<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, 1996
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, 1996:
13,563,182 shares of Common Stock.
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2
PART I
Item 1. Financial Statements
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(in thousands)
<S> <C> <C>
Assets
Investments
Fixed maturities - available for sale at fair value
(amortized cost $742,947 and $726,726) $ 750,506 $ 754,547
Equity securities at fair value (cost $12,350 and $7,527) 13,394 7,948
Short-term investments at cost (note 2) 7,382 9,802
Other investments at equity 10 2
------------ ------------
Total investments 771,292 772,299
Cash 1,849 1,465
Accrued investment income 10,666 10,467
Accounts receivable 83,059 76,118
Current income taxes recoverable 6,559 1,330
Reinsurance receivables for losses and loss adjusting expenses 21,151 19,293
Mortgage loans held for sale (note 3) 13,411 13,673
Deferred policy acquisition costs 44,165 41,688
Prepaid reinsurance premiums 6,930 6,784
Mortgage servicing rights 35,071 35,705
Deferred income taxes 3,049 ---
Other assets 36,570 31,776
------------ ------------
Total assets $ 1,033,772 $ 1,010,598
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
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3
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(in thousands)
<S> <C> <C>
Liabilities
Losses and loss adjusting expenses $ 350,154 $ 341,864
Unearned premiums 207,558 196,461
Outstanding drafts 18,773 13,708
Indebtedness to affiliates 2,114 1,019
Notes payable to nonaffiliates (note 3) 41,179 35,965
Notes payable to affiliates (note 2) 5,450 3,500
Guarantee of ESOP obligations 26,120 26,270
Deferred income taxes --- 2,854
Other liabilities 34,112 37,371
------------ ------------
Total liabilities 685,460 659,012
------------ ------------
Stockholders' equity
Preferred stock, no par value, issuable in series,
authorized 7,500 shares
6-3/4% Series, 1,827 shares issued and outstanding 37,813 37,813
ESOP Series, issued and outstanding 2,993 shares in 1995 (note 4) --- 45,835
Common stock, no par value, $1 stated value, authorized 40,000 shares,
issued and outstanding 13,813 shares in 1996 and 9,445 shares in
1995 (notes 4 and 5) 13,813 9,445
Additional paid-in capital 140,840 104,596
Retained earnings 173,048 159,470
Unrealized appreciation of investments (net of deferred
income tax expense of $3,028 in 1996 and $9,907 in 1995) 5,575 18,335
Unearned compensation related to ESOP (22,777) (23,908)
------------ ------------
Total stockholders' equity 348,312 351,586
------------ ------------
Total liabilities and stockholders' equity $ 1,033,772 $ 1,010,598
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
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4
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1996 1995 1996 1995
---------- ----------- ----------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues
Earned premiums $ 121,114 $ 111,583 $ 239,984 $ 221,064
Investment income 12,044 11,664 24,163 22,939
Realized investment gains 31 248 39 263
Other income (note 2) 13,396 11,191 25,734 22,696
---------- ----------- ----------- ----------
146,585 134,686 289,920 266,962
---------- ----------- ----------- ----------
Losses and expenses
Losses and loss adjusting expenses 95,056 77,547 176,038 151,979
Amortization of deferred policy
acquisition costs 26,663 24,496 52,825 48,628
Other underwriting expenses 3,653 5,693 9,867 11,965
Other expenses 10,070 8,558 20,096 18,292
Interest expense 602 478 769 924
---------- ----------- ----------- ----------
136,044 116,772 259,595 231,788
---------- ----------- ----------- ----------
Income before income taxes 10,541 17,914 30,325 35,174
---------- ----------- ----------- ----------
Income taxes
Current 2,917 6,259 7,906 11,640
Deferred 76 (1,101) 923 (1,606)
---------- ----------- ----------- ----------
2,993 5,158 8,829 10,034
---------- ----------- ----------- ----------
Net income $ 7,548 $ 12,756 $ 21,496 $ 25,140
========== =========== =========== ==========
Net income applicable to common stock $ 6,669 $ 10,947 $ 19,143 $ 21,511
========== =========== =========== ==========
Earnings per share
Primary $ .48 $ 1.19 $ 1.56 $ 2.36
========== =========== =========== ==========
Fully diluted $ .48 $ .86 $ 1.42 $ 1.69
========== =========== =========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
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5
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 21,496 $ 25,140
