<PAGE>
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 50391-2000
(Address of principal executive offices) (Zip Code)
515-280-4211
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 29, 1996 the number of Registrant's Common Stock, no par value,
outstanding was 9,496,465. The aggregate market value of the Common Stock of the
Registrant (based on the average bid and asked prices at closing) held by
nonaffiliates at February 29, 1996 was $392,458,345.
Documents Incorporated By Reference
The Registrant's definitive proxy statement (1996 Proxy Statement), which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1995, is incorporated by reference under Part III.
The index to the exhibits is located on page 78.
This document contains 211 pages.
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2
TABLE OF CONTENTS
Part I
Item 1. Business......................................................... 3
Item 2. Properties........................................................18
Item 3. Legal Proceedings.................................................19
Item 4. Submission of Matters to a Vote of Security Holders...............19
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...............................................20
Item 6. Selected Financial Data...........................................21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................22
Item 8. Financial Statements and Supplementary Data.......................30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................59
Part III
Item 10. Directors and Executive Officers of the Registrant................60
Item 11. Executive Compensation............................................60
Item 12. Security Ownership of Certain Beneficial Owners and Management....60
Item 13. Certain Relationships and Related Transactions....................60
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..61
Index to Financial Statement Schedules........................................61
Signatures....................................................................77
Index to Exhibits.............................................................78
<PAGE>
3
Part I
Item 1. Business
ALLIED Group, Inc. (the Company) was incorporated in 1971 as an Iowa corporation
and operates as a regional insurance holding company headquartered in Des
Moines, Iowa. At year-end 1995, The ALLIED Group Employee Stock Ownership Trust
owned 26.9% of the outstanding voting stock of the Company. ALLIED Mutual
Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance
company, controlled 18% of the voting stock of the Company. The Company has two
reportable business segments: property-casualty insurance and excess & surplus
lines insurance. Property-casualty insurance was the most significant segment in
1995, accounting for 85.4% of consolidated revenues. The Company's segment
information is contained in note 18 of Notes to Consolidated Financial
Statements.
Property-casualty Insurance
The Company's property-casualty segment operates through three subsidiaries:
AMCO Insurance Company (AMCO), ALLIED Property and Casualty Insurance Company
(ALLIED Property and Casualty), and Depositors Insurance Company (Depositors),
which underwrite personal lines (primarily automobile and homeowners) and small
commercial lines. The property-casualty segment operates exclusively in the
United States; primarily in the central and western states. The segment and
ALLIED Mutual pool their property-casualty business. See notes 4 and 6 of Notes
to Consolidated Financial Statements and "Business-Relationship with ALLIED
Mutual-Pooling Agreement."
A.M. Best has assigned a rating of A+ (superior) to each of the Company's
property-casualty subsidiaries and to ALLIED Mutual for 1995 with respect to
their financial strength and their ability to meet policyholder and other
contractual obligations based on the review of the pool's 1994 statutory results
and operating performance.
The profitability of the property-casualty segment is affected by many factors,
including industry price competition, the severity and frequency of
weather-related claims, the adequacy of prior-year estimates of loss and loss
settlement expense reserves, court decisions that define the extent of coverage
and the compensation awarded for injuries and losses, insurance laws and
regulations, fluctuations in the financial markets, interest rates, reinsurance
costs, and general business and economic conditions.
The Company pursues a strategy of growth in personal lines of insurance, which
it sells predominantly in central and western United States, primarily through a
system of more than 2,100 independent agencies, a growing number of which
represent the property-casualty subsidiaries of the Company on an exclusive
basis for their personal lines of insurance. For the year ended December 31,
1995, 65.7% of the property-casualty subsidiaries' net earned premiums were
attributable to personal lines of insurance. While the majority of the Company's
revenues are attributable to personal lines, the Company also writes commercial
lines of insurance for small businesses through such agents. Because the
Company's primary focus, and primary market served by its independent agency
force, is personal lines of insurance and because the Company perceives the
risks to be greater in commercial lines, the Company has been conservative in
the types of commercial risks it underwrites and in the pricing therefor.
Historically, this has resulted in the Company writing less commercial business
than it might otherwise have if it adopted a more aggressive strategy in
commercial lines. It has also resulted in a lower combined ratio for the
commercial lines compared with its core personal lines business.
The property-casualty segment markets its products through three distribution
systems: independent agencies, exclusive agencies, and direct response
marketing. Generally, AMCO writes, through independent agencies, personal and
commercial property-casualty insurance lines, consisting primarily of private
passenger automobile and homeowners, with lesser emphasis on special multiple
peril, workers' compensation, inland marine, and other miscellaneous lines of
business. ALLIED Property and Casualty generally writes personal lines insurance
products through agents who sell ALLIED Property and Casualty personal lines
exclusively, and Depositors generally writes personal lines through a direct
mail and telemarketing agency, ALLIED Group Insurance Marketing Company, an
affiliate of ALLIED Mutual.
<PAGE>
4
Neither the insurance subsidiaries in the property-casualty segment nor ALLIED
Mutual appoint managing general agents, and each retains all underwriting,
claims, and reinsurance authority. While the insurers provide contractual
binding authority to most agents, such authority is subject to express
limitations on the nature, type, and extent of each risk. With respect to the
ability of the agents to bind the insurers, the insurers have no right to reject
any contracts entered into by the agents even if the agent exceeds the express
limitations; however, such instances occur infrequently, and constitute no
material financial risk to the Company.
The pooling agreement provides that ALLIED Mutual, ALLIED Property and Casualty,
and Depositors cede to AMCO (pool administrator) premiums, losses, allocated
loss settlement expenses, commissions, premium taxes, service charge income, and
dividends to policyholders and assume from AMCO an amount of this pooled
property-casualty business equal to their participation in the pooling
agreement. ALLIED Mutual's crop hail business is not pooled. AMCO pays certain
underwriting expenses, unallocated loss settlement expenses, and premium
collection expenses for all of the pool participants and receives a fee equal to
a specified percentage of premiums as well as a contingent fee based on the
attainment of certain combined ratios from each of the pool participants.
The pooling arrangement provides ALLIED Mutual, ALLIED Property and Casualty,
and Depositors more predictable expense levels by limiting such expenses to a
specified percentage of their premiums. AMCO has opportunities to profit from
the efficient administration of such underwriting, loss settlement, and premium
collection activities and to provide similar services to nonaffiliated insurance
companies in the future. The property-casualty segment's participation in the
pool in 1995, 1994, and 1993 was 64%. As of December 31, 1995, the statutory
capital and surplus of ALLIED Mutual and AMCO was $229,848,488 and $196,568,115,
respectively.
The following table sets forth statutory basis and generally accepted accounting
principles (GAAP) basis information for the Company's property-casualty
subsidiaries for the years indicated.
<TABLE>
<CAPTION>
At or for the year ended December 31,
--------------------------------------------
1995 1994 1993
----------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Reinsurance pool percentage 64% 64% 64%
Net written premiums $ 440,838 $ 403,066 $ 370,218
=========== =========== ==========
Earned premiums $ 425,838 $ 386,732 $ 344,322
Losses and loss settlement expenses 295,583 268,302 242,208
Underwriting expenses 114,511 110,259 105,707
----------- ----------- ----------
Statutory underwriting gain (loss) 15,744 8,171 (3,593)
GAAP adjustments 1,943 1,637 4,204
----------- ----------- ----------
GAAP underwriting gain 17,687 9,808 611
Investment income excluding realized gains 39,110 35,279 33,471
Realized investment gains 236 2,956 1,293
Other income 6,850 6,143 5,527
----------- ----------- ----------
Income before income taxes $ 63,883 $ 54,186 $ 40,902
=========== =========== ==========
GAAP combined ratio 95.8 97.5 99.8
Wind and hail losses $ 28,664 $ 24,383 $ 18,737
Impact of wind and hail losses on combined ratio 6.7 6.3 5.4
Invested assets $ 658,044 $ 565,490 $ 511,464
Statutory loss and loss settlement expense reserves $ 277,819 $ 252,608 $ 229,649
Statutory capital and surplus $ 257,845 $ 233,407 $ 208,273
</TABLE>
<PAGE>
5
The underwriting experience of the pool is indicated by the statutory combined
ratio, a measure of underwriting profitability which excludes investment income
and income taxes. Generally, a ratio below 100 indicates underwriting
profitability and a ratio exceeding 100 indicates an underwriting loss. The
following table sets forth the net earned premiums and the statutory combined
ratios (after policyholder dividends) by line of insurance business for the
property-casualty segment for the years indicated.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- -------------------------
Net Statutory Net Statutory Net Statutory
earned combined earned combined earned combined
premiums ratio premiums ratio premiums ratio
----------- ---------- ---------- --------- ---------- ---------
Line of business (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Personal automobile $ 208,873 96.5 $ 192,712 97.4 $ 174,243 98.3
Homeowners 71,035 99.2 60,204 107.4 51,351 109.1
----------- ---------- ----------
Personal lines 279,908 97.2 252,916 99.8 225,594 100.8
----------- ---------- ----------
Commercial automobile 23,873 95.2 22,384 98.4 20,526 90.5
Workers' compensation 29,443 70.2 28,251 83.3 24,291 96.3
Other property and liability 90,302 100.2 80,908 94.0 71,723 99.5
Other lines 2,312 50.2 2,273 66.6 2,188 47.6
----------- ---------- ----------
Commercial lines 145,930 92.7 133,816 92.0 118,728 96.3
----------- ---------- ----------
Total $ 425,838 95.7 $ 386,732 97.1 $ 344,322 99.3
=========== ========== ==========
</TABLE>
The following table sets forth the components of the statutory combined ratio
and wind and hail loss information for the Company's property-casualty segment
for the years indicated.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Statutory combined ratio
Loss ratio 60.1 60.1 59.4
Loss adjustment expense ratio 9.3 9.3 10.9
Underwriting expense ratio 26.0 27.3 28.6
Dividend ratio 0.3 0.4 0.4
------ ------ ------
Total 95.7 97.1 99.3
======= ======= =======
Impact of wind and hail losses
on the statutory combined ratio
Personal automobile 1.8 2.1 2.1
Homeowners 21.7 21.5 17.9
Personal lines 6.8 6.7 5.7
Commercial lines 6.5 5.5 4.9
Total 6.7 6.3 5.4
</TABLE>
Wind and hail losses are calculated by adding together all claims with a cause
of loss from wind or hail and then deducting the related reinsurance recoveries.
The information provides an indication of how weather-related losses impact the
property-casualty segment's operating results for the years presented. Losses
not resulting from either wind or hail are excluded from these calculations.
<PAGE>
6
The following table sets forth premium information and agency counts for the
property-casualty pool (including ALLIED Mutual) for the years indicated.
<TABLE>
<CAPTION>
At or for the year ended December 31,
-------------------------------------------
1995 1994 1993
---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Direct written premiums by distribution system
Independent agency system $ 503,922 $ 479,351 $ 444,453
Exclusive agency system 180,799 148,777 121,026
Direct response marketing system 22,136 18,418 15,144
---------- ----------- ----------
Total direct written premiums,
excluding crop hail premiums 706,857 646,546 580,623
Crop hail premiums (non-pooled) 7,781 6,024 4,660
---------- ----------- ----------
Total direct written premiums $ 714,638 $ 652,570 $ 585,283
========== =========== ==========
Agency counts
Independent agencies 1,968 1,910 1,833
Exclusive agencies 192 164 126
Net written premiums $ 699,608 $ 638,301 $ 572,129
Net premiums earned $ 676,169 $ 612,799 $ 544,099
</TABLE>
The following table sets forth the geographic percentage distribution of
property-casualty pool (including ALLIED Mutual) direct written premiums for the
years indicated.
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
California 24.0% 24.0% 24.0%
Iowa 23.3 24.6 26.0
Kansas 8.4 8.4 8.2
Nebraska 7.9 8.1 8.2
Minnesota 7.6 7.9 8.4
Missouri 4.8 4.8 5.1
Colorado 3.6 3.5 3.7
Illinois 3.1 2.8 2.5
Utah 2.5 2.2 2.2
Tennessee 2.4 2.2 1.7
Washington 2.1 1.7 1.2
South Dakota 2.0 2.1 2.0
Other * 8.3 7.7 6.8
------- ------- ------
100.0% 100.0% 100.0%
======= ======= ======
</TABLE>
*Includes all other states, none of which accounted for more than 2% in 1995.
Excess & Surplus Lines
Western Heritage Insurance Company (Western Heritage) is an excess & surplus
lines insurance subsidiary, which primarily underwrites commercial lines. A.M.
Best has assigned a rating of A- (excellent) to Western Heritage for 1995 based
on the review of their 1994 statutory results and operating performance.
For 1995, Western Heritage's net earned premiums were 74.3% specialty commercial
casualty, 9% commercial property, 14.3% commercial transportation, and 2.4%
personal lines coverages. Specialty commercial casualty lines include general
liability, multiple peril, and product liability coverages for special events,
such as concerts, fairs, exhibitions, and parades as well as coverages for
merchants and artisan contractors. Specialty commercial property lines include
<PAGE>
7
coverages for buildings that are older, in higher risk locations, or vacant;
agricultural and contractor equipment; and protection against vandalism.
Commercial transportation coverages include liability, physical damage, and
garagekeepers insurance written for used car dealers and repair shops. The
personal lines consist primarily of basic property coverages for dwellings.
Western Heritage agents are accorded contractual binding authority for risks
which meet the insurer's written underwriting guidelines and rules. Western
Heritage appoints no managing general agents, however, and retains all
underwriting, claims, and reinsurance authority. With respect to the ability of
the agents to bind Western Heritage, Western Heritage has no right to reject any
contracts entered into by the agents.
The following table sets forth statutory and GAAP basis information for the
excess & surplus lines segment for the years indicated.
<TABLE>
<CAPTION>
At or for the year ended December 31,
----------------------------------------------
1995 1994 1993
----------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C>
Net written premiums $ 30,606 $ 27,026 $ 24,892
=========== ============ ===========
Earned premiums $ 29,661 $ 25,786 $ 24,014
Losses and loss settlement expenses 22,357 18,568 16,696
Underwriting expenses 8,202 7,536 6,605
----------- ------------ -----------
Statutory underwriting (loss) gain (898) (318) 713
GAAP adjustments 43 100 (66)
----------- ------------ -----------
GAAP underwriting (loss) gain (855) (218) 647
Investment income excluding realized gains 5,830 5,241 4,868
Realized investment (losses) gains (135) (24) 103
----------- ------------ -----------
Income before income taxes $ 4,840 $ 4,999 $ 5,618
=========== ============ ===========
GAAP combined ratio 102.9 100.8 97.3
Invested assets $ 96,435 $ 79,588 $ 75,111
Loss and loss settlement expense reserves $ 47,120 $ 40,066 $ 38,401
Statutory capital and surplus $ 27,770 $ 23,896 $ 21,942
</TABLE>
The following table sets forth the net earned premiums and statutory combined
ratios of the commercial casualty, commercial property, commercial
transportation, and personal lines written by Western Heritage for the years
indicated.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- ------------------------
Net Statutory Net Statutory Net Statutory
earned combined earned combined earned combined
premiums ratio premiums ratio premiums ratio
----------- --------- ----------- --------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial casualty $ 22,031 103.9 $ 20,800 103.5 $ 20,002 99.3
Commercial property 2,676 91.2 2,579 80.5 2,530 57.9
Commercial transportation 4,254 98.6 1,682 101.8 636 162.2
Personal lines 700 115.1 725 60.4 846 81.6
----------- ----------- -----------
Total $ 29,661 102.2 $ 25,786 99.9 $ 24,014 96.1
=========== =========== ===========
</TABLE>
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8
The following table sets forth the geographic percentage distribution of excess
& surplus lines direct written premiums for the years indicated.
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Texas 23.3% 23.9% 27.6%
Illinois 9.9 10.9 11.2
California 8.8 11.9 14.1
Florida 7.2 8.4 5.2
Oklahoma 4.3 4.0 3.8
Hawaii 3.7 3.7 4.1
Alabama 3.1 1.5 0.9
Missouri 3.0 1.2 1.0
Louisiana 3.0 3.6 3.4
Ohio 2.9 2.4 2.3
Colorado 2.8 2.5 2.6
Mississippi 2.6 1.2 0.8
Arkansas 2.5 1.6 1.2
New Mexico 2.0 1.9 1.4
Other* 20.9 21.3 20.4
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
*Includes all other states, none of which accounted for more than 2%
in 1995.
Reinsurance
The Company's insurance subsidiaries follow the industry practice of reinsuring
a portion of their insured risks, paying to the reinsurer a portion of the
premiums received on all policies. Insurance is ceded principally to reduce the
net liability on individual risks and to protect against catastrophic losses.
The basic reinsurance treaties benefiting the parties to the pooling agreement
insure risks in excess of specific amounts. Except for crop-hail reinsurance,
all reinsurance is obtained by the pool participants directly and the pool
administrator does not have any additional or special reinsurance arrangements
other than as a pool participant. The financial stability of each participating
reinsurer is independently monitored by the pool participants and by their
reinsurance intermediaries.
The property-casualty pool participants and Western Heritage purchase coverage
from nonaffiliated reinsurers in the ordinary course of their businesses. See
"Business-Relationship with ALLIED Mutual-Other Relationships" for the ALLIED
Mutual and American Re-Insurance Company property catastrophe reinsurance
agreement. The insurers monitor the availability of replacement coverages in the
reinsurance market, and the Company believes that replacement coverages from
financially responsible reinsurers are available and accordingly does not deem
its existing reinsurance arrangements to be material.
With the exception of Western Heritage, all retentions discussed in this section
are for the entire pool. The property-casualty subsidiaries of the Company are
allocated a portion of the stated pool retentions based upon their respective
pool participation percentage.
The parties to the pooling agreement are covered by a property treaty which
provides per risk property reinsurance in excess of a retention of $500,000 to a
maximum limit of $5,000,000 per risk. Such parties are also covered by a
property treaty that provides coverage on a facultative basis in excess of a
retention of $5,000,000 to a maximum limit of $15,000,000.
The pool participants purchase property catastrophe reinsurance from a large
number of reinsurers each of which provides a relatively small percentage of the
total cover. For 1995, the pool liability limit of the cover is 90% of
$100,000,000 with retention of $10,000,000. A reinstatement agreement exists
allowing purchases of reinsurance for an additional catastrophe occurring in the
same year. See "Business-Relationship with ALLIED Mutual for affiliated
reinsurance relationships." In 1996 the pool increased its maximum property
catastrophe coverage to 90% of $120,000,000.
<PAGE>
9
The pool's retention for most casualty risks is $375,000, with a reinsurance
limit of $1,000,000 per occurrence. Other treaties provide reinsurance for each
workers' compensation loss over $375,000 and up to $5,000,000. Catastrophe
workers' compensation treaties increase the reinsurance to $35,000,000.
Western Heritage, which is not a participant in the property-casualty pool,
purchases reinsurance on property risks covering 75% of the risk in excess of
$50,000 to a maximum of $1,000,000, which is the largest property risk insured.
Western Heritage also purchases casualty reinsurance in excess of $200,000 to a
maximum of $1,000,000, the largest casualty risk insured. Western Heritage does
not write workers' compensation or primary auto coverage.
Although reinsurance does not legally discharge an insurer from its primary
liability for the full amount of the policies, it does make the assuming
reinsurer liable to the insurer to the extent of the reinsurance ceded. As of
December 31, 1995, there were no past due amounts from reinsurers. Historically,
the Company has had no adverse collection experience with its reinsurers.
Losses and Loss Settlement Expense Reserves
In many cases, several years may elapse between the occurrence of an insured
loss, the reporting of the loss to the insurer, and the insurer's payment of
that loss. To recognize liabilities for unpaid losses, the insurance
subsidiaries establish reserves, which are balance sheet liabilities
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events which have occurred. The insurance
subsidiaries do not discount loss reserves for financial statement purposes.
When a claim is reported, a case reserve for the estimated amount of the
ultimate payment is established. The estimate reflects an informed judgment
based on general corporate reserving practices and the Company's experience and
knowledge regarding the nature and value of the specific type of claim. Reserves
are also established on an aggregate basis to provide for losses incurred but
not yet reported to the insurer and the overall adequacy of case reserves. The
insurance subsidiaries also establish reserves representing the estimated
expenses of settling claims, including legal and other fees and general expenses
of administering the claims adjustment process.
As part of the reserving process, historical data is reviewed and consideration
is given to the anticipated impact of various factors such as known and
anticipated legal developments, changes in social attitudes, inflation, and
economic conditions. This process relies on the basic assumption that past
experience, adjusted for the effect of current developments and likely trends,
is an appropriate basis for predicting future events. Reserve amounts are
necessarily based on management's informed estimates, and as other data becomes
available and is reviewed, these estimates and judgments are revised, resulting
in increases or decreases to existing reserves.
While the methods for setting the reserve structure are well tested, some
assumptions about loss patterns have changed. In particular, recent higher jury
verdicts and judicial decisions which expand coverage to new theories of
liability have increased the demands against the loss and loss settlement
expense reserves of the insurance subsidiaries. Not only have anticipated claims
increased in severity, but unanticipated claims have arisen. In establishing
reserves, management considers exposure the Company may have to environmental
claims. Because reported claim activity levels are minimal and the emphasis of
the Company's property-casualty business is primarily on personal lines and
small commercial business, management believes exposure to material liability on
environmental claims to be remote as of December 31, 1995. The Company continues
to monitor legal developments as they relate to the Company's exposure to
environmental claims.
The following table presents the development of losses and loss settlement
expense reserves for 1985 to 1994 for the pool (which includes ALLIED Mutual)
and Western Heritage. The top line of the table shows the estimated reserve for
losses and loss settlement expenses at the balance sheet date for each of the
indicated years. These figures represent the estimated amount of losses and loss
settlement expenses, net of reinsurance recoverables, for claims arising in the
current and all prior years that were unpaid at the balance sheet date,
including losses that had been incurred but not yet reported. The lower portion
of the table shows the re-estimated amount of net reserves as a percentage of
the previously recorded net reserves based on experience as of the end of each
succeeding year. The re-estimated reserves change as more information becomes
known about the frequency and severity of claims for individual years.
<PAGE>
10
<TABLE>
<CAPTION>
At or for the year ended December 31,
------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for
losses and loss
settlement
expenses, net $110,145 $126,150 $160,152 $210,746 $248,870 $280,443 $312,089 $355,092 $386,936 $424,595 $471,247
Paid (cumulative)
as of (1)
1 year later 44.8% 42.7% 47.5% 41.7% 43.6% 44.2% 43.6% 40.1% 40.8% 39.9%
2 years later 65.5 68.8 70.8 64.0 65.8 67.2 66.3 61.9 60.7
3 years later 81.3 84.0 85.8 77.2 79.3 80.4 79.8 72.6
4 years later 91.1 93.3 93.6 84.1 86.3 88.5 86.0
5 years later 96.0 98.2 97.9 87.7 91.5 92.5
6 years later 99.4 100.7 101.0 90.2 94.1
7 years later 101.3 103.3 102.8 92.1
8 years later 103.2 104.8 104.3
9 years later 104.6 106.7
10 years later 106.2
Net reserves re-
estimated as of
end of year (1) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
1 year later 100.7 102.7 103.6 98.3 100.4 101.0 100.2 97.7 98.3 100.1
2 years later 102.3 104.2 106.3 97.6 99.6 101.1 101.1 96.8 98.9
3 years later 102.9 106.9 106.8 97.3 99.6 102.6 102.4 97.2
4 years later 105.5 107.9 107.1 97.5 101.5 104.6 103.1
5 years later 106.4 107.8 107.8 98.1 103.4 105.7
6 years later 106.8 108.7 108.9 99.3 104.5
7 years later 107.3 109.9 110.5 100.4
8 years later 108.6 111.7 111.8
9 years later 110.3 113.2
10 years later 111.3
Net cumulative redundancy (deficiency)
Dollars $(12,494) $(16,633) $(18,906) $ (911) $(11,157) $(15,958) $ (9,734) $ 10,037 $ 4,378 $ (292)
Percentage (11.3)% (13.2)% (11.8)% 0.4% (4.5)% (5.7)% (3.1)% 2.8% 1.1% (0.1)%
Gross reserves - end of year $373,958 $400,912 $447,311 $492,304
Reinsurance recoverables 18,866 13,976 22,716 21,057
-------- -------- -------- --------
Net reserves - end of year $355,092 $386,936 $424,595 $471,247
======== ======== ======== ========
Gross re-estimated reserves - latest (2) 98.7% 100.5% 100.6%
Re-estimated recoverables - latest (2) 127.6% 145.0% 109.7%
Net re-estimated reserves - latest (2) 97.2% 98.9% 100.1%
Gross cumulative redundancy (deficiency)
Dollars $ 4,825 $ (1,907) $ (2,497)
Percentage 1.4% (0.5)% (0.6)%
</TABLE>
(1) Shown as a percentage of reserves for losses and loss settlement expenses.
(2) Shown as a percentage of gross reserves, reinsurance recoverables and net
reserves.
The cumulative redundancy or deficiency represents the aggregate change in the
estimates over all prior years. It should be emphasized that the table presents
a run-off of balance sheet reserves rather than accident or policy year loss
development. Therefore, each amount in the table includes the effects of changes
in reserves for all prior years.
The following table reconciles the reserves for losses and loss settlement
expenses from the previous table to the amount shown on the Company's
consolidated balance sheets.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1995 1994
----------- -----------
(in thousands)
<S> <C> <C>
Loss and loss settlement expense reserves for the property-casualty pool
and Western Heritage $ 471,247 $ 424,595
Less: Loss and loss settlement expense reserves of ALLIED Mutual 146,308 131,921
----------- -----------
324,939 292,674
Add: Reinsurance recoverables 16,925 18,322
----------- -----------
Loss and loss settlement expense reserves (GAAP) $ 341,864 $ 310,996
=========== ===========
</TABLE>
<PAGE>
11
The next table sets forth a reconciliation of beginning and ending GAAP reserves
for losses and loss settlement expenses for the years indicated, net of
reinsurance recoverables. The table includes property-casualty and excess &
surplus lines insurance loss and loss settlement expense reserves. Developments
for losses and loss settlement expenses on prior years is immaterial to the
Company's consolidated financial statements taken as a whole.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1995 1994 1993
---------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Net reserves for losses and loss settlement
expenses at beginning of year $ 292,674 $ 268,050 $ 227,971
---------- ----------- -----------
Incurred losses and loss settlement expenses
Provision for insured events of current year 315,956 288,574 262,772
Increase (decrease) in provision for
insured events of prior years 1,984 (1,630) (3,854)
---------- ----------- -----------
Total incurred losses and loss
settlement expenses 317,940 286,944 258,918
---------- ----------- -----------
Payments
Losses and loss settlement expenses
attributable to insured events of current year 169,254 151,479 138,926
Losses and loss settlement expenses
attributable to insured events of prior years 116,421 110,841 91,848
Adjustment to beginning of the year
reserves resulting from the change in the
reinsurance pool participation percentage * --- --- (11,935)
Total payments 285,675 262,320 218,839
---------- ----------- -----------
Net reserves for losses and loss
settlement expenses at end of year $ 324,939 $ 292,674 $ 268,050
========== =========== ===========
</TABLE>
* As of January 1, 1993, the property-casualty subsidiaries' underwriting
accounts were adjusted to reflect their increased participation in the pool. The
property-casualty subsidiaries received cash and securities for the transfer of
reserves from ALLIED Mutual as of January 1, 1993. There was no income statement
effect from this transaction as the amount received was offset by the increase
in the reserves. However, since the reserves transferred were necessarily based
upon estimates, subsequent changes in the estimates are reflected in current
operating results.
