<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 June 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 July 31, 1995:
9,239,162 shares of Common Stock.
<PAGE>
2
PART I
Item 1. Financial Statements
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Assets
Investments
Fixed maturities
Held to maturity at amortized cost (fair value
$392,636,057 and $388,486,183) $386,659,628 $401,716,819
Available for sale at fair value (amortized cost
$303,029,055 and $251,810,148) 311,312,326 243,567,793
Equity securities at fair value (cost $4,489,347
and $4,374,400) 4,904,288 4,507,163
Other investments at equity 442,033 458,187
Short-term investments at cost (note 2) 19,648,836 5,656,327
------------ ------------
Total investments 722,967,111 655,906,289
Cash 1,684,824 1,541,280
Indebtedness from affiliates 609,949 571,725
Accrued investment income 9,829,590 10,348,751
Securities held for sale (note 3) 20,255,527 15,540,332
Accounts receivable (less allowance for doubtful accounts
of $516,937 and $451,089) 74,817,840 68,466,424
Reinsurance receivables for losses and loss settlement expenses 22,005,332 20,935,911
Deferred policy acquisition costs 40,528,132 38,269,534
Prepaid reinsurance premiums 6,828,917 6,380,857
Equipment 11,008,738 8,641,858
Current income taxes recoverable 3,039,838 2,593,629
Deferred income taxes 4,778,053 9,099,807
Other assets 54,106,780 54,454,743
------------ ------------
Total assets $972,460,631 $892,751,140
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
3
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Liabilities
Losses and loss settlement expenses $323,809,251 $310,996,429
Unearned premiums 191,104,816 180,112,525
Notes payable to nonaffiliates (note 3) 61,068,788 41,540,782
Notes payable to affiliates (note 2) 3,460,000 2,000,000
Guarantee of ESOP obligations (note 4) 27,770,000 28,150,000
Outstanding drafts 15,819,983 13,309,164
Other liabilities 34,600,722 34,761,544
------------ ------------
Total liabilities 657,633,560 610,870,444
------------ ------------
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 3,091,426 shares in
1995 and 3,154,244 shares in 1994 46,808,932 47,753,129
Common stock, no par value, $1 stated value, authorized
40,000,000 shares, issued and outstanding 9,224,193
shares in 1995 and 8,999,661 shares in 1994 9,224,193 8,999,661
Additional paid-in capital 102,010,657 98,926,297
Retained earnings 138,579,538 119,752,032
Unrealized appreciation (depreciation) of investments (net
of deferred income tax (expense) benefit of ($3,059,341)
and $2,868,709) 5,638,871 (5,240,883)
Unearned compensation related to ESOP (25,247,507) (26,121,927)
------------ ------------
Total stockholders' equity 314,827,071 281,880,696
------------ ------------
Total liabilities and stockholders' equity $972,460,631 $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 Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Premiums earned $111,582,982 $102,276,895 $221,063,920 $200,093,736
Investment income 11,664,265 10,420,277 22,939,267 20,034,141
Realized investment gains 247,805 2,682,760 262,555 3,073,545
Income from affiliates (note 2) 1,110,849 1,146,824 2,304,950 2,358,908
Other income 10,080,141 10,823,866 20,391,202 21,524,117
------------ ------------ ------------ ------------
134,686,042 127,350,622 266,961,894 247,084,447
------------ ------------ ------------ ------------
Losses and expenses
Losses and loss settlement
expenses 77,547,312 70,109,836 151,978,655 135,557,896
Amortization of deferred policy
acquisition costs 24,495,880 22,543,196 48,627,819 44,151,750
Other underwriting expenses 5,692,815 6,145,237 11,964,906 13,364,988
Other expenses 8,557,741 8,419,530 18,291,894 17,082,959
Interest expense 478,100 667,218 924,494 1,390,038
------------ ------------ ------------ ------------
116,771,848 107,885,017 231,787,768 211,547,631
------------ ------------ ------------ ------------
Income before income taxes 17,914,194 19,465,605 35,174,126 35,536,816
------------ ------------ ------------ ------------
Income taxes
Current 6,259,128 7,593,713 11,639,929 11,235,893
Deferred (1,101,103) (1,964,056) (1,606,295) (1,006,226)
------------ ------------ ------------ ------------
5,158,025 5,629,657 10,033,634 10,229,667
------------ ------------ ------------ ------------
Net income $ 12,756,169 $ 13,835,948 $ 25,140,492 $ 25,307,149
============ ============ ============ ============
Net income applicable to
common stock $ 10,946,575 $ 12,006,918 $ 21,510,960 $ 21,644,689
============ ============ ============ ============
Earnings per share
Primary $ 1.19 $ 1.34 $ 2.36 $ 2.40
============ ============ ============ ============
Fully diluted $ .86 $ .94 $ 1.69 $ 1.70
============ ============ ============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
5
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 25,140,492 $ 25,307,149
Adjustments to reconcile net income to net cash provided by
operating activities
Losses and loss settlement expenses 12,812,822 10,211,247
Unearned premiums, net 10,544,231 10,389,721
Deferred policy acquisition costs (2,258,598) (2,355,848)
Accounts receivable, net (7,420,837) (4,975,276)
Depreciation and amortization 4,150,535 3,929,671
Realized investment gains (262,555) (3,073,545)
Securities held for sale, net (1,062,189) 1,963,351
Indebtedness with affiliates (38,224) 1,412,715
Accrued investment income 519,161 (531,394)
Other assets (70,703) (3,683,748)
Unearned compensation related to ESOP 874,420 825,342
Income taxes
Current (446,209) 1,398,774
Deferred (1,606,295) (1,006,226)
Other, net 1,021,787 (3,110,369)
------------ ------------
Net cash provided by operating activities 41,897,838 36,701,564
------------ ------------
Cash flows from investing activities
Purchase of fixed maturities
Held to maturity --- (75,827,550)
Available for sale (86,746,174) (47,278,063)
Purchase of equity securities (188,835) (526,558)
Purchase of equipment (4,571,634) (3,161,022)
Sale of fixed maturities
Held for maturity --- 1,191,524
Available for sale 28,868,410 32,279,110
Maturities, calls, and principal reductions of fixed maturities
Held to maturity 14,486,459 35,034,731
Available for sale 6,831,682 21,556,241
Sale of equity securities 66,098 ---
Short-term investments, net (13,992,509) 2,448,942
Sale of other investment --- 9,190,504
Sale of equipment 105,500 224,300
------------ ------------
Net cash used in investing activities (55,141,003) (24,867,841)
------------ ------------
Cash flows from financing activities
Notes payable to nonaffiliates, net 15,875,000 (1,800,000)
Notes payable to affiliates, net 1,460,000 (1,100,000)
Issuance of common stock 2,364,695 520,136
Repurchase of common stock --- (5,143,003)
Dividends paid to stockholders, net of income tax benefit (6,312,986) (5,904,323)
------------ ------------
Net cash provided by (used in) financing activities 13,386,709 (13,427,190)
------------ ------------
Net increase (decrease) in cash 143,544 (1,593,467)
Cash at beginning of year 1,541,280 2,843,220
------------ ------------
Cash at end of quarter $ 1,684,824 $ 1,249,753
============ ============
</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 June 30, 1995, The ALLIED Group Employee Stock Ownership Trust (ESOP Trust)
owned 27.9% 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
$1,253,388 and $1,177,454 for employees leased to affiliates for the six months
ended June 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 $1,051,562 and $1,181,454 relating to services
performed for ALLIED Mutual and subsidiaries for the first half 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 $1,184,692 and $651,340 in the first six months of 1995 and
1994, respectively. There were recoveries of $1,573,481 from ALLIED Mutual under
the agreement in the first six months of 1995 and none in the first half of
1994.