Adjustments to reconcile net income to net cash
provided by operating activities
Losses and loss adjusting expenses 8,290 12,813
Unearned premiums, net 10,951 10,544
Deferred policy acquisition costs (2,477) (2,259)
Accounts receivable, net (8,799) (7,421)
Depreciation and amortization 5,150 4,151
Realized investment gains (39) (263)
Mortgage loans held for sale, net (1,924) (1,062)
Indebtedness with affiliates 1,095 (38)
Accrued investment income (199) 519
Other assets (4,024) (71)
Cost of ESOP shares allocated 1,131 875
Income taxes
Current (5,229) (446)
Deferred 923 (1,606)
Other, net 2,877 1,022
---------- ----------
Net cash provided by operating activities 29,222 41,898
---------- ----------
Cash flows from investing activities
Purchase of fixed maturities - available for sale (97,278) (86,746)
Purchase of equity securities (5,304) (189)
Purchase of equipment (5,998) (4,572)
Sale of fixed maturities - available for sale 16,829 28,868
Maturities, calls, and principal reductions of fixed maturities 63,687 21,319
Sale of equity securities 520 66
Short-term investments, net 2,419 1,007
Sale of equipment 78 106
---------- ----------
Net cash used in investing activities (25,047) (40,141)
---------- ----------
Cash flows from financing activities
Notes payable to nonaffiliates, net 7,400 875
Notes payable to affiliates, net 1,950 1,460
Issuance of common stock 1,156 2,365
Repurchase of common stock (6,379) ---
Dividends paid to stockholders, net of income tax benefit (7,918) (6,313)
---------- ----------
Net cash used in financing activities (3,791) (1,613)
---------- ----------
Net increase in cash 384 144
Cash at beginning of year 1,465 1,541
---------- ----------
Cash at end of quarter $ 1,849 $ 1,685
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
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6
ALLIED Group, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The accompanying interim consolidated financial statements include the accounts
of ALLIED Group, Inc. and its subsidiaries (collectively, the Company) on a
consolidated basis. 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. All such adjustments
are of a normal and recurring nature. All significant intercompany balances and
transactions have been eliminated and certain amounts have been reclassified to
conform to current-period presentation. 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. 1995 Annual Report to Stockholders.
At June 30, 1996, The ALLIED Group Employee Stock Ownership Trust (ESOP Trust)
owned 26.4% 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.
(2) Transactions with Affiliates
Pursuant to the terms of the Intercompany Operating Agreement, the Company
leases employees to its subsidiaries and ALLIED Mutual and certain of its
subsidiaries. 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 $1.4 million and
$1.3 million for employees leased to affiliates for the six months ended June
30, 1996 and 1995, respectively, which are included in other income.
A subsidiary of the Company provides data processing and other services for
ALLIED Mutual and its subsidiaries. Included in other income are revenues of
$645,000 and $1.1 million relating to services performed for ALLIED Mutual and
subsidiaries for the first half of 1996 and 1995, 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 million in excess of $5 million.
ALLIED Mutual's and the reinsurance company's participation in such agreement
are 90% and 10%, respectively. Premiums paid by the property-casualty segment to
ALLIED Mutual were $1.8 million and $1.2 million in the first six months of 1996
and 1995, respectively. There were recoveries from ALLIED Mutual under the
agreement of $3 million and $1.6 million in the first half of 1996 and 1995,
respectively.
The Company and its affiliates deposit their excess cash into a short-term
investment fund. The fund was established to concentrate short-term cash in a
single account to maximize yield. AID Finance Services, Inc., a wholly owned
subsidiary of ALLIED Mutual, is the fund administrator. At June 30, 1996, the
Company had $3.5 million invested in the fund and had several unsecured notes
payable to the fund totaling $5.5 million. The interest rates on the borrowings
range from 5.5% to 8.5%.
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7
Interest income from affiliates of $219,000 and $174,000 in the first half of
1996 and 1995, respectively. Interest expense with affiliates was $111,000 and
$59,000 in the first six months of 1996 and 1995, respectively.