Noninsurance Operations
The investment services segment of the Company is comprised of ALLIED Group
Mortgage Company (ALLIED Mortgage) and, through October 29, 1993, Dougherty
Dawkins, Inc. and subsidiaries (Dougherty Dawkins). Dougherty Dawkins was sold
October 29, 1993 and the results of operations through the closing date are
reflected in the Company's consolidated financial statements. See note 7 of
Notes to Consolidated Financial Statements.
ALLIED Mortgage purchases, originates, and services single-family residential
mortgages. It acquires mortgage servicing rights from savings and loan
associations, banks, other mortgage companies, the Resolution Trust Corporation,
and other financial institutions. The market in which ALLIED Mortgage originates
mortgages is primarily Polk County, Iowa, which includes the Des Moines area.
ALLIED Mortgage purchases and services mortgages on a nationwide basis. See
"Business--Competition."
<PAGE>
12
ALLIED Mortgage began operations in 1987, and by year-end 1995, its servicing
portfolio included 54,533 mortgages for a total value of $3 billion. ALLIED
Mortgage is an approved seller-servicer of mortgages guaranteed by Government
National Mortgage Association, Federal National Mortgage Association, and
Federal Home Loan Mortgage Corporation. See "Business--Regulation." Working
capital requirements are managed through short-term financing with commercial
banks. See note 8 of Notes to Consolidated Financial Statements.
The Company's data processing services segment is comprised of ALLIED Group
Information Systems, Inc. (AGIS) and The Freedom Group, Inc. (Freedom), which
have a line of property-casualty and life insurance software products and data
processing services which are marketed under the name "Freedom Group" to
affiliated and nonaffiliated insurance companies. AGIS provides management
information services to the property-casualty subsidiaries, ALLIED Mutual,
ALLIED Life Insurance Company (ALLIED Life), the Company, and other company
subsidiaries. See "Business--Relationship with ALLIED Mutual." These services
include the processing of policies and claims, billing, rating, statistical and
regulatory reporting, and recordkeeping. AGIS also provides automated systems to
the property-casualty segment's agency force. The majority of the segment's
revenues and operating profits came from affiliated companies.
Through its direct sales force, AGIS licenses property-casualty insurance
software to property-casualty insurance companies generally on a national basis.
AGIS also provides certain consulting services and software maintenance
services. On a nationwide basis, Freedom licenses statutory accounting insurance
software to property-casualty and life insurance companies on primarily a direct
sales basis.
Investments
The Company uses its investments to generate the majority of its operating
profit and provide liquidity. Investments in fixed maturities are classified as
available for sale. See note 1--"Investments" of Notes to Consolidated Financial
Statements. The Company's invested assets are managed by Conning & Company,
subject to restrictions on permissible investments under applicable state
insurance codes and the Company's investment policies. Those policies require
that the fixed maturity portfolio be invested primarily in debt obligations
rated "BBB" (investment grade) or higher by Standard & Poor's Corporation
(Standard & Poor's) or a recognized equivalent at the time the security is
acquired by the Company. 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 & Poor's
Corporation or Moody's. The Company monitors the investment quality of the fixed
maturity portfolio subsequent to acquisition by reviewing on a quarterly basis
the current debt ratings assigned to each of the securities in the fixed
maturity portfolio.
Fixed income securities comprised 97.7% of the Company's invested assets, 98.1%
of those had an "BBB" rating from Standard & Poor's (or the equivalent from
Moody's) at December 31, 1995. The portfolio contain no real estate or mortgage
loans. At December 31, 1995, less than $300,000 of the Company's fixed
maturities were rated less than investment grade securities. At year-end 1995,
the Company held $14,439,351 of nonrated securities. Evaluation of the issuers'
rating and ratings for the issuers' other securities supports management's view
that the nonrated securities are investment grade. At December 31, 1995, the
fair value of the Company's fixed maturity portfolio was $27.8 million over
amortized cost.
As of December 31, 1995, the Company held collateralized mortgage obligation
(CMO) investments with a carrying and fair value of $77,671,819. Substantially
all of the Company's CMO investments are in planned amortization class bonds or
sequential pay bonds with anticipated durations of approximately 3.8 years at
December 31, 1995. 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.
The carrying values of all the Company's investments in fixed maturities are
reviewed on an ongoing basis. If this review indicates a decline in fair value
below cost is other than temporary, the Company's carrying value in the
investment is reduced to its estimated realizable value and a specific
write-down is taken. Such reductions in carrying value are recognized as
realized losses and charged to income.
<PAGE>
13
The table below shows the classifications of the Company's investments at
December 31, 1995.
<TABLE>
<CAPTION>
Fair Amount reflected Percent
value on balance sheet of total
----------- ---------------- --------
(dollars in thousands)
<S> <C> <C> <C>
Fixed maturities
U.S. Government obligations (1) $ 109,329 $ 109,329 14.2%
U.S. Government corporations and agencies 145,008 145,008 18.8
State municipalities and political subdivisions 284,640 284,640 36.8
Foreign governments 2,161 2,161 0.3
Public utilities 11,773 11,773 1.5
All other corporate bonds 201,636 201,636 26.1
----------- ----------- ------
Total fixed maturities 754,547 754,547 97.7
Equity securities 7,948 7,948 1.0
Other investments 2 2
Short-term investments at cost 9,802 9,802 1.3
----------- ----------- ------
$ 772,299 $ 772,299 100.0 %
=========== =========== ======
</TABLE>
(1) All such securities are backed by the full faith and credit of the
United States Government.
The following table sets forth the composition of the Company's fixed maturity
investments by rating at December 31, 1995.
<TABLE>
<CAPTION>
Percent of
Amount portfolio
---------- ----------
Rating (1) (dollars in thousands)
----------
<S> <C> <C>
AAA $ 538,757 71.4%
AA 79,883 10.6
A 114,146 15.1
BBB 7,041 1.0
Below BBB 281
Nonrated 14,439 1.9
---------- -----
Total $ 754,547 100.0%
========== =====
</TABLE>
(1) Ratings are assigned primarily by Standard & Poor's with remaining
ratings assigned by Moody's and converted to the equivalent Standard &
Poor's ratings.
The following table sets forth contractual maturities in the fixed maturity and
short-term investment portfolios at December 31, 1995. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Percent of
Amount portfolio
---------- ----------
Maturity (dollars in thousands)
--------
<S> <C> <C>
One year or less $ 40,813 5.4%
Over 1 year through 5 years 218,052 28.9
Over 5 years through 10 years 275,699 36.5
Over 10 years 16,615 2.2
---------- ------
551,179 73.0
Mortgaged-backed securities 203,368 27.0
---------- ------
Total $ 754,547 100.0%
========== ======
</TABLE>
<PAGE>
14
Investment results of the Company for each year in the three years ended
December 31, 1995 are shown in the following table.
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Average invested assets (1) $ 714,720 $ 627,677 $ 549,621
Investment income (2) 47,242 41,070 39,030
Average annual yield on total investments 6.6% 6.5% 7.1%
Tax equivalent yield on total investments (3) 7.8% 7.9% 8.2%
Realized investment gains $ 505 $ 2,888 $ 1,396
</TABLE>
(1) Represents total invested assets on an average quarterly basis. The
beginning of the period balance for 1993 has been adjusted to reflect
the effects of the changes in the pooling agreement.
(2) Investment income is net of investment expenses and does not include
realized investment gains or losses or provision for income taxes.
(3) Assuming an effective tax rate of 35%.
Competition
The insurance industry is highly competitive. The Company's insurance
subsidiaries compete with numerous insurance companies, many of which are
substantially larger and have considerably greater financial resources. Because
the Company's insurance subsidiaries operate through independent agents and such
agents represent more than one company, they face competition within each
agency. The Company's insurance subsidiaries compete by underwriting criteria,
pricing, automation, service, and product design. The Company believes that its
management information systems and procedures for selecting and rating risks
accord it a competitive advantage.
Competition in the excess & surplus lines market stiffened in recent years as
standard market capacity increased and prices decreased. Western Heritage
competes in its chosen market (approximately 40 states in the Midwest, West, and
South) with numerous insurers on the basis of service, price, and financial
strength.
ALLIED Mortgage, in originating residential mortgages in central Iowa and
servicing residential mortgages nationally, competes through competitive pricing
and service. Nationally, ALLIED Mortgage is a small-sized company servicing
mortgages with remaining principal balances aggregating $3 billion at December
31, 1995. The largest competitors service in excess of $126 billion of
mortgages. With greater capital and greater efficiencies, the larger companies
have an advantage in originating and purchasing mortgages to obtain the
servicing rights. ALLIED Mortgage has access to capital due to its association
with the Company and competes in the purchase of servicing on the basis of price
and in mortgage originations on the basis of price and quality of service.
Regulation
The Company's insurance subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they transact business
under statutes which delegate regulatory, supervisory, and administrative powers
to state insurance commissioners. Such regulation is designed generally to
protect policyholders rather than investors and relates to such matters as the
standards of solvency which must be met and maintained; the licensing of
insurers and their agents; the nature of and examination of the affairs of
insurance companies, which includes periodic market conduct and financial
examinations by the regulatory authorities; annual and other reports, prepared
on a statutory accounting basis, required to be filed on the financial condition
of insurers or for other purposes; establishment and maintenance of reserves for
unearned premiums and losses and loss settlement expenses; and requirements
regarding numerous other matters. In general, the Company's insurance
subsidiaries must file all rates for insurance directly underwritten with the
insurance department of each state in which they operate; reinsurance generally
is not subject to rate regulation. Further, state insurance statutes typically
place limitations on the amount of dividends or other distributions payable by
insurance companies in order to protect their solvency. Iowa, the jurisdiction
of incorporation of all of the Company's insurance subsidiaries (except Western
Heritage), requires that dividends be paid only out of statutory unassigned
<PAGE>
15
surplus and requires prior regulatory approval for the payment of any dividend
which exceeds the greater of either 10% of the insurer's policyholders' surplus
as of the preceding December 31 or statutory net income of the preceding
calendar year. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Regulations" and note 13 of Notes to Consolidated
Financial Statements for additional discussion of dividend limitations. AMCO and
ALLIED Property and Casualty are also commercially domiciled insurers within the
State of California and subject to regulation (including limitations on dividend
payments) as California domiciled insurers by the California Insurance
Commissioner. The amounts available for distributions as dividends from Western
Heritage are limited by Arizona law, state of jurisdiction, to statutory
unassigned surplus and requires prior regulatory approval for the payment of any
dividends which exceed the lesser of 10% of the policyholders' surplus as of the
preceding December 31 or net investment income of the preceding calendar year.
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 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
continues to believe that the insurance subsidiaries will not be liable for any
material rollback of premiums.
The Company is also subject to statutes governing insurance holding company
systems in various jurisdictions. Typically, such statutes require the Company
periodically to file information with the state insurance regulatory authority,
including information concerning its capital structure, ownership, financial
condition and general business operations. Under the terms of applicable state
statutes, any person or entity desiring to acquire more than a specified
percentage (commonly 10%) of the Company's outstanding voting securities is
required first to obtain approval from the applicable state insurance
regulators. Chapter 521A of the Iowa Code relating to holding companies, to
which the Company is subject, requires disclosure of transactions between the
Company and its insurance subsidiaries or between an insurer and another
subsidiary, that such transactions satisfy certain standards, including that
they be fair, equitable, and reasonable and that certain material transactions
be specifically non-disapproved by the Iowa Insurance Division. Further, prior
approval by the Iowa Insurance Division is required of affiliated sales,
purchases, exchanges, loans or extensions of credit, guarantees, or investments,
any of which involve 5% or more of the insurer's admitted assets as of the
preceding December 31st.
Under insolvency or guaranty fund laws in most states in which the Company's
insurance subsidiaries and ALLIED Mutual operate, insurers doing business in
those states can be assessed, up to prescribed limits, for losses incurred by
policyholders as a result of the insolvency of other insurance companies. The
amounts and timing of such assessments are beyond the control of the Company and
generally have an adverse impact on the Company's earnings. Additionally, the
Company is required to participate in various mandatory pools or underwriting
associations in amounts related to the amount of the Company's direct writings
in the applicable state.
Recently, the insurance regulatory framework has been placed under increased
scrutiny by various states, the federal government, and the National Association
of Insurance Commissioners (NAIC). Various states have considered or enacted
legislation which changes, and in many cases increases, the state's authority to
regulate insurance companies. The NAIC has recommended to the states for
adoption and implementation several regulatory initiatives designed to reduce
the risk of insurance company insolvencies. Two of these initiatives include
risk based capital standards and a model investment law.
The NAIC's risk based capital (RBC) requirements were adopted by the NAIC in
1993 and require property-casualty insurance companies to calculate and report
information under the RBC formula. It is anticipated that 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, and unearned premium) risk. Based on the subsidiaries' statutory
financial statements and 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 any amount which would require regulator action.
The NAIC's model legislation to govern insurance company investments is in
development. An exposure draft was released in December of 1995 and a model law
may be adopted by the NAIC in 1996. The effect of adoption by the Iowa
legislature is not expected to be a significant to the Company.
<PAGE>
16
The mortgage banking subsidiary is subject to the rules and regulations of, and
examination by, the United States Department of Housing and Urban Development,
Federal National Mortgage Association (FNMA), and Government National Mortgage
Association (GNMA) with respect to originating, processing, selling, and
servicing mortgage loans. These rules and regulations, among other things,
prohibit discrimination, provide for inspection and appraisals of properties,
require credit reports on prospective borrowers, and sometimes fix maximum
interest rates, fees, and loan amounts. GNMA requires the maintenance of
specified amounts of net worth that vary with the amount of GNMA mortgage-backed
securities issued by ALLIED Mortgage. There are also various state laws
affecting mortgage banking operations.
Relationship with ALLIED Mutual
The Company is operated as a part of the ALLIED Group of insurance companies.
ALLIED Mutual has operated as a mutual property-casualty insurance company since
1929. In 1971, it organized the Company as a wholly owned subsidiary and
transferred to it certain assets, including the stock of AMCO, which had
operated as a subsidiary of ALLIED Mutual since 1959. In 1985, the Company
effected an initial public offering which then resulted in public ownership of
approximately 22% of its common stock. As of December 31, 1995, ALLIED Mutual
controlled 18% of the voting stock of the Company.
The operations of the Company and its subsidiaries are interrelated with the
operations of ALLIED Mutual. The Company and ALLIED Mutual share common
executive officers, and three directors of the Company are also directors of
ALLIED Mutual.
For the year ended December 31, 1995, ALLIED Mutual reported, in accordance with
Statutory Accounting Principles, net income of $12,162,049, a statutory combined
ratio of 104.5, and assets and surplus at December 31, 1995 of $498,568,711 and
$229,848,488, respectively. As of December 31, 1995, ALLIED Mutual's invested
assets were $453,311,143. Invested assets included a fixed maturity portfolio of
$338,971,484 (at amortized cost), of which over 95.3% was rated "BBB" or higher
by Standard & Poor's or a recognized equivalent rating agency. Invested assets
also included $72,071,431 in equity investments in affiliates (which includes
the Company, ALLIED Life Financial Corporation (ALFC), which is a 52% owned
subsidiary of ALLIED Mutual, and AID Finance Services, Inc.). ALLIED Mutual
files its statutory-basis financial reports with the state insurance departments
in the territories in which it operates.
The Company and ALLIED Mutual formalized their relationship by entering into an
Intercompany Operating Agreement, a Stock Rights Agreement, and a Pooling
Agreement.
Intercompany Operating Agreement
The Company, ALLIED Mutual, ALFC, and each of their respective subsidiaries are
parties to an Intercompany Operating Agreement providing for the sharing of
employees, office space, agency forces, data processing, and other services and
facilities. The Company and its subsidiaries receive from and pay to ALLIED
Mutual and its subsidiaries fees and cost reimbursements for the employees,
services, and facilities provided. In determining the allocated costs to the
companies, each provider of the various services (e.g., ALLIED Mutual leases
office facilities, AGIS provides data processing, etc.) attempts to set fees on
a basis consistent with that which would apply in an arm's length transaction
with nonaffiliates. However, there can be no assurance that the actual rates
charged reflect those which would be obtained if the Company and ALLIED Mutual
were not affiliated and had agreed upon rates following arm's length
negotiation. See "Relationship with ALLIED Mutual-Pooling Agreement" for a
discussion of changes that impact expense sharing arrangements between ALLIED
Mutual and the Company.
The Company leases to ALLIED Mutual and certain of its subsidiaries all of the
employees utilized in their operations for a fee and reimbursement of personnel
costs based on certain allocation methods. The Company is obligated to provide
the entire requirements for employees of ALLIED Mutual and certain of its
subsidiaries, but ALLIED Mutual reserves the right to hire employees
independently rather than leasing them from the Company. In 1995, 1994, and
1993, ALLIED Mutual and its subsidiaries paid the Company approximately
$2,489,390, $2,414,504, and $3,204,386, respectively, for leased employees,
substantially all of which represented cost reimbursement.
<PAGE>
17
The Intercompany Operating Agreement also provides for the leasing by ALLIED
Mutual to the Company of substantially all of the office space utilized by the
Company. ALLIED Mutual and the Company share agency forces as well as other
services and facilities. The Intercompany Operating Agreement contains a
covenant not to compete that binds each of the Company, ALLIED Mutual, and ALFC
not to engage in a business that competes with the products or markets of any
other party or such party's subsidiaries for the term of the Intercompany
Operating Agreement and five years thereafter. The Intercompany Operating
Agreement can be terminated by ALLIED Mutual, ALFC, or the Company after
December 31, 2004 upon two years prior notice.
In addition, ALLIED Mutual, the Company, and ALFC have certain rights under the
Intercompany Operating Agreement, the Pooling Agreement, and the Management
Information Services Agreement in the event a nonaffiliated party acquires the
ownership of 50% or more of the voting stock of the Company or ALFC. If such an
event were to occur, ALLIED Mutual, the Company, or ALFC, as the case may be,
has the right to (i) terminate all three of the Intercompany Operating
Agreement, the Pooling Agreement, and the Management Information Services
Agreement upon six months notice (ii) extend the term of all three such
agreements for up to ten additional years beyond December 31, 2004, upon six
months notice, or (iii) allow such agreements to continue in effect.
Stock Rights Agreement
The Company and ALLIED Mutual are parties to a Stock Rights Agreement, which
grants certain rights to, and imposes certain restrictions on, ALLIED Mutual in
respect of its holdings of the Company's common and preferred stock. This
Agreement expires in 2005.
Pursuant to the Stock Rights Agreement, ALLIED Mutual is entitled to nominate,
and the Company is required to use its best efforts to cause the election or
retention of, a number of members of the Company's Board of Directors in
proportion to ALLIED Mutual's percentage ownership of the total number of shares
of the Company's voting stock outstanding at the time of nomination. In
addition, the Company is required to elect to its Executive Committee at least
one Company director who has been nominated by ALLIED Mutual but who is not an
officer or employee of ALLIED Mutual. The Stock Rights Agreement also restricts
the ability of ALLIED Mutual to grant proxies and solicit other shareholders of
the Company. Under the Stock Rights Agreement, ALLIED Mutual is prohibited from
initiating or accepting a tender offer for shares of the Company's common stock
except under certain conditions. The Company has a right of first refusal with
respect to any sale by ALLIED Mutual of the Company's common stock, subject to
certain exceptions, including a distribution of such stock to the public in a
registered public offering or sale pursuant to Rule 144. ALLIED Mutual has
incidental registration rights and three demand registration rights with respect
to the Company's common and 6-3/4% Series preferred stock it owns.
The limitations on ALLIED Mutual's ability to initiate, or tender shares, in a
tender offer as well as the limitations on its ability to grant proxies and
solicit other shareholders of the Company terminate upon a consolidation or
merger of the Company with another corporation in which the Company is not the
surviving corporation, a sale of substantially all of its assets, or the
holding, by any person other than ALLIED Mutual, of 50% or more of the voting
securities of the Company then outstanding. The Agreement will be suspended for
so long as ALLIED Mutual holds less than 10% of the outstanding common stock and
6-3/4% Series preferred stock of the Company.
Pooling Agreement
The Pooling Agreement provides that ALLIED Mutual, ALLIED Property and Casualty,
and Depositors cede to AMCO premiums, losses, allocated loss settlement
expenses, commissions, premium taxes, service charge income, and dividends to
policyholders and assume from AMCO an amount of this pooled property-casualty
business equal to their participation in the Pooling Agreement. ALLIED Mutual's
crop hail business is not pooled. AMCO pays certain underwriting expenses,
unallocated loss settlement expenses, and premium collection expenses for all of
the pool participants and receives a fee equal to a specified percentage of
premiums as well as a contingent fee based on the attainment of certain combined
ratios from each of the pool participants. AMCO charges each of the other pool
participants 12.85% of written premiums for underwriting services, 7.25% of
earned premiums for unallocated loss settlement expenses, and 0.75% of earned
premiums for premium collection services. AMCO received pool administrative fees
<PAGE>
18
of $55,721,043, $50,449,437, and $44,920,376 from ALLIED Mutual in 1995, 1994,
and 1993, respectively. The administrative fees are subject to renegotiation
during the term of the pooling agreement upon five years notice.
The pooling agreement provides ALLIED Mutual, ALLIED Property and Casualty, and
Depositors more predictable expense levels by limiting such expenses to a
specified percentage of their premiums in lieu of the prior arrangement, where
such expenses were allocated based on the pool participation percentages. These
arrangements give AMCO opportunities to profit from the efficient administration
of such underwriting, loss settlement, and premium collection activities and to
provide similar services to nonaffiliated insurance companies in the future.
Changes to the Pooling Agreement must be approved by the Coordinating Committee.
The term of the Pooling Agreement extends to 2004 after which time it can be
terminated by either party on five years' notice. The Pooling Agreement may also
be terminated or extended by ALLIED Mutual upon the occurrence of certain
events. See "Relationship with ALLIED Mutual-Intercompany Operating Agreement."
The Coordinating Committee
Under the Intercompany Operating Agreement, the Company, ALLIED Mutual, and ALFC
have formed a Coordinating Committee comprised of two independent directors of
the Company, two directors of ALLIED Mutual, and two independent directors of
ALFC, none of whom serve on other ALLIED boards. All disputes arising under the
Intercompany Operating Agreement as well as other intercompany agreements are to
be submitted to the Coordinating Committee for resolution. Decisions of this
Coordinating Committee must be unanimous and are binding on the parties.
Historically, all issues that have been submitted to the Coordinating Committee
have been resolved by the Committee. The Company anticipates that any future
issues would be similarly resolved. If an issue is not resolved by the
Coordinating Committee, it will be submitted to arbitration. In such
arbitration, each party to the dispute selects one arbitrator, and if such
dispute involves only two parties, such arbitrators select a third arbitrator.
Other Relationships
ALLIED Mutual has participated with American Re-Insurance Company in a property
catastrophe reinsurance agreement to cover the property-casualty segment's share
of pooled losses. In 1995, 1994, and 1993, ALLIED Mutual's and American
Re-Insurance Company's respective participation in the reinsurance agreement
were 90% and 10% and covered the property-casualty segment's share of pooled
losses up to $5,000,000 in excess of $5,000,000. See notes 4 and 6 of Notes to
Consolidated Financial Statements for additional information concerning
transactions between the Company and ALLIED Mutual.
Employees
At December 31, 1995, the Company was the direct employer of personnel for all
subsidiaries of the Company and of ALLIED Mutual and its subsidiaries other than
ALFC, employing 2,243 persons. None of the Company's employees are members of a
collective bargaining unit. Management believes that its employee relations are
good.
Item 2. Properties
The majority of the real property occupied by the Company and its subsidiaries
are owned or leased by ALLIED Mutual. A portion of the costs of the properties
is paid by the Company and its subsidiaries. See "Relationship with ALLIED
Mutual-Intercompany Operating Agreement." Management considers the properties to
be adequate for its needs. The primary properties owned by ALLIED Mutual are the
home office in Des Moines, Iowa, a data processing facility and claims center in
Urbandale, Iowa, and regional offices in Denver, Colorado and Lincoln, Nebraska.
The Santa Rosa, California regional office building is leased by ALLIED Mutual.
The Company and its subsidiaries lease office space in Des Moines and Cedar
Rapids, Iowa, Minneapolis, Minnesota, Lincoln, Nebraska, and Scottsdale,
Arizona.
<PAGE>
19
Item 3. Legal Proceedings
The Company and its subsidiaries are party to various lawsuits arising in the
normal course of business. The Company and its subsidiaries believe the
resolution of these lawsuits will not have a material adverse effect on their
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted during the fourth quarter of 1995 to a vote of holders
of ALLIED Group, Inc. stock.
<PAGE>
20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders' Matters
The Company's common stock trades on The Nasdaq Stock Market under the symbol
ALGR. As of December 31, 1995, there were 1,026 stockholders of record. The
following table shows the high and low market prices and dividends paid per
share for each calendar quarter for the two most recent years.
<TABLE>
<CAPTION>
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
High $ 28-3/4 $ 30-1/4 $ 33 $ 36-3/4
Low 23-5/16 27-1/4 27-1/2 31-1/2
Dividends 0.17 0.17 0.17 0.17
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
1994 Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
High $ 27-1/4 $ 26-3/4 $ 30-1/2 $ 31
Low 23 22-3/4 25 22
Dividends 0.15 0.15 0.15 0.15
</TABLE>
There are certain regulatory restrictions relating to the payment of dividends
(see note 13 of Notes to Consolidated Financial Statements). It is the present
intention of the Board of Directors to declare quarterly cash dividends.
<PAGE>
21
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
At or for the year ended December 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ----------- ---------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Premiums earned
Personal $ 279,908 $ 252,916 $ 225,594 $ 191,059 $ 145,029
Commercial 145,930 133,816 118,728 101,364 79,516
------------ ----------- ---------- ----------- -----------
Total property-casualty 425,838 386,732 344,322 292,423 224,545
Excess & Surplus Lines 29,661 25,786 24,014 27,738 23,612
------------ ----------- ---------- ----------- -----------
Total 455,499 412,518 368,336 320,161 248,157
Investment income 47,242 41,070 39,030 32,716 27,975
Realized investment gains 505 2,888 1,396 1,975 2,189
Other income 49,519 50,888 73,680 91,739 76,044
------------ ----------- ---------- ----------- -----------
Total revenues 552,765 507,364 482,442 446,591 354,365
Losses and expenses 478,917 440,665 425,685 407,584 332,242
------------ ----------- ---------- ----------- -----------
Income from before
income taxes 73,848 66,699 56,757 39,007 22,123
Income taxes 21,471 19,074 16,835 10,332 5,114
------------ ----------- ---------- ----------- -----------
Net income $ 52,377 $ 47,625 $ 39,922 $ 28,675 $ 17,009
============ =========== ========== =========== ===========
Fully diluted earnings per share
Net income $ 3.52 $ 3.19 $ 2.61 $ 1.94 $ 1.34
============ =========== ========== =========== ===========
Realized investment gain $ .02 $ .14 $ .06 $ .09 $ .12
============ =========== ========== =========== ===========
Property-casualty wind and
hail losses $ 1.35 $ 1.15 $ .89 $ .74 $ 1.04
============ =========== ========== =========== ===========
Dividends paid $ .68 $ .60 $ .51 $ .43 $ .37
============ =========== ========== =========== ===========
Balance Sheet Data
Total investments $ 772,299 $ 655,906 $ 606,511 $ 460,038 $ 356,788
Total assets 1,010,598 892,751 855,525 688,488 557,636
Notes payable 39,465 43,541 82,459 66,543 79,124
Guarantee of ESOP obligations 26,270 28,150 29,500 30,590 33,140
Other Data
Pool percentage 64% 64% 64% 60% 53%
Book value per share $ 24.23 $ 19.68 $ 17.98 $ 14.34 $ 13.18
Closing stock price per share $ 36.00 $ 24.75 $ 26.25 $ 21.17 $ 11.33
Return on average book value
per share 16.1% 17.0% 15.9% 14.2% 10.5%
Pretax investment yield 6.6% 6.5% 7.1% 7.6% 8.3%
Pretax profit on revenues 13.4% 13.1% 11.8% 8.7% 6.2%
Cash dividends to closing
stock price 1.9% 2.4% 1.9% 2.0% 3.3%
Closing stock price to
earnings ratio 10.2 7.8 10.1 10.9 8.5
Property-casualty statutory
combined ratio 95.7 97.1 99.3 102.5 107.9
Shares outstanding
Preferred shares 4,820 4,981 5,070 5,141 3,368
Common shares 9,445 9,000 9,026 4,469 4,281
</TABLE>
<PAGE>
22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the Selected
Financial Data and Consolidated Financial Statements and related footnotes
included elsewhere herein.
