12.3 points to
103.2. The improvement was primarily due to a 10.1 improvement in the loss and
loss adjusting expense ratio for the quarter ended September 30, 1995. The
impact of wind and hail losses on the combined ratio in the third quarter of
1995 and 1994 was 22.9 points and 42.1 points, respectively. Overall, the
personal lines statutory combined ratio improved to 97.2 in the first nine
months of 1995 from 99.2 in the same period of 1994. The statutory combined
ratio for commercial lines improved to 91.5 in the first nine months of 1995
from 91.9 for nine months of 1994. The improvement in commercial lines was
primarily attributable to the results achieved in commercial auto and workers'
compensation.
<PAGE>
12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Excess & Surplus Lines
Premiums earned increased to $21.9 million for the first nine months of 1995
from $19 million for the first nine months of 1994. For the quarter only,
premiums earned increased 15.6% to $7.7 million from $6.7 million for the same
period in 1994. Net premiums written increased 15.7% to $23 million through
September 30, 1995 from $19.9 million through September 30, 1994. Direct
premiums earned increased 16.1% to $27.5 million for the nine months ended
September 30, 1995 from $23.7 million for the same period in 1994. As of
September 30, 1995, the segment's book of business was comprised of 2.3%
personal lines and 97.7% commercial lines. For the first nine months of 1994,
the business mix was 2.9% personal lines and 97.1% commercial lines.
The statutory combined ratio (after policyholder dividends) was 103.6, which
produced an underwriting loss (on a generally accepted accounting principles
basis) of $951,000 for the first nine months of 1995. The combined ratio of 98.3
for the first three quarters of 1994 resulted in an underwriting gain of
$133,000. The combined ratio increased primarily because of a 29.2% increase in
losses and loss settlement expenses experienced in the first nine months of
1995. The loss experience of the first nine months of 1995 increased the loss
ratio 8.8 points from the same period last year.
Income before income taxes for the nine months ended September 30, 1995
decreased 16.3% to $3.4 million from $4 million; for the three months ended
September 30, 1995, income before income taxes increased to $1.7 million from
$1.1 million for the three months ended September 30, 1994. Realized investment
gains were $3,000 in the first nine months of 1995 compared with losses of
$25,000 for the first nine months in 1994. Investment income for the first nine
months of 1995 increased 10.2% to $4.3 million from $3.9 million for the same
period in 1994. Investment income increased due to a larger average balance in
the investment portfolio. The pretax yield on those assets was down slightly to
6.8% compared to 6.9% in the first nine months of 1994. Invested assets
increased 12.9% to $89.9 million at September 30, 1995 from the previous
year-end.
Noninsurance Operations
Prior to January 1, 1995, the Company disclosed certain noninsurance operations
(investment services and data processing) as reportable segments in accordance
with Statement of Financial Accounting Standards (SFAS) 14, "Financial Reporting
for Segments of a Business Enterprise" and Regulation S-K. In 1995, the
noninsurance operations are not reported as segments since they did not meet the
reporting requirements of SFAS 14 for any of the periods presented. Management
does not anticipate that their results of operations and financial position will
qualify them as segments in the future.
Revenues for ALLIED Group Mortgage Company (ALLIED Mortgage) in the first nine
months of 1995 decreased to $13.1 million from $13.4 million for the same period
in 1994. Income before income taxes increased 10.7% to $3.2 million from $2.9
million for the first nine months of 1994. Income before income taxes for the
third quarter increased slightly to $1.3 million from $1.2 million. The
servicing portfolio increased 14.1% to $3 billion at September 30, 1995 from
$2.7 billion at September 30, 1994. At December 31, 1994 the servicing portfolio
was $3 billion.
Data processing revenues decreased 6.9% for the first nine months of 1995, to
$34.5 million from $37.1 million for the same period of 1994. For the nine
months ended September 30, 1995, data processing reported a loss before income
<PAGE>
13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
taxes of $826,000 compared to income before income taxes of $2.4 million for the
first three quarters of 1994. The loss before income taxes is primarily due to a
13.8% decrease in computer processing revenues for the nine months ended
September 30, 1995.