At June 30, 1995, the Company had $2,420,758 invested in a short-term investment
fund with affiliated companies. One of the affiliates, AID Finance Services,
Inc. (a wholly owned subsidiary of ALLIED Mutual), is the administrator of the
fund. The Company also had various unsecured notes payable to the investment
fund at June 30, 1995 totaling $3,460,000. The borrowings had maturity dates
within 30 days of June 30, 1995 and interest rates of 6.2%.
<PAGE>
7
ALLIED Group, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
The Company had interest income from affiliates of $173,772 and $166,011 in the
first six months of 1995 and 1994, respectively. Interest expense with
affiliates was $58,792 and $69,647 in the first two quarters of 1995 and 1994,
respectively.
(3) Notes Payable to Nonaffiliates
At June 30, 1995, ALLIED Group Mortgage Company (ALLIED Mortgage) had borrowed
$27,238,788 under the terms of two separate mortgage loan warehousing agreements
with different commercial banks. On March 27, 1995, ALLIED Mortgage negotiated a
$10,000,000 mortgage loan warehousing agreement, which includes a $2,000,000
servicing acquisition subline, with a third bank. ALLIED Mortgage had borrowings
of $775,000 under the service acquisition line of credit on June 30, 1995. 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 June 30, 1995, the
outstanding borrowings of ALLIED Mortgage were secured by $20,255,527 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 $12,250,000 at the end of the second 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 $15,000,000 of 8.4% senior secured notes outstanding as of
June 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
10 equal annual installments of $1,500,000 beginning September 1, 1995 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 (AMCO)
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 an outstanding balance of $3,000,000 at June 30, 1995. AMCO
also had $2,805,000 outstanding at the end of the second quarter on an
uncommitted basis. All borrowings with the Federal Home Loan Bank of Des Moines
are secured by United States Government securities with a carrying value of
$10,484,250.
(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 June 30, 1994 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>
Six Months Ended
June 30,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Revenues (1)
Property-casualty $229,602,931 $211,070,548
Excess & surplus lines 16,953,600 14,873,460
Eliminations and other (2) 20,405,363 21,140,439
------------ ------------
Total $266,961,894 $247,084,447
============ ============
Income before income taxes (1)
Property-casualty $ 32,365,082 $ 29,950,329
Excess & surplus lines 1,620,069 2,919,045
Eliminations and other (2) 1,188,975 2,667,442
------------ ------------
Total $ 35,174,126 $ 35,536,816
============ ============
June 30, December 31,
1995 1994
------------ ------------
Assets
Property-casualty $799,283,095 $749,759,680
Excess & surplus lines 117,874,460 105,721,707
Eliminations and other (2) 55,303,076 37,269,753
------------ ------------
Total $972,460,631 $892,751,140
============ ============
</TABLE>
(1) Including realized investment gains or losses.
(2) All noninsurance operations (including investment services, data
processing, and employee leasing) are included in Eliminations and other.
Segment information for 1994 was restated.
<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 86%
of consolidated revenues for the six months ended June 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 64% in the reinsurance pool.
As of June 30, 1995, The ALLIED Group Employee Stock Ownership Trust (ESOP
Trust) owned 27.9% 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 six months ended June 30, 1995 were $267 million,
up 8% over the $247.1 million reported for the first six months of 1994.
Excluding the effects of the 1994 sale of MidAmerica Financial Corporation
(MidAmerica), the growth in consolidated revenues for the six months ended June
30, 1995 was 9.4%. The increase in consolidated revenues was primarily because
of the 10.5% growth in premiums earned for the six months ended June 30, 1995.
Income before income taxes for the first six months of 1995 was down slightly to
$35.2 million from $35.5 million for the first half of 1994. For the second
quarter only, income before income taxes was down 8% to $17.9 million from $19.5
million for the same quarter in 1994. Income before income taxes was down
primarily due to lower realized investment gains in the three months ended June
30, 1995. The property-casualty segment was the dominant contributor to second
quarter operating results with an increase of $2.4 million.
Net income was down 0.7% to $25.1 million, bringing fully diluted earnings per
share to $1.69 for the six months ended June 30, 1995, from $25.3 million for
the corresponding period in 1994. Fully diluted earnings per share before net
realized gains were $1.68 for the first six months of 1995 compared with $1.55
for the same period of 1994. Book value per share increased to $21.81 from
$20.75 and $19.68 at March 31, 1995 and December 31, 1994, respectively.
<PAGE>
10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The statutory combined ratio for the Company improved to 95.4 from 95.7 for the
six months ended June 30, 1994. The improvement was due to a 1.3 point
improvement in the underwriting expense ratio that more than offset the increase
in the loss and loss adjusting expense ratio. For the six months ended June 30,
1995, the loss and loss adjusting ratio increased 1.2 points to 68.8 from 67.6
for the same period last year.
Property-casualty
Revenues for the property-casualty segment increased to $229.6 million from
$211.1 million for the six months ended June 30, 1995 and 1994, respectively.