ALLIED Group, Inc. (the Company) is a regional insurance holding company. As of
December 31, 1995, The ALLIED Group Employee Stock Ownership Trust (ESOP Trust)
owned 26.9% of the outstanding stock. ALLIED Mutual Insurance Company (ALLIED
Mutual), an affiliated property-casualty insurance company, controlled 18% 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 catastrophic events, general
economic conditions, and other factors such as changes in tax laws and the
regulatory environment.
1995 COMPARED TO 1994
Consolidated revenues for 1995 were $552.8 million, up 8.9% over the $507.4
million reported for 1994. Excluding realized in gains, revenues grew 9.5% for
1995. The increase occurred primarily because of the 10.4% growth in earned
premiums.
Income before income taxes was up 10.7% to $73.8 million from $66.7 million for
1994 primarily because of revenue growth and improved underwriting margins for
the property-casualty segment. The property-casualty segment was the dominant
contributor to operating income with an increase of $9.7 million.
Net income for the year ended December 31, 1995 was up 10% to $52.4 million,
raising fully diluted earnings per share to $3.52 from $3.19. Fully diluted
earnings per share before net realized investment gains were $3.50 for 1995
compared with $3.05. Book value per share increased to $24.23 from $19.68.
Property-casualty
Revenues for the property-casualty segment increased to $472 million from $431.1
million for 1994. Direct earned premiums for the segment were $435.2 million for
1995 compared with $383.5 million one year earlier. Earned premiums increased
10.1% to $425.8 million from $386.7 million. The increase resulted primarily
from growth in insurance exposure as well as a larger average premium per
policy.
Pooled net written premiums (including ALLIED Mutual) totaled $692.6 million, a
9.4% increase over 1994 production. The average premium per policy for personal
lines was up 3.4% to $586 while the policy count grew 6.5%. The average premium
per policy for commercial lines increased 2% to $1,086, and policy count was up
5.3%. Earned premiums for the property-casualty segment were 65.7% personal
lines and 34.3% commercial lines. The business mix for 1994 was 65.4% personal
and 34.6% commercial lines.
Income before income taxes increased to $63.9 million from $54.2 million
primarily as a result of lower underwriting expenses in 1995 and an increase in
earned premiums. Investment income was $39.1 million compared with $35.3
million. The pretax yield on invested assets was 6.4%, down from 6.6% one year
earlier. Realized investment gains were $236,000 compared with $3 million.
Realized investment gains for 1994 included $2.6 million from the sale of the
segment's 20% interest in a savings and loan holding company. Other income
increased to $6.9 million from $6.1 million in 1994.
<PAGE>
23
The statutory combined ratio (after policyholder dividends) improved to 95.7
from the 97.1 reported in 1994. Improvement was attributed primarily to a
1.3-point decrease in the underwriting expense ratio. The decrease was the
result of the Company's continuing efforts to improve efficiency and
productivity. Wind and hail losses for 1995 increased to $28.7 million from
$24.4 million in 1994. The impact of wind and hail losses on the statutory
combined ratio was 6.7 points for the year ended December 31, 1995 and 6.3
points for 1994. The underwriting gain (on a generally accepted accounting
principles basis) was $17.7 million compared with $9.8 million for 1994. On a
fully diluted basis, the impact of wind and hail losses on the results of
operations was $1.35 per share versus $1.15 in 1994.
The personal auto statutory combined ratio improved to 96.5 for 1995 from 97.4
last year. The improvement was due to a 1.4-point decrease in the underwriting
expense ratio that more than offset the increase in the loss and loss settlement
expense ratio. The statutory combined ratio for the homeowners line was 99.2
compared with 107.4 for 1994. The impact of wind and hail losses on the
homeowners combined ratio increased slightly to 21.7 points from 21.5 points.
Results for the homeowners line were favorably affected by better pricing in
1995. Overall, the personal lines statutory combined ratio improved to 97.2 in
1995 from 99.8 in 1994. The statutory combined ratio for commercial lines
increased to 92.7 from 92.0 for the previous year.
Excess & Surplus Lines
Earned premiums increased to $29.7 million for 1995 from $25.8 million for 1994.
Net written premiums increased 13.2% to $30.6 million from $27 million. Direct
earned premiums were $37.2 million compared with $32.3 million. As of December
31, 1995, the segment's book of business was comprised of 2.4% personal lines
and 97.6% commercial lines. For 1994, the business mix was 2.8% personal and
97.2% commercial lines.
The statutory combined ratio (after policyholder dividends) was 102.2, which
produced an underwriting loss (on a generally accepted accounting principles
basis) of $855,000. The statutory combined ratio of 99.9 for 1994 resulted in an
underwriting loss of $218,000. The 1995 combined ratio increased primarily
because of a 20.4% increase in losses and loss settlement expenses (3.4-points
on the combined ratio).
Income before income taxes for 1995 decreased 3.2% to $4.8 million from $5
million. The decrease was primarily due to poor loss development. Realized
investment losses were $136,000 compared with losses of $24,000 for 1994.
Investment income increased 11.2% to $5.8 million from $5.2 million. Investment
income increased because a larger average balance of invested assets more than
offset a 10 basis-point decline in the pretax yield from last year's 6.8%.
Invested assets rose 21.2% from the previous year-end to $96.4 million at
December 31, 1995.
Noninsurance Operations
Revenues for ALLIED Group Mortgage Company (ALLIED Mortgage) decreased in 1995
to $17.9 million from $18.3 million in 1994. Growth in revenues was adversely
affected by a decrease in interest income due to a decline in the average
balance of mortgage loans held for sale in 1995. The mortgage servicing
portfolio was $3 billion at year-end 1995 and 1994. Income before income taxes
for ALLIED Mortgage was up 13.8% to $4.5 million from $4 million for 1994. The
increase was primarily the result of lower operating expenses.
Revenues for the data processing operations decreased 6% to $48.6 million from
$51.8 million in 1994. The operations reported a pretax loss of $618,000 for
1995 and a pretax profit of $3.9 million the previous year. The 1995 decreases
were primarily the result of a reduction in revenues generated from the
affiliated property-casualty segment. Fees for processing and product
maintenance services were lowered during the year to more closely approximate
cost for providing such services to that segment's companies.
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
investment grade (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
<PAGE>
24
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 & Poor's Corporation or Moody's. At December 31, 1995 the Company's
investment portfolio consisted almost exclusively of fixed income securities;
98.1% were rated investment securities or higher. The portfolios contained no
real estate or mortgage loans.
Invested assets were up 17.7% to $772.3 million from $655.9 million at year-end
1994. Fixed maturities at amortized cost increased 11.2%. In 1995, the Company
reclassified all fixed maturities in held to maturity to available for sale.
Therefore, all fixed maturities were marked to market at December 31, 1995. See
Investments section in note 1 of Notes to Consolidated Financial Statements.
Consolidated investment income increased 15% to $47.2 million from $41.1 million
in 1994. The increase was due primarily to a larger average balance of invested
assets. The tax-equivalent yield was down in 1995 to 7.8% compared with 7.9% one
year earlier. The aftertax yield for 1995 and 1994 was 5.1%.
At December 31, 1995, the Company held collateralized mortgage obligation (CMO)
investments with a carrying and fair value of $77.7 million. The Company's
investments in CMOs as of December 31, 1994 had a carrying value of $59.6
million (fair value of $57 million). Substantially all of the Company's CMO
investments are in planned amortization class bonds or sequential pay bonds with
anticipated durations of approximately five 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 effective income tax rate was 29.1% compared with 28.6% for 1994.
The income tax expense for 1995 rose to $21.5 million from $19.1 million due to
higher operating income and a smaller percentage of tax-exempt investment
income.
1994 COMPARED TO 1993
Consolidated revenues for 1994 were $507.4 million, up 5.2% over the $482.4
million reported for 1993. Though earned premiums grew 12% in 1994, the
percentage increase in revenues was constrained by the sale of the Company's
investment banking and asset management subsidiary in October of 1993.
Income before income taxes was up 17.5% to $66.7 million from $56.8 million for
1993 primarily because of improved underwriting results for the
property-casualty segment. The segment's operating income increased $13.3
million.
Net income for the year ended December 31, 1994 was up 19.3% to $47.6 million,
raising fully diluted earnings per share to $3.19 from $2.61. Fully diluted
earnings per share before net realized investment gains were $3.05 compared with
$2.55. Book value per share increased to $19.68 from $17.98.
Property-casualty
Revenues for the property-casualty segment increased to $431.1 million from
$384.6 million for 1993. Direct earned premiums for the segment were $383.5
million for 1994 compared with $328.5 million one year earlier. Earned premiums
increased 12.3% to $386.7 million from $344.3 million. The increase resulted
primarily from growth in insurance exposure and a larger average premium per
policy.
Pooled net written premiums (including ALLIED Mutual) totaled $632.8 million, an
11.3 % increase over 1993 production. The average premium per policy for
personal lines was up 3.8% to $567 while the policy count grew 8%. The average
premium per policy for commercial lines increased 4.5% to $1,065, and policy
count was up 4.8%. Earned premiums for the property-casualty segment were 65.4%
personal lines and 34.6% commercial lines. The business mix for 1993 was 65.5%
personal and 34.5% commercial.
<PAGE>
25
Income before income taxes increased to $54.2 million from $40.9 million as a
result of the first statutory underwriting profit in seven years. Investment
income was $35.3 million compared with $33.5 million. The pretax yield on
invested assets was 6.6%, down from 7% due to a larger investment in tax-exempt
securities. Realized investment gains were $3 million compared with $1.3
million; the increase was from the sale of the segment's 20% interest in a
savings and loan holding company in 1994 for $9.4 million. The pretax gain of
$2.6 million from the sale generated an aftertax gain on a fully diluted basis
of $0.13 per share. Other income increased to $6.1 million from $5.5 million in
1993.
The statutory combined ratio (after policyholder dividends) improved to 97.1
from the 99.3 reported in 1993. Improvement was attributed to a 1.2-point
decrease in the underwriting expense ratio and a 1-point decrease in the loss
and loss settlement expense ratio. The decreases were the result of the
Company's continuing efforts to improve efficiency and productivity. Wind and
hail losses for 1994 increased to $24.4 million from $18.7 million in 1993;
their impact on the combined ratio worsened to 6.3 points from 5.4 points for
1993. The underwriting gain (on a generally accepted accounting principles
basis) was $9.8 million compared with a gain of $611,000 for 1993. On a fully
diluted basis, wind and hail losses increased $0.26 per share to $1.15 in 1994.
The personal auto statutory combined ratio improved to 97.4 for 1994 from 98.3.
The improvement was due to a 10.6% growth in earned premiums that outpaced the
increase in losses and loss settlement expenses. The statutory combined ratio
for the homeowners line was 107.4 compared with 109.1 for 1993. The impact of
the wind and hail losses on the homeowners combined ratio increased to 21.5
points from 17.9 points, but the increase was offset by lower loss settlement
and underwriting expenses. Overall, the personal lines statutory combined ratio
improved to 99.8 in 1994 from 100.8 in 1993. The statutory combined ratio for
commercial lines improved to 92.0 from 96.3.
Excess & Surplus Lines
Earned premiums increased 7.4% to $25.8 million for 1994 from $24 million. Net
written premiums increased 8.6% to $27 million from $24.9 million. Direct earned
premiums were $32.3 million compared with $30 million. As of December 31, 1994,
the segment's book of business was comprised of 2.8% personal lines and 97.2%
commercial lines. For 1993, the business mix was 3.5% personal and 96.5%
commercial.
The statutory combined ratio (after policyholder dividends) was 99.9, which
produced an underwriting loss (on a generally accepted accounting principles
basis) of $218,000. The statutory combined ratio of 96.1 for 1993 resulted in an
underwriting gain of $647,000. The 1994 combined ratio worsened primarily
because of a 16.4% increase in incurred losses resulting from higher than
anticipated one unusually large claim; the loss and loss settlement expense
ratio increased 2.5 points.
Income before income taxes for 1994 decreased 11% to $5 million from $5.6
million for 1993. Realized investment losses were $24,000 compared with gains of
$103,000. Investment income increased 7.7% to $5.2 million from $4.9 million
because a larger average balance of invested assets more than offset the decline
in the pretax yield to 6.8% from 7.2%. Invested assets rose 6% from the previous
year-end to $79.6 million at December 31, 1994.
Noninsurance Operations
Revenues for ALLIED Mortgage decreased slightly in 1994 to $18.3 million from
$18.4 million in 1993, adversely affected by a sharp decrease in marketing
revenues in an interest rate environment that experienced rising rates
throughout the year. In 1993, falling interest rates provided the market with an
abundance of mortgage loans to be purchased or originated at below-market prices
and allowed the mortgage loans to be sold on the secondary market at a premium.
The stability in revenues in 1994 was attributed primarily to an increase in
servicing fees that offset the decline in marketing revenues. The mortgage
servicing portfolio grew 19.3% to $3 billion from $2.5 billion at year-end 1993.
Income before income taxes for ALLIED Mortgage was up 16.5% to $4 million from
$3.4 million for 1993. The increase was primarily the result of fewer servicing
rights being written off due to the reduction in refinancing activities in 1994.
During 1993, lower interest rates increased the amount of servicing rights being
expensed as the underlying mortgages were repaid or refinanced.
<PAGE>
26
Revenues increased 6.8% for the data processing operations to $51.8 million from
$48.4 million in 1993. Income before income taxes decreased 16.8% to $3.9
million in 1994 from $4.6 million. The decrease occurred because the growth in
operating expenses outpaced the increase in revenues. Higher operating expenses
were the result of expensing direct development costs.
Investments and Investment Income
Invested assets were up 8.1% to $655.9 million from $606.5 million at year-end
1993. The investment portfolios consisted of 99.6% investment grade securities
at December 31, 1994. The fair value of the Company's investment in fixed
maturities held to maturity was $13.2 million below amortized cost compared with
an excess of $18.8 million at December 31, 1993.
Consolidated investment income increased 5.2% to $41.1 million from $39 million
for 1993. The Company's pretax rate of return on invested assets was down to
6.5% from the previous year's 7.1%. The aftertax yield for 1994 was 5.1%
compared with 5.4%.
As of December 31, 1994, the Company held collateralized mortgage obligation
(CMO) investments with a carrying value of $59.6 million (fair value of $57
million). The Company's investments in CMOs as of December 31, 1993 had a
carrying value of $104 million (fair value of $105.6 million).
Income Taxes
The Company's effective income tax rate was 28.6% compared with 29.7% for 1993.
The increased tax-exempt income in 1994 was primarily responsible for the change
in the effective tax rate. The income tax expense for 1994 rose to $19.1 million
from $16.8 million due to higher operating income.
REGULATIONS
The NAIC's risk based capital (RBC) requirements were adopted by the NAIC in
1993 and call for property-casualty insurance 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,
and unearned premiums) risk. The subsidiaries' statutory financial statements
and counsel's interpretation of the RBC formula lead management to believe
capital levels are sufficient to support the level of risk inherent in Company
operations and are in excess of the minimums required.
The NAIC's model legislation to govern insurance company investments is in
development. An exposure draft was released in December of 1995, and the model
investment law may be adopted by the NAIC in 1996. The effect of the adoption by
the Iowa legislature is not expected to be significant to the Company.
California has been 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 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
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 payments of claims, commissions, premiums taxes,
operating expenses, income taxes, and the purchase of fixed maturities and
equity securities. In developing its strategy, the Company establishes a level
<PAGE>
27
of cash and highly liquid short- and intermediate-term securities that, combined
with expected cash flow, is believed adequate to meet anticipated short-term and
long-term payment obligations.
In 1995, operating activities generated cash flows of $97.9 million; in 1994,
the total was $85.5 million; in 1993, the total was $91.6 million (including
$25.8 million from the 1993 change in the pool participation percentage and pool
administration). For each year, the primary source of funds was premium growth
in the Company's property-casualty insurance operations. Proceeds from the sale
of 1.6 million shares of common stock in the first quarter of 1993 accounted for
the majority of the $38.1 million generated from financing activities during
1993.
In each of the years, funds generated from operating activities were used
primarily to purchase investment grade fixed securities, accounting for the
majority of cash used in investing activities. The net cash used in investing
activities in 1995, 1994, and 1993 was $88.8 million, $69.5 million, and $128.8
million, respectively. In 1993, additional funds were generated from financing
activities and were used primarily to purchase investment grade fixed
maturities. In 1995, 1994, and 1993, the Company paid dividends of $13.5
million, $12.7 million, and $11.8 million, respectively.
In 1994, the Company also used funds to repurchase $6.4 million of common stock.
On February 11, 1994, the Company's Board of Directors approved a plan to
repurchase up to 250,000 shares of the Company's common stock on the open
market. The 250,000 shares were repurchased at an average cost of $25.44 per
share. The repurchase program was completed during November of 1994.
On December 14, 1994, the Company's Board of Directors approved the repurchase
of an additional 250,000 shares of the Company's common stock on the open
market. Through December 31, 1995, the Company had not repurchased any shares
under this program.
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. In 1994, additional funds of $9.4 million were
generated from the sale of the 20% interest in a savings and loan holding
company. As of December 31, 1995, the Company and its subsidiaries had no
material commitments for capital expenditures. Future debt and stock issuance
will be considered as additional capital needs arise. The method of funding will
depend upon financial market conditions.
The Company's mortgage banking subsidiary, ALLIED Mortgage, has separate credit
agreements 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, to purchase servicing rights, and to purchase short-term
investments. These notes payable are not guaranteed by the Company. At December
31, 1995, ALLIED Mortgage had short-term borrowings of $22.5 million, which are
to be repaid through the subsequent sale of securities inventory. The amount of
short-term borrowings fluctuates daily depending on the level of inventory being
financed. Long-term borrowings amounted to $13.5 million to be repaid over the
next nine years. See note 8 of Notes to Consolidated Financial Statements. 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. See note 14 of Notes to
Consolidated Financial Statements.
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. At December 31, 1995, the
property-casualty and excess & surplus lines segments' net written premiums were
171% and 110% of their statutory surplus, respectively. On February 18, 1993,
1.6 million shares of common stock were sold to the public at $24.67 per share;
the Company used the net proceeds to contribute $36.1 million to the
property-casualty subsidiaries and improve overall liquidity.
The Company relies primarily on dividends from its insurance subsidiaries to pay
preferred and common stock dividends to Company stockholders. State insurance
regulations restrict the maximum amount of dividends the property-casualty
subsidiaries can pay without prior regulatory approval. The maximum dividend
that the subsidiaries may pay without prior approval of the insurance
authorities is the greater of either 10% of the subsidiary's statutory capital
<PAGE>
28
stock and surplus as of the preceding December 31 or net income of the preceding
calendar year. In 1996 the maximum amount legally available for distribution to
the Company without prior approval is $44.1 million.
The excess & surplus lines subsidiary is domiciled in Arizona and operates under
Arizona state laws. The maximum amount available for distribution as dividends
from the excess & surplus lines subsidiary is limited to the lesser of 10% of
stockholders' surplus as of the preceding December 31 or net investment income
of the pre year. The excess & surplus lines segment could pay $2.8 million in
1996 without prior notice to the insurance commissioner. The Company anticipates
that the excess & surplus lines segment will not pay dividends in 1996.
During 1995, the Company received dividend payments of $12 million from the
property-casualty subsidiaries and $974,000 from noninsurance subsidiaries.
During 1994 and 1993, the property-casualty subsidiaries made dividend payments
of $7.8 million and $7.7 million, respectively, to the Company; noninsurance
subsidiaries paid dividends of $1.1 million and $440,000, respectively.
Dividend payments to common stockholders totaled $6.3 million for the year ended
December 31, 1995, up from $5.4 million and $4.4 million in 1994 and 1993,
respectively. In 1995, 1994, and 1993, the Company paid dividends of $3.7
million, $3.8 million, and $3.9 million, respectively, on the ESOP Series. In
each year, the Company paid dividends of $3.5 million on the 6-3/4% Series
preferred stock.
At its March 5, 1996 meeting, the Board of Directors approved a first-quarter
1996 common stock dividend of $0.22 per share for payment to holders of record
on March 26. The dividend is $0.05 (29.4%) higher than the amount paid in the
fourth quarter of 1995.
On March 7, 1996, the ESOP Trust converted its shares of the ESOP Series to
approximately 4.4 million shares of common stock. The conversion increased the
number of shares outstanding to 13.9 million. Paying the first-quarter 1996
common stock dividends on the new shares of common stock held by the ESOP Trust
will increase the Company's dividend payments in the first quarter by $675,000.
If the $0.22 rate is approved by the Board each quarter of 1996, the annual
dividend payments will rise $939,000 as a result of the conversion of the ESOP
Series share to common stock. The impact is greatest in the first quarter
because the ESOP Trust will receive the full first-quarter dividend in addition
to the ESOP Series dividend for the two months prior to the conversion.
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 9 of Notes to Consolidated Financial Statements. At December 31, 1995, the
balance of the obligations was $26.3 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 paid to the
ESOP Trust. The Company made contributions to the ESOP Trust of $733,000 in
1995, $35,000 in 1994, and $54,000 in 1993. The Company paid dividends of $2.8
million in 1995, 1994, and 1993, which were used for such debt service. In
connection with its ESOP guarantee of ESOP obligations, the Company is required
to maintain minimum stockholders' equity and to comply with certain other
financial covenants. See notes 9 and 15 of Notes to Consolidated Financial
Statements.
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>
29
THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK
<PAGE>
30
Item 8. Financial Statements and Supplementary Data
Management's Representation
The management of ALLIED Group, Inc. is responsible for the integrity and fair
presentation of the consolidated financial statements, related notes, and all
other information presented herein. The statements were prepared in accordance
with generally accepted accounting principles and include amounts that are based
on management's best estimates and judgements.
Management maintains a system of internal control designed to provide reasonable
assurance as to the integrity and reliability of the financial statements, the
protection of assets from unauthorized use or disposition, the prevention and
detection of fraudulent financial reporting, and the appropriate division of
responsibility. In addition, the Company's internal audit department
systematically reviews these controls, evaluates their adequacy and
effectiveness, and reports thereon. Management has considered internal audit
recommendations and those of KPMG Peat Marwick LLP and has in its opinion
responded appropriately to those recommendations. Management believes that as of
December 31,1995 the Company's system of internal control is adequate to
accomplish the objectives discussed herein.
The Company's financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The audit was conducted in accordance
with generally accepted auditing standards, which included a consideration of
the Company's system of internal control to the extent necessary to form an
independent opinion on the financial statements prepared by management.
The audit committee of the Board of Directors, composed solely of outside
directors, oversees management's discharge of its financial reporting
responsibilities. The committee meets periodically with management, internal
auditors, and representatives of KPMG Peat Marwick LLP to discuss auditing,
financial reporting and internal control matters. Both internal and independent
auditors have access to the audit committee without management's presence.
Jamie H. Shaffer
President (Financial)
<PAGE>
31
Independent Auditors' Report
The Board of Directors and Stockholders
ALLIED Group, Inc.
We have audited the accompanying consolidated balance sheets of ALLIED Group,
Inc. and subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis. evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ALLIED Group, Inc.
and subsidiaries as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in note 1 of Notes to Consolidated Financial Statements, the
Company changed its method of accounting for investments in fixed maturities in
1993.