Investment Income
The investment policy for the Company's insurance segments requires that the
fixed maturity portfolios be invested primarily in debt obligations rated "A" or
higher by Standard & Poor's Corporation or a recognized equivalent at the time
of acquisition. The Company's investment portfolios consisted almost exclusively
of fixed income securities, 98.4% of which had at least an "A" rating from
Standard & Poor's (or the equivalent from Moody's) at September 30, 1995. At the
end of the first nine months of 1995, the fixed maturities portfolios consisted
of 99.8% investment-grade securities. The fair value of the Company's investment
in fixed maturities held to maturity was $8.4 million above amortized cost
compared with $13.2 million below amortized cost at December 31, 1994. The
investment portfolios contained no commercial or residential real estate or
mortgage loans.
Invested assets were up 13% to $741 million from $655.9 million at year-end
1994. Nine-month consolidated investment income increased 16.3% to $35.3 million
from $30.4 million through September 30, 1994. The Company's pretax rate of
return on invested assets was up to 6.7% from last year's 6.5%. The higher
interest rate environment of 1994 allowed the Company to reinvest proceeds from
maturing investments in investments of similar quality bearing higher interest
rates.
As of September 30, 1995, the Company held collateralized mortgage obligation
(CMO) investments with a carrying of $68.4 million (fair value $68.3 million)
compared to a carrying value of $70 million (fair value $68.5 million) as of
September 30, 1994. Substantially all of the Company's CMO investments are in
planned amortization class bonds or sequential pay bonds with anticipated
durations of approximately 5 years at the time of acquisition. The Company has
not invested in the more volatile types of CMO products such as companion or
accrual (Z-bond) tranches. All of the Company's CMO investments have an active
secondary market; accordingly their effect on the Company's liquidity does not
differ from that of other fixed income investments.
Income Taxes
The Company's year-to-date effective income tax rate was up slightly to 28.9%
from 28.6% at year-end 1994. The income tax expense for the first nine months of
1995 was up to $15.6 million from $14.5 million for the same period in 1994. The
increase was due in part to improved operating income in 1995.
New Accounting Standard
In May of 1995, the Financial Accounting Standards Board (FASB) issued SFAS 122,
"Accounting for Mortgage Servicing Rights," an amendment to SFAS 65, "Accounting
for Certain Mortgage Banking Activities." SFAS 122 eliminates the accounting
distinction between rights to service mortgage loans for others that are
acquired through loan origination activities and those acquired through purchase
<PAGE>
14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
transactions. SFAS 122 also requires that a mortgage banking enterprise assess
its capitalized mortgage servicing rights for impairment based on the fair value
of those rights. This statement is effective for fiscal years beginning after
December 15, 1995, on a prospective basis. The Company will adopt SFAS 122 on
January 1, 1996 and has determined that the implementation will not have a
material effect on its financial statements.
The FASB has announced that it will issue an implementation guide entitled,
"FASB Special Report, A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities," in November of 1995. The
Company adopted Statement 115 on December 31, 1993. The FASB has stated that the
guide will include transition guidance that would permit an enterprise to
reassess the appropriateness of the classifications of all securities held upon
the issuance of the Special Report but no later than December 31, 1995. Once the
Special Report is issued, the Company plans to reassess its classifications of
its investments and may transfer additional securities from held-to-maturity to
available-for-sale prior to December 31, 1995. At the time of transfer, any
unrealized gain or loss on investments previously held-to-maturity will be
recorded as a component of stockholders' equity.
Regulations
As of September 30, 1995, California was the source of 24% of the pool's direct
written premiums. Proposition 103, approved by California voters in 1988,
provides for a rollback of rates on premiums collected in calendar year 1989 to
the extent that the insurer's return on equity for each Proposition 103 line
exceeded 10%. Since it was passed, Proposition 103 has been the subject of a
number of legal and regulatory proceedings for the purpose of clarifying the
scope and extent of insurers' rollback obligations. Management of the Company
cannot accurately predict the timing of a final determination of legal liability
to roll back premiums. Based upon analysis of the rollback regulations issued by
the California Department of Insurance, however, management believes it is
probable that Company's subsidiaries will not be liable for any material
rollback of premiums.
Liquidity and Capital Resources
Substantial cash inflows are generated from premiums, pool administration fees,
investment income, and proceeds from maturities of portfolio investments. The
principal outflows of cash are payment of claims, commissions, premium taxes,
operating expenses, and income taxes and the purchase of fixed maturities. In
developing its investment strategy, the Company establishes a level of cash and
highly liquid short and intermediate term securities which, combined with
expected cash flow, is believed adequate to meet anticipated short-term and
long-term payment obligations.