For the second quarter only, revenues increased to $115.8 million from $109.2
million for the same quarter in 1994. Realized investment gains for the second
quarter of 1994 includes a pretax gain of $3 million from the sale of
MidAmerica. Direct earned premiums for the segment were $210.2 million for the
first six months of 1995 compared with $184.8 million one year earlier. Earned
premiums increased 10.2% for the first six months of 1995 to $206.9 million from
$187.8 million; premiums earned for the quarter ended June 30, 1995 increased
8.5% to $104.2 million from $96 million for the same quarter in 1994. The
increase in earned premiums resulted primarily from growth in insurance
exposure.
Pooled net written premiums (including ALLIED Mutual) totaled $339.6 million, a
9.6% increase over production in the first six months of 1994. The average
premium per policy for personal lines was up 2.9% from the first six months of
1994 to $575 while the policy count grew 8%. The average premium per policy for
commercial lines excluding crop-hail increased 3.8% from the first six months of
1994 to $1,079 and the policy count was up 4.8%. Earned premiums for the
property-casualty segment were 65.6% personal lines and 34.4% commercial lines
in the first six months of 1995. The business mix for the first six months of
1994 was 65.4% personal lines and 34.6% commercial lines.
Income before income taxes increased to $32.4 million from $30 million in the
first six months of 1994 as a result of improved underwriting results and
increased premiums earned. Investment income for the first six months of 1995
was $19 million compared to $17.1 million for the same period in 1994. The
pretax yield on invested assets was 6.5% for the six months ended June 30, 1995
and 1994. Realized investment gains were $268,000 compared with $3.1 million in
the first six months of 1994. Other income for the first six months of 1995
increased to $3.4 million from $3 million for the same period in 1994.
The statutory combined ratio (after policyholder dividends) for the first six
months of 1995 improved to 94.6 from the 95.7 reported in the first six months
of 1994. Improvement in the combined ratio was primarily attributed to a 1.3
point decrease in the underwriting expense ratio. The improvement in
underwriting expense ratio was the result of the Company's continuing efforts to
improve efficiency and productivity. Wind and hail losses for the first six
months of 1995 increased to $16.2 million from $8.9 million for the same period
of 1994. The impact of wind and hail losses on the combined ratio was 7.8 points
and 4.7 points for the six months ended June 30, 1995 and 1994, respectively.
The underwriting gain (on a generally accepted accounting principles basis) was
$9.7 million compared with a gain of $6.7 million for the first six months of
1994. On a fully diluted basis, wind and hail losses cost the Company $0.76 per
share versus $0.42 per share in the first six months of 1994.
The following table presents the property-casualty's statutory combined ratio by
line of business for the three and six months ended June 30, 1995 and 1994:
<PAGE>
11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1995 1994 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
Personal automobile 94.7 93.3 94.4 94.8
Homeowners 104.6 115.1 104.1 107.2
Personal lines 97.2 98.5 96.8 97.7
Commercial automobile 88.9 98.7 93.3 95.5
Workers' compensation 61.9 69.9 70.0 79.6
Other property/liability 98.2 94.6 97.2 95.5
Other lines 47.5 56.4 50.8 64.9
Commercial lines 88.5 89.3 90.2 91.7
Total 94.2 95.3 94.6 95.7
</TABLE>
The private passenger auto statutory combined ratio improved to 94.4 for the
first six months of 1995 from 94.8 for the same period in 1994. The improvement
in the combined ratio for the private passenger auto was due primarily to a 1.2
point reduction in the underwriting expense ratio. The statutory combined ratio
for the homeowners line was 104.1 for the first six months of 1995 compared with
107.2 for the same period of 1994. The improvement in the combined ratio for
homeowners was due to a 1.8 point improvement in the underwriting expense ratio
and 17.2% growth in premiums earned that more than offset increases in losses
and loss settlement expenses. The impact of wind and hail losses on the combined
ratio for the homeowners line increased to 26.3 points from 16.0 points for the
first six months of 1994. Overall, the personal lines statutory combined ratio
improved to 96.8 in the first six months of 1995 from 97.7 in the same period of
1994. The statutory combined ratio for commercial lines improved to 90.2 in the
first six months of 1995 from 91.7 for the previous year's first half. The
improvement in commercial lines was primarily attributable to a 9.6 point
reduction in the combined ratio for workers' compensation to 70.0 from 79.6 for
the first six months of 1994.
Excess & Surplus Lines
Earned premiums increased to $14.1 million for the first six months of 1995 from
$12.3 million for the first six months of 1994. For the quarter only, earned
premiums increased 17.8% to $7.4 million from $6.2 million for the same period
in 1994. Net written premiums increased 20% to $15.5 million through June 30,
1995 from $12.9 million through June 30, 1994. Direct earned premiums increased
16.8% to $17.9 million for the six months ended June 30, 1995 from $15.3 million
for the same period in 1994. As of June 30, 1995, the segment's book of business
was comprised of 2.4% personal lines and 97.6% commercial lines. For the first
six months of 1994, the business mix was 3.1% personal lines and 96.9%
commercial lines.
The statutory combined ratio (after policyholder dividends) was 107.3, which
produced an underwriting loss (on a generally accepted accounting principles
basis) of $1.2 million for the first six months of 1995. The combined ratio of
<PAGE>
12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
96.1 for the first half of 1994 resulted in an underwriting gain of $331,000.
The combined ratio increased primarily because of a 39.9% increase in losses and
loss settlement expenses experienced in the first half of 1995. The loss
experience of the first half of 1995 increased the loss ratio 11.3 points from
the same half last year.
Income before income taxes for the six months ended June 30, 1995 decreased
44.5% to $1.6 million from $2.9 million; for the three months ended June 30,
1995, income before income taxes decreased to $539,000 from $1.4 million for the
three months ended June 30, 1994. Realized investment gains were $2,000 in the
first half of 1995 compared with losses of $26,000 for the first six months in
1994. Investment income for the first six months of 1995 increased 8.1% to $2.8
million from $2.6 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 half of 1994. Invested assets increased 11% from the previous year-end to
$88.3 million at June 30, 1995.