KPMG Peat Marwick LLP
Des Moines, Iowa
February 2, 1996 except for note 20,
which is as of March 7, 1996
<PAGE>
32
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Assets
Investments (note 2)
Fixed maturities (note 3)
Available for sale at fair value $ 754,547 $ 243,568
Held to maturity at amortized cost --- 401,717
Equity securities at fair value (note 3) 7,948 4,507
Short-term investments at cost (notes 3 and 4) 9,802 5,656
Other investments at equity 2 458
-------------- --------------
Total investments 772,299 655,906
Cash 1,465 1,541
Indebtedness from affiliates (note 4) --- 572
Accrued investment income 10,467 10,349
Accounts receivable 76,118 68,466
Current income taxes recoverable (note 17) 1,330 2,594
Reinsurance receivables for losses and loss settlement expenses 19,293 20,936
Mortgage loans held for sale (notes 2 and 8) 13,673 15,540
Deferred policy acquisition costs 41,688 38,269
Prepaid reinsurance premiums 6,784 6,381
Mortgage servicing rights (note 8) 35,705 36,981
Deferred income taxes (note 17) --- 9,100
Other assets 31,776 26,116
-------------- --------------
Total assets $ 1,010,598 $ 892,751
============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
33
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Liabilities
Losses and loss settlement expenses (notes 5 and 6) $ 341,864 $ 310,996
Unearned premiums 196,461 180,113
Outstanding drafts 3,708 13,309
Indebtedness to affiliates (note 4) 1,019 ---
Notes payable to nonaffiliates (notes 2 and 8) 35,965 41,541
Notes payable to affiliates (notes 2 and 4) 3,500 2,000
Guarantee of ESOP obligations (notes 2 and 9) 26,270 28,150
Deferred income taxes (note 17) 2,854 ---
Other liabilities (notes 14 and 16) 37,371 34,761
-------------- --------------
Total liabilities 659,012 610,870
-------------- --------------
Stockholders' equity
Preferred stock, no par value, issuable in series,
authorized 7,500 shares (note 10)
6-3/4% Series, 1,827 shares issued and outstanding 37,813 37,813
ESOP Series, issued and outstanding 2,993 shares
in 1995 and 3,154 shares in 1994 45,835 47,753
Common stock, no par value, $1 stated value, authorized
40,000 shares, issued and outstanding 9,445 shares
in 1995 and 9,000 shares in 1994 (notes 11 and 12) 9,445 9,000
Additional paid-in capital 104,596 98,926
Retained earnings (note 13) 159,470 119,752
Unrealized appreciation (depreciation) of investments
(net of deferred income tax (expense)
benefit of ($9,907) and $2,869) 18,335 (5,241)
Unearned compensation related to ESOP (note 9) (23,908) (26,122)
-------------- --------------
Total stockholders' equity 351,586 281,881
-------------- --------------
Commitments and contingent liabilities (notes 6 and 14)
Total liabilities and stockholders' equity $ 1,010,598 $ 892,751
============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
34
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues
Earned premiums (notes 4 and 6) $ 455,499 $ 412,518 $ 368,336
Investment income (note 3) 47,242 41,070 39,030
Realized investment gains (notes 3 and 7) 505 2,888 1,396
Income from affiliates (note 4) 5,285 4,737 5,478
Other income 44,234 46,151 68,202
-------------- -------------- --------------
552,765 507,364 482,442
-------------- -------------- --------------
Losses and expenses (note 4)
Losses and loss settlement expenses (notes 5 and 6) 317,940 286,944 258,918
Amortization of deferred policy acquisition costs 100,120 90,858 81,154
Other underwriting expenses 20,583 25,090 27,006
Other expenses 38,713 35,419 55,486
Interest expense (note 8) 1,561 2,354 3,121
-------------- -------------- --------------
478,917 440,665 425,685
-------------- -------------- --------------
Income before income taxes 73,848 66,699 56,757
-------------- -------------- --------------
Income taxes (note 17)
Current 22,293 17,499 18,421
Deferred (822) 1,575 (1,586)
-------------- -------------- --------------
21,471 19,074 16,835
-------------- -------------- --------------
Net income $ 52,377 $ 47,625 $ 39,922
============== ============== ==============
Net income applicable to common stock $ 45,160 $ 40,319 $ 32,502
============== ============== ==============
Earnings per share
Primary $ 4.91 $ 4.48 $ 3.68
============== ============== ==============
Fully diluted $ 3.52 $ 3.19 $ 2.61
============== ============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
35
ALLIED Group, Inc. and Subsidiaries
Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Preferred stock, beginning of year $ 85,566 $ 87,125 $ 88,055
Issuance of shares of ESOP Series (note 10) 699 794 889
ESOP Series shares converted to
common shares (note 11) (2,617) (2,353) (1,819)
-------------- -------------- --------------
Preferred stock, end of year 83,648 85,566 87,125
-------------- -------------- --------------
Common stock, beginning of year 9,000 9,026 4,469
Issuance of shares of common stock (notes 11 and 12) 445 224 1,719
Repurchase of shares of common stock (note 11) --- (250) ---
Effect of 3-for-2 stock split --- --- 2,838
-------------- -------------- --------------
Common stock, end of year 9,445 9,000 9,026
-------------- -------------- --------------
Additional paid-in capital, beginning of year 98,926 101,541 57,810
Issuance of shares of common stock (notes 11 and 12) 5,670 3,258 46,569
Repurchase of shares of common stock (note 11) --- (6,110) ---
Effect of 3-for-2 stock split --- --- (2,838)
Other, net --- 237 ---
-------------- -------------- --------------
Additional paid-in capital, end of year 104,596 98,926 101,541
-------------- -------------- --------------
Retained earnings, beginning of year 119,752 83,922 54,902
Net income 52,377 47,625 39,922
Dividends paid on preferred stock (note 10) (7,217) (7,306) (7,421)
Dividends paid on common stock (note 11) (6,291) (5,396) (4,423)
Tax benefits attributable to tax deductible dividends
on unallocated shares of the ESOP 849 907 942
-------------- -------------- --------------
Retained earnings, end of year 159,470 119,752 83,922
-------------- -------------- --------------
Unrealized (depreciation) appreciation of investments,
beginning of year (5,241) 5,900 ---
Change in unrealized appreciation (depreciation), net 23,576 (11,141) 17
Cumulative effect of accounting change for
investments (note 1) --- --- 5,883
-------------- -------------- --------------
Unrealized appreciation (depreciation) of
investments, end of year 18,335 (5,241) 5,900
-------------- -------------- --------------
Unearned compensation related to ESOP,
beginning of year (26,122) (27,874) (29,221)
Cost of ESOP Series shares allocated 2,214 1,752 1,347
-------------- -------------- --------------
Unearned compensation related to ESOP,
end of year (23,908) (26,122) (27,874)
-------------- -------------- --------------
Total stockholders' equity $ 351,586 $ 281,881 $ 259,640
============== ============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
36
ALLIED Group, Inc. and Subsidiaries
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 52,377 $ 47,625 $ 39,922
Adjustments to reconcile net income to net cash
provided by operating activities
Losses and loss settlement expenses 30,868 31,140 32,508
Unearned premiums, net 15,945 17,575 18,817
Deferred policy acquisition costs (3,419) (3,861) (4,080)
Accounts receivable, net (6,009) (13,151) (20,873)
Depreciation and amortization 9,583 6,576 10,463
Realized investment gains (505) (2,888) (1,396)
Mortgage loans held for sale, net (1,529) 9,944 15,005
Indebtedness with affiliates 1,591 1,815 (1,118)
Accrued investment income (118) (992) (1,236)
Other assets (6,644) (15,386) (15,796)
Cost of ESOP Series shares allocated 2,214 1,752 1,347
Income taxes
Current 1,264 (81) (1,001)
Deferred (822) 1,575 (1,586)
Other, net 3,109 3,902 (5,157)
-------------- -------------- --------------
97,905 85,545 65,819
Cash provided from the change in the reinsurance
pooling agreement (note 4) --- --- 25,778
-------------- -------------- --------------
Net cash provided by operating activities 97,905 85,545 91,597
-------------- -------------- --------------
Cash flows from investing activities
Purchase of fixed maturities
Available for sale (184,600) (91,722) (18,473)
Held to maturity --- (104,233) (219,912)
Purchase of equity securities (4,819) (814) (3,778)
Purchase of equipment (7,794) (5,653) (4,942)
Sale of fixed maturities
Available for sale 48,012 26,606 20,142
Held to maturity (note 3) --- 5,733 ---
Maturities, calls, and principal reductions of
fixed maturities
Available for sale 36,456 34,532 ---
Held to maturity 25,510 54,825 79,548
Sale of equity securities 2,072 215 ---
Short-term investments, net (4,146) 1,263 3,215
Sale of subsidiary (note 7) --- --- 14,304
Sale of other investment (note 7) --- 9,395 ---
Sale of equipment 470 358 1,094
-------------- -------------- --------------
Net cash used in investing activities (88,839) (69,495) (128,802)
-------------- -------------- --------------
Cash flows from financing activities
Notes payable to nonaffiliates, net (2,180) 380 1,800
Notes payable to affiliates, net 1,500 (1,500) (153)
Issuance of preferred stock 699 794 889
Issuance of common stock 3,498 1,129 46,469
Repurchase of common stock --- (6,360) ---
Dividends paid to stockholders, net of
income tax benefit (12,659) (11,795) (10,902)
-------------- -------------- --------------
Net cash (used in) provided by financing activities (9,142) (17,352) 38,103
-------------- -------------- --------------
Net (decrease) increase in cash (76) (1,302) 898
Cash at beginning of year 1,541 2,843 1,945
-------------- -------------- --------------
Cash at end of year $ 1,465 $ 1,541 $ 2,843
============== ============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
37
ALLIED Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(1) Summary Of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
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.
The Company's property-casualty segment operates through three subsidiaries:
AMCO Insurance Company (AMCO), ALLIED Property and Casualty Insurance Company
(ALLIED Property and Casualty), and Depositors Insurance Company (Depositors),
which underwrite personal lines (primarily automobile and homeowners) and small
commercial lines. The property-casualty segment operates exclusively in the
United States and primarily in central and western states. Iowa and California
accounted for 23.3% and 24%, respectively, of 1995 direct written premiums. The
property-casualty segment markets its products through three distribution
systems: independent agencies, exclusive agencies, and direct response. The
property-casualty segment accounted for 85.4% of 1995 consolidated revenues.
Western Heritage Insurance Company (Western Heritage) is the excess & surplus
lines subsidiary, which primarily underwrites commercial lines. The excess &
surplus lines segment operates exclusively in the United States. In 1995 the
segment accounted for 6.4% of consolidated revenues.
The noninsurance subsidiaries are ALLIED Group Mortgage Company (ALLIED
Mortgage), Dougherty Dawkins, Inc. and subsidiaries (Dougherty Dawkins) through
October 29, 1993, ALLIED Group Information Systems, Inc. (AGIS), The Freedom
Group, Inc. (Freedom Group), Midwest Printing Services, Ltd., ALLIED Group
Leasing Corporation, and ALLIED General Agency Company.
At year-end 1995 the ALLIED Group Employee Stock Ownership Trust (ESOP Trust)
owned 26.9% of the outstanding voting stock of the Company. ALLIED Mutual
Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance
company, controlled 18% of the voting stock of the Company.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP), which differ in some respects
from those followed in reports to insurance regulatory authorities. The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. All significant intercompany balances and transactions have been
eliminated. Certain amounts in the financial statements for prior years have
been reclassified to conform to the current year's presentation.
Investments
In compliance with Statement of Financial Accounting Standards (SFAS) 115,
"Accounting for Certain Investments in Debt and Equity Securities," investments
in fixed maturities where there is the positive intent and ability to hold to
maturity are classified as held to maturity and carried at cost adjusted for
amortization of premium or discount. Amortization of premiums and discounts on
mortgage-backed securities incorporates a prepayment assumption to estimate the
securities' expected lives. Except for declines that are other than temporary,
changes in fair value are not reflected in the financial statements. Investments
in fixed maturities that may be sold prior to maturity and are not bought and
<PAGE>
38
held principally for the purpose of selling in the near term are segregated into
an available for sale portfolio and are carried at fair value. Unrealized
appreciation and depreciation of securities classified as available for sale are
excluded from income and reported as a separate component of stockholders'
equity net of deferred income taxes.
In conjunction with the adoption of SFAS 115 on December 31, 1993, the Company
reclassified certain securities totaling $199,618 to securities available for
sale from securities held to maturity. The reclassification increased
stockholders' equity by $5,883 net of deferred income taxes.
In November of 1995, the Financial Accounting Standards Board (FASB) issued an
implementation guide entitled, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," which
included transition guidelines that permitted the Company to reassess the
appropriateness of its classification of all securities held at November 30,
1995; reassessment was to be completed no later than December 31, 1995. Prior to
the deadline, the Company reclassified $359,409 of securities held to maturity
to securities available for sale. The reclassification increased unrealized
appreciation of investments by $7,727 net of deferred income taxes.
The carrying values of all investments in fixed maturities are reviewed on an
ongoing basis. If this review indicates that a decline in fair value below cost
is other than temporary, the Company's carrying value in the investment is
reduced to its estimated realizable value and a specific write-down is taken.
Such reductions in carrying value are recognized as realized losses and charged
to income. Realized gains and losses on disposition of investments are based on
specific identification of the investments sold.
Equity securities are carried at fair value with any unrealized appreciation and
depreciation reported net of deferred income taxes as a separate component of
stockholders' equity. All short-term investments are recorded at cost, which
approximates fair value. Other investments are reported using the equity method.
Other investments at December 31, 1995 and 1994 included a 20% ownership in
Black Hawk Holding Company (Black Hawk), an abstract and title holding company.
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. Derivatives are used to hedge
against well defined market and interest rate risks. The Company has entered
into an interest rate swap agreement to reduce its exposure to interest rate
risk associated with its guarantee of ESOP obligations. ALLIED Mortgage enters
into futures, options, and cash markets to limit its exposure to market risk on
mortgage loans held for sale.
Property-casualty and Excess & Surplus Lines
Premiums are recognized as revenue ratably over the terms of the respective
policies. Unearned premiums are calculated on the monthly pro rata basis.
Amounts paid for ceded reinsurance premiums are reported as prepaid reinsurance
premiums and amortized over the remaining contract period in proportion to the
amount of insurance protection provided. Premiums receivable from policyholders
and agents are recorded at cost less an allowance for doubtful accounts.
Policy acquisition costs such as commissions, premium taxes, and certain other
underwriting and agency expenses that vary with and are directly related to the
production of business have been deferred. Such deferred policy acquisition
costs are being amortized as premium revenue is recognized. The method followed
in computing deferred policy acquisitions costs limits the amount of such
deferred costs to their estimated realizable value, which gives effect to the
premium to be earned, related investment income, losses and loss settlement
expenses, and certain other costs expected to be incurred as the premium is
earned.
Liabilities for losses are based upon case-basis estimates of reported losses,
estimates of unreported losses based upon prior experience adjusted for current
trends, and estimates of losses expected to be paid under assumed reinsurance
<PAGE>
39
contracts. Liabilities for loss settlement expenses are provided by estimating
expenses expected to be incurred in settling the claims provided for in the loss
reserve. Changes in estimates are reflected in current operating results (note
5).
Ceded reinsurance amounts with unaffiliated reinsurers relating to reinsurance
receivables for paid and unpaid losses and loss settlement expenses and prepaid
reinsurance are reported on the balance sheets on a gross basis. Amounts ceded
to ALLIED Mutual relating to the affiliated reinsurance pooling agreement and
the property catastrophe reinsurance agreement have not been grossed up because
the contracts provide that receivables and payables may be offset upon
settlement.
The liabilities for losses and loss settlement expenses are considered adequate
to cover the ultimate cost of losses and claims incurred to date net of
estimated salvage and subrogation recoverable. Since the provisions are
necessarily based on estimates, the ultimate liability may be more or less than
such provisions.
Noninsurance Operations
Mortgage loans held for sale by ALLIED Mortage are reported at the lower of cost
or fair value on an aggregate basis. The fair value calculation includes
consideration of all open positions, outstanding commitments from investors,
related fees paid, and unrealized gains and losses from open options and
financial futures contracts. Loan origination fees and certain direct costs
related to loan origination are deferred and recognized at the time the related
loans are sold. In the normal course of business, ALLIED Mortgage protects its
position in mortgages by taking positions in options, futures, and cash markets.
Market risk exists in the event of fluctuations in market prices on the unhedged
portions of mortgage loans held for sale and outstanding commitments.
Effective January 1, 1995, ALLIED Mortgage adopted SFAS 122, "Accounting for
Mortgage Servicing Rights, an Amendment of FASB Statement No. 65." Accordingly,
ALLIED Mortgage recognizes as separate assets the rights to service mortgage
loans for others, whether acquired through purchases or loan originations.
Capitalized mortgage servicing rights are assessed periodically for impairment
based on the fair value of those rights. ALLIED Mortgage stratifies its mortgage
servicing portfolio on the basis of certain risk characteristics, including loan
type and note rate, and determines fair value based upon the present value of
estimated future cash flows. Impairment is recognized through a valuation
allowance for each impaired stratum. The total valuation allowance for
capitalized mortgage servicing rights was $1,368 as of December 31, 1995. The
fair value of capitalized mortgage servicing rights as of December 31, 1995 was
approximately $40,186. Capitalized mortgage servicing rights are amoritzed over
twelve years using the straight-line method, which management believes
approximates the realization of the related net servicing income. Amortization
of servicing rights for the years ended December 31, 1995, 1994, and 1993 was
$4,728, $3,507, and $6,033, respectively. The adoption of SFAS 122 did not have
a material effect on the financial statements. Prior to adoption of SFAS 122,
the Company capitalized only the costs related to purchased mortgage servicing
rights.
Depreciation and Amortization
Equipment and software are included in other assets at cost less accumulated
depreciation and amortization. For financial reporting purposes, depreciation
and amortization are provided primarily on the straight-line basis over the
estimated useful lives of the assets, ranging from two to seven years.
Accelerated depreciation methods are utilized for income tax purposes.
Retirement Plan Costs
The amount of compensation cost related to The ALLIED Group Employee Stock
Ownership Plan (ESOP) is based on the cost of the shares allocated to
participants plus interest expense incurred related to the debt of the ESOP
reduced by dividends paid used to service the ESOP's debt (the shares allocated
<PAGE>
40
method). The income tax benefit for the tax deductibility of dividends paid on
unallocated shares of the ESOP available for debt service is included as a
direct addition to retained earnings.
Stock-based Compensation
The FASB issued SFAS 123, "Accounting for Stock-Based Compensation," in October
of 1995. SFAS 123 specifies a fair value method of accounting for stock-based
compensation plans and recognizes compensation cost over the vesting period of
the option granted. An entity is permitted to determine its net income by
continuing to apply Opinion 25, "Accounting for Stock Issued to Employees," but
must comply with the disclosure requirements of SFAS 123. SFAS 123 is required
to be adopted for fiscal years beginning after December 15, 1995. The Company
will adopt the disclosure requirements of SFAS 123 for the year ended December
31, 1996 but will continue to account for stock-based compensation plans under
Opinion 25.
Income Taxes
Deferred income taxes reflect the impact of temporary differences between the
tax basis of assets and liabilities and the reported amounts of those assets and
liabilities for financial reporting purposes. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Income tax expense provisions increase or decrease in the
same period in which a change in tax rates is enacted.
Earnings per Share
Primary earnings per share calculations are computed after net income is reduced
by the amount of dividends paid on the Company's preferred stock and divided by
the weighted average of common stock and common stock equivalents outstanding
during the period. Securities that are in substance equivalent to common stock
(primarily stock options) are referred to as common stock equivalents.
Fully diluted earnings per share calculations are based on the weighted average
number of shares of common stock and common stock equivalents outstanding for a
period and the assumed conversion of the ESOP Series convertible preferred stock
into common stock. Net income is reduced by dividends on the 6-3/4% Series
preferred stock and by the additional costs for the ESOP resulting from the
assumed replacement of the convertible preferred stock dividends with common
stock dividends net of the related income taxes.
Cash Flows
For purposes of reporting cash flows, changes in notes payable issued by ALLIED
Mortgage to purchase mortgage loans held for sale are included in cash flows
from operating activities.
<PAGE>
41
(2) Fair Value of Financial Instruments
The estimated fair value amounts have been determined by using available market
information and appropriate valuation methods. The estimates presented herein
are not necessarily indicative of the amounts that would be realized in a
current market exchange, and the use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
Fixed maturities (available for sale and held to maturity)--The estimated fair
value is based upon the quoted market prices for the same or similar issues or
from independent pricing services (note 3).
Equity securities--The estimated fair value is based upon the quoted market
prices where available or from independent pricing services (note 3).
Short-term investments--Due to their short-term nature, their carrying amount
approximates fair value.
Mortgage loans held for sale--The fair value is estimated using quoted market
prices and includes commitments to extend credit and forward sales commitments
(note 14).
Excess servicing rights--The fair value represents the present value of
estimated future servicing revenues in excess of normal servicing revenues over
the assumed life of the servicing portfolio.
Notes payable to affiliates and nonaffiliates--Due to the short maturity of the
short-term notes payable, carrying value approximates fair value. The fair value
of the long-term notes payable is estimated using current rates available for
similar issues (notes 4 and 8).
Guarantee of ESOP obligations--Due to its floating interest rate, the guarantee
approximates its fair value (note 9).
Interest rate swap agreement (derivative)--The fair value reflects the estimated
amount the Company would pay to terminate the contract at year-end, thereby
taking into account the current unrealized gains or losses of the open contract.
Dealer quotes are available for the Company's derivative (note 9).
Other financial instruments--Due to their short-term nature, their carrying
amount approximates fair value.
<PAGE>
42
The following table presents the carrying value and estimated fair value of the
financial instruments at December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
---------------------------- ----------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Fixed maturities - available for sale $ 754,547 $ 754,547 $ 243,568 $ 243,568
Fixed maturities - held to maturity --- --- 401,717 388,486
Equity securities 7,948 7,948 4,507 4,507
Short-term investments 9,802 9,802 5,656 5,656
Mortgage loans held for sale 13,673 13,673 15,540 15,540
Excess servicing rights 538 538 559 559
Notes payable to nonaffiliates (35,965) (36,364) (41,541) (39,145)
Notes payable to affiliates (3,500) (3,500) (2,000) (2,000)
Guarantee of ESOP obligations (26,270) (26,270) (28,150) (28,150)
Interest rate swap agreement --- (1,052) --- (405)
</TABLE>
The estimated fair values presented herein are based on pertinent information
available to management as of December 31, 1995 and 1994. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since those dates; current estimates of fair value
may differ significantly from the amounts presented herein.
<PAGE>
43
(3) Investments
Following is a schedule of amortized costs and estimated fair values of
investments in fixed maturities and equity securities as of December 31, 1995
and 1994. The estimated fair values for fixed maturities and equity securities
are based on quoted market prices for the same or similar issues or from
independent pricing services.
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
1995 cost gains losses value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fixed maturities
Available for sale
U.S. Treasury securities $ 79,653 $ 2,493 $ 1 $ 82,145
U.S. Government corporations and agencies 8,186 440 --- 8,626
Obligations of states and political subdivisions 273,822 11,098 280 284,640
Foreign governments 2,091 70 --- 2,161
Corporate securities and public utilities 167,540 6,089 22 173,607
Mortgage-backed securities 195,434 8,017 83 203,368
------------ ------------ ------------ ------------
Totals $ 726,726 $ 28,207 $ 386 $ 754,547
============ ============ ============ ============
Equity securities $ 7,527 $ 486 $ 65 $ 7,948
============ ============ ============ ============
1994
Fixed maturities
Available for sale
U.S. Treasury securities $ 92,540 $ 12 $ 3,935 $ 88,617
U.S. Government corporations and agencies 3,936 114 --- 4,050
Obligations of states and political subdivisions 40,219 227 1,252 39,194
Corporate securities and public utilities 46,919 136 1,198 45,857
Mortgage-backed securities 68,196 208 2,554 65,850
------------ ------------ ------------ ------------
251,810 697 8,939 243,568
------------ ------------ ------------ ------------
Held to maturity
U.S. Treasury securities $ 19,258 $ 117 $ 323 $ 19,052
U.S. Government corporations and agencies 1,581 26 --- 1,607
Obligations of states and political subdivisions 245,779 1,617 11,107 236,289
Foreign governments 2,115 --- 149 1,966
Corporate securities and public utilities 75,733 521 1,483 74,771
Mortgage-backed securities 57,251 19 2,469 54,801
------------ ------------ ------------ ------------
401,717 2,300 15,531 388,486
------------ ------------ ------------ ------------
Totals $ 653,527 $ 2,997 $ 24,470 $ 632,054
============ ============ ============ ============
Equity securities $ 4,375 $ 198 $ 66 $ 4,507
============ ============ ============ ============
</TABLE>
<PAGE>
44
The table below presents the amortized cost and estimated fair value of fixed
maturities at December 31, 1995 by contractual maturity. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
-------------- --------------
<S> <C> <C>
Due in 1 year or less $ 40,527 $ 40,813
Due after 1 year through 5 years 210,295 218,052
Due after 5 years through 10 years 264,377 275,699
Due after 10 years 16,093 16,615
-------------- --------------
531,292 551,179
Mortgage-backed securities 195,434 203,368
-------------- --------------
Totals $ 726,726 $ 754,547
============== ==============
</TABLE>
The following table presents for the years ended December 31, 1995, 1994, and
1993 the gross realized gains and losses by portfolio included in the proceeds
from calls, principal reductions, and sales of fixed maturities.
<TABLE>
<CAPTION>
1995 1994 1993
---------- ------------ -----------
<S> <C> <C> <C>
Available for sale
Gross realized gains $ 957 $ 621 $ 507
Gross realized losses (910) (138) ---
---------- ------------ -----------
47 483 507
---------- ------------ -----------
Held to maturity
Gross realized gains 54 8 1,050
Gross realized losses (1) (246) (161)
---------- ------------ -----------
53 (238) 889
---------- ------------ -----------
Net realized gains $ 100 $ 245 $ 1,396
========== ============ ===========
</TABLE>
There were no sales or transfers from the held to maturity portfolio in 1995 and
1993. For the year ended December 31, 1994, gross realized losses of the held to
maturity portfolio included a realized loss of $195 on the sale of an
investment. The investment had an amortized cost of $4,937 and was disposed of
due to the significant downgrade of the issuer's credit rating in 1994.
Additionally, the Company sold from the held to maturity portfolio an investment
with an amortized cost of $1,001 for a realized loss of $10. There were no
transfers in 1994.
As required by law, fixed maturities and short-term investments were on deposit
with various insurance regulatory authorities at December 31, 1995 and 1994
amounting to $10,487 and $10,583, respectively.
As of December 31, 1995 and 1994, there were no investments that were non-income
producing for the previous twelve months.
<PAGE>
45
A summary of net investment income for the years ended December 31, 1995, 1994,
and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Interest on fixed maturities $ 47,160 $ 40,760 $ 37,646
Dividends on equity securities 167 220 99
Interest on short-term investments 665 367 548
Equity earnings in unconsolidated subsidiaries 11 555 2,027
Other, net 20 54 104
------------ ------------ -----------
Total investment income 48,023 41,956 40,424
Investment expense 584 703 1,161
Interest expense 197 183 233
------------ ------------ -----------
Net investment income $ 47,242 $ 41,070 $ 39,030
============ ============ ===========
</TABLE>
A summary of net realized investment gains (losses) and net changes in
unrealized appreciation (depreciation) of investments for the years ended
December 31, 1995, 1994, and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Net realized investment gains (losses)
Fixed maturities
Available for sale $ 47 $ 483 $ 507
Held to maturity 53 (238) 889
Equity securities 405 (3) ---
Other investments (note 7) --- 2,646 ---
------------ ------------ -----------
505 2,888 1,396
------------ ------------ -----------
Net changes in unrealized appreciation (depreciation) of investments
Fixed maturities
Available for sale 36,063 (17,293) 9,026
Held to maturity 13,231 (32,016) (493)
Equity securities 289 104 29
------------ ------------ -----------
49,583 (49,205) 8,562
------------ ------------ -----------
Net realized investment gains (losses) and changes in
unrealized appreciation (depreciation) of investments $ 50,088 $ (46,317) $ 9,958
============ ============ ===========
</TABLE>
<PAGE>
46
(4) Transactions With Affiliates
The property-casualty segment and ALLIED Mutual participate in a reinsurance
pooling agreement. The pooling agreement provides that AMCO (pool administrator)
assumes from the pool participants premiums, losses, allocated loss settlement
expenses, commissions, premium taxes, service charge income, and dividends to
policyholders. Then the pool participants assume from AMCO an amount of this
pooled property-casualty business equal to their participation in the pooling
agreement. AMCO pays certain underwriting expenses, unallocated loss settlement
expenses, and premium collection expenses for all of the pool participants and
receives a fee equal to a specified percentage of premiums as well as a
contingent fee based on the attainment of certain combined ratios from each of
the pool participants. AMCO charges each of the participants 12.85% of written
premiums for underwriting services, 7.25% of earned premiums for unallocated
loss settlement expenses, and 0.75% of earned premiums for premium collection
services. The administrative fees are subject to renegotiation during the term
of the agreement upon at least five years' notice. AMCO received pool
administrative fees of $55,721, $50,449, and $44,920 from ALLIED Mutual in 1995,
1994, and 1993, respectively. The term of the pooling agreement extends to
December 31, 2004, after which it can be terminated by participating parties
upon five years' notice. All changes to the pooling agreement must be approved
by the coordinating committee of the Board of Directors.
The reinsurance pooling agreement was amended January 1, 1993 to increase the
property-casualty segment's participation to 64% from 60% in 1992. ALLIED Mutual
transferred cash of $16,240 to the property-casualty segment to fund the
additional net underwriting liabilities assumed. The pooling agreement was also
amended January 1, 1993 to change the pool administrator from ALLIED Mutual to
AMCO. As a result of becoming pool administrator, AMCO assumed $9,538 in certain
underwriting liabilities and received a corresponding amount of cash from ALLIED
Mutual. See note 6 for discussion of reinsurance transactions between the
Company's property-casualty subsidiaries and ALLIED Mutual.