In the first nine months of 1995, operating activities generated cash flows of
$69.2 million; in the first nine months of 1994, the total was $59.9 million.
For both years, the primary source of funds was premium growth in the Company's
property-casualty insurance operations.
Funds generated from the operating activities for the first nine months of 1995
and 1994 were used primarily to purchase investment-grade fixed securities which
accounted for the majority of the investing activities. In the first three
quarters of 1995, all fixed securities purchased were recorded in the available
for sale investment portfolio. Operating cash flows were also used to pay $10.1
million of dividends to stockholders in the first nine months of 1995. For the
same period in 1994, the funds generated from the operating activities were used
to repurchase $5.1 million of common stock and to pay dividends to stockholders
of $9.5 million.
<PAGE>
15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Financing activities in the first nine months of 1995 generated funds of $4.7
million. The funds generated from financing activities was primarily from
short-term borrowings ALLIED Mortgage made under its Investment and Security
Agreement. The proceeds from the borrowings were used to purchase short-term
investments (see note 3 of the Notes to Interim Consolidated Financial
Statements).
Management anticipates that short-term and long-term capital expenditures, cash
dividends, and operating cash needs will be met from existing capital and
internally generated funds. As of September 30, 1995, the Company and its
subsidiaries had no material commitments for capital expenditures. Future debt
and stock issuance will be considered as additional capital needs arise. The
method of funding will depend upon financial market conditions.
The Company's mortgage banking subsidiary, ALLIED Mortgage, has separate credit
arrangements to support its operations. Short-term and long-term notes payable
to nonaffiliated companies are used by ALLIED Mortgage to finance its securities
held for sale and to purchase servicing rights. The level of short-term
borrowings fluctuates daily depending on the level of inventory being financed.
At September 30, 1995, short-term borrowings amounted to $30.7 million to be
repaid through the subsequent sale of securities inventory and long-term
borrowings amounted to $13.5 million to be repaid over the next 9 years. ALLIED
Mortgage also had $15 million of short-term borrowings outstanding under an
Investment and Security Agreement to be paid down upon the maturity of the
investments which were purchased with the debt proceeds. These notes payable are
not guaranteed by the Company. In the normal course of its business, ALLIED
Mortgage also makes commitments to buy and sell securities that may result in
credit and market risk in the event the counterparty is unable to fulfill its
obligation.
Historically, the Company's insurance subsidiaries have generated sufficient
funds from operations to pay their claims. While the property-casualty and
excess & surplus lines insurance companies have maintained adequate investment
liquidity, they have in the past required additional capital contributions to
support premium growth.
Industry and regulatory guidelines suggest that a property-casualty insurer's
annual net written premiums should not exceed approximately 300% of statutory
surplus.
A source of cash flows for the holding company is dividend payments from its
subsidiaries. During the first nine months of 1995, the Company received
dividend payments of $8.3 million from the property-casualty subsidiaries and
$332,000 from noninsurance subsidiaries. During the same period of 1994, the
Company received dividend payments of $5.5 million from the property-casualty
subsidiaries and $557,000 from noninsurance subsidiaries. Holding company
dividend payments to common stockholders totaled $4.7 million for the nine
months ended September 30, 1995, up from $4 million for the same period in 1994.
In the first three quarters of 1995 and 1994, the Company paid dividends of $2.6
million on the 6-3/4% Series preferred stock. The Company also paid dividends of
$2.8 million and $2.9 million on the ESOP Series preferred stock in the nine
months ended September 30, 1995 and 1994, respectively.
In 1990, the ESOP Trust issued notes totaling $35 million (ESOP obligations) to
acquire ESOP Series preferred stock for the Company's Employee Stock Ownership
Plan (ESOP). In March 1995, the ESOP Trust refinanced its notes with a Term
Credit Agreement and Guaranty (Agreement) with two separate commercial banks.