Noninsurance Operations
Prior to January 1, 1995, the Company disclosed noninsurance operations
(investment services and data processing) as reportable segments in accordance
with Statement of Financial Accounting Standards (SFAS) No. 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 No. 14. 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 half
of 1995 decreased 9.2% to $8.5 million from $9.4 million in 1994. The decrease
in revenues is primarily attributed to interest income decreasing $1.1 million
for the six months ended June 30, 1995. The decrease is due to a lower average
balance of securities held for sale in the first half of 1995. Income before
income taxes increased 17.7% to $2 million from $1.7 million for the first half
of 1994. Income before income taxes for the second quarter was up 28.4% to $1
million from $782,000. The servicing portfolio increased 15.8% to $3 billion at
June 30, 1995 from $2.6 billion at June 30, 1994. At December 31, 1994 the
servicing portfolio was $3 billion.
Data processing revenues decreased 6% for the first six months of 1995, to $22.6
million from $24 million for the same period of 1994. For the six months ended
June 30, 1995, data processing reported a loss before income taxes of $991,000
compared to income before income taxes of $1.3 million for the first half of
1994. The loss before income taxes is primarily due to a 13% decrease in
computer processing revenues for the six months ended June 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% of which had at least an "A" rating from
Standard & Poor's (or the equivalent from Moody's) at June 30, 1995. At the end
of the first six months of 1995, the fixed maturities portfolios consisted of
99.5% investment-grade securities. The fair value of the Company's investment in
<PAGE>
13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
fixed maturities held to maturity was $6 million above amortized cost compared
with $13.2 million below amortized cost at December 31, 1994. The portfolios
contained no commercial or residential real estate or mortgage loans.
Invested assets were up 10.2% to $723 million from $655.9 million at year-end
1994. Six-month consolidated investment income increased 14.5% to $22.9 million
from $20 million through June 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 June 30, 1995, the Company held collateralized mortgage obligation (CMO)
investments with a carrying and fair value of $68.8 million compared to a
carring value of $70.9 million (fair value $70.1 million) as of June 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 down to 28.5% from
28.6% at year-end 1994. The income tax expense for the first six months of 1995
was down to $10 million from $10.2 million for the same period in 1994. The
decrease was due in part to lower operating income in 1995.
New Accounting Standard
In May of 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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 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.
Regulations
The National Association of Insurance Commissioners' (NAIC) risk-based capital
(RBC) requirements were adopted by the NAIC in 1993 and require
property-casualty companies to calculate and report information under the RBC
formula. It is anticipated the Iowa legislature will enact the NAIC's proposal
into law in 1996. The RBC formula uses the statutory financial statements to
calculate the minimum indicated capital level to support asset (investment and
credit) risk and underwriting (loss reserves, premiums written, and unearned
premium) risk. Based upon the subsidiaries statutory financial statements and
management's interpretation of the RBC formula, management believes capital
levels are sufficient to support the level of risk inherent in Company
operations and are in excess of the minimums required.
<PAGE>
14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The NAIC's model legislation to govern insurance company investments is in
development. An exposure draft was released in August of 1994, and no specfic
timetable for completion and adoption of the final model legislation has been
determined.
California was the source of 24% of the pool's direct written premiums in 1994.
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 half of 1995, operating activities generated cash flows of $41.9
million; in the first six months of 1994, the total was $36.7 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 six months of 1995
and 1994 were used primarily to purchase investment-grade fixed securities which
accounted for the majority of the investing activities. Operating cash flows
were also used to pay $6.7 million of dividends to stockholders in the first six
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 $6.3 million.
Financing activities in the first half of 1995 generated funds of $13.4 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 4 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 June 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.
<PAGE>
15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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 June 30, 1995, short-term borrowings amounted to $28 million to be repaid
through the subsequent sale of securities inventory and long-term borrowings
amounted to $15 million to be repaid over 10 years. ALLIED Mortgage also had
$12.3 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 six months of 1995, the Company received dividend
payments of $5.5 million from the property-casualty subsidiaries and $313,000
from noninsurance subsidiaries. During the same period of 1994, the Company
received dividend payments of $3.3 million from the property-casualty
subsidiaries and $438,000 from noninsurance subsidiaries. Holding company
dividend payments to common stockholders totaled $3.1 million for the six months
ended June 30, 1995, up from $2.7 million for the same period in 1994. In the
first half of 1995 and 1994, the Company paid dividends of $1.9 million and $1.8
million on the ESOP Series preferred stock and 6-3/4% Series preferred stock
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 June 30, 1995,
the balance of the obligations was $27.8 million. Company contributions 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>
16
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on May 9, 1995.
(b) James W. Callison, Richard O. Jacobson, and John P. Taylor were
elected to serve as directors of the Company for a term of three
years which expires in 1998. Current directors whose terms expire
in 1996 are John E. Evans, William E. Timmons, and Donald S.
Willis. Current directors whose terms expire in 1997 are Harold S.
Carpenter, Charles I. Colby, and Harold S. Evans.
(c) With respect to the voting on the election of directors:
For Withheld
James W. Callison 14,744,094 171,917
Richard O. Jacobson 14,774,107 141,904
John P. Taylor 14,770,470 145,541
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
10.51 Second Amendment to ALLIED Group Employee Stock Ownership Plan,
dated May 15, 1995
10.52 Intercompany Cash Concentration Fund Agreement, dated April 24,
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 second
quarter ended June 30, 1995.
<PAGE>
17
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: August 4, 1995 /s/ Jamie H. Shaffer
---------------------------------------
Jamie H. Shaffer, President (Financial)
and Treasurer
<PAGE>
18
ALLIED Group, Inc. and Subsidiaries
INDEX TO EXHIBITS
EXHIBIT
NUMBER ITEM PAGE
10.51 Second Amendment to ALLIED Group Employee Stock Ownership 19
Plan, dated May 15, 1995
10.52 Intercompany Cash Concentration Fund Agreement dated
April 24, 1995 20
11 Statement re Computation of Per Share Earnings 30
27 Financial Data Schedule 31
<PAGE>
19
SECOND AMENDMENT
TO THE
ALLIED GROUP EMPLOYEE STOCK OWNERSHIP PLAN
By virtue and in exercise of the amending power reserved to ALLIED Group,
Inc. (the "Company") pursuant to section 12.1 of the ALLIED Group Employee Stock
Ownership Plan (the "Plan"), and pursuant to resolutions to amend adopted April
28, 1995, the Plan is hereby amended as set forth below, effective as of January
1, 1990.