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 $2,490, $2,415,
and $3,204 for employees leased to affiliates for the years ended December 31,
1995, 1994, and 1993, respectively, which are included in income from affiliates
and in eliminations and other under segment information.
The Intercompany Operating Agreement between the Company and ALLIED Mutual also
provides for the continued availability of office space, marketing services,
agency forces, and computer and other facilities. Expenses are charged to the
Company based on specific identification or, if undeterminable, the expenses are
allocated on the basis of cost and time studies that are updated annually. The
agreement extends through December 31, 2004, after which it may be terminated on
two years' notice given after December 31, 2002 by either ALLIED Mutual or the
Company.
Included in income from affiliates are revenues of $2,795, $2,322, and $2,274
relating to data processing services provided by AGIS to ALLIED Mutual and its
subsidiaries for the years ended December 31, 1995, 1994, and 1993,
respectively.
ALLIED Mutual participates with a nonaffiliated reinsurance company in a
property catastrophe reinsurance agreement to cover the property-casualty
segment's share of pooled losses. In 1995, 1994, and 1993, the coverage was
$5,000 in excess of $5,000. ALLIED Mutual's and the reinsurance company's
respective participation in such agreement was 90% and 10% in 1995, 1994, and
1993. Related premiums paid by the property-casualty segment to ALLIED Mutual
were $2,330 in 1995, $1,866 in 1994, and $1,478 in 1993. There were recoveries
of $2,586, $2,217, and $1,400 from ALLIED Mutual in 1995, 1994, and 1993,
respectively.
All expenses incurred on the Company's behalf by its affiliates have been
reflected in the accompanying financial statements. Management believes the
costs incurred by its affiliates and allocated to the Company are reasonable and
would not be materially different than if they had been incurred from a
nonaffiliated third party. The aforementioned transactions result in
intercompany balances that are created during the normal course of business and
are settled on a monthly basis.
<PAGE>
47
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 administrator of the fund. At December 31,
1995 and 1994, the Company had $7,773 and $4,021, respectively, invested in the
fund. The Company also had several unsecured notes payable to the fund at
December 31, 1995 totaling $3,500. Interest rates ranged from 5.9% to 8.8%, and
the notes mature in January of 1996. At December 31, 1994 the Company had two
unsecured notes payable to the investment fund totaling $2,000.
The Company paid interest to affiliates of $127, $123, and $484 in 1995, 1994,
and 1993, respectively.
(5) Losses and Loss Settlement Expenses
The following table sets forth the reconciliation of beginning and ending
reserves for losses and loss settlement expenses for the years indicated.
Reinsurance recoverables on unpaid losses and loss settlement expenses are
included on the consolidated balance sheets within reinsurance receivables for
losses and loss settlement expenses. The following table includes
property-casualty and excess & surplus lines losses and loss settlement expense
reserves.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
Reserves for losses and loss settlement expenses at beginning of year $ 310,996 $ 279,856 $ 243,276
Less reinsurance recoverables 18,322 11,806 15,305
------------ ----------- ------------
Net reserves for losses and loss settlement expenses at beginning of year 292,674 268,050 227,971
------------ ----------- ------------
Incurred losses and loss settlement expenses
Provision for insured events of current year 315,956 288,574 262,772
Increase (decrease) in provisions for insured events of prior years 1,984 (1,630) (3,854)
------------ ----------- ------------
Total incurred losses and loss settlement expenses 317,940 286,944 258,918
------------ ----------- ------------
Payments
Losses and loss settlement expenses attributable to
insured events of current year 169,254 151,479 138,926
Losses and loss settlement expenses attributable to
insured events of prior years 116,421 110,841 91,848
Adjustment to beginning of the year reserves resulting from
the change in the reinsurance pool participation percentage --- --- (11,935)
------------ ----------- ------------
Total payments 285,675 262,320 218,839
------------ ----------- ------------
Net reserves for losses and loss settlement expenses at end of year 324,939 292,674 268,050
Plus reinsurance recoverables 16,925 18,322 11,806
------------ ----------- ------------
Reserves for losses and loss settlement expenses at end of year $ 341,864 $ 310,996 $ 279,856
============ =========== ============
</TABLE>
The reserving process relies on the basic assumption that past experience,
adjusted for the effect of current developments and likely trends, is an
appropriate basis for predicting future events. Reserve amounts are necessarily
based on management's informed estimates; as other data becomes available and is
reviewed, these estimates and judgments are revised, resulting in increases and
decreases to existing reserves. As a result of changes in estimates of insured
<PAGE>
48
events in prior years, the provision for losses and loss settlement expenses
increased $1,984 in 1995 and decreased $1,630 and $3,854 in 1994 and 1993,
respectively. Development for losses and loss settlement expenses on prior years
is immaterial to the financial statements taken as a whole.
As of January 1, 1993, the property-casualty subsidiaries' underwriting accounts
were adjusted to reflect their increased participation in the pool. The
property-casualty subsidiaries received cash and securities for the transfer of
reserves from ALLIED Mutual as of January 1, 1993. There was no income statement
effect from this transaction as the amount received was offset by the increase
in the reserves. Because the reserves transferred were necessarily based upon
estimates, subsequent changes in the estimates are reflected in current
operating results.
In establishing reserves, management considers exposure the Company may have to
environmental claims. Because reported claim activity levels are minimal and the
emphasis of the Company's property-casualty business is primarily on personal
lines and small commercial business, management believes exposure to material
liability on such claims to be remote as of December 31, 1995. The Company
continues to monitor legal developments as they relate to the Company's exposure
to environmental claims.
(6) Reinsurance
The property-casualty and excess & surplus lines subsidiaries cede insurance to
other insurers in the ordinary course of business for the purpose of limiting
their maximum loss exposure through diversification of their risks. See note 4
for discussion of reinsurance contracts with ALLIED Mutual. Reinsurance
contracts do not relieve the Company from its obligations to policyholders as
the primary insurer. Failure of reinsurers to honor their obligations could
result in losses to the Company; consequently, allowances are established for
amounts deemed uncollectible. The Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies. As of
December 31, 1995, reinsurance receivables and prepaid reinsurance premiums
associated with three nonaffiliated reinsurers aggregated approximately $14,675,
which represented a significant portion of the total prepaid reinsurance
premiums and reinsurance receivables for losses and loss settlement expenses.
The property-casualty subsidiaries also assume insurance as members of various
pools and associations.
The effect of reinsurance on premiums written and earned and losses and loss
settlement expenses incurred for the years ended December 31, 1995, 1994, and
1993 was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
Direct written premiums $ 494,462 $ 436,988 $ 382,070
Assumed from nonaffiliates 8,572 8,667 8,072
Net (ceded to) assumed from ALLIED Mutual (6,151) 8,793 27,030
Ceded to nonaffiliates (25,439) (24,356) (22,062)
------------ ----------- ------------
Net written premiums $ 471,444 $ 430,092 $ 395,110
============ =========== ============
Direct earned premiums $ 472,407 $ 415,767 $ 358,492
Assumed from nonaffiliates 8,831 8,536 7,682
Net (ceded to) assumed from ALLIED Mutual (703) 11,863 23,729
Ceded to nonaffiliates (25,036) (23,648) (21,567)
------------ ----------- ------------
Net earned premiums $ 455,499 $ 412,518 $ 368,336
============ =========== ============
Direct losses and loss settlement expenses $ 335,779 $ 303,318 $ 249,941
Assumed from nonaffiliates 5,889 5,821 7,372
Net (ceded to) assumed from ALLIED Mutual (14,648) (9,450) 6,807
Ceded to nonaffiliates (9,080) (12,745) (5,202)
------------ ----------- ------------
Net losses and loss settlement expenses incurred $ 317,940 $ 286,944 $ 258,918
============ =========== ============
</TABLE>
<PAGE>
49
(7) Dispositions
On June 1, 1994, the Company completed the sale of its investment in MidAmerica
Financial Corporation (MidAmerica) for $9,395. The 20% interest in MidAmerica
was acquired for investment purposes and was reported in other investments. The
pretax gain of $2,646 is included in realized investment gains for 1994 in the
consolidated statements of income.
On October 29, 1993, the Company completed the sale of its investment banking
and asset management subsidiary, Dougherty Dawkins, for $14,304. The results of
operations through the closing date are reflected in the Company's consolidated
income statements. The pretax loss on this transaction was $894 and is included
in other expenses in the consolidated statements of income.
(8) Notes Payable to Nonaffiliates
The short-term notes payable to nonaffiliated companies include line of credit
agreements used by ALLIED Mortgage primarily to finance its mortgage loans held
for sale. At December 31, 1995 and 1994, ALLIED Mortgage had borrowed $22,465
and $24,361, respectively, under the terms of mortgage loan warehousing
agreements with three different commercial banks; the agreements expires in
April and May of 1996. Under the terms of the agreements, ALLIED Mortgage can
borrow up to the lesser of $67,000 or 98% of the mortgage credit borrowing base,
which includes related sublines. At December 31, 1995, the outstanding
borrowings of ALLIED Mortgage under these line of credit agreements were secured
by mortgage loans held for sale of $13,673, mortgage servicing rights on loans
with a principal balance of $2,796,696, and foreclosure loans of $3,904.
Interest rates applicable to these borrowing arrangements vary with the level of
investable deposits maintained at the respective commercial banks.
During 1993, ALLIED Mortgage entered into an agreement with a life insurance
company for $15,000 of 8.4% senior secured notes due September 1, 2004. The
notes are secured by mortgage servicing rights and are payable in equal annual
installments of $1,500 every September 1; interest is payable semiannually. At
December 31, 1995 and 1994, the outstanding balance was $13,500 and $15,000,
respectively.
The Federal Home Loan Bank of Des Moines provides a $3,000 committed credit
facility through a line of credit agreement with AMCO that expires March 6,
1996. Interest on any outstanding borrowings is payable at an annual rate equal
to the federal funds unsecured rate for federal reserve member banks. The
Company had no outstanding balance as of December 31, 1995. At December 31,
1994, there was an outstanding balance of $2,180.
The Company paid interest to nonaffiliates of $1,569, $2,249, and $2,442 in
1995, 1994, and 1993, respectively.
(9) Guarantee of ESOP Obligations
On July 12, 1990, the ESOP Trust issued Remarketed Floating Rate Notes (FRN)
totaling $35,000 with a final maturity of July 12, 2005. The proceeds from the
FRN were used to acquire Series A ESOP Convertible Preferred Stock. Effective
March 13, 1995, the ESOP Trust refinanced its $28,150 of FRN under the terms of
a Term Credit Agreement and Guaranty (Credit Agreement) with two separate
commercial banks. The loans mature July 12, 2005, and interest rates applicable
to the borrowings are adjusted at the beginning of each interest period. The
interest periods may be one, three, or six months at the discretion of the ESOP
Trust.
The Company has guaranteed on an unsecured basis the ESOP Trust's reimbursement
obligations under the Credit Agreement. The Company's guarantee has been
recorded in the consolidated balance sheets as a liability under the caption,
"Guarantee of ESOP obligations." At December 31, 1995 and 1994, the Company had
an outstanding guarantee of principal of $26,270 and $28,150, respectively. The
Company contributions to the ESOP Trust plus dividends on leveraged shares held
by the ESOP Trust are used to meet interest and principal payments on the notes.
As principal payments are made, the recorded ESOP guarantee is reduced.
<PAGE>
50
The interest rate on the Credit Agreement resets at the beginning of each
interest period, and the ESOP Trust's interest expense is included as a
component of the Company's ESOP expense. The Company is party to an interest
rate swap agreement with a broker-dealer to reduce the financial statement
impact of fluctuations in the Credit Agreement interest rate. The interest rate
swap transactions generally involve the exchange of fixed and floating rate
interest payments without the exchange of the underlying principal amount. As of
December 31, 1995, the amount of principal covered under the swap agreement was
$19,760 with a fixed interest rate of 7.4%. The amount of principal covered
under the swap agreement reduces over time; the final swap maturity date is
December 12, 1997. During 1995, the actual Credit Agreement interest rate ranged
from 6% to 6.8%. During 1994 and 1993, the actual FRN interest rates ranged from
2.9% to 6.3% and 2.8% to 3.3%, respectively. Though nonperformance of the
broker-dealer is not expected, the Company is exposed to credit loss should such
an event occur.
The Credit Agreement includes various financial and operating covenants with
which the Company must comply. The covenants include the maintenance of certain
contractual relationships with ALLIED Mutual, continued ownership of certain
subsidiaries, limitations on the issuance of security interests in certain
assets, maintenance of various financial ratios, and minimum net equity
requirements.
(10) Preferred Stock
The Company is authorized to issue 7,500,000 shares of preferred stock without
par value. The preferred stock may be issued from time to time by the Board of
Directors in one or more series with such dividend rights, conversion rights,
voting rights, redemption provisions, liquidation preferences, and other rights
and restrictions as the Board of Directors may determine.
6-3/4% Series
The 6-3/4% Series preferred stock (6-3/4% Series), issued to ALLIED Mutual at a
value of $28.50 per share, is perpetual, nonconvertible, voting, and cumulative
with respect to dividends. The 6-3/4% Series has no preemptive rights and is not
registered or traded. Upon any transfer by ALLIED Mutual, the 6-3/4% Series is
callable under certain conditions and becomes nonvoting. It ranks on a parity
with the ESOP Series. Each share of the 6-3/4% Series has 1-1/2 votes. The
annual dividend rate is 6-3/4% of the liquidation preference of $28.50 ($1.92
per share) and is payable quarterly.
The Company entered into a Stock Rights Agreement with ALLIED Mutual to grant
both parties certain rights in terms of registration, transfer, voting, board
nominations, and other matters. Pursuant to the Stock Rights Agreement executed
July 5, 1990, ALLIED Mutual is entitled to nominate for election to the
Company's Board of Directors a number of director nominees that most closely
approximates the same percentage of the total number of members of the Company's
Board of Directors as is equal to ALLIED Mutual's percentage ownership of the
total number of shares of Company voting stock.
ESOP Series
As of December 31, 1995, a commercial bank acting on behalf of the ESOP
participants as the trustee for the ESOP Trust (Trustee) was the holder of
2,992,710 shares of ESOP Convertible Preferred Stock that had been issued in
series (collectively, ESOP Series). In 1995, the ESOP Trust purchased 13,426
shares of Series D for $54.00 per share. In 1994 the ESOP Trust purchased 22,223
shares of ESOP Series for $37.12 per share: 9,247 shares of Series C and 12,976
shares of Series D.
The Trustee is entitled to vote the ESOP Series on all matters submitted to a
vote of the holders of the common stock of the Company, voting together with the
holders of common stock and the 6-3/4% Series as one class. The ESOP Trust
generally provides that each ESOP participant is entitled to direct the Trustee
how to vote (or whether to tender or exchange) the shares of ESOP Series
allocated to the participant's account. Each share of the ESOP Series is
convertible into 1-1/2 shares of common stock and has 1-1/2 votes, subject to
antidilution adjustments.
<PAGE>
51
The ESOP Series ranks senior to the common stock as to the payment of dividends
and has an annual dividend of $1.20 per share paid on a monthly basis. In the
event of a liquidation of the Company, the Trustee of the ESOP Series is
entitled to receive $15 per share plus accrued dividends prior to any
distribution to the holders of common stock.
The ESOP Series is redeemable at the option of the Company any time after three
years from issuance and under specified circumstances prior thereto. The
redemption price is $15 per share plus a premium in the first ten years after
issuance that reduces in equal annual increments from 8% in the first year to 0%
in the eleventh year. The Company, solely at its discretion, has the option to
issue common stock, cash, or a combination thereof for any redemption price.
Upon notice of redemption, the Trustee, acting in its fiduciary capacity, may
elect to convert the ESOP Series to common stock prior to redemption.
The ESOP Series has no preemptive rights and is not registered or traded. Upon
any transfer by the Trustee, the ESOP Series is automatically converted into
shares of the Company's common stock. See note 20 for discussion of the
conversion of ESOP Series to common stock subsequent to year-end 1995.
(11) Common Stock
The Company has reserved 750,000 shares of common stock for issuance under the
ALLIED Group, Inc. Employee Stock Purchase Plan (ESPP). The ESPP is available to
full-time employees who meet minimum age and service requirements. The
participants in the ESPP purchase Company common stock on a monthly basis and
pay 85% of the fair market value of the shares issued under the plan. During
1995, 26,498 shares were issued at a weighted average price per share of $24.59.
During 1994 and 1993, 27,603 and 70,203 shares were issued at a weighted average
price of $22.36 and $22.62, respectively. At December 31, 1995, 282,490 shares
were available for issuance.
The Company has reserved 1,350,000 shares of common stock to be issued through
the ALLIED Group, Inc. Dividend Reinvestment and Stock Purchase Plan. Any
stockholder of record may participate in the plan and have cash dividends
reinvested in additional shares of Company common stock. The plan also provides
for optional cash payments. Shares of common stock purchased under the plan may
be either original issue shares or open market shares, such determination to be
made at the discretion of the Company. The number of shares purchased by the
plan participants is based upon fair market value on the dividend payment date.
During 1995, 42,705 shares, puchased on the open market, were issued at a
weighted average price per share of $30.01. During 1994 and 1993, 50,305 and
35,043 shares were issued at the weighted average prices per share of $26.06 and
$27.39, respectively. At December 31, 1995, 626,941 shares were available for
issuance.
The Company has reserved 375,000 shares of common stock for issuance under the
ALLIED Group, Inc. Outside Director Stock Purchase Plan. Under the plan,
participants pay 85% of the fair value of the shares issued and the remainder is
paid proportionally by the Company and/or the other companies within the ALLIED
Group to which the director fees were allocated. Only nonemployee directors of
the Company and its affiliates may participate in this plan. Shares of common
stock may be purchased only on the purchase dates: the last business day of June
and December. During 1995, 4,197 shares were issued at a weighted average price
per share of $31.75. During 1994 and 1993, 5,231 and 4,530 shares were issued at
a weighted average price of $24.85 and $24.98, respectively. At December 31,
1995, 355,816 shares were available for issuance.
The Company has reserved 250,000 shares of common stock for issuance under the
ALLIED Life Employee Stock Purchase Plan. The Company receives fair market value
for the shares issued under the plan. During 1995, 2,005 shares were issued at a
weighted average price per share of $28.76. During 1994 and 1993, 309 and 47
shares were issued at a weighted average price per share of $26.30 and $26.44,
respectively. At December 31, 1995, 247,639 shares were available for issuance.
<PAGE>
52
The Company awarded 13,311 shares of restricted stock to key employees, and 406
of such shares were cancelled in 1995. The restricted shares were awarded under
the ALLIED Group, Inc. Long-Term Management Incentive Plan (note 12).
During 1994, the Company repurchased and cancelled 250,000 shares of its common
stock on the open market at an average cost of $25.44 per share. The repurchase
was approved by the Board of Directors in the first quarter of 1994, implemented
pursuant to Rule 10b-18 under the Securities Exchange Act of 1934, and completed
on November 17, 1994.
On December 14, 1994, the Company's Board of Directors approved a plan to
repurchase 250,000 shares of the Company's common stock on the open market also
pursuant to Rule 10b-18. The actual number of shares repurchased is dependent
upon market conditions, and the plan may be suspended 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. The Company did
not repurchase any shares under this plan through December 31, 1995.
During 1995, 1994, and 1993, 174,960, 110,956, and 94,124 ESOP Series shares
were converted to 262,440, 166,434, and 141,186 shares of common stock,
respectively. The Company has reserved 5,950,524 shares of common stock for
conversion of the ESOP Series.
On February 18, 1993, 2,587,500 shares of common stock were sold to the public
at $24.67 per share. The Company received $37,600 in proceeds (net of
underwriting discount and expenses) from the sale of 1,612,500 shares. The
remaining 975,000 shares were sold by ALLIED Mutual.
The dividend rate per common share was $0.68, $0.60, and $0.51 for 1995, 1994,
and 1993, respectively.
(12) Long-Term Incentive Plans
The ALLIED Group, Inc. Restated and Amended Stock Option Plan (Option Plan) and
the ALLIED Group, Inc. Nonqualified Stock Option Plan (Nonqualified Plan) had
675,000 and 225,000 shares of common stock, respectively, reserved for issuance
to certain key employees of ALLIED Group, Inc. and subsidiaries. Both plans are
nonqualified stock option plans as defined by the Internal Revenue Code. The
period for granting options under these plans expired on August 5, 1995. During
1995, 30,000 and 40,000 options were granted under the Option Plan and the
Nonqualified Plan, respectively, at an exercise price of $27.50 per share. The
options expire ten years after the date of grant. During 1995, 33,135 shares
were deregistered under the Nonqualified Plan.
The Company deregistered 103,955 shares under the ALLIED Group Executive Equity
Incentive Plan (Equity Plan) during 1994. The Company had reserved 525,000
shares of common stock for issuance under the terms of the Equity Plan. The
Equity Plan is a nonqualified stock option plan as defined by the Internal
Revenue Code, with eligibility granted only to certain key employees of the
Company and its affiliated companies. The optionees pay $0.67 of the per share
option price upon exercise; the balance of the exercise price is paid by the
company that leases the employee. At December 31, 1995, 14,460 options were
outstanding and exercisable under the Equity Plan. There are no shares available
to grant any additional options under the Equity Plan, and the options currently
outstanding expire on December 31, 1997.
Under the Freedom Group Incentive Plan (Freedom Plan), the Company had reserved
270,000 shares of authorized but unissued common stock. The Freedom Plan is a
nonqualified stock option plan as defined by the Internal Revenue Code. Three
key employees were granted options to purchase up to 270,000 shares of the
Company's common stock. The optionees pay $0.67 of the per share option price
upon exercise; the balance of the exercise price is to be paid by Freedom Group.
On April 30, 1993, the participants were vested in 54,000 stock options and the
remaining 216,000 unvested shares were deregistered. At year-end 1995, 18,000
vested options remained unexercised.
During 1994, the Company reserved 600,000 shares of common stock for issuance to
key employees of the Company and its affiliates under the ALLIED Group, Inc.
Long-Term Management Incentive Plan (Incentive Plan). Under the Incentive Plan,
<PAGE>
53
shares of common stock are available for grant until December 31, 2003 as
incentive and nonqualified stock options (collectively, Options), stock
appreciation rights (SARs), and restricted stock. The Options, SARs, and
restricted stock were issued to vest two years after the grant date at a rate of
25% per year and expire ten years after the date of grant. Options, SARs, and
restricted stock prices are based upon the fair market value as of the date of
grant. During 1995, 60,000 Options and 7,667 SARs were granted at $27.63 per
share. At December 31, 1995, 452,522 shares were available for award under the
Incentive Plan.
A summary of the status of the Company's stock option plans as of December 31,
1995, 1994, and 1993 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------ ---------- ------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 402,164 $ 17.45 395,001 $ 16.58 938,263 $ 7.71
Granted 130,000 27.56 63,000 24.30 180,000 26.34
Exercised (137,004) 9.41 (32,000) 8.32 (225,480) 7.80
Cancelled (16,923) 11.17 (23,837) 27.06 (497,782) 7.62
------------ ------------- ------------
Outstanding at end of year 378,237 $ 24.11 402,164 $ 17.45 395,001 $ 16.58
============ ============= ============
Options exercisable at end of year 46,971 191,165 215,001
============ ============= ============
</TABLE>
The issuance of SARs and restricted stock under the Incentive Plan reduces the
number of Options available for future issuance. During 1995, 13,311 shares of
restricted stock were awarded at $27.38 per share, and 406 restricted shares
were cancelled. At December 31, 1995, 12,671 restricted shares were outstanding.
The following table shows SAR activity for the years ended December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
--------------------------- --------------------------
Weighted Weighted
Number average Number average
of SARs price of SARs price
------------- ---------- ------------ ----------
<S> <C> <C> <C>
Outstanding at beginning of year 8,000 $ 24.34 --- $ ---
Granted 7,667 27.63 8,500 24.34
Exercised (1,000) 24.25 --- ---
Cancelled --- --- (500) 24.25
------------- ------------
Outstanding at end of year 14,667 $ 26.07 8,000 $ 24.34
============= ============
</TABLE>
<PAGE>
54
(13) Retained Earnings
Retained earnings of the property-casualty and excess & surplus lines
subsidiaries available for distribution as dividends are limited by law to the
amount of statutory unassigned surplus as of the date the dividend is authorized
or paid. The maximum dividend the property-casualty subsidiaries may pay without
prior approval of the state of Iowa (state of domicile) insurance regulatory
authorities is the greater of either 10% of the property-casualty statutory
capital stock and surplus as of the preceding December 31 or statutory net
income of the preceding calendar year. The amount legally available for
distribution from the property-casualty segment in 1996 to the Company without
regulatory approval is $44,121. The maximum dividend the excess & surplus lines
subsidiary may pay without prior approval of the state of Arizona (state of
domicile) insurance regulatory authorities is the lesser of either 10% of the
statutory capital stock and surplus as of the preceding year or net investment
income of the preceding year. The maximum amount legally available for
distribution in 1996 without regulatory approval is $2,777.
The following table includes selected information for the Company's insurance
subsidiaries as determined in accordance with accounting practices prescribed or
permitted by insurance regulatory authorities:
<TABLE>
<CAPTION>
As of December 31, 1995 1994
------------ ------------
<S> <C> <C> <C>
Statutory capital and surplus
Property-casualty $ 257,845 $ 233,407
============ ============
Excess & surplus lines $ 27,770 $ 23,896
============ ============
Year ended December 31, 1995 1994 1993
------------ ------------ ------------
Statutory net income
Property-casualty $ 41,995 $ 40,699 $ 22,052
============ ============ ============
Excess & surplus lines $ 2,773 $ 3,047 $ 3,484
============ ============ ============
</TABLE>
(14) Commitments and Contingent Liabilities
The Company leases data processing equipment and certain office facilities under
operating leases expiring in various years through 2003. Rental expense amounted
to $2,587, $3,845, and $3,817 for the years ended December 31, 1995, 1994, and
1993, respectively. For each of the next five years and in the aggregate as of
December 31, 1995, these are the minimum future rental payments under
noncancellable operating leases having remaining terms in excess of one year:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 982
1997 1,022
1998 906
1999 768
2000 644
Subsequent to 2000 306
------------
Total $ 4,628
============
</TABLE>
In the normal course of business, ALLIED Mortgage grants mortgage loan
commitments to borrowers, subject to normal loan underwriting standards. As of
December 31, 1995, ALLIED Mortgage had granted loan commitments of approximately
$39,500, including floating rate commitments of $12,600. To hedge loan
commitments, ALLIED Mortgage may enter into options, futures, or cash delivery
<PAGE>
55
contracts. As of December 31, 1995, ALLIED Mortgage had commitments to sell
mortgage securities totaling approximately $27,000 and no outstanding options.
In connection with these commitments to buy and sell mortgages, ALLIED Mortgage
is exposed to credit risk in the event the counterparty is unable to fulfill its
contractual obligations.
Although loans serviced for others are not on the accompanying balance sheets,
ALLIED Mortgage does have credit risk associated with the mortgage servicing
portfolio. As the loan servicer, ALLIED Mortgage is required to process
delinquent loans through the foreclosure process, thereby incurring certain
direct expenses which generally are, but may not be, reimbursed. At December 31,
1995, ALLIED Mortgage had sold loans totaling approximately $20,500 while
retaining recourse risk. ALLIED Mortgage established allowances for losses in
connection with these various risks, which totaled $1,476 and $1,495 at December
31, 1995 and 1994, respectively. These allowances are included in other
liabilities on the accompanying balance sheets.