(3) Notes Payable to Nonaffiliates
At June 30, 1996, ALLIED Group Mortgage Company (ALLIED Mortgage) had borrowed
$20.3 million 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 million or 98% of the
mortgage credit borrowing base. The outstanding borrowings of ALLIED Mortgage
were secured by $13.4 million of pledged mortgage loans held for sale, mortgage
servicing rights on loans with a principal balance of $2.9 billion, and
foreclosure loans. Interest rates applicable to ALLIED Mortgage's borrowing
arrangements vary with the level of investable deposits maintained at the
respective commercial banks.
ALLIED Mortgage had $13.5 million of 8.4% senior secured notes outstanding as of
June 30, 1996. 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 $1.5 million 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 million committed credit
facility through a line of credit agreement with AMCO Insurance Company (AMCO)
that expires March 1997. Interest on any outstanding borrowings is payable at an
annual rate equal to the federal funds unsecured rate for Federal Reserve member
banks, which was 5.5% at June 30, 1996. There was an outstanding balance of $3
million at June 30, 1996. AMCO also had $4.4 million outstanding at the end of
the second quarter on an uncommitted basis. Borrowings with the Federal Home
Loan Bank of Des Moines were secured by United States Government securities with
a carrying value of $10.5 million at June 30, 1996.
(4) ESOP Convertible Preferred Stock
On March 6, 1996, the ESOP Trustee elected to convert the ESOP Convertible
Preferred Stock (ESOP Series) to common stock. Each share of ESOP Series was
convertible to 1.5 shares of common stock. The ESOP Trustee converted 2.9
million shares of ESOP Series into 4.4 million shares common stock, raising the
total common shares issued and outstanding to 13.9 million. The conversion was
completed on March 7, 1996.
(5) Common Stock
As of June 30, 1996, the Company had repurchased 164,500 shares of common stock
on the open market at an average price per share of $38.78. The plan to
repurchase 250,000 shares of common stock pursuant to Rule 10b-18 of the
Securities Exchange Act of 1934 was approved by the Board of Directors on
December 14, 1994. The actual number of shares to be repurchased is dependent
upon market condition and may be terminated at the Company's discretion (note
7).
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8
(6) 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 coverage 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 lease fees from affiliates).
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
-------------- --------------
(in thousands)
<S> <C> <C>
Revenues (1)
Property-casualty $ 249,960 $ 229,603
Excess & surplus lines 17,443 16,954
Eliminations and other 22,517 20,405
-------------- --------------
Total $ 289,920 $ 266,962
============== ==============
Income before income taxes (1)
Property-casualty $ 25,094 $ 32,365
Excess & surplus lines 3,578 1,620
Eliminations and other 1,653 1,189
-------------- --------------
Total $ 30,325 $ 35,174
============== ==============
June 30, December 31,
1996 1995
-------------- --------------
(in thousands)
Assets
Property-casualty $ 869,942 $ 847,401
Excess & surplus lines 123,028 122,200
Eliminations and other 40,802 40,997
-------------- --------------
Total $ 1,033,772 $ 1,010,598
============== ==============
(1) Including realized investment gains or losses.
</TABLE>
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9
(7) Subsequent Event
Subsequent to the quarter ended June 30, 1996, the Company repurchased the
remaining 85,500 shares of common stock allowable under the December 14, 1994
stock repurchase plan. On July 15, 1996, the Company completed the repurchase
and cancellation of 250,000 shares of its own common stock on the open market at
an average price per share of $38.37.
On July 16, 1996, the Company's Board of Directors approved a plan to repurchase
an additional 250,000 shares of the Company's common stock on the open market
pursuant to Rule 10b-18. The actual number of shares repurchased is dependent
upon market conditions, and the plan may be terminated at the Company's
discretion. The Company has no present intention to cause its shares to be
delisted or deregistered as a result of this repurchase program.
<PAGE>
10
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, 1995.
ALLIED Group, Inc., a regional insurance holding company, and its subsidiaries
(collectively, the Company) operate exclusively in the United States and
primarily in the central and western states. The Company's largest segment
includes three property-casualty insurance companies that write personal lines
(primarily automobile and homeowners) and small commercial lines of insurance.
The other reportable segment is excess & surplus lines insurance.
Property-casualty insurance was the most significant segment, accounting for
86.2% of consolidated revenues for the six months ended June 30, 1996.
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.