1. Sections 9.1(a) and 9.4(a) of the Plan are hereby amended to delete the
following parenthetical language after the words "does not exceed $3,500"
in both Sections:
"(and in the past has never exceeded $3,500)"
and insert the following language in its place:
"(and at the time of any prior distribution has never exceeded
$3,500)"
2. Sections 9.1(b) and 9.4(b) of the Plan are hereby amended to delete the
following parenthetical language after the words "exceeds $3,500" in both
Sections:
"(or in the past has ever exceeded $3,500)"
and insert the following language in its place:
"(or at the time of any prior distribution has ever exceeded
$3,500)"
IN WITNESS WHEREOF, the undersigned has caused these presents to be signed
on behalf of the Company and its corporate seal affixed and attested, this 12th
day of May, 1995.
ALLIED Group, Inc.
By: /s/ Douglas L. Andersen
-----------------------------
Its: President (Property-casualty)
-----------------------------
Attest:
By: /s/ George T. Oleson
----------------------
Its: Secretary
----------------------
<PAGE>
20
INTERCOMPANY CASH CONCENTRATION FUND AGREEMENT
THIS AGREEMENT is made effective as of the 24th day of April, 1995 by and
among AID Finance Services, Inc. ("AID"), ALLIED Mutual Insurance Company
("Mutual"), ALLIED Group, Inc. ("AGI"), AMCO Insurance Company ("AMCO"), ALLIED
Property and Casualty Insurance Company ("APC"), Depositors Insurance Company
("Depositors"), Western Heritage Insurance Company ("WHIC"), ALLIED Group
Leasing Corporation ("AGLC"), ALLIED Group Information Systems, Inc. ("AGIS"),
Midwest Printing Services, Ltd. ("MWP"), The Freedom Group, Inc. ("TFG"), ALLIED
General Agency Company ("AGA"), ALLIED Life Financial Corporation ("ALFC"),
ALLIED Life Insurance Company ("Life"), ALLIED Group Merchant Banking
Corporation ("AGMBC"), ALLIED Life Brokerage Agency, Inc. ("ALBA"), ALLIED Group
Insurance Marketing Company ("AGIMC") and ALLIED Group Medical Plan Trust
("Trust") for and in consideration of their mutual promises and agreements. AID,
Mutual, AGI, AMCO, APC, Depositors, WHIC, AGLC, AGIS, MWP, TFG, AGA, ALFC, Life,
AGMBC, ALBA, AGIMC, and Trust shall be referred to collectively as the
"Companies". AMCO, APC, Depositors, WHIC, AGLC, AGIS, MWP, TFG and AGA, are
referred to collectively as the "AGI Subsidiaries." Life, AGMBC and ALBA are
referred to collectively as the "ALFC Subsidiaries." AID and AGIMC are referred
to collectively as the "Mutual Subsidiaries."
WITNESSETH:
WHEREAS, the Companies form part of the ALLIED Group of companies and while
retaining separate corporate identities wish to maximize their short term
investment power through the terms of this Agreement;
WHEREAS, the Companies have established a cash concentration fund (the "CCF
Fund") so that the Companies which have excess cash can deposit into the CCF
Fund and Companies that need cash can borrow from the CCF Fund; and
WHEREAS, Companies recognize that by pooling their cash into the CCF Fund,
cash can be invested for greater efficiency by reducing the number of
transactions and the costs related to each transaction; and
WHEREAS, the establishment of the CCF Fund was originally approved by the
Companies then in existence and the Investment Committees of the Boards of
Directors of AGI and Mutual on April 27, 1987; and
WHEREAS, the CCF Fund has operated for the benefit of the Companies since
its establishment in 1987; and
WHEREAS, this Agreement is intended to provide the terms of operation of
the CCF Fund; and
WHEREAS, the Companies acknowledge that this Agreement is to their mutual
benefit and agree to be bound by the terms herein.
<PAGE>
21
NOW, THEREFORE, for the mutual covenants contained herein and other good
and valuable consideration, the Companies agree as follows:
I. FUND INVESTMENTS
1.1. Management and Investment. AID shall be the entity which manages the
CCF Fund, and AID shall have discretion as to how to invest deposits of the
Companies except as limited hereinafter.
1.2. Limitation on Investment. The CCF Funds may be invested by AID in
overnight money market accounts, commercial checking accounts, intercompany
borrowings and any other short term investment grade vehicles approved by the
Investment Committees of the Board of Directors of AGI, Mutual and ALFC.
1.3. Liquidity. AID shall maintain sufficient liquidity in the CCF Fund to
allow for withdrawals.
1.4. Recordkeeping. AID will maintain investment and other appropriate
records as are necessary to fulfill the terms of this Agreement.
II. MANAGEMENT FEE
2.1. Daily Management Fee. AID shall be paid a daily management fee for
managing the CCF Fund.
2.2. Calculation of Management Fee. Said management fee shall be earned at
the rate of five (5) basis points of amount of invested assets in the CCF Fund
at the end of each day and shall be paid on the last day of each month.
III. EARNINGS/LOSS ALLOCATIONS
3.1. Earnings Calculation. Each of the Companies share of the earnings of
CCF Fund investments shall be determined daily at the close of each day after
deduction for the management fee to AID. Said share of CCF Fund earnings shall
be based on the ratio of the amount of cash the individual Company has in the
CCF Fund to the total amount invested in the CCF Fund multiplied by the daily
earnings of the CCF Fund.
3.2. Payment of Earnings. Payments to each of the Companies for their
proportionate share of CCF Fund earnings shall be made on the last day of each
month and shall be the sum of all of the individual Companies daily earnings
allocations computed for said month.
3.3. Loss Allocation. If any of the CCF Fund investments shall become
worthless or be sold at a loss, the loss of principal shall be borne by AID who
shall make the other Companies whole for principal contributed.
<PAGE>
22
IV. DEPOSIT/WITHDRAWAL PROCEDURE
4.1. Deposit Procedures. All deposits to the CCF Fund made by any of the
Companies shall be made to the Accounting Department and posted to the balance
account of the depositing Companies. be made to be made to
(a) Cash Deposits Prior to 3 p.m. (CST). As long as a cash deposit is
made by 3 p.m. (CST) it will be reflected on the Company's balance and earn
income from the day of the deposit until withdrawal.