The Company guaranteed the ESOP Trust's obligations under the Agreement (see
note 4 of Notes to Interim Consolidated Financial Statements). At September 30,
1995, the balance of the obligation was $27.8 million. Company contributions
<PAGE>
16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
plus dividends on the ESOP Series preferred stock are used by the ESOP Trust to
service the ESOP obligations. Dividends and payments for the employee lease fees
from its subsidiaries are used by the Company to fund the amounts. In connection
with its guarantee of ESOP obligations, the Company is required to maintain
minimum stockholders' equity and to comply with certain other financial
covenants.
Insurance premiums are established before the amount of losses and loss
settlement expenses, or the extent to which inflation may affect such expenses,
is known. Consequently, the Company attempts to anticipate the impact of
inflation in establishing premiums. Inflation is implicitly considered in the
determination of reserves for losses and loss settlement expenses since portions
of the reserves are expected to be paid over extended periods of time. The
importance of continually reviewing reserves is even more pronounced in periods
of extreme inflation.
<PAGE>
17
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
10.30 First Amendment to the Term Credit Agreement and Guaranty,
dated October 12, 1995.
10.53 Amendment to the Nonqualified Stock Option Plan, dated
October 20, 1995.
11 Statement re Computation of Per Share Earnings.
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the third quarter ended
September 30, 1995.
<PAGE>
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIED Group, Inc.
(Registrant)
Date: November 3, 1995 /s/ Jamie H. Shaffer
--------------------------------------
Jamie H. Shaffer, President (Financial)
and Treasurer
<PAGE>
19
ALLIED Group, Inc. and Subsidiaries
INDEX TO EXHIBITS
EXHIBIT
NUMBER ITEM PAGE
10.30 First Amendment to the Term Credit Agreement and 20
Guaranty, dated October 12, 1995.
10.53 Amendment to the Nonqualified Stock Option Plan,
dated October 20, 1995. 21
11 Statement re Computation of Per Share Earnings 22
27 Financial Data Schedule 23
<PAGE>
20
Exhibit 10.30
Bank of Montreal
October 12, 1995
U.S. Corporate Banking
115 South LaSalle Street, 12th Floor
Chicago, Illinois 60603
(312) 750-4300
Mr. George Oleson
ALLIED Group, Inc.
701 5th Avenue
Des Moines, IA 50391-2000
Re: Section 6.1.19 Certain Indebtedness of the Term Credit Agreement and
Guaranty ("Agreement") dated March 13, 1995 by and among ALLIED Group,
Inc., State Street Bank and Trust Company as trustee for The ALLIED
Group Employee Stock Ownership Trust, Bank of Montreal, and Norwest
Bank Iowa N.A.
Dear George:
Bank of Montreal and Norwest Bank Iowa N.A. hereby agree to amend the
above-referenced section of the Agreement to read as follows, effective as of
October 12, 1995:
"Cause the aggregate amount of the Non-Recourse Indebtedness of ALLIED
Mortgage at all times to be less than $100,000,000".
Please acknowledge receipt and agreement by signing and returning to the
following address:
Bank of Montreal
115 So. La Salle Street
12th Floor
Chicago, IL 60603
Very Truly Yours,
Elise Brenneman
Director
Acknowledged and Agreed: ALLIED Group, Inc.
By: /s/ Jamie H. Shaffer
---------------------------------------------
Title: President (Financial)
---------------------------------------------
Acknowledged and Agreed: Norwest Bank Iowa N.A.
By: /s/ W. C. Green, Jr.
---------------------------------------------
Title: Vice President
---------------------------------------------
Acknowledged and Agreed: The ALLIED Group Employee Stock Ownership Trust
By State Street Bank and Trust Company, not
individually (except for Sections 5.2(a) and (b)),
but solely in its capacity as ESOP Trustee (as
hereinabove defined)
By: /s/ Kelly Driscoll
---------------------------------------------
Title: Vice President
---------------------------------------------
cc: Jim Shaffer, President (Financial), ALLIED Group, Inc.
Paul Curran, SEC Accounting Manager, ALLIED Group, Inc.
The ALLIED Group, Inc. ESOP Manager, State Street Bank Trust Company
Denise Courcy, State Street Bank Trust Company
<PAGE>
21
Exhibit 10.53
AMENDMENT DATED OCTOBER 20, 1995
ALLIED GROUP, INC.