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, 1996 were $289.9
million, up 8.6% over the $267 million reported for the first half of 1995. For
the second quarter only, consolidated revenues increased 8.8% over the second
quarter in 1995. The increase occurred primarily because of the growth in earned
premiums for the three and six months ended June 30, 1996.
Income before income taxes for the first half of 1996 was down to $30.3 million
from $35.2 million for the same period in 1995. For the second quarter only,
income before income taxes was down 41.2% to $10.5 million from $17.9 million
for the same quarter in 1995 due to higher wind and hail losses experienced by
the property-casualty segment in the second quarter. Wind and hail losses were
up 45.9% for the first half of 1996 compared to the same period in 1995.
Net income was down 14.5% to $21.5 million, bringing fully diluted earnings per
share to $1.42 for the six months ended June 30, 1996, from $25.1 million ($1.69
per share) for the corresponding period in 1995. Fully diluted earnings per
share before net realized gains were $1.42 for the first six months of 1996
compared with $1.68 for the same period of 1995. For the three months ended June
30, 1996 and 1995, fully diluted earnings before net realized gains were $0.48
and $0.85, respectively.
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11
Book value per share at June 30, 1996 was $24.13 down from $24.23 at December
31, 1995. The decline in book value was primarily the result of the recent
upward trend in interest rates and from the higher wind and hail losses
experienced in the second quarter of 1996. At June 30, 1996, the fair value of
investments in fixed maturities were $7.6 million above amortized cost compared
to $27.8 million above amortized cost at December 31, 1995. If the effect of
reporting fixed maturity investments at market were excluded, the book value at
June 30, 1996 was $23.77 compared to $22.94 at December 31, 1995.
Property-casualty
Revenues for the property-casualty segment increased to $250 million from $229.6
million for the six months ended June 30, 1996 and 1995, respectively. For the
second quarter only, revenues increased to $126.1 million from $115.8 million
for the same quarter in 1995. Direct earned premiums for the segment were $237.9
million for the first half of 1996 compared with $210.2 million one year
earlier. Earned premiums increased 9% for the first six months of 1996 to $225.6
million from $206.9 million; earned premiums for the second quarter only
increased 9.3% to $113.9 million from $104.2 million for the same quarter in
1995. The increase resulted primarily from growth in insurance exposure.
Investment income for the first six months of 1996 was $20.6 million compared to
$19 million for the same period in 1995. The pretax yield on invested assets was
6.3% and 6.5% for the six months ended June 30, 1996 and 1995, respectively.
Realized investment gains were $36,000 compared with $268,000 in the first half
of 1995. Other income for the first six months of 1996 increased to $3.8 million
from $3.4 million for the same period in 1995.
Pooled net written premiums (including ALLIED Mutual) totaled $372.1 million, a
9.6% increase over production in the first six months of 1995. For the second
quarter only, pooled net written premiums increased 12.1% to $200.5 million from
$178.9 million for the same quarter in 1995. The average premium per policy for
personal lines was up 3.8% from the first six months of 1995 to $597 while the
policy count grew 6.9%. The average premium per policy for commercial lines
excluding crop-hail increased slightly from the first half of 1995 to $1,084 and
the policy count was up 5.6%. Earned premiums for the property-casualty segment
were 66.5% personal lines and 33.5% commercial lines in the first half of 1996.
The business mix for the first six months of 1995 was 65.6% personal lines and
34.4% commercial lines.
Income before income taxes decreased to $25.1 million from $32.4 million in the
first half of 1995 primarily due to increased losses and loss adjusting
expenses. For the three months ended June 30, 1996, income before income taxes
was down to $7.6 million compared to $16.3 million in the same period in 1995.
Losses and loss adjusting expenses increased 26% and 18% for the three and six
months, respectively, ended June 30, 1996 compared to the same periods in 1995.
The statutory combined ratio (after policyholder dividends) for the first half
of 1996 was 99.4 compared to 94.6 reported in the first half of 1995; for the
second quarter of 1996 and 1995 the ratio was 103.7 and 94.2, respectively. The
change in the combined ratio was primarily attributed to a 5.6- and 10.6-point
increase in the six and three month loss and loss adjusting expense ratio,
respectively. Wind and hail losses for the first six months of 1996 increased to
$23.7 million from $16.2 million for the same period of 1995. The impact of wind
and hail losses on the combined ratio was 10.5 points and 7.8 points for the six
months ended June 30, 1996 and 1995, respectively. The underwriting gain (on a
generally accepted accounting principles basis) was $706,000 compared with a
gain of $9.7 million for the first half of 1995. On a fully diluted basis, the
impact of wind and hail losses on the results of operations was $1.10 per share
versus $0.76 per share in the first six months of 1995.