(b) Cash Deposits Received at or After 3 p.m. (CST). Any deposit being
made at or later than 3 p.m. (CST) shall not be reflected in the depositing
Companies balance until the following day and, therefore, shall not earn income
until reflected in the account balance.
(c) Wire Transfer Deposits Prior to 10 a.m. (CST). To assure receiving
credit for a deposit on the day of a wire transfer notification must be received
by AID, through the Accounting Department, by 10 a.m. (CST) on that day.
(d) Wire Transfer Deposits Received at or After 10 a.m. (CST). In the
event any wire transfer deposit is receive at or later than 10 a.m. (CST) on any
day, AID will attempt to transact the deposit that same day but is not required
to do so until the following day.
4.2. Withdrawal Procedures. Withdrawal of any or all monies invested in the
CCF Fund can be done on a daily basis by contacting AID through the Accounting
Department.
(a) Wire Transfer Withdrawals Prior to 10 a.m. (CST). To assure
receiving a withdrawal on the day requested, said withdrawal communication must
be received by AID through the Accounting Department by 10 a.m. (CST) of the day
the withdrawal is requested.
(b) Wire Transfer Withdrawals Received at or After 10 a.m. (CST). If
any request for withdrawal is received at or later than 10 a.m. (CST) on any
day, AID will attempt to transact the withdrawal the same day it is requested
but is not required to do so until the following day.
4.3. All Participation is Discretionary. All participation in the CCF Fund
pursuant to this Agreement is at the discretion of the individual Companies.
V. LOAN PROCEDURES
5.1 Loan from CCF Fund. Companies wishing to borrow money from the CCF Fund
for short term loans (30 days or less) should deliver a loan request to AID,
through the Accounting Department. AID will have sole and absolute discretion as
to whether the loan is approved based on the then current intercompany borrowing
policy.
<PAGE>
23
5.2 Loan Documentation. The Companies agree to complete loan document
similar to those attached hereto as Exhibit A. The terms of the loan shall be as
specified in the loan document.
VI. TERM, TERMINATION, AND CHANGE OF CONTROL
6.1. Term and Termination. This Agreement shall be effective on April 24,
1995 and shall continue in effect until AID delivers to the other Companies a
written notice that the Agreement is terminated. If one or more of the Companies
other than AID intends to cease participation in the Agreement as to it as of a
specified date thereafter such Company is required to give written notice to AID
prior to the specified date of termination.
6.2. Change of Control. A change of control in any of the Companies which
results in a majority interest held by a person or entity other than one of the
Companies shall automatically terminate this Agreement as to that company and
all funds invested in the CCF Fund will be immediately returned to any company
terminated by this paragraph.
VII. DISPUTE RESOLUTION
7.1. AGI and AGI Subsidiaries. Any controversy, claim, or dispute arising
out of or relating to this Agreement, or breach thereof, among or between AGI
and the AGI Subsidiaries shall be resolved by AGI's Board of Directors, the
decision of which shall be binding.
7.2. Mutual and Mutual Subsidiaries. Any controversy, claim, or dispute
arising out of or relating to this Agreement, or breach thereof, among or
between Mutual and the Mutual Subsidiaries shall be resolved by Mutual's Board
of Directors, the decision of which shall be binding.
7.3. ALFC and ALFC Subsidiaries. Any controversy, claim, or dispute arising
out of or relating to this Agreement, or breach thereof, among or between ALFC
and the ALFC Subsidiaries shall be resolved by ALFC's Board of Directors, the
decision of which shall be binding.
7.4. Between AGI and/or AGI Subsidiaries and Mutual and/or Mutual
Subsidiaries. Any controversy, claim or dispute arising out of or relating to
this Agreement, or breach thereof, among or between AGI and/or AGI Subsidiaries
and Mutual and/or the Mutual Subsidiaries shall be resolved by the Coordinating
Committee members of the Boards of Directors of AGI and Mutual, the decision of
which shall be final.
7.5. Between Mutual and/or Mutual Subsidiaries and ALFC and ALFC
Subsidiaries. Any controversy, claim or dispute arising out of or relating to
this Agreement, or breach thereof, among or between Mutual and/or Mutual
Subsidiaries and ALFC and/or the ALFC Subsidiaries shall be resolved by the
Coordinating Committee members of the Boards of Directors of Mutual and ALFC,
the decision of which shall be final.
<PAGE>
24
7.6. Between ALFC and/or ALFC Subsidiaries and AGI and AGI Subsidiaries.
Any controversy, claim or dispute arising out of or relating to this Agreement,
or breach thereof, among or between ALFC and/or ALFC Subsidiaries and AGI and/or
the AGI Subsidiaries shall be resolved by the Coordinating Committee members of
the Boards of Directors of ALFC and AGI, the decision of which shall be final.
7.7. All Other Disputes. Any controversy, claim, or dispute arising out of
or relating to this Agreement, or breach thereof, between any of (i) AGI and/or
the AGI Subsidiaries, (ii) Mutual and/or the Mutual Subsidiaries, and (iii) ALFC
and/or the ALFC Subsidiaries shall be resolved by the Coordinating Committee
members of the Boards of Directors of AGI, Mutual and ALFC, the decision of
which shall be binding.
7.8. Arbitration. If a controversy, claim, or dispute cannot be resolved
pursuant to Sections 7.1 through 7.7, then it will be submitted to binding
arbitration as set forth hereafter.
(a) Consent to Arbitration. Each party to this Agreement hereby
consents and agrees that any dispute between the parties hereto with respect to
the interpretation, performance, or breach of any of the terms of this Agreement
or the transactions contemplated hereby which cannot be resolved by the
Coordinating Committee shall be referred to arbitration conducted in accordance
with the rules and procedures of the American Arbitration Association ("AAA"),
upon written request of the disputing party hereto delivered to the party with
which it has a dispute. Within thirty (30) days of the delivery of such written
notice, each party involved shall nominate an AAA-licensed arbitrator (the
"Party Arbitrators"). Within thirty (30) days of their nomination, if there are
two Party Arbitrators, the Party Arbitrators shall select a third AAA-licensed
arbitrator (the "Third-Arbitrator") and shall give the parties hereto written
notice of such choice. If there are three parties to the dispute and each party
selects a Party Arbitrator, the three Party Arbitrators selected shall
constitute the Arbitrators without further selection. If there are more than
three parties to the dispute, the parties to this Agreement agree that Mutual
shall represent Mutual and Its Subsidiaries, ALFC shall represent ALFC and Its
Subsidiaries, and AGI shall represent AGI and Its Subsidiaries.