NONQUALIFIED STOCK OPTION PLAN
The ALLIED Group, Inc. Nonqualified Stock Option Plan (the "Plan") was
amended by the Board of Directors of ALLIED Group, Inc. (the "Company") on
October 20, 1995, to reflect the changes set fourth below. Capitalized terms
used herein shall have the meaning as assigned thereto in the Plan.
Shares Subject to Plan. The Board of Directors of the Company approved
a reduction in the number of Shares authorized to be issued under the Plan. As
of October 20, 1995, there remained 97,500 Shares of Common Stock available for
issuance pursuant to the exercise of Options under the Plan. The Board of
Directors reduced such amount by 33,135 Shares to leave remaining 64,365 Shares
of Common Stock available for issuance pursuant to the exercise of Options under
the Plan.
<PAGE>
22
Exhibit 11
ALLIED Group, Inc. and Subsidiaries
Computation of Per Share Earnings
For the Three and Nine Months Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1995 1994 1995 1994
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Primary
Net income $ 13,405,158 $ 10,812,760 $ 38,545,650 $ 36,119,909
Preferred stock dividends (1,801,173) (1,823,886) (5,430,705) (5,486,347)
Stock options in subsidiary (112,110) (109,603) (272,724) (237,493)
---------------- --------------- --------------- ---------------
Adjusted net income $ 11,491,875 $ 8,879,271 $ 32,842,221 $ 30,396,069
================ =============== =============== ===============
Earnings per share $ 1.23 $ .97 $ 3.54 $ 3.32
================ =============== =============== ===============
Weighted average shares
outstanding 9,259,189 8,988,846 9,155,557 9,007,592
Dilutive effective of
unexercised
stock options* 95,398 156,610 110,331 152,173
--------------- ---------------- --------------- ---------------
9,354,587 9,145,456 9,265,888 9,159,765
=============== ================ =============== ===============
Fully Diluted
Net income $ 13,405,158 $ 10,812,760 $ 38,545,650 $ 36,119,909
Preferred stock dividends (878,780) (878,779) (2,636,339) (2,636,339)
Stock options in subsidiary (112,316) (109,912) (274,249) (238,244)
Additional net ESOP
expenses-assuming
conversion of ESOP Series
preferred stock (45,469) (80,131) (136,408) (240,394)
--------------- ---------------- --------------- ---------------
Adjusted net income $ 12,368,593 $ 9,743,938 $ 35,498,654 $ 33,004,932
=============== ================ =============== ===============
Earnings per share $ .88 $ .70 $ 2.55 $ 2.37
=============== ================ =============== ===============
Weighted average shares
outstanding 13,872,497 13,715,704 13,814,800 13,758,935
Dilutive effective of
unexercised stock option* 121,379 166,702 121,612 166,702
--------------- ---------------- --------------- ---------------
13,993,876 13,882,406 13,936,412 13,925,637
=============== ================ =============== ===============
* Primary - Based on average market price
Fully Diluted - Based on the higher of the average market price or the
market price at September 30 of each year
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
GROUP, INC.'S SEPTEMBER 30, 1995 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000774624
<NAME> ALLIED GROUP, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1.000
<DEBT-HELD-FOR-SALE> 336,536,324
<DEBT-CARRYING-VALUE> 375,320,559
<DEBT-MARKET-VALUE> 383,752,263
<EQUITIES> 5,002,888
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 740,995,596
<CASH> 1,514,458
<RECOVER-REINSURE> 22,175,453
<DEFERRED-ACQUISITION> 41,915,218
<TOTAL-ASSETS> 997,239,283
<POLICY-LOSSES> 330,045,404
<UNEARNED-PREMIUMS> 197,508,248
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 59,780,424
<COMMON> 9,302,089
0
84,092,303
<OTHER-SE> 233,493,796
<TOTAL-LIABILITY-AND-EQUITY> 997,239,283
336,831,843
<INVESTMENT-INCOME> 35,335,208
<INVESTMENT-GAINS> 238,121
<OTHER-INCOME> 34,715,594
<BENEFITS> 234,378,450
<UNDERWRITING-AMORTIZATION> 74,072,535
<UNDERWRITING-OTHER> 15,632,530
<INCOME-PRETAX> 54,190,133
<INCOME-TAX> 15,644,483
<INCOME-CONTINUING> 38,545,650
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,545,650
<EPS-PRIMARY> 3.620
<EPS-DILUTED> 2.590
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