California was the source of 24% of the pool's direct written premiums in 1995.
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 continues to believe
that the insurance subsidiaries will not be liable for any material rollback of
premiums.
The Company is party to various lawsuits arising in the normal course of
business. Management believes the resolution of these lawsuits will not have a
material adverse effect on its financial condition or its results of operations.
(15) Employee Retirement Plan
The ESOP established by ALLIED Group, Inc. covers all of its employees who meet
age and service requirements. Shares of ESOP Series preferred stock are
allocated annually to each employee's account pursuant to a formula and held in
trust until the employee's termination, retirement, or death. As shares of ESOP
Series preferred stock are allocated to participants, the cost of such shares is
expensed and deducted from "Unearned compensation related to ESOP" included in
stockholders' equity.
The Company's ESOP expense was $2,682 in 1995, $1,780 in 1994, and $1,529 in
1993. Of those respective amounts, $65, $30, and $37 were included in the
employee lease fee received from affiliates pursuant to the terms of the
Intercompany Operating Agreement for the years ended December 31, 1995, 1994,
and 1993, respectively.
During 1995, 1994, and 1993, the ESOP Trust received $2,782, $2,782, and $2,783,
respectively, from dividends on the ESOP Series used to service debt on the ESOP
obligations and to purchase stock for participants. ALLIED Group, Inc. made ESOP
contributions of $733 in 1995, $35 in 1994, and $54 in 1993. Interest incurred
on the ESOP debt, which is included as a component of ESOP expense, was $1,831,
$1,225, and $918 in 1995, 1994, and 1993, respectively. The ESOP shares as of
December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Allocated shares 1,254,784 1,297,657
Unallocated shares 1,737,926 1,856,587
------------ ------------
Total ESOP shares 2,992,710 3,154,224
============ ============
</TABLE>
<PAGE>
56
(16) Other Postretirement Benefit Plan
In addition to the ESOP, the Company sponsors a health care plan that provides
postretirement medical benefits to full-time employees who meet age and service
requirements. The plan is contributory with retiree contributions adjusted
annually, and it contains other cost-sharing features such as deductibles and
coinsurance. The Company's policy is to fund the cost of medical benefits in
amounts determined at the discretion of management.
The following table presents the plan's postretirement benefit obligations as of
December 31, 1995 and 1994 reconciled with the plan's funded status and the
amount recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $ (3,170) $ (2,690)
Other fully eligible plan participants (620) (560)
Other active plan participants (2,470) (2,440)
----------- ------------
Obligation at year-end (6,260) (5,690)
Plan assets --- ---
----------- ------------
Funded status (6,260) (5,690)
Unrecognized transition obligation 4,100 4,340
Unrecognized net loss (gain) 50 (20)
Fourth-quarter payments 70 80
----------- ------------
Accrued postretirement benefit liability at year-end $ (2,040) $ (1,290)
=========== ============
</TABLE>
A 7.5% weighted average discount rate was used to determine the accumulated
postretirement benefit obligation at December 31, 1995 and 1994.
Net periodic postretirement benefit cost for the years ended December 31, 1995,
1994, and 1993 included the following:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
Service cost $ 350 $ 360 $ 270
Interest cost 420 390 380
Return on assets --- --- ---
Amortization of transition obligation 240 240 240
------------ ----------- ------------
Net periodic postretirement benefit cost $ 1,010 $ 990 $ 890
============ =========== ============
</TABLE>
For measurement purposes, a 9% annual rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) was assumed for 1996; the
rate was assumed to decrease in equal annual increments to 5% by the year 2000
and to remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation by
approximately $430 and the aggregate of the service and interest cost components
of net periodic postretirement benefit cost by approximately $40.
<PAGE>
57
(17) Income Taxes
Total income taxes for the years ended December 31, 1995, 1994, and 1993 were
allocated as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net income $ 21,471 $ 19,074 $ 16,835
---------- ---------- ----------
Stockholders' equity
Unrealized appreciation (depreciation) of investments 12,776 (6,036) 3,168
Tax-deductible dividends paid on unallocated ESOP Series shares (849) (907) (942)
Tax-basis compensation expense in excess of amounts recognized
for financial reporting purposes from the exercise of stock options (1,064) (175) (3,791)
---------- ---------- ----------
10,863 (7,118) (1,565)
---------- ---------- ----------
Total $ 32,334 $ 11,956 $ 15,270
========== ========== ==========
</TABLE>
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995 and
1994 relate to the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets
Loss and loss settlement expense reserve discounting $ 13,540 $ 12,194
Unrealized depreciation of investments --- 2,869
Unearned premium reserve 13,277 12,161
Deferred compensation 2,187 2,054
Other 1,790 1,078
----------- -----------
Total gross deferred tax assets 30,794 30,356
Less valuation allowance --- ---
----------- -----------
Net deferred tax assets 30,794 30,356
----------- -----------
Deferred tax liabilities
Deferred policy acquisition costs (14,591) (13,394)
Mortgage servicing rights (3,497) (2,745)
Unrealized appreciation of investments (9,907) ---
Deferred software development and fees (3,106) (2,448)
Other (2,547) (2,669)
----------- -----------
Total gross deferred tax liabilities (33,648) (21,256)
----------- -----------
Net deferred tax (liabilities) assets $ (2,854) $ 9,100
=========== ===========
</TABLE>
Since adoption of SFAS 109 on January 1, 1993, there has not been a valuation
allowance for deferred income tax assets. In assessing the realization of
deferred tax assets, management considers whether it is more likely than not
that the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers primarily tax planning strategies and the scheduled
reversal of deferred tax liabilities in making this assessment and believes it
is more likely than not the Company ultimately will realize the benefits of the
deductible differences recognized at December 31, 1995.
The actual income tax expense for the years ended December 31, 1995, 1994, and
1993 differed from the expected tax expense (computed by applying the federal
corporate tax rate of 35% to income before income taxes). The difference was
primarily a result of investment income exempt from federal income tax, which
decreased tax expense by $4,504, $4,630, and $3,445 in 1995, 1994, and 1993,
respectively.
<PAGE>
58
Included in income tax expense is state income tax expense of $402, $456, and
$956 for the years ended December 31, 1995, 1994, and 1993, respectively. The
Company paid federal and state income taxes of $19,117, $16,702, and $14,525 in
1995, 1994, and 1993, respectively.
The IRS is currently examining the 1992 income tax return. Any proposed
adjustments are not expected to have a material impact on the Company's
financial condition or results of operations.
(18) Segment Information
The Company's operations include two major segments: property-casualty and
excess & surplus lines. Their principal products, services, revenues, income
before income taxes, assets, depreciation and amortization, and capital
expenditures 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 lease fees from affiliates).
<TABLE>
<CAPTION>
At or for the year ended December 31, 1995 1994 1993
------------- ----------- ------------
<S> <C> <C> <C>
Revenues (1)
Property-casualty $ 472,034 $ 431,110 $ 384,613
Excess & surplus lines 35,356 31,003 28,985
Eliminations and other (2) 45,375 45,251 68,844
------------- ----------- ------------
Total $ 552,765 $ 507,364 $ 482,442
============= =========== ============
Income before income taxes
Property-casualty $ 63,883 $ 54,186 $ 40,902
Excess & surplus lines 4,840 4,999 5,618
Eliminations and other (2) 5,125 7,514 10,237
------------- ----------- ------------
Total $ 73,848 $ 66,699 $ 56,757
============= =========== ============
Assets
Property-casualty $ 847,401 $ 749,760 $ 675,194
Excess & surplus lines 122,200 105,722 96,543
Eliminations and other 40,997 37,269 83,788
------------- ----------- ------------
Total $ 1,010,598 $ 892,751 $ 855,525
============= =========== ============
Depreciation and amortization
Property-casualty $ 851 $ 281 $ ---
Excess & surplus lines 58 58 ---
Other (2) 8,674 6,237 10,463
------------- ----------- ------------
Total $ 9,583 $ 6,576 $ 10,463
============= =========== ============
Capital expenditures
Property-casualty $ 3,390 $ 1,161 $ ---
Excess & surplus lines 131 16 ---
Other (2) 4,273 4,476 4,942
------------- ----------- ------------
Total $ 7,794 $ 5,653 $ 4,942
============= =========== ============
</TABLE>
(1) Including realized investment gains or losses.
(2) Including the results of Dougherty Dawkins' operations through the sale
date of October 29, 1993. Its results are also reflected in the Company's
consolidated income statements. The loss on the sale is reported in
eliminations and other.
<PAGE>
59
(19) Unaudited Interim Financial Information
<TABLE>
<CAPTION>
Quarter ended March 31 June 30 September 30 December 31
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
1995 Operating Summary
Earned premiums $ 109,481 $ 111,583 $ 115,768 $ 118,667
============= ============ ============ ===========
Investment income $ 11,275 $ 11,664 $ 12,396 $ 11,907
============= ============ ============ ===========
Realized investment gains $ 15 $ 248 $ (24) $ 267
============= ============ ============ ===========
Total revenues $ 132,276 $ 134,686 $ 140,159 $ 145,644
============= ============ ============ ===========
Losses and expenses $ 115,016 $ 116,772 $ 121,143 $ 125,986
============= ============ ============ ===========
Net income $ 12,384 $ 12,756 $ 13,405 $ 13,831
============= ============ ============ ===========
Fully diluted earnings per share
Net income $ .83 $ .86 $ .90 $ .93
============= ============ ============ ===========
1994 Operating Summary
Earned premiums $ 97,817 $ 102,277 $ 104,762 $ 107,662
============= ============ ============ ===========
Investment income $ 9,614 $ 10,420 $ 10,347 $ 10,689
============= ============ ============ ===========
Realized investment gains $ 391 $ 2,683 $ 30 $ (215)
============= ============ ============ ===========
Total revenues $ 119,734 $ 127,351 $ 127,100 $ 133,180
============= ============ ============ ===========
Losses and expenses $ 103,663 $ 107,885 $ 111,984 $ 117,133
============= ============ ============ ===========
Net income $ 11,471 $ 13,836 $ 10,813 $ 11,505
============= ============ ============ ===========
Fully diluted earnings per share
Net income $ .76 $ .94 $ .72 $ .77
============= ============ ============ ===========
</TABLE>
Caution should be exercised in comparing the results of consecutive quarters.
(20) Subsequent Event
On March 7, 1996, the ESOP Trust converted all of its shares of ESOP Series to
4,402,797 shares of common stock. The conversion increased the number of common
shares outstanding to approximately 13,949,000 shares.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
<PAGE>
60
PART III
Item 10. Directors and Executive Officers of the Registrant
The information under the caption "Directors and Executive Officers" in the 1996
Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
The information under the caption "Compensation of Executive Officers" in the
1996 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Security Ownership of Directors and Executive
Officers" in the 1996 Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions and Relationships" in
the 1996 Proxy Statement is incorporated herein by reference.
<PAGE>
61
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of Financial Statements and Schedules.
Form 10-K
Page(s)
---------
1. Financial Statements.
Independent Auditors' Report. 31
Consolidated Balance Sheets as of December 31, 1995
and 1994. 32 to 33
Consolidated Statements of Income for the Years ended
December 31, 1995, 1994 and 1993. 34
Statements of Stockholders' Equity for the Years ended
December 31, 1995, 1994 and 1993. 35
Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1994 and 1993. 36
Notes to Consolidated Financial Statements. 37 to 59
2. Schedules.
Report of Independent Auditors on Schedules. 68
I - Summary of Investments-Other Than Investments
in Related Parties. 69
II - Condensed Financial Information of Registrant 70 to 73
III - Supplementary Insurance Information. 74
IV - Reinsurance. 75
VI - Supplemental Information. 76
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements and notes thereto.
3. Executive Compensation Plans and Arrangements.
Long-term Management Incentive Compensation Plan for 1991
(Incorporated by reference to Exhibit 10.3 to the Company's September
30, 1993 Form 10-Q on file with the Commission), Exhibit 10.3.
Long-term Management Incentive Compensation Plan for 1992
(Incorporated by reference to Exhibit 10.4 to the Company's September
30, 1993 Form 10-Q on file with the Commission), Exhibit 10.4.
<PAGE>
62
Short-term and Long-term Management Incentive Compensation Plans for
1993 (Incorporated by reference to Exhibit 10.5 to the Company's
September 30, 1993 Form 10-Q on file with the Commission), Exhibit
10.5.
ALLIED Group, Inc. Restated and Amended Stock Option Plan
(Incorporated by reference to Exhibit 10.19 to the Company's December
31, 1992 Form 10-K on file with the Commission), Exhibit 10.18.
ALLIED Group, Inc. Nonqualified Stock Option Plan (Incorporated by
reference to Exhibit 10.20 to the Company's December 31, 1992 Form
10-K on file with the Commission), Exhibit 10.19.
ALLIED Group, Inc. Outside Director Stock Purchase Plan (Incorporated
by reference to Exhibit 10.21 to the Company's December 31, 1992 Form
10-K on file with the Commission), Exhibit 10.20.
ALLIED Group, Inc. Executive Equity Incentive Plan (Incorporated by
reference to Exhibit 10.22 to the Company's December 31, 1992 Form
10-K on file with the Commission), Exhibit 10.21.
The ALLIED Group Employee Stock Ownership Plan, Amended and Restated,
dated September 27, 1994 (Incorporated by reference to Exhibit 10.27
to the Company's September 30, 1994 Form 10-Q on file with the
Commission), Exhibit 10.27.
First Amendment to The ALLIED Group Employee Stock Ownership Plan,
dated March 7, 1995 (Incorporated by reference to Exhibit 10.50 to
the Company's March 31, 1995 Form 10-Q on file with the Commission),
10.29.
Second Amendment to The ALLIED Group Employee Stock Ownership Plan,
dated May 15, 1995 (Incorporated by reference to Exhibit 10.51 to the
Company's June 30, 1995 Form 10-Q on file with the Commission),
10.30.
ALLIED Group Mortgage Company Nonqualified Stock Option Plan
(Incorporated by reference to Exhibit 10.28 of the Company's
Registration Statement on Form S-3 filed with the Commission on
February 2, 1993, Registration No. 33-55714), Exhibit 10.35.
Short-term Management Incentive Plans for 1993 (Incorporated by
reference to Exhibit 10.39 to the Company's December 31, 1993 Form
10-K on file with the Commission), Exhibit 10.39.
ALLIED Group Short Term Management Incentive Plan for 1994
(Incorporated by reference to Exhibit 10.40 to the Company's June 30,
1994 Form 10-Q on file with the Commission), Exhibit 10.40.
ALLIED Group, Inc. Long-Term Management Incentive Plan (Incorporated
by reference to Exhibit 10.42 to the Company's March 31, 1994 Form
10-Q on file with the Commission), Exhibit 10.42.
Consulting Agreement between John E. Evans and ALLIED Group, Inc.,
ALLIED Mutual Insurance Company, and ALLIED Life Financial
Corporation (Incorporated by reference to Exhibit 10.48 to the
Company's December 31, 1994 Form 10-K on file with the Commission),
Exhibit 10.48.
ALLIED Group Short Term Management Incentive Plan for 1995
(Incorporated by reference to Exhibit 10.49 to the Company's December
31, 1994 Form 10-K on file with the Commission), Exhibit 10.49.
ALLIED Group Short Term Management Incentive Plan for 1996, Exhibit
10.52.
(b) Reports on Form 8-K.
None.
<PAGE>
63
(c) Exhibits.
NOTE: See "Index to Exhibits" on page number 78, which discloses the
specific page numbers for the exhibits included in this Form 10-K.
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession.
2.2 Stock Rights Agreement between ALLIED Mutual Insurance Company
and ALLIED Group, Inc. dated July 5, 1990 (Incorporated by
reference to Exhibit 2.4 to the Company's July 1, 1990 Form
8-K on file with the Commission).
2.3 First Amendment to Stock Rights Agreement between ALLIED
Mutual Insurance Company and ALLIED Group, Inc. (Incorporated
by reference to Exhibit 2.5 to the Company's September 30,
1992 Form 10-Q on file with the Commission).
3. Articles of incorporation and bylaws.
3.1 Amended and Restated Articles of Incorporation of the Company
as of December 22, 1989 (Incorporated by reference to Exhibit
3.1 to the Company's December 31, 1989 Form 10-K on file with
the Commission).
3.2 Articles of Amendment dated May 26, 1993 of the Amended and
Restated Articles of Incorporation (Incorporated by reference
to Exhibit 3.10 of the Company's June 30, 1993 From 10-Q on
file with the Commission).
3.3 Bylaws of the Company as of July 9, 1991 (Incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-2 filed with the Commission on July 9,
1991, Registration No. 33-40995).
3.4 Amendment to Bylaws of the Company as of March 3, 1992
(Incorporated by reference to Exhibit 3.6 to Company's
December 31, 1992 Form 10-K on file with the Commission).
3.5 Amendment to Bylaws of the Company as of October 14, 1993
(Incorporated by reference to Exhibit 3.5 to Company's
December 31, 1993 Form 10-K on file with the Commission).
3.6 Certificate of Designations, defining the rights of holders of
Series A ESOP Convertible Preferred Stock of ALLIED Group,
Inc. (Incorporated by reference to Exhibit 4.1 to the
Company's July 1, 1990 Form 8-K on file with the Commission).
3.7 Certificate of Designations, defining the rights of holders of
Series B ESOP Convertible Preferred Stock of ALLIED Group,
Inc. (Incorporated by reference to Exhibit 4.3 to the
Company's December 31, 1990 Form 10-K on file with the
Commission).
3.9 Certificate of Designations, defining the rights of holders of
6-3/4% Series Preferred Stock of ALLIED Group, Inc.
(Incorporated by reference to Exhibit 3.7 to Company's
November 2, 1992 Form 8-K on file with the Commission).
3.10 Certificate of Designations, defining the rights of holders of
Series D ESOP Convertible Preferred Stock of ALLIED Group,
Inc. (Incorporated by reference to Exhibit 3.8 to the
Company's Registration Statement on Form S-3 filed with the
Commission on February 2, 1993, Registration No. 33-55714).
<PAGE>
64
3.11 Articles of Correction for the Certificate of Designations
defining the rights of holders of Series D ESOP Convertible
Preferred Stock of ALLIED Group, Inc. (Incorporated by
reference to Exhibit 3.9 to the Company's Registration
Statement on Form S-3 filed with the Commission on February 9,
1993, Registration No. 33-55714).
3.12 Amendment to Bylaws of the Company as of December 14, 1994,
(Incorporated by reference to Exhibit 3.12 to the Company's
December 31, 1994 Form 10-K on file with the Commission).
4. Instruments defining the rights of security holders including
indentures.
4.6 Stock Purchase Agreement between ALLIED Group, Inc. and State
Street Bank and Trust Company, dated December 31, 1993
(Incorporated by reference to Exhibit 4.6 of the Company's
December 31, 1993 Form 10-K on file with the Commission).
4.7 Agreement between ALLIED Group, Inc. and State Street Bank and
Trust Company, dated March 7, 1996.
4.8 Stock Purchase Agreement between ALLIED Group, Inc. and State
Street Bank and Trust Company dated December 30, 1994.
4.9 Stock Purchase Agreement between ALLIED Group, Inc. and State
Street Bank and Trust Company dated December 29, 1995.
10. Material contracts.
10.3 Long-term Management Incentive Compensation Plan for 1991
(Incorporated by reference to Exhibit 10.3 to the Company's
September 30, 1993 Form 10-Q on file with the Commission).
10.4 Long-term Management Incentive Compensation Plan for 1992
(Incorporated by reference to Exhibit 10.4 to the Company's
September 30, 1993 Form 10-Q on file with the Commission).
10.5 Short-term and Long-term Management Incentive Compensation
Plans for 1993 (Incorporated by reference to Exhibit 10.5 to
the Company's September 30, 1993 Form 10-Q on file with the
Commission).
10.7 Amended and Restated Management Information Services Agreement
between ALLIED Group Information Systems, Inc. and certain of
its affiliated companies.
10.10 Amended and Restated Reinsurance Pooling Agreement between
ALLIED Mutual Insurance Company and certain of its affiliated
companies (Incorporated by reference to Exhibit 10.7 to the
Company's December 31, 1989 Form 10-K on file with the
Commission).
10.11 Amendment to Amended and Restated Reinsurance Pooling
Agreement between ALLIED Mutual Insurance Company and certain
of its affiliated companies as of March 28, 1990 (Incorporated
by reference to Exhibit 10.11 to the Company's March 31, 1990
Form 10-Q on file with the Commission).
10.12 Amendment to Amended and Restated Reinsurance Pooling
Agreement between ALLIED Mutual Insurance Company and the
Company's property-casualty insurance subsidiaries
(Incorporated by reference to Exhibit 10.19 to the Company's
December 31, 1991 Form 10-K on file with the Commission).
<PAGE>
65
10.13 Fourth Amendment to Amended and Restated Reinsurance Pooling
Agreement between ALLIED Mutual Insurance Company and the
Company's property-casualty insurance subsidiaries
(Incorporated by reference to Exhibit 10.33 to the Company's
September 30, 1992 Form 10-Q on file with the Commission).
10.14 Second Amended and Restated Reinsurance Pooling Agreement
between ALLIED Mutual Insurance Company and the Company's
property-casualty insurance subsidiaries (Incorporated by
reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-3 filed with the Commission on December
15, 1992, Registration No. 33-55714).
10.15 First Amendment to the Second Amended and Restated Reinsurance
Pooling Agreement between ALLIED Mutual Insurance Company and
the Company's property-casualty insurance subsidiaries
(Incorporated by reference to Exhibit 10.43 to the Company's
March 31, 1993 Form 10-Q on file with the Commission).
10.16 Amended and Restated ALLIED Group Intercompany Operating
Agreement between the Company and its affiliated companies
dated August 25, 1993 and amendment thereto dated November 1,
1993 (Incorporated by reference to Exhibit 10.14 to the
Company's September 30, 1993 Form 10-Q on file with the
Commission).
10.17 ALLIED Group, Inc. Federal Income Tax Sharing Agreement.
10.18 ALLIED Group, Inc. Restated and Amended Stock Option Plan
(Incorporated by reference to Exhibit 10.19 to the Company's
December 31, 1992 Form 10-K on file with the Commission).
10.19 ALLIED Group, Inc. Nonqualified Stock Option Plan
(Incorporated by reference to Exhibit 10.20 to the Company's
December 31, 1992 Form 10-K on file with the Commission).
10.20 ALLIED Group, Inc. Outside Director Stock Purchase Plan
(Incorporated by reference to Exhibit 10.21 to the Company's
December 31, 1992 Form 10-K on file with the Commission).
10.21 ALLIED Group, Inc. Executive Equity Incentive Plan
(Incorporated by reference to Exhibit 10.22 to the Company's
December 31, 1992 Form 10-K on file with the Commission).
10.22 Agency Agreement between ALLIED Group Insurance Marketing
Company and Depositors Insurance Company, AMCO Insurance
Company, and ALLIED Property and Casualty Insurance Company
(Incorporated by reference to Exhibit 10.17 to the Company's
December 31, 1991 Form 10-K on file with the Commission).
10.27 The ALLIED Group Employee Stock Ownership Plan, Amended and
Restated, dated September 27, 1994 (Incorporated by reference
to Exhibit 10.27 to the Company's September 30, 1994 Form 10-Q
on file with the Commission).
10.28 The ALLIED Group Employee Stock Ownership Trust (Incorporated
by reference to Exhibit 10.27 to the Company's March 31, 1991
Form 10-Q on file with the Commission).
10.29 First Amendment to The ALLIED Group Employee Stock Ownership
Plan, dated March 7, 1995 (Incorporated by reference to
Exhibit 10.50 to the Company's March 31, 1995 Form 10-Q on
file with the Commission).
10.30 Second Amendment to The ALLIED Group Employee Stock Ownership
Plan, dated May 15,1995 (Incorporated by reference to Exhibit
10.51 to the Company's June 30, 1995 Form 10-Q on file with
the Commission).
<PAGE>
66
10.32 Term Credit Agreement and Guaranty between ALLIED Group, Inc.,
ALLIED Group Employee Ownership Trust, Bank of Montreal, and
Norwest Bank Iowa, N.A. (Incorporated by reference to Exhibit
10.29 to the Company's March 31, 1995 Form 10-Q on file with
the Commission).
10.33 First Amendment to the Term Credit Agreement and Guaranty,
dated October 12, 1995. (Incorporated by reference to Exhibit
10.30 to the Company's September 30, 1995 Form 10-Q on file
with the Commission).
10.35 ALLIED Group Mortgage Company Nonqualified Stock Option Plan
(Incorporated by reference to Exhibit 10.28 of the Company's
Registration Statement on Form S-3 filed with the Commission
on February 2, 1993, Registration No. 33-55714).
10.37 Stock Purchase Agreement between ALLIED Group, Inc. and
Michael E. Dougherty and Dougherty Dawkins, Inc. (Incorporated
by reference to Exhibit 10.38 to the Company's June 30, 1993
Form 10-Q on file with the Commission).
10.38 The ALLIED Group Marketing Agreement between the Company's
property-casualty subsidiaries and certain of its affiliated
companies dated August 25, 1993 and amendment thereto dated
November 1, 1993 (Incorporated by reference to Exhibit 10.39
to the Companies September 30, 1993 Form 10-Q on file with the
Commission).
10.39 Short-term Management Incentive Plan for 1993 (Incorporated by
reference to Exhibit 10.39 to the Company's December 31, 1993
Form 10-K on file with the Commission).
10.40 ALLIED Group Short Term Management Incentive Plan for 1994
(Incorporated by reference to Exhibit 10.40 to the Company's
June 30, 1994 Form 10-Q on file with the Commission).
10.42 ALLIED Group, Inc. Long-Term Management Incentive Plan
(Incorporated by reference to Exhibit 10.42 to the Company's
March 31, 1994 Form 10-Q on file with the Commission).
10.44 Second Amendment to Amended and Restated ALLIED Group
Intercompany Operating Agreement dated May 16, 1994
(Incorporated by reference to Exhibit 10.42 to the Company's
June 30, 1994 Form 10-Q on file with the Commission).
10.45 Second Amendment to the ALLIED Group Marketing Agreement
between the Company's property-casualty subsidiaries and
certain of its affiliated companies, dated August 25, 1994
(Incorporated by reference to Exhibit 10.45 to the Company's
September 30, 1994 Form 10-Q on file with the Commission).
10.46 Third Amendment to Amended and Restated ALLIED Group
Intercompany Operating Agreement (Incorporated by reference to
Exhibit 10.46 to the Company's December 31, 1994 Form 10-K on
file with the Commission).
<PAGE>
67
10.47 Second Amendment to Amended and Restated Reinsurance Pooling
Agreement (Incorporated by reference to Exhibit 10.47 to the
Company's December 31, 1994 Form 10-K on file with the
Commission).
10.48 Consulting Agreement between John E. Evans and ALLIED Group,
Inc., ALLIED Mutual Insurance Company, and ALLIED Life
Financial Corporation (Incorporated by reference to Exhibit
10.48 to the Company's December 31, 1994 Form 10-K on file
with the Commission).
10.49 ALLIED Group Short Term Management Incentive Plan for 1995
(Incorporated by reference to Exhibit 10.49 to the Company's
December 31, 1994 Form 10-K on file with the Commission).