(b) Authority of Arbitrators. The arbitrators shall be empowered to
decide all issues submitted to arbitration using principles of law and equity
and, if required, by application of any customary practices in the insurance and
reinsurance industries. The arbitrators shall be relieved of all judicial
formalities and shall not be required to follow any rules of evidence except as
such rules may be imposed on arbitration proceedings conducted in accordance
with the laws of the State of Iowa, but the arbitrators shall attempt to enforce
the intents and purposes of this Agreement to the extent practicable and in
accordance with Iowa law. The decision of a majority of the arbitrators shall be
final and binding on each of the parties to the arbitration proceeding.
<PAGE>
25
(c) Expenses; Location. Each party to the dispute shall bear the
expenses of its respective Party Arbitrator. If only two parties are involved in
the arbitration, the involved parties shall jointly share all other expenses of
the arbitration proceeding and the expenses of the Third Arbitrator. The
arbitration proceeding shall take place at Des Moines, Iowa unless another
location is mutually agreed upon by the parties. The arbitration proceeding
shall be governed by the laws of the State of Iowa. The parties hereto hereby
agree that any information respecting any matters submitted to arbitration in
accordance with the foregoing or any aspect of the arbitration proceeding itself
shall be treated as confidential and will not be disclosed to anyone not
employed or acting on behalf of a party hereto in connection with such
arbitration or used at any time in any manner that is adverse to the interests
of either party hereto but, in any such case, such information may be disclosed
if such disclosure is made in connection with either party's prosecution or
defense of any legal proceedings or if such disclosure is required pursuant to a
subpoena or other legal order issued by any judicial or regulatory body or is
otherwise required by law.
(d) Restriction. Anything set forth herein to the contrary
notwithstanding, with respect to any issue to be determined by arbitration, each
of the parties to the arbitration proceeding shall submit in writing to the
arbitrators the party's proposed resolution of such issue. The arbitrators shall
be constrained in their decision relating to such issue to select only between
the proposed resolutions of the parties, and the arbitrators shall have no
discretion to fashion any compromise or other resolution of the issue submitted
for arbitration.
VIII. CONFIDENTIAL INFORMATION AND TRADE SECRETS
8.1. Confidentiality. Each party to this Agreement shall keep confidential,
except as the other party or parties may otherwise consent in writing, and,
except for the other parties' benefit, not disclose or make any use of at any
time and for any purpose whatsoever, any trade secrets, confidential
information, knowledge, data, trademarks or trade names, or other information of
any of the Companies to their products, know-how, designs, customer lists,
business plans, marketing plans and strategies, pricing strategies, or other
subject matter pertaining to any business of the Companies or any of their
clients, customers, consultants, licensees, or affiliates, which the party has
obtained or may obtain, or otherwise acquire during the course of contacts,
discussions, negotiation, or agreement with any of the other parties, except as
herein provided (hereafter, collectively, "Confidential Information"). No party
shall deliver, reproduce or in any way allow any Confidential Information of the
other parties or any documentation relating thereto, to be delivered to or used
by any third parties without specific written direction or consent of a duly
authorized officer of the other party.
<PAGE>
26
8.2. Permissive Release of Confidential Information. Notwithstanding the
provisions of Section VIII of this Agreement, any Confidential Information may
be used in connection with any arbitration relating to the transactions
contemplated by this Agreement and such information may be disclosed if such
disclosure is made in connection with the parties' prosecution or defense of any
legal proceedings or if such disclosure is required pursuant to a subpoena or
other legal order issued by any judicial or regulatory body or is otherwise
required by law.
IX. MISCELLANEOUS
9.1. Assignment. This Agreement, including any or all rights and
obligations hereunder, shall not be assigned by any of the parties to any third
party without the prior written consent of all of the other parties. Except as
otherwise provided in this Agreement, the obligations and rights of the parties
shall be binding upon and inure to the benefit of any assignee, transferee,
successor, or receiver of each of the parties.
9.2. Waiver; Remedies. No delay or omission of any party to this Agreement
to exercise any right or power hereunder shall impair such right or power or be
a waiver of any default or an acquiescence therein; and any single or partial
exercise of any such right or power shall not preclude other or further exercise
thereof or the exercise of any other right. In addition to any rights granted
herein, the parties hereto shall have and may exercise any and all rights and
remedies now or hereafter provided by law except as may be limited by Section V
of this Agreement.
9.3. Notices. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally or if mailed by certified or registered mail (return
receipt requested) to the party at its address as set forth on the signature
page of this Agreement. Any notice given as provided in this Section 9.3, if
given personally, shall be effective upon delivery, or if given by certified or
registered mail, shall be effective three days after deposit in the mail. Any
party hereto may change the address at which it is to be given notice by giving
notice to the other party as provided in this Section 9.3.
9.4. Governing Law. This Agreement shall be deemed to be a contract made
under the laws of the State of Iowa and shall be construed and interpreted under
the laws of such state applicable to contracts made and to be performed entirely
within such state.
9.5. Enforceability. If any one or more of the covenants, agreements,
provisions, or other terms of this Agreement shall be for any reason whatsoever
determined to be invalid, then such terms shall be deemed severable from the
remaining terms of this Agreement and shall in no way affect the validity or
enforceability of the other terms of this Agreement and such invalid terms shall
<PAGE>
27
be replaced by valid terms bearing the closest possible similarity in substance
so that the intentions and purposes being the basis of this Agreement could be
enforced to the greatest extent permitted by law.
9.6. Survival of Representations, Warranties, and Covenants. All covenants,
agreements, representations, and warranties made in this Agreement by any of the
parties hereto, including but not limited to, the indemnification provisions set
forth herein, shall be effective on the effective date hereof and thereafter.
9.7. Counterparts. This Agreement may be executed simultaneously in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.8. Headings. The headings in the sections and subsections of this
Agreement are inserted for convenience only and shall not constitute a part
hereof.
9.9. Entire Agreement. This Agreement, including the schedules and addenda
referred to herein and any documents executed by the parties simultaneously
herewith constitute the entire understanding and agreement of the parties hereto
and supersede all other prior agreements and understandings, written or oral,
between the parties with respect to the transactions contemplated herein.