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12
The following table presents the property-casualty's statutory combined ratio by
line of business for the six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Personal automobile 98.5 94.7 98.4 94.4
Homeowners 126.3 104.6 111.6 104.1
Personal lines 105.7 97.2 101.8 96.8
Commercial automobile 102.5 88.9 101.5 93.3
Workers' compensation 76.0 61.9 72.5 70.0
Other property/liability 106.6 98.2 99.9 97.2
Other lines 43.7 47.5 50.3 50.8
Commercial lines 99.8 88.5 94.8 90.2
Total 103.7 94.2 99.4 94.6
</TABLE>
The personal auto statutory combined ratio increased to 98.4 for the first half
of 1996 from 94.4 for the same period in 1995. The increase was primarily due to
a 4.6-point deterioration in the loss and loss adjusting expense ratio. The
statutory combined ratio for the homeowners line was 111.6 for the first six
months of 1996 compared with 104.1 for the same period of 1995. The increase was
primarily due to a 8.6-point deterioration in the loss and loss adjusting
expense ratio. The impact of wind and hail losses on the combined ratio for the
homeowners line increased to 29.9-points from 26.3-points for the first six
months of 1995. Overall, the personal lines statutory combined ratio increased
to 101.8 in the first half of 1996 from 96.8 in the same period of 1995. The
statutory combined ratio for commercial lines increased to 94.8 in the first six
months of 1996 from 90.2 for the first half of 1995. The deterioration of
personal and commercial lines combined ratio was primarily attributable to
higher loss and loss adjusting expenses due to wind and hail.
Excess & Surplus Lines
Earned premiums increased to $14.4 million for the first half of 1996 from $14.1
million for the first six months of 1995. For the quarter only, earned premiums
decreased 1.7% to $7.2 million from $7.4 million for the same period in 1995.
Net written premiums decreased 5.8% to $14.6 million for the six months ended
June 30, 1996 from $15.5 million through June 30, 1995. The decrease in net
written premium is attributed to the soft market that the segment operates in
and management's decision not to sacrifice underwriting results for premium
growth. Direct earned premiums increased slightly to $18.1 million for the six
months ended June 30, 1996 from $17.9 million for the same period in 1995. For
the six month periods ended June 30, 1996 and 1995, the segment's book of
business was comprised of 2.4% personal lines and 97.6% commercial lines.
The statutory combined ratio (after policyholder dividends) was 96.3, which
produced an underwriting gain (on a generally accepted accounting principles
basis) of $547,000 for the first half of 1996. The combined ratio of 107.3 for
the first six months of 1995 resulted in an underwriting loss of $1.2 million.
The combined ratio decreased primarily because of a 10.8-point decrease in the
<PAGE>
13
loss and loss adjusting expense ratio in the first six months of 1996. The
decrease in the loss and loss adjusting expense ratio was primarily due to
improved loss development in the first half of 1996 over the same period last
year.
Income before income taxes for the six months ended June 30, 1996 increased
120.8% to $3.6 million from $1.6 million; for the quarter ended June 30, 1996,
income before income taxes increased to $1.8 million from $539,000 for the same
quarter in 1995. The segment had no realized gains for the first half of 1996.
Realized investment gains were $2,000 for the first six months in 1995.
Investment income for the first six months of 1996 increased 7.3% to $3 million
from $2.8 million for the same period in 1995. Investment income increased due
to a larger average balance in the investment portfolio. The pretax yield on
those assets was down to 6.3% compared to 6.8% in the first six months of 1995.
Invested assets decreased slightly to $96.3 million at June 30, 1996 from
year-end 1995. If the effect of unrealized appreciation is taken into account,
invested assets increased 2.3% over year-end 1995.
Noninsurance Operations
Revenues for the noninsurance operations (including investment services, data
processing, and employee lease fees from affiliates) decreased 4% for the first
half of 1996 to $73.4 million from $76.5 million for the same period last year.