10.50 Intercompany Cash Concentration Fund Agreement, dated April
24, 1995 (Incorporated by reference to Exhibit 10.52 to the
Company's June 30, 1995 Form 10-Q on file with the Commission)
10.51 Amendment to the Nonqualified Stock Option Plan, dated October
20, 1995 (Incorporated by reference to Exhibit 10.53 to the
Company's September 30, 1995 Form 10-Q on file with the
Commission).
10.52 ALLIED Group Short Term Management Incentive Plan for 1996.
10.53 Property Special Catastrophe Excess Contract.
11. Statement re computation of per share earnings.
21. Subsidiaries of the Registrant.
23. Consent of Independent Auditors.
27. Financial Data Schedule
28P. Information from Reports Furnished to State Insurance Regulatory
Authorities.
(d) Financial Statements required by Regulation S-X which are excluded from the
Annual Report to Stockholders by Rule 14a-3(b)(1).
None.
<PAGE>
68
REPORT OF INDEPENDENT AUDITORS ON SCHEDULES
The Board of Directors and Stockholders
ALLIED Group, Inc.:
Under date of February 2, 1996 we reported on the consolidated balance sheets of
ALLIED Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1995, as
contained in the 1995 Annual Report. As reported in Note 1 to the consolidated
financial statements, the Company changed its method of accounting for
investments in 1993. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related consolidated
financial statement schedules listed in Part IV, Item 14(a)2. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Des Moines, Iowa
February 2, 1996
<PAGE>
69
ALLIED Group, Inc. and Subsidiaries
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1995
<TABLE>
<CAPTION>
Amount at
Market which shown in
Type of investment Cost value the balance sheet
------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Fixed maturities - bonds
U.S. Government and government
agencies and authorities $ 244,165,971 $ 254,337,128 $ 254,337,128
States, municipalities, and
political subdivisions 273,822,087 284,640,205 284,640,205
Foreign governments 2,090,501 2,160,580 2,160,580
All other corporate bonds 206,647,060 213,408,867 213,408,867
--------------- --------------- ---------------
Total fixed maturities 726,725,619 $ 754,546,780 754,546,780
===============
Equity securities 7,527,302 $ 7,948,517 7,948,517
===============
Other long-term investments 1,840 1,840
Short-term investments 9,801,481 9,801,481
--------------- ---------------
Total investments $ 744,056,242 $ 772,298,618
=============== ===============
</TABLE>
<PAGE>
70
ALLIED Group, Inc. and Subsidiaries
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
--------------- ---------------
<S> <C> <C>
Cash $ --- $ 164,912
Indebtedness from affiliates 4,768,770 3,429,295
Accrued investment income 72,518 65,853
Short-term investments 6,021,020 2,520,286
Fixed maturities -- Available for sale at fair value
(amortized cost $8,976,639 and $5,896,422) 9,080,124 5,279,682
Equity securities at fair value (cost $1,790,896 and $1,799,700) 2,071,834 1,883,963
Investment in subsidiaries at equity (note 1) 362,026,479 300,515,572
Current income taxes recoverable 79,129 269,597
Deferred income taxes 110,152 ---
Other assets 551,593 686,604
--------------- ---------------
Total assets $ 384,781,619 $ 314,815,764
=============== ===============
Liabilities
Guarantee of ESOP obligations $ 26,270,000 $ 28,150,000
Deferred income taxes --- 173,358
Other liabilities 6,926,145 4,611,710
--------------- ---------------
Total liabilities 33,196,145 32,935,068
--------------- ---------------
Stockholders' Equity
Preferred stock, no par value, issuable in series, authorized
7,500,000 shares; issued and outstanding 4,819,932 shares
in 1995 and 4,981,466 in 1994 83,647,674 85,565,516
Common stock, no par value, $1 stated value, authorized
40,000,000 shares; issued and outstanding 9,444,646 in
1995 and 8,999,661 in 1994 9,444,646 8,999,661
Additional paid-in capital 104,595,912 98,926,297
Retained earnings 159,469,625 119,752,032
Unrealized appreciation (depreciation) of investments (net
of deferred income tax (expense) benefit of $(9,906,744)
and $2,868,709) 18,335,633 (5,240,883)
Unearned compensation related to ESOP (23,908,016) (26,121,927)
--------------- --------------------
Total stockholders' equity 351,585,474 281,880,696
--------------- ---------------
Total liabilities and stockholders' equity $ 384,781,619 $ 314,815,764
=============== ===============
</TABLE>
See accompanying Notes to Condensed Financial Statements
<PAGE>
71
ALLIED Group, Inc. and Subsidiaries
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues
Equity in undistributed earnings of subsidiaries (note 1) $ 38,478,651 $ 38,772,373 $ 32,398,744
Dividends received from subsidiaries (note 1) 12,985,307 8,866,550 8,169,554
Employee leasing income 93,265,042 83,265,394 83,941,836
Realized investment losses 405,654 (43,024) ---
Investment income 654,489 452,030 491,885
Other income 47,621 53,018 57,386
-------------- -------------- --------------
145,836,764 131,366,341 125,059,405
-------------- -------------- --------------
Expenses
Salaries, benefits, payroll taxes and other
employee leasing costs 91,929,248 82,177,291 81,826,843
Operating expenses 1,375,281 2,067,786 2,297,743
Interest expense 4,014 24,060 808,117
-------------- -------------- --------------
93,308,543 84,269,137 84,932,703
-------------- -------------- --------------
Income from operations before income taxes 52,528,221 47,097,204 40,126,702
Income tax (benefit) expense 151,392 (527,792) 204,281
-------------- -------------- --------------
Net income $ 52,376,829 $ 47,624,996 $ 39,922,421
============== ============== ==============
</TABLE>
See accompanying Notes to Condensed Financial Statements.
<PAGE>
72
ALLIED Group, Inc. and Subsidiaries
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 52,376,829 $ 47,624,996 $ 39,922,421
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed earnings (38,478,651) (38,772,373) (32,398,744)
Realized investment losses (405,654) 43,024 ---
Indebtedness from affiliates (1,339,475) (1,359,725) (5,406,842)
Accrued investment income (6,665) 19,629 (63,760)
Cost of ESOP Series shares allocated 2,213,911 1,751,994 1,347,539
Income taxes:
Current 190,468 2,110,615 (1,702,670)
Deferred (656,689) 597,191 (23,427)
Other, net 529,635 1,272,665 6,016,967
-------------- --------------- --------------
Net cash provided by operating activities 14,423,709 13,288,016 7,691,484
-------------- --------------- --------------
Cash flows from investing activities:
Investments in subsidiaries 539 350 (49,382,962)
Sale of subsidiary --- --- 14,303,671
Purchase of fixed maturities
Available for sale (3,276,014) (16,030,000) (8,491,352)
Held to maturity --- --- (1,260,199)
Purchase of equity securities (1,630,622) (813,638) (1,203,172)
Short-term investments, net (3,500,734) 199,744 1,284,155
Sale of fixed maturities--available for sale --- 7,487,290 512,892
Maturities, calls, and principal reductions
of fixed maturities
Available for sale 235,608 10,564,855 ---
Held to maturity --- 1,244,960 ---
Sale of equity securities 2,045,080 214,660 ---
-------------- --------------- --------------
Net cash provided by (used in) investing activities (6,126,143) 2,868,221 (44,236,967)
-------------- --------------- --------------
Cash flows from financing activities:
Issuance of preferred stock 699,559 794,133 889,470
Issuance of common stock 3,497,199 1,128,345 46,469,119
Repurchase of common stock --- (6,360,128) ---
Dividends paid to stockholders, net of income tax benefit (12,659,236) (11,795,038) (10,901,459)
-------------- --------------- --------------
Net cash (used in) provided by financing activities (8,462,478) (16,232,688) 36,457,130
-------------- --------------- --------------
Net decrease in cash (164,912) (76,451) (88,353)
Cash beginning of year 164,912 241,363 329,716
-------------- --------------- --------------
Cash end of year $ --- $ 164,912 $ 241,363
============== =============== ==============
</TABLE>
See accompanying Notes to Condensed Financial Statements.
<PAGE>
73
ALLIED Group, Inc. and Subsidiaries
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of ALLIED Group,
Inc. and its subsidiaries.
(1) The Company's investment in subsidiaries, undistributed earnings of
subsidiaries, and dividends received from subsidiaries are shown by segment
below:
<TABLE>
<CAPTION>
Property- Excess &
casualty Surplus Other Total
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Year ended
December 31, 1995
Investment in subsidiaries $ 293,167,247 $ 37,291,129 $ 31,568,103 $ 362,026,479
Equity in undistributed
earnings of subsidiaries $ 33,655,150 $ 3,516,974 $ 1,306,527 $ 38,478,651
Dividends received from
subsidiaries $ 12,011,307 $ --- $ 974,000 $ 12,985,307
Year ended
December 31, 1994
Investment in subsidiaries $ 239,722,727 $ 31,341,143 $ 29,451,702 $ 300,515,572
Equity in undistributed
earnings of subsidiaries $ 31,614,854 $ 3,634,920 $ 3,522,599 $ 38,772,373
Dividends received from
subsidiaries $ 7,799,550 $ --- $ 1,067,000 $ 8,866,550
Year ended
December 31, 1993
Investment in subsidiaries $ 217,048,558 $ 28,991,799 $ 26,291,417 $ 272,331,774
Equity in undistributed
earnings of subsidiaries $ 22,081,768 $ 4,049,891 $ 6,267,085 $ 32,398,744
Dividends received from
subsidiaries $ 7,729,354 $ --- $ 440,200 $ 8,169,554
</TABLE>
<PAGE>
74
ALLIED Group, Inc. and Subsidiaries
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
Years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
Reserves for Amortization
Deferred losses and Losses of deferred Other
policy loss Net and loss policy under-
acquisition settlement Unearned Premiums investment settlement acquisition writing Premiums
Segments costs expenses premiums earned income expenses costs expenses written
-------- ----------- ------------ ---------- --------- ---------- ---------- ------------ ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995
Property-casualty $ 38,846 $ 285,385 $ 180,217 $ 425,838 $ 39,110 $ 295,583 $ 93,684 $ 18,859 $ 440,838
Excess & Surplus 2,842 56,479 16,244 29,661 5,830 22,357 6,436 1,724 30,606
Other operations --- --- --- --- 2,302 --- --- --- ---
Eliminations --- --- --- --- --- --- --- --- ---
---------- ----------- ---------- --------- ---------- ---------- ------------ ---------- ----------
Consolidated $ 41,688 $ 341,864 $ 196,461 $ 455,499 $ 47,242 $ 317,940 $ 100,120 $ 20,583 $ 471,444
========== =========== ========== ========= ========== ========== ============ ========== ==========
1994
Property-casualty $ 35,546 $ 260,420 $ 164,938 $ 386,732 $ 35,279 $ 268,376 $ 85,081 $ 23,466 $ 403,066
Excess & Surplus 2,723 50,576 15,175 25,786 5,242 18,568 5,777 1,659 27,026
Other operations --- --- --- --- 549 --- --- --- ---
Eliminations --- --- --- --- --- --- --- (35) ---
---------- ----------- ---------- --------- ---------- ---------- ------------ ---------- ----------
Consolidated $ 38,269 $ 310,996 $ 180,113 $ 412,518 $ 41,070 $ 286,944 $ 90,858 $ 25,090 $ 430,092
========== =========== ========== ========= ========== ========== ============ ========== ==========
1993
Property-casualty $ 31,952 $ 233,508 $ 148,255 $ 344,322 $ 33,471 $ 242,196 $ 75,751 $ 25,764 $ 370,218
Excess & Surplus 2,455 46,348 13,575 24,014 4,867 16,722 5,403 1,242 24,892
Other operations --- --- --- --- 1,661 --- --- --- ---
Eliminations --- --- --- --- (969) --- --- --- ---
---------- ----------- ---------- --------- ---------- ---------- ------------ ---------- ----------
Consolidated $ 34,407 $ 279,856 $ 161,830 $ 368,336 $ 39,030 $ 258,918 $ 81,154 $ 27,006 $ 395,110
========== =========== ========== ========= ========== ========== ============ ========== ==========
</TABLE>
<PAGE>
75
ALLIED Group, Inc. and Subsidiaries
SCHEDULE IV
REINSURANCE
Years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
Percentage
Ceded Assumed of amount
Gross other from other Net assumed to
amount companies companies (1) amount net
-------------- --------------- ------------------ --------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
1995
Premiums:
Property-casualty $ 435,223 $ 265,571 $ 256,186 $ 425,838 60.2%
Excess & surplus lines 37,184 7,523 --- 29,661 ---
-------------- --------------- ------------------ ---------------
Total premiums $ 472,407 $ 273,094 $ 256,186 $ 455,499 56.2%
============== =============== ================== ===============
1994
Premiums:
Property-casualty $ 383,510 $ 242,490 $ 245,712 $ 386,732 63.5%
Excess & surplus lines 32,257 6,471 --- 25,786 ---
-------------- --------------- ------------------ ---------------
Total premiums $ 415,767 $ 248,961 $ 245,712 $ 412,518 59.6%
============== =============== ================== ===============
1993
Premiums:
Property-casualty $ 328,530 $ 415,752 $ 431,544 $ 344,322 125.3%
Excess & surplus lines 29,961 5,947 --- 24,014 ---
-------------- --------------- ------------------ ---------------
Total premiums $ 358,491 $ 421,699 $ 431,544 $ 368,336 117.2%
============== =============== ================== ===============
</TABLE>
(1) See note 6 of Notes to Consolidated Financial Statements for additional
information on amounts assumed from ALLIED Mutual Insurance Company in
accordance with the affiliated reinsurance pooling agreement.
<PAGE>
76
ALLIED Group, Inc. and Subsidiaries
SCHEDULE VI
SUPPLEMENTAL INFORMATION
Years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
Losses and loss
Discount settlement expenses
if any incurred related to Paid losses
deducted ---------------------------------- and loss
from Current Prior settlement
Segment reserves year years expenses
------- --------------- --------------- -------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
1995
Property-casualty $ --- $ 294,176 $ 1,407 $ 270,373
Excess & surplus lines --- 21,780 577 15,302
--------------- --------------- -------------- ---------------
Total $ --- $ 315,956 $ 1,984 $ 285,675
=============== =============== ============== ===============
1994
Property-casualty $ --- $ 271,723 $ (3,347) $ 245,416
Excess & surplus lines --- 16,851 1,717 16,904
--------------- --------------- -------------- ---------------
Total $ --- $ 288,574 $ (1,630) $ 262,320
=============== =============== ============== ===============
1993
Property-casualty $ --- $ 247,211 $ (5,014) $ 203,228
Excess & surplus lines --- 15,561 1,160 15,611
--------------- --------------- -------------- ---------------
Total $ --- $ 262,772 $ (3,854) $ 218,839
=============== =============== ============== ===============
</TABLE>
<PAGE>
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLIED Group, Inc.
(Registrant)
Date: March 5, 1996 By /s/ Jamie H. Shaffer
-------------------------------------
Jamie H. Shaffer
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
<TABLE>
<S> <C> <C>
By: /s/ Douglas L. Andersen By: /s/ Jamie H. Shaffer By: /s/ John E. Evans
- -------------------------------------- ------------------------------------- --------------------------------
Douglas L. Andersen Jamie H. Shaffer John E. Evans
President (Property-casualty) President (Financial) and Treasurer Chairman of the Board
March 5, 1996 March 5, 1996 and Director
March 5, 1996
By: /s/ James W. Callison By: By: /s/ Charles I. Colby
- -------------------------------------- ------------------------------------- --------------------------------
James W. Callison Harold S. Carpenter Charles I. Colby
Director Director Director
March 5, 1996 March 5, 1996 March 5, 1996
By: /s/ Harold S. Evans By: /s/ Richard O. Jacobson By: /s/ John P. Taylor
- -------------------------------------- ------------------------------------- --------------------------------
Harold S. Evans Richard O. Jacobson John P. Taylor
Director Director Director
March 5, 1996 March 5, 1996 March 5, 1996
By: /s/ William E. Timmons By: /s/ Donald S. Willis
- -------------------------------------- -------------------------------------
William E. Timmons Donald S. Willis
Director Director
March 5, 1996 March 5, 1996
</TABLE>
<PAGE>
78
ALLIED Group, Inc. and Subsidiaries
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Item Page
<S> <C> <C>
4.7 Agreement between ALLIED Group, Inc. and State Street Bank and Trust Company, 79
dated March 7, 1996.
4.8 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust 83
Company, dated December 31, 1994.
4.9 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust 99
Company, dated December 31, 1995.
10.7 Amended and Restated Management Information Services Agreement between ALLIED 115
Group Information Systems, Inc. and certain of its affiliated companies dated
January 1, 1995
10.17 ALLIED Group, Inc. Federal Income Tax Sharing Agreement 142
10.52 ALLIED Group Short Term Management Incentive Plan for 1996 148
10.53 Property Special Catastrophe Excess Contract 156
11 Statement re Computation of Per Share Earnings 169
21 Subsidiaries of the Registrant 170
23 Consent of Independent Auditors 171
27 Financial Data Schedule 172
28P Information from Reports Furnished to State Insurance Regulatory Authorities 173
</TABLE>
<PAGE>
79
EXHIBIT 4.7
AGREEMENT
THIS AGREEMENT dated as of March 7, 1996, between ALLIED GROUP, INC,. an
Iowa corporation (the "Company") and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company, solely in its capacity as trustee under the Plan
defined below and not individually (the "Trustee"). Defined terms used herein
and not defined herein shall have the meaning ascribed to them in The ALLIED
Group Employee Stock Ownership Plan (the "Plan").
WITNESSETH:
WHEREAS, the Company has established and maintains the Plan for the
benefit of all employees eligible to participate therein;
WHEREAS, the Plan qualifies as an "employee stock ownership plan" within
the meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986, as
amended (the "Code");
WHEREAS, the Company has established and maintains The ALLIED Group
Employee Stock Ownership Trust (the "Trust") and the Company has appointed the
Trustee to act as the trustee thereof pursuant to a trust agreement between the
Company and the Trustee amended and restated as of January 7, 1991 (the "Trust
Agreement");
WHEREAS, the Trustee has determined to convert the Company Preferred
Stock held by the Trustee to Company Common Stock on March 7, 1996, based upon
such facts and circumstances which the Trustee has determined to be relevant
including, without limitation, the Company's execution of this Agreement and the
declaration by the Board of Directors of the Company of a $0.22 per share
dividend on the Company Common Stock for the first quarter 1996;
NOW THEREFORE, in consideration of these premises and the mutual
promises contained herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. This Agreement shall be effective on March 7, 1996.
2. For the purpose of this Agreement, the following terms shall have
the following meanings:
(a) "Mandatory Employer Contributions" shall mean and include all
contributions made to the Trust by the Company pursuant to Section 4.1
of the Plan (or any successor provision thereto).
<PAGE>
80
(b) "Credited Shortfall Amount", with respect to any Reconciliation
Date, shall mean the sum of the Shortfall Amounts with respect to all
prior Reconciliation Dates.
(c) "Reconciliation Date" shall mean each of December 31, 1996, December
31, 1997, December 31, 1998, December 31, 1999, and March 7, 2000.
(d) "Release Date" shall mean no later than the April 12th (or the
following business day) following a Reconciliation Date.
(e) "Shortfall Amount" with respect to any Reconciliation Date means the
excess, if any, of (i) the sum of the aggregate dividends which would
have been paid on the Company Preferred Stock held by the Trustee but
for its conversion to Company Common Stock from March 7, 1996 through
the Reconciliation Date over (ii) the sum of the aggregate dividends
paid on the Company Common Stock from March 7, 1996 through the
Reconciliation Date plus the Credited Shortfall Amount. The Shortfall
Amount with respect to a Reconciliation Date shall be calculated based
on the number of allocated shares of Company Common Stock held by the
Trustee on such Reconciliation Date (and the equivalent number of shares
of Company Preferred Stock).
3. Subject to compliance with all requirements of federal and state law,
the Company agrees to effectuate a release of Company Common Stock in excess of
the Mandatory Employer Contribution with a fair market value equal to the
Shortfall Amount. The Company shall effectuate a release of any shares of
Company Common Stock necessary to meet any such Shortfall Amount by the Release
Date. Subject to the requirements of federal law, the shares of Company Common
Stock released pursuant to this paragraph shall be allocated to make up the
Shortfall Amount among the active Participants in the Plan as of the applicable
Reconciliation Date.
4. The Company agrees that it will use its best efforts to (i) cause the
Plan to qualify as an employee stock ownership plan within the meaning of
Section 4975(e)(7) and 401(a) of the Code and (ii) maintain such qualification
at all times prior to the termination of the Plan.
5. The representations, warranties, and agreements in this Agreement
shall survive the date hereof.
6. This Agreement shall be governed by and construed in accordance with
the laws of the State of Iowa applicable to contracts to be executed, delivered
and performed in such state, to the extent not preempted by the laws of the
United States of America. The parties hereby irrevocably and unconditionally
consent to submit to the exclusive jurisdiction of the courts of the State of
Iowa and the United States of America located in Polk County, Iowa for any
<PAGE>
81
actions, suits or proceedings arising out of or relating to this Agreement. This
Agreement, the Plan and Trust Agreement (including documents referred to therein
or delivered pursuant thereto) set forth the entire Agreement of the parties
with respect to the subject matter contained herein and supersede all prior oral
and written agreements, if any, between the parties with respect to such subject
matter. This Agreement shall bind and inure to the benefit of all successors to,
and assigns of, the parties hereto; provided, however, that the Trustee shall
not assign or otherwise transfer its interest in, or obligations under, this
Agreement without the written consent of the Company, except that the Trustee
may assign, without the Company's written consent, all its rights hereunder to
any institution exercising trust powers in connection with any such institution
assuming the duties of a trustee under the Trust Agreement. In the event that
any provision of this Agreement shall be declared unenforceable by a court of
competent jurisdiction, such provision shall be stricken herefrom and the
remainder of this Agreement shall remain binding on the parties hereto. In the
event any such provision shall be so declared unenforceable due to its scope or
breadth, then it shall be narrowed to the scope or breadth permitted by law.
7. This Agreement may be executed in two counterparts, each of which
shall be deemed an original, but each of which taken together shall constitute
one and the same instrument.
8. This Agreement may not be modified with respect to the obligations of
a party hereto except by an instrument in writing signed by such party.
9. The terms and provisions of the Trust Agreement relating to the
nature of the responsibilities of the Trustee and the indemnification by the
Company of the Trustee are incorporated herein by reference and made applicable
to this Agreement.
10. All notices, requests, or other communications required or permitted
to be delivered hereunder shall be in writing, delivered to each party hereto at
its address specified in the Trust Agreement and shall become effective as
therein provided. Any party hereto may from time to time, by written notice
given as aforesaid, designate any other address to which notices, requests or
other communications addressed to it shall be sent.
<PAGE>
82
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date first above written.
ALLIED GROUP, INC.
By ______________________________
Name _____________________________
Title ____________________________
STATE STREET BANK AND TRUST COMPANY
solely in its capacity as Trustee
under the Plan and Trust Agreement
referred to herein and not
individually
By _______________________________
Name _____________________________
Title ____________________________
<PAGE>
83
EXHIBIT 4.8
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of December 30, 1994, between ALLIED
GROUP, INC., an Iowa corporation (the "Company"), and STATE STREET BANK AND
TRUST COMPANY, a Massachusetts trust company (the "Trustee"), solely in its
capacity as trustee under the Plan defined below and not individually.
WITNESSETH;
WHEREAS, the Company has established and maintains The ALLIED Group
Employee Stock Ownership Plan (the "Plan"), for the benefit of all employees
eligible to participate therein;
WHEREAS, the Plan qualifies as an "employee stock ownership plan"
within the meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986,
as amended (the "Code");
WHEREAS, the Company has established and maintains The ALLIED Group
Employee Stock Ownership Trust (the "Trust") and the Company has appointed the
Trustee to act as the trustee thereof pursuant to a trust agreement between the
Company and the Trustee amended and restated as of April 16, 1991 (the "Trust
Agreement");
WHEREAS, the Trust Agreement provides that the assets of the trust
created thereunder shall be invested in, among other things, shares of common
stock of the Company ("Common Stock") or convertible preferred stock of the
Company;
WHEREAS, the Company has previously designated 85,000 shares as a
series of preferred stock, with no par value, called the Series C ESOP
Convertible Preferred Stock, of which 75,753 shares were previously issued and
the Company has offerred 9,247 shares for sale to the Trustee (the "Series C
Preferred Stock");
WHEREAS, the Company has designated 500,000 shares as a series of
convertible preferred stock, with no par value, called the Series D ESOP
Convertible Preferred Stock, of which 30,762 shares were previously issued and
of which the Company has offered 12,976 shares for sale to the Trustee (the
"Series D Preferred Stock");
WHEREAS, as directed by the ESOP Committee (the "Committee") under the
terms of the Trust Agreement, the Trustee is authorized to purchase shares of
Series C Preferred Stock and Series D Preferred Stock and the Company wishes to
issue and sell such shares of Series C Preferred Stock and Series D Preferred
Stock to the Trustee, and no commission will be paid by the Trustee in
connection with the purchase of such shares of Series C Preferred Stock and
Series D Preferred Stock; and
WHEREAS, the Trustee is required under the Trust Agreement to
independently determine (i.e., without direction from the Company) the purchase
price that shall be paid for any stock of the Company, and the Trustee has
received an opinion of Whitman Heffernan & Rhein Co., Inc. (the "Valuation
<PAGE>
84
Opinion") that the purchase of the shares of Series C Preferred Stock and Series
D Preferred Stock pursuant to the terms to this Agreement is fair and equitable
to the participants in the Plan and the price to be paid for the Series C
Preferred Stock and Series D Preferred Stock is not in excess of adequate
consideration.
NOW THEREFORE, in consideration of these premises and the mutual
promises contained herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. The Trustee hereby agrees to purchase (the "Purchase") with the Proceeds, and
the Company hereby agrees to issue and sell for cash to the Trust 9,247 shares
of Series C Preferred Stock and 12,976 shares of Series D Preferred Stock (the
"Shares") for an aggregate purchase price (the "Purchase Price") of $825,000.00
(or approximately $37.125 per share). The Company will pay all stamp and other
transfer taxes, if any, which may be payable in respect of the issuance, sale
and delivery of the Shares and shall be entitled to any refund thereof.
2. The Purchase shall be consummated at or about 5:30 P.M. Central
Standard Time on December 30, 1994 (such date of delivery being hereinafter
called the "Delivery Date") at the offices of the Company, Des Moines, Iowa or
as otherwise agreed by the parties hereto. On the Delivery Date, the Trustee
shall deliver to the Company the Purchase Price in immediately available funds
together with an opinion of Goodwin, Proctor & Hoar, counsel to the Trustee, in
the form attached as Annex A hereto and a copy of the Valuation Opinion, and the
Company will deliver to the Trustee a certificate or certificates representing
the Shares which shall be registered in the name of the Trustee, as trustee
under the Plan, or in the name of its nominee, together with an opinion of
Katherine E. Schmidt, Associate Corporate Counsel of the Company, in the form
attached as Annex B hereto.