Provided, however, the foregoing shall not operate or be construed to prohibit
proof of prior understandings and agreements between or among the parties to the
extent necessary to properly construe or interpret this Agreement.
9.10. Amendments. Any changes to this Agreement and any further obligations
of the parties to each other must be in writing and executed by their respective
duly authorized officers.
The remainder of this page is intentionally left blank.
<PAGE>
28
AID Finance Services, Inc. ALLIED Mutual Insurance
Company
By:__________________________ By:________________________________
Jamie H. Shaffer Douglas L. Andersen
Title: President (Financial) Title:President (Property-Casualty)
Date:________________________ Date:______________________________
ALLIED Group, Inc. AMCO Insurance Company
By:__________________________ By:________________________________
Jamie H. Shaffer Douglas L. Andersen
Title: President (Financial) Title:President (Property-Casualty)
Date:________________________ Date:______________________________
ALLIED Property and Casualty Depositors Insurance Company
Insurance Company
By:__________________________ By:________________________________
Douglas L. Andersen Douglas L. Andersen
Title:President (Property- Title:President (Property-Casualty)
Casualty)
Date:________________________ Date:______________________________
Western Heritage Insurance ALLIED Group Leasing
Company Corporation
By:__________________________ By:________________________________
Joe Olson Jamie H. Shaffer
Title: President Title: President (Financial)
Date:________________________ Date:______________________________
ALLIED Group Information Midwest Printing Services,
Systems, Inc. Ltd.
By:__________________________ By:________________________________
Bob O. Myers C. Mel Roe
Title: President Title: President
Date:________________________ Date:______________________________
The Freedom Group, Inc. ALLIED General Agency Company
By:__________________________ By:________________________________
Larry J. Kane Douglas L. Andersen
Title: President Title:President (Property-Casualty)
Date:________________________ Date:______________________________
<PAGE>
29
ALLIED Life Financial ALLIED Life Insurance Company
Corporation
By:__________________________ By:_________________________________
Samuel J. Wells Samuel J. Wells
Title: President Title: President
Date:________________________ Date:_______________________________
ALLIED Group Merchant Banking ALLIED Life Brokerage Agency,
Corporation Inc.
By:__________________________ By:_________________________________
Paul G. McGillivray Samuel J. Wells
Title: President Title: President
Date:________________________ Date:_______________________________
ALLIED Group Insurance ALLIED Group Medical Plan
Marketing Company Trust
By:__________________________ By:_________________________________
William G. Stevenson George T. Oleson, Trustee
Title: President
Date:_______________________________
Date:_______________________
By:_________________________________
Jamie H. Shaffer, Trustee
Date:_______________________________
By:_________________________________
Charles H. McDonald, Trustee
Date:_______________________________
<PAGE>
30
Exhibit 11
ALLIED Group, Inc. and Subsidiaries
Computation of Per Share Earnings
For the Three and Six Months Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Primary
Net income $ 12,756,169 $ 13,835,948 $ 25,140,492 $ 25,307,149
Preferred stock dividends (1,809,594) (1,829,030) (3,629,532) (3,662,460)
Stock options in subsidiary (82,520) (57,857) (160,686) (127,677)
------------ ------------ ------------ ------------
Adjusted net income $ 10,864,055 $ 11,949,061 $ 21,350,274 $ 21,517,012
============ ============ ============ ============
Earnings per share $ 1.17 $ 1.31 $ 2.32 $ 2.35
============ ============ ============ ============
Weighted average shares
outstanding 9,170,716 8,960,494 9,102,882 9,017,121
Dilutive effective of
unexercised
stock options* 94,609 153,606 117,798 149,955
------------ ------------ ------------ ------------
9,265,325 9,114,100 9,220,680 9,167,076
============ ============ ============ ============
Fully Diluted
Net income $ 12,756,169 $ 13,835,948 $ 25,140,492 $ 25,307,149
Preferred stock dividends (878,780) (878,779) (1,757,559) (1,757,559)
Stock options in subsidiary (82,847) (57,919) (161,323) (127,860)
Additional net ESOP
expenses-assuming
conversion of ESOP Series
preferred stock (45,079) (80,131) (90,157) (160,263)
------------ ------------ ------------ ------------
Adjusted net income $ 11,749,463 $ 12,819,119 $ 23,131,453 $ 23,261,467
============ ============ ============ ============
Earnings per share $ .84 $ .92 $ 1.66 $ 1.67
============ ============ ============ ============
Weighted average shares
outstanding 13,829,344 13,711,944 13,785,473 13,780,908
Dilutive effective of
unexercised stock option* 94,609 158,101 121,728 158,101
------------ ------------ ------------ ------------
13,923,953 13,870,045 13,907,201 13,939,009
============ ============ ============ ============
</TABLE>
* Primary - Based on average market price
Fully Diluted - Based on the higher of the average market price or the market
price at June 30 of each year
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
GROUP, INC'S JUNE 30, 1995 FORM 10-Q AND IS QUALIFIED IN ITS ENTIREITY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000774624
<NAME> ALLIED GROUP, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1.00000
<DEBT-HELD-FOR-SALE> 311,312,326
<DEBT-CARRYING-VALUE> 386,659,628
<DEBT-MARKET-VALUE> 392,636,057
<EQUITIES> 4,904,288
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 722,967,111
<CASH> 1,684,824
<RECOVER-REINSURE> 22,005,332
<DEFERRED-ACQUISITION> 40,528,132
<TOTAL-ASSETS> 972,460,631
<POLICY-LOSSES> 323,809,251
<UNEARNED-PREMIUMS> 191,104,816
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 64,528,788
<COMMON> 9,224,193
0
84,621,319
<OTHER-SE> 220,981,559
<TOTAL-LIABILITY-AND-EQUITY> 972,460,631
221,063,920
<INVESTMENT-INCOME> 22,939,267
<INVESTMENT-GAINS> 262,555
<OTHER-INCOME> 22,696,152
<BENEFITS> 151,978,655
<UNDERWRITING-AMORTIZATION> 48,627,819
<UNDERWRITING-OTHER> 11,964,906
<INCOME-PRETAX> 35,174,126
<INCOME-TAX> 10,033,634
<INCOME-CONTINUING> 25,140,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,140,492
<EPS-PRIMARY> 2.360
<EPS-DILUTED> 1.690
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