Income before income taxes was $1.7 million for the first half of 1996 compared
to $1.2 million for the six months ended June 30, 1995. For the second quarter
only, income before income taxes increased 3.8% to $1.1 million from $1 million
for the quarter ended June 30, 1995.
Revenues for investment services in the first six months of 1996 increased to $9
million from $8.5 million for the same period in 1995. Income before income
taxes increased 25.8% to $2.5 million from $2 million for the first half of
1995. The servicing portfolio was $2.9 billion at June 30, 1996 and $3 billion
at December 31, 1995.
Investments and Investment Income
The investment policy for the Company's insurance segments requires that the
fixed maturity portfolio be invested primarily in debt obligations rated "BBB"
or higher by Standard & Poor's Corporation or a recognized equivalent at the
time of acquisition. The policy also states that equity securities are to be of
United States and Canadian corporations listed on established exchanges or
publicly traded in the over-the-counter market. Preferred stock is to be
comprised primarily of issues rated at least A3/A- by Standard and Poor's
Corporation or Moody's. The Company's investment portfolio consisted almost
entirely of fixed income securities; 98.3% were rated investment grade or higher
at June 30, 1996. The investment portfolio contained no real estate or mortgage
loans at June 30, 1996.
Invested assets were down slightly to $771.3 million from $772.3 million at
year-end 1995. The decrease in invested assets reflects the $20.3 million
decline in the market value of fixed maturity investments caused by rising
interest rates. Six-month consolidated investment income increased 5.3% to $24.2
million from $22.9 million through June 30, 1995. The Company's pretax rate of
return on invested assets was down to 6.3% from last year's 6.7%.
Income Taxes
The Company's year-to-date effective income tax rate unchanged at 29.1% at June
30, 1996 compared to year-end 1995. The income tax expense for the first half of
1996 was down to $8.8 million from $10 million for the same period in 1995. The
decrease was due to lower operating income.
<PAGE>
14
New Accounting Standard
In June of 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
125 is effective for fiscal years beginning after December 31, 1996. The Company
will adopt SFAS 125 on January 1, 1997 and has determined that the
implementation will not have a material effect on its financial statements.
Regulations
California was the source of approximately 25% of the pool's direct written
premiums for the past ten years. 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 of business exceeded 10%. Management of the Company continues to believe
that the insurance 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 six months of 1996, operating activities generated cash flows of
$29.2 million; in the first half of 1995, the total was $41.9 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 half of 1996 and
1995 were used primarily to purchase investment-grade fixed securities, equity
securities, and equipment which accounted for the majority of the investing
activities. Operating cash flows were also used to pay $8.5 million of dividends
to stockholders and to repurchase $6.4 million of common stock in the first six
months of 1996. For the same period in 1995, the funds generated from the
operating activities were used to pay dividends to stockholders of $6.7 million.
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, 1996, 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 Group Mortgage Company (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 mortgage loans held for sale and to purchase
mortgage servicing rights. The level of short-term borrowings fluctuates daily
depending on the level of inventory being financed. At June 30, 1996, short-term
borrowings amounted to $20.3 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. These notes payable are not guaranteed by the
<PAGE>
15
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.
A source of cash flows for the holding company is dividend payments from its
subsidiaries. During the first six months of 1996, the Company received dividend
payments of $7.5 million from the property-casualty subsidiaries and $38,000
from noninsurance subsidiaries. During the same period of 1995, the Company
received dividend payments of $5.5 million from the property-casualty
subsidiaries and $313,000 from noninsurance subsidiaries. Dividend payments to
common stockholders totaled $6.1 million for the six months ended June 30, 1996,
up from $3.1 million for the same period in 1995. In the first half of 1996 and
1995, the Company paid dividends of $1.8 million on the 6-3/4% Series preferred
stock. The Company also paid dividends of $595,000 and $1.9 million on the ESOP
Series preferred stock (ESOP Series) in the six months ended June 30, 1996 and
1995, respectively.
On March 6, 1996, the ESOP Trustee elected to convert the ESOP Series to common
stock. The conversion was completed on March 7, 1996 (see note 4 of the Notes to
Interim Consolidated Financial Statements).
Subsequent to June 30, 1996, the Company completed the repurchase and
cancellation of 250,000 of its own common stock pursuant to the repurchase plan
approved by the Board of Directors on December 14, 1996. The plan was completed
on July 15, 1996 at an average cost per share of $38.37. On July 16, 1996, the
Board of Directors approved a plan to repurchase an additional 250,000 shares of
the Company's common stock on the open market (see note 7 of the Notes to
Interim Financial Statements).
Company contributions plus dividends on the ESOP leveraged common 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.
<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 1, 1996.
(b) John E. Evans, William E. Timmons, and Donald S. Willis were
elected to serve as directors of the Company for a term of
three years which expires in 1999. Current directors whose
terms expire in 1997 are Harold S. Carpenter, Charles I. Colby,
and Harold S. Evans. Current directors whose terms expire in
1998 are James W. Callison, Richard O. Jacobson, and John P.
Taylor.
(c) With respect to the voting on the election of directors:
For Withheld
John E. Evans 15,442,297 137,006
William E. Timmons 15,422,101 157,202
Donald S. Willis 15,422,023 157,280
Item 6. Exhibits and Reports on Form 8-K
(a) 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, 1996.
<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 5, 1996 /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
11 Statement re Computation of Per Share Earnings 19
27 Financial Data Schedule 20
<PAGE>
19
Exhibit 11
ALLIED Group, Inc. and Subsidiaries
Computation of Per Share Earnings
For the Three and Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- -------------------------------
1996 1995 1996 1995
--------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Primary
Net income $ 7,548,066 $ 12,756,169 $ 21,496,330 $ 25,140,492
Preferred stock dividends (878,779) (1,809,594) (2,353,043) (3,629,532)
Stock options in subsidiary (117,142) (82,520) (218,810) (160,686)
--------------- -------------- ------------- -------------
Adjusted net income $ 6,552,145 $ 10,864,055 $ 18,924,477 $ 21,350,274
=============== ============== ============= =============
Earnings per share $ .47 $ 1.17 $ 1.52 $ 2.32
=============== ============== ============= =============
Weighted average shares
outstanding 13,910,473 9,170,716 12,283,194 9,102,882
Dilutive effective of
unexercised stock options* 124,243 94,609 132,752 117,798
--------------- -------------- ------------- -------------
14,034,716 9,265,325 12,415,946 9,220,680
=============== ============== ============= =============
Fully Diluted
Net income $ 7,548,066 $ 12,756,169 $ 21,496,330 $ 25,140,492
Preferred stock dividends (878,779) (878,780) (1,757,559) (1,757,559)
Stock options in subsidiary (117,225) (82,847) (219,271) (161,323)
Additional net ESOP
expenses-assuming
conversion of ESOP Series
preferred stock --- (45,079) --- (90,157)
--------------- -------------- ------------- -------------
Adjusted net income $ 6,552,062 $ 11,749,463 $ 19,519,500 $ 23,131,453
=============== ============== ============= =============
Earnings per share $ .47 $ .84 $ 1.39 $ 1.66
=============== ============== ============= =============
Weighted average shares
outstanding 13,910,473 13,829,344 13,925,608 13,785,473
Dilutive effective of
unexercised stock option* 155,116 94,609 155,116 121,728
--------------- -------------- ------------- -------------
14,065,589 13,923,953 14,080,724 13,907,201
=============== ============== ============= =============
</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, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000774624
<NAME> ALLIED GROUP, INC
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 750,506
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 13,394
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 771,292
<CASH> 1,849
<RECOVER-REINSURE> 21,151
<DEFERRED-ACQUISITION> 44,165
<TOTAL-ASSETS> 1,033,772
<POLICY-LOSSES> 350,154
<UNEARNED-PREMIUMS> 207,558
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 41,179
0
37,813
<COMMON> 13,813
<OTHER-SE> 296,686
<TOTAL-LIABILITY-AND-EQUITY> 1,033,772
239,984
<INVESTMENT-INCOME> 24,163
<INVESTMENT-GAINS> 39
<OTHER-INCOME> 25,734
<BENEFITS> 176,038
<UNDERWRITING-AMORTIZATION> 52,825
<UNDERWRITING-OTHER> 9,867
<INCOME-PRETAX> 30,325
<INCOME-TAX> 8,829
<INCOME-CONTINUING> 21,496
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,496
<EPS-PRIMARY> 1.560
<EPS-DILUTED> 1.420
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