3. The Comp any hereby represents, warrants and covenants to
the Trustee as follows:
a. the Company (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State
of Iowa and (ii) has full corporate power and authority
to execute and deliver this Agreement, to carry out the
transactions contemplated hereby, to own, lease and
operate its assets and properties, and to carry on its
business as now being conducted;
b. this Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against
the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting
creditors' rights generally and to general principles of
equity (regardless of whether considered in a proceeding
at law or in equity);
<PAGE>
85
c. the execution, delivery and performance of this Agreement
by the Company and the consummation of the transactions
contemplated hereby will not violate (i) the Company's
Certificate of Incorporation or By-laws, each as amended
to date or, (ii) any provision of any agreement,
instrument, order, award, judgment or decree to which the
Company is a party or by which it or any of its
businesses or properties are bound, or (iii) any statute,
rule or regulation of any federal, state or local
government or governmental agency applicable to the
Company except in the case of subparagraphs (ii) or (iii)
of this Section 3(c) for any such violations which either
individually or in the aggregate do not have a material
adverse effect on the business or properties of the
Company and its subsidiaries taken as a whole;
d. except for any necessary applications with the National
Association of Securities Dealers Automated Quotation
system with respect to any newly issued shares of Common
Stock which may be issued upon conversion of the Shares,
no approval, authorization or other action by, or filing
(other than such filings of the Company as may be
necessary in connection with any registration for sale of
the common stock that may be issuable upon conversion of
the Shares) with, any government authority is required to
be obtained or made by the Company in connection with the
execution, delivery and performance by the Company of
this Agreement and the consummation of the transactions
contemplated hereby;
e. the Shares have been duly and validly authorized and,
when issued and delivered to and paid for by the Trustee
pursuant to this Agreement, (i) will be validly issued,
fully paid and nonassessable and not liable to any
further call or assessment, (ii) the certificates
representing the Shares comply with the applicable
requirements of Iowa law and (iii) the Trustee will
acquire full right, title and interest in and to the
Shares free and clear of any and all liens, claims,
charges and encumbrances (other than rights of
participants in the Plan);
f. the Company (i) has duly and validly authorized and
reserved for issuance a sufficient number of shares of
Common Stock, as may be issued, from time to time, upon
conversion of the Shares and (ii) such shares of Common
Stock, when issued upon conversion of the Shares in
accordance with the Certificate of Designations, will be
validly issued, fully paid and nonassessable and not
liable to any further call or assessment and will not be
subject to preemptive rights;
<PAGE>
86
g. the Plan has been duly authorized and established, and
the Trust Agreement has been duly authorized, by all
necessary corporate action on the part of the Company;
the Plan constitutes in all material respects in form an
employee stock ownership plan within the meaning of
Section 4975(e)(7) of the Code, Code Regulation Section
54.4975-11 and Section 407(d)(6) of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"); and each of the Shares constitute a qualifying
employer security within the meaning of Section
4975(e)(8) of the Code; provided, however, that in making
the representations contained in this Section 3(g) the
Company has relied upon the correctness of the Trustee's
representations contained in Section 4(f) of this
Agreement;
h. the Company's Reports on Form 10-Q for the quarterly
period ended September 30, 1994, on the date filed with
the Securities and Exchange Commission ("SEC"), conformed
in all material respects to the requirements of the
Securities Exchange Act of 1934, as amended;
i. no person or other entity is entitled to any fees or
commissions due to the Company's actions in connection
with the purchase and sale of the Shares;
j. the Company shall use its best efforts during the term of
the Trust to cause the Plan to maintain its qualification
as an employee stock ownership plan within the meaning of
Section 4975 of the Code; and
k. the Company has furnished and will continue to furnish to
the Trustee from time to time copies of all reports and
financial statements which the Company shall send or make
available to its public stockholders generally, all other
written communications from the Company to public
shareholders generally and each regular or periodic
report, proxy statement, registration statement or
prospectus, if any, filed by the Company with the SEC;
and
4. The Trustee represents and warrants to the Company as
follows:
a. the Trustee (i) is a duly organized and validly existing
Massachusetts trust company in good standing and with
full power and authority to act as Trustee and exercise
trust powers, including without limitation, the trust
powers provided in and contemplated by the Trust
Agreement, and (ii) has full corporate power and
authority to execute and deliver this Agreement and to
carry out the transactions contemplated hereby;
<PAGE>
87
b. this Agreement has been duly authorized, executed and
delivered by the Trustee and constitutes a valid and
binding obligation of the Trustee, enforceable against
the Trustee in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting
creditors' rights generally and to general principles of
equity (regardless of whether considered in a proceeding
at law or in equity);
c. the execution, delivery and performance of this Agreement
by the Trustee and the consummation of the transactions
contemplated hereby will not violate (i) the Trustee's
Corporate Charter or By-laws, each as amended to date, or
(ii) any provision of any agreement, instrument, order,
award, judgment or decree to which the Trustee is a party
or by which it or any of its businesses or properties are
bound or (iii) any statute, rule or regulation of any
federal, state or local government or governmental agency
applicable to the Trustee except in the case of
subparagraphs (ii) or (iii) of this Section 4(c) for any
such violations which either individually or in the
aggregate do not have a material adverse effect on the
business or properties of the Trustee; provided, however,
that in making the representations contained in clause
(iii) of this Section 4(c), the Trustee has relied upon
the correctness of the Company's representations in
Sections 3(g) of this Agreement, as limited by the
proviso therein, and 3(i) and (2) the Committee's
direction letter dated December 29, 1994;
d. no approval, authorization or other action by, or filing
with, any governmental authority is required to be
obtained or made by the Trustee in connection with the
execution, delivery and performance by the Trustee of
this Agreement and the consummation of the transactions
contemplated hereby;
e. the Trustee is acquiring the Shares on behalf of the Plan
solely for investment purposes and not with a view to, or
for sale in connection with, any distribution thereof;
provided, however, that the Shares will be allocated to
the accounts of the participants in the Plan pursuant to
the terms of the Plan and distributions may be made to
participants and beneficiaries of the Plan in shares of
Common Stock issuable upon conversion of the Series C
Preferred Stock and Series D Preferred Stock or payable
upon redemption of the Series C Preferred Stock and
Series D Preferred Stock, including upon exercise of the
rights set forth in Section 7 of the Certificate of
Designations, or in shares of Common Stock otherwise
<PAGE>
88
acquired by the Trustee pursuant to the terms of the
Plan, it being understood that the Shares are being sold
to the Trustee pursuant to an exemption from the
registration requirements of the Securities Act of 1933,
as amended (the "Securities Act"), in reliance upon this
representation and warranty;
f. the purchase of the Shares on the Delivery Date by the
Trust for the Purchase Price is for not greater than
"adequate consideration" as that phrase is defined in
Section 3(18) of ERISA, and proposed regulations
thereunder, and will not constitute a prohibited
transaction under Section 406 of ERISA or Section 4975(c)
of the Code by reason of the exemptions set forth in
Section 408(e) of ERISA and Section 4975(d) (13) of the
Code; provided that in making the representations
contained in this Section 4(f), the Trustee has relied
upon the correctness of the Company's representations
contained in Sections 3(g), as limited by the proviso
therein, and 3(i) of this Agreement as well as the
Valuation Opinion;
g. the Shares purchased by the Trust have a conversion price
which is reasonable as of the date hereof; provided,
however, that in making the representations contained in
this Section 4(g), the Trustee has relied upon the
correctness of the Valuation Opinion; and
h. no person or other entity is entitled to any commissions
due to the Trustee's actions in connection with the
purchase and sale of the Shares.
5. The Trustee hereby (i) acknowledges that the Shares purchased on
behalf of the Trust pursuant to this Agreement may, by their terms, be issued
only to the Trustee or a successor trustee acting on behalf of the Trust, (ii)
acknowledges that the Trust Agreement provides that none of the Series C
Preferred Shares and Series D Preferred Shares shall be transferred in any
manner to participants under the Plan but in lieu thereof shares of Common Stock
shall be distributed to participants or transferred to the participants' Section
401(k) accounts pursuant to the terms of the Plan, (iii) acknowledges that the
Certificate of Designations provides that any Shares that are transferred sold
or otherwise disposed of by the Trustee shall be automatically, and without any
action on the part of the Company, converted into shares of Common Stock, and
(iv) agrees not to transfer, sell or otherwise dispose of any of the Shares or
other shares of Series C Preferred Stock and Series D Preferred Stock or to
attempt to do so, except in compliance with the Trust Agreement. Nothing
contained in this Section 5 shall be deemed to restrict the ability of the
Trustee to convert shares of Series C Preferred Stock and Series D Preferred
Stock into shares of Common Stock or to require the Company to redeem shares of
Series C Preferred Stock and Series D Preferred
<PAGE>
89
Stock, in each case in accordance with the Certificate of Designations, or the
ability of the Trustee to transfer, sell or otherwise dispose of shares of
Common Stock of the Company issued upon conversion of shares of Series C
Preferred Stock and Series D Preferred Stock or upon a redemption of shares of
Series C Preferred Stock and Series D Preferred Stock.
6. The Trustee understands that the certificate(s) representing the
Shares will bear the following legend and that a notation restricting their
transfer will be made on the stock transfer books of the Company:
a. Series C: The shares of Series C preferred stock
represented by this certificate have not been registered
under the Securities Act of 1933, as amended. Such shares
of stock may not be sold, assigned, pledged or otherwise
transferred in the absence of an effective registration
statement under said Securities Act covering such
transfer or an opinion of counsel satisfactory to the
issuer that registration under said Securities Act is not
required.
The shares of stock represented by this certificate are
subject to restrictions on transfer set forth in the
Certificate of Designations relating to the Corporation's
Series C ESOP Convertible Preferred Stock and in a Stock
Purchase Agreement dated as December 30, 1994. The
Corporation will furnish a copy of such agreement to the
holder of this certificate without charge upon written
request.
b. Series D: The shares of Series D preferred stock
represented by this certificate have not been registered
under the Securities Act of 1933, as amended. Such shares
of stock may not be sold, assigned, pledged or otherwise
transferred in the absence of an effective registration
statement under said Securities Act covering such
transfer or an opinion of counsel satisfactory to the
issuer that registration under said Securities Act is not
required.
The shares of stock represented by this certificate are
subject to restrictions on transfer set forth in the
Certificate of Designations relating to the Corporation's
Series D ESOP Convertible Preferred Stock and in a Stock
Purchase Agreement dated as December 30, 1994. The
Corporation will furnish a copy of such agreement to the
holder of this certificate without charge upon written
request.
7. Upon the reasonable written request of the Trustee, the Company
agrees that, at the Company's expense, it will prepare and file, as promptly as
practicable after such request, and use its best efforts to cause to become
<PAGE>
90
effective, a registration statement on an appropriate form, including a final
prospectus (the "Registration Statement"), under and complying with the
Securities Act and the rules and regulations thereunder, relating to the number
of shares of the Company's Common Stock into which the Shares are from time to
time convertible or as are acquired upon a redemption or repurchase, including a
redemption pursuant to the provisions of Section 7 of the Certificate of
Designations, as shall be necessary, in the opinion of counsel to the Company,
for the Trustee to carry out its responsibilities under the Plan and Trust
Agreement. Whenever shares of Common Stock are so registered, the Company shall
also use its best efforts to register of qualify such shares covered by the
Registration Statement under the "blue sky" or securities laws of such
jurisdictions within the United States as the Trustee may reasonably request;
provided, however, that the Company shall not be required to consent to the
general service of process for all purposes in any jurisdiction where it is not
then qualified to do business.
8. The Company agrees that it will use its best efforts to (i) cause
the Plan to qualify as an employee stock ownership plan within the meaning of
Section 4975(e)(7) of the Code and (ii) maintain such qualification at all times
prior to the termination of the Plan.
9. The representations, warranties and agreements in this
Agreement shall survive the date hereof and the Delivery Date.
10. This Agreement shall be governed by and construed in accordance
with the laws of the State of Iowa applicable to contracts to be executed,
delivered and performed in such state, to the extent not preempted by the laws
of the United States of America. The parties hereby irrevocably and
unconditionally consent to submit to the exclusive jurisdiction of the courts of
the State of Iowa and the United States of America located in Polk County, Iowa
for any actions, suits or proceedings arising out of or relating to this
Agreement. This Agreement, the Plan and Trust Agreement (including documents
referred to therein or delivered pursuant thereto) set forth the entire
Agreement of the parties with respect to the subject matter contained herein and
supersede all prior oral and written agreements, if any, between the parties
with respect to such subject matter. This Agreement shall bind and inure to the
benefit of all successors to, and assigns of, the parties hereto; provided,
however, that the Trustee shall not assign or otherwise transfer its interest
in, or obligations under, this Agreement without the written consent of the
Company, except that the Trustee may assign, without the Company's written
consent, all its rights hereunder to any institution exercising trust powers in
connection with any such institution assuming the duties of a trustee under the
Trust Agreement. In the event that any provision of this Agreement shall be
declared unenforceable by a court of competent jurisdiction, such provision
shall be stricken herefrom and the remainder of this Agreement shall remain
binding on the
<PAGE>
91
parties hereto. In the event any such provision shall be so declared
unenforceable due to its scope or breadth, then it shall be narrowed to the
scope or breadth permitted by law.
11. This Agreement may be executed in two counterparts, each of
which shall be deemed an original, but each of which taken together
shall constitute one and the same instrument.
12. This Agreement may not be modified with respect to the obligations
of a party hereto except by an instrument in writing signed by such party.
13. The terms and provisions of the Trust Agreement relating to the
nature of the responsibilities of the Trustee and the indemnification by the
Company of the Trustee are incorporated herein by reference and made applicable
to this Agreement.
14. All notices, requests, or other communications required or
permitted to be delivered hereunder shall be in writing, delivered to each party
hereto at its address specified in the Trust Agreement and shall become
effective as therein provided. Any party hereto may from time to time, by
written notice given as aforesaid, designate any other address to which notices,
requests or other communications addressed to it shall be sent.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date first above written.
ALLIED GROUP, INC.
By __________________________________
Name ________________________________
Title _______________________________
STATE STREET BANK AND TRUST COMPANY
solely in its capacity as Trustee
under the Plan and Trust Agreement
referred to herein and not
individually
By __________________________________
Name ________________________________
Title _______________________________
<PAGE>
92
Annex A
December 30, 1994
ALLIED Group, Inc.
701 Fifth Avenue
Des Moines, Iowa 50391-2003
Re: The ALLIED Group Employee Stock Ownership Trust
-----------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel for State Street Bank and Trust
Company ("State Street"), as trustee (the "Trustee") of The ALLIED Group
Employee Stock Ownership Trust (the "Trust"), which forms a part of the ALLIED
Group Employee Stock Ownership Plan ("Plan"), and which is evidenced by the
Trust Agreement dated April 16, 1991 (the "ESOP Trust Agreement") between
Trustee and ALLIED Group, Inc. (the "Company") in connection with the purchase
by the Trustee of 9,247 shares of Series C ESOP Convertible Preferred Stock and
_______ shares Series D ESOP Convertible Preferred Stock of the Company, no par
value (the "Preferred Stock") pursuant to the Stock Purchase Agreement between
the Company and the Trustee dated as of December 30, 1994 (the "Stock Purchase
Agreement"). Capitalized terms used herein that are not defined herein have the
meanings set forth in the Stock Purchase Agreement.
In connection therewith, we have reviewed executed copies of: (i) the
Stock Purchase Agreement; (ii) the ESOP Trust Agreement; (iii) the Certificate
of Designations of Series C ESOP Convertible Preferred Stock and Series D ESOP
Convertible Preferred Stock of ALLIED Group, Inc.; (iv) the corporate charter
and by-laws of State Street, both as amended to date; (v) other records,
documents, and instruments relating to the powers and organization of State
Street and to State Street's acceptance of fiduciary duties, obligations and
trusts; and (vi) such other certificates and documents as we have deemed
relevant or necessary as a basis for the opinion expressed below.
In our examination, we have assumed without any investigation (i) the
legal capacity of each natural person, (ii) the full power and authority of each
person other than State Street to execute, deliver and perform its obligations
under each document heretofore executed and delivered or hereafter to be
executed and delivered and to do each other act heretofore done or hereafter to
be done by such person, (iii) the due authorization, execution and delivery by
each person other than
State Street of each document heretofore executed and delivered by such person,
(iv) the legality, validity, binding effect and enforceability as to each person
other than State Street of each document heretofore executed and delivered or
hereafter to be
<PAGE>
93
ALLIED Group, Inc.
December 30, 1994
executed and delivered and of each other act heretofore done or hereafter to be
done by such person, (v) the genuineness of each signature other than those of
officers of State Street and the completeness and authenticity of each document
submitted to us as an original, (vi) the conformity to the original of each
document submitted to us as a copy, (vii) the authenticity of the original of
each document submitted to us as a copy and (viii) no amendment or modification
hereafter of any provision of any document. Insofar as our opinion relates to,
or depends on, any matter of fact, we have relied on representations as set
forth in the Stock Purchase Agreement, and upon written statements and
certificates of officers of State Street and of public officials.
We are members of the Bar of the Commonwealth of Massachusetts and,
accordingly, we express no opinion herein concerning any law other than the laws
of the Commonwealth of Massachusetts and the Federal laws of the United States
of America, to the extent specifically referred to herein.
As used in this opinion with respect to any matter, the qualifying
phrase "to the best of our knowledge" means that, without independent review or
verification, nothing has come to our attention in the course of our performing
legal services for the
Trustee with respect to said matter.
We express no opinion as to matters governed by the Internal Revenue
Code of 1986 (the "Code") or the Employee Retirement Income Security Act of 1974
("ERISA"), both as amended, or federal or state
securities laws.
Based on and subject to the foregoing, we are of the opinion that:
1. State Street, acting solely in its capacity as Trustee, has all
requisite power and authority to execute, deliver and perform its obligations
under the Stock Purchase Agreement.
2. The execution, delivery and performance of the Stock Purchase
Agreement by State Street, as Trustee, will not violate the charter or the
by-laws of State Street or, to the best of our knowledge, any order, judgment or
decree binding on State Street (individually or as trustee).
3. The Stock Purchase Agreement has been duly executed and
delivered by State Street, as Trustee.
4. No authorization, approval or consent of, and no filings or
registrations with, any governmental or regulatory authority or agency are
necessary for the execution, delivery or performance by State Street of the
Stock Purchase Agreement or for the validity or enforceability thereof, except
for filings with the Internal Revenue Service or the Department of Labor which
may from time to time be required by ERISA or the Code.
<PAGE>
94
ALLIED Group, Inc.
December 30, 1994
We express no opinion as to any matter other than as expressly set
forth above, and no other opinion is intended to be implied nor may be inferred
herefrom. The opinions expressed herein are given as of the date hereof and we
undertake no obligation hereby and disclaim any obligation to advise you of any
change after the date hereof pertaining to any matter referred to herein.
Neither this opinion nor any part hereof may be delivered to, used or relied
upon by any person or entity other than you without our prior written consent.
Very truly yours,
------------------------------
<PAGE>
95
Annex B
December 30, 1994
State Street Bank and Trust Company
Legal Division, Q6N
200 Newport Avenue
North Quincy, MA 02171
Ladies and Gentlemen:
I have acted as legal counsel of ALLIED Group, Inc., an Iowa corporation (the
"Company"), and in such capacity I have advised the Company in connection with
The ALLIED Group Employee Stock Ownership Trust (the "ESOP Trust"), a trust
established under that certain Trust Agreement amended and restated as of April
16, 1991 (the "Trust Agreement"), between the Company and State Street Bank and
Trust Company, as trustee (the "Trustee" or "State Street"), which implements
and forms a part of the ALLIED Group Employee Stock Ownership Plan (the "Plan"),
and in connection with the purchase by the Trustee of 9,247 shares of Series C
ESOP Convertible Preferred Stock and _______ shares of Series D ESOP Convertible
Preferred Stock of the Company, no par value (the "Preferred Stock"), pursuant
to the Stock Purchase Agreement between the Company and the Trustee dated
December 30, 1994 (the "Stock Purchase Agreement"). Capitalized terms used
herein without definition shall have the meanings ascribed to them in the Stock
Purchase Agreement.
In connection therewith, I have reviewed executed copies of (i) the Stock
Purchase Agreement, (ii) the Certificate of Designations in respect to the
Series C Convertible Preferred Stock and Series D Convertible Preferred Stock
(the "Certificate of Designations"), and (iii) such other certificates and
documents as I have deemed relevant or necessary as a basis for the opinion
expressed below.
In such connection, I have assumed the genuineness of all signatures, the
authenticity of all documents submitted to me as originals, the conformity to
original documents of all documents submitted to me as photostatic or certified
copies, and the authenticity of the originals of such copies. I have relied, to
the extent I deem such reliance proper, upon representations made in the
documents and certificates or representations made in writing by duly authorized
representatives of the Company.
In rendering the opinions contained herein, I have assumed that (a) State
Street, as Trustee, has all requisite power and authority to execute, deliver,
and perform its obligations under the Stock Purchase Agreement; (b) that the
execution, delivery, and performance of the Stock Purchase Agreement by State
Street, as Trustee, will not violate the charter or bylaws of State Street; and
(c) that the Stock Purchase Agreement has been executed and delivered by State
Street as Trustee and constitutes the legal,
<PAGE>
96
December 30, 1994
valid, and binding obligation of the ESOP Trust, enforceable in accordance with
its terms, except as enforcement may be limited by (i) bankruptcy, insolvency,
reorganization, or similar laws affecting the enforcement of creditors' rights
generally, or (ii) equitable principles of general applicability (regardless of
whether such enforceability is considered in a proceeding in equity or law).
I express no opinion with respect to the laws of any jurisdiction other than the
State of Iowa and the United States of America. These opinions are expressed as
of the date hereof and are therefore subject to subsequent interpretive,
regulatory, legislative, and
judicial developments.
Based on and subject to the foregoing, I am of the opinion that:
1. The Company is validly existing and in good standing under the
laws of the State of Iowa and has all requisite corporate power
to execute, deliver, and perform the Stock Purchase Agreement.
The Company has taken all necessary corporate action to
authorize the execution, delivery, and performance of the Stock
Purchase Agreement.
2. The Stock Purchase Agreement has been duly executed and
delivered by the Company and is the legal, valid, and binding
agreement of the Company, enforceable against the Company in
accordance with its respective terms, except as the
enforceability thereof may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance,
or similar laws affecting the enforcement of creditors' rights
generally or (ii) equitable principles of general applicability
(regardless of whether such enforceability is considered in a
proceeding in equity or at law).
3. The Preferred Shares have the rights, preferences, and
qualifications set forth in the Certificate of Designations,
have been validly authorized, and upon payment therefor as
provided in the Stock Purchase Agreement, will be validly
issued and outstanding and will constitute fully-paid and
nonassessable shares of Series C ESOP Convertible Preferred
Stock and Series D Convertible Preferred Stock of the Company.
The shares of the Company's common stock, no par value ("Common
Stock") initially reserved for issuance and to be issued upon
conversion of the Preferred Shares in accordance with their
terms have been duly and validly authorized and are sufficient
in number for conversion of all the Preferred Shares, and such
Common Stock, when so issued upon such conversion, will be duly
and validly issued, fully-paid, and nonassessable.
4. Upon payment by the Trust as provided in the Stock Purchase
Agreement, the Company will convey to the Trust good and valid
title to the Preferred Shares free and
<PAGE>
97
December 30, 1994
clear of any liens, claims, security interests, and
encumbrances, except for beneficial interests accruing to Plan
participants and their beneficiaries.
5. As of the date hereof, the Plan and the ESOP Trust in form meet
in all material respects (a) the applicable requirements of
Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), (b) the requirements applicable to an employee
stock ownership plan for purposes of Section 4975(e)(7) of the
Code and the regulations promulgated thereunder, and (c) the
requirements for exemption from tax under Section 501(a) of the
Code.
6. The shares of Preferred Stock to be purchased by the ESOP Trust
constitute "employer securities" within the meaning of Section
409(1) of the Code and "qualifying employer securities" within
the meaning of Section 407(d)(5) of ERISA.
7. The shares of Preferred Stock to be purchased by the ESOP Trust
have voting rights equivalent to the common stock into which
such shares may be converted, and the Plan meets the voting
rights requirements of Section 409(e)(2) of the Code with
respect to such shares.
In rendering the foregoing opinions and any other opinions expressed
in this letter, I have relied on the following assumptions:
a. Except as to matters expressly opined on herein, the
Plan and ESOP Trust have been, and will continue to be,
administered and operated at all times strictly in
accordance with their terms and with all requirements of
applicable law including, but not limited to, all of the
requirements applicable to a qualified plan under
Section 401(a); the requirements applicable to an
"employee stock ownership plan" (within the meaning of
Section 4975(e)(7)) under Section 4975 and 409 of the
Code; and the requirements applicable to a tax- exempt
trust under Section 501(a); and with the provisions of
ERISA and all regulations thereunder.
b. The conversion price at which the shares of Preferred
Stock may be converted to common stock of the Company is
reasonable as of the date of acquisition of such
Preferred Stock by the ESOP Trust.
c. No fiduciary of the Plan has received any consideration
of the type described in Section 4975(c)(1)(F) of the
Code and Section 406(b)(3) of ERISA in connection with
the transactions described herein.
<PAGE>
98
December 30, 1994
d. The fiduciaries of the Plan and the ESOP Trust have
acted prudently and in good faith, and have given
appropriate consideration to those facts and
circumstances that are relevant to the transactions in
accordance with the fiduciary requirements of part 4
of Title I of ERISA.
In connection with the assumptions made in paragraph (b) above, I understand
that the Trustee has received an opinion from Whitman Heffernan and Rhein Co.,
Inc. to effect that (i) the price to be paid by the ESOP Trust per share of
Preferred Stock is not in excess of fair market value or adequate consideration,
as defined under Title I of the Employee Retirement Income Security Act of 1974,
as amended, including the regulations thereunder ("ERISA"); and (ii) the terms
and conditions of the proposed transaction, including the terms governing the
right to convert the Preferred Stock into Common Stock of the Company, are fair
and reasonable to the ESOP Trust from a financial point of view.
These opinions are rendered solely to the Trustee in connection with the
transactions of the Trustee contemplated by the Stock Purchase Agreement. No
other person, firm, or corporation may rely upon these opinions for any purpose
without my prior written consent.
Yours very truly,
- -------------------------
<PAGE>
99
EXHIBIT 4.9
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of December 29, 1995, between ALLIED
GROUP, INC., an Iowa corporation (the "Company"), and STATE STREET BANK AND
TRUST COMPANY, a Massachusetts trust company, solely in its capacity as trustee
under the Plan defined below and not individually (the "Trustee").
WITNESSETH;
WHEREAS, the Company has established and maintains The ALLIED Group
Employee Stock Ownership Plan (the "Plan"), for the benefit of all employees
eligible to participate therein;
WHEREAS, the Plan qualifies as an "employee stock ownership plan"
within the meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986,
as amended (the "Code");
WHEREAS, the Company has established and maintains The ALLIED Group
Employee Stock Ownership Trust (the "Trust") and the Company has appointed the
Trustee to act as the trustee thereof pursuant to a trust agreement between the
Company and the Trustee amended and restated as of April 16, 1991 (the "Trust
Agreement");
WHEREAS, the Trust Agreement provides that the assets of the trust
created thereunder shall be invested in, among other things, shares of common
stock of the Company ("Common Stock") or convertible preferred stock of the
Company;
WHEREAS, the Company has designated 500,000 shares as a series of
convertible preferred stock, with no par value, called the Series D ESOP
Convertible Preferred Stock, of which 43,738 shares were previously issued and
of which the Company has offered 13,426 shares for sale to the Trustee (the
"Series D Preferred Stock");
WHEREAS, as directed by the ESOP Committee (the "Committee") under the
terms of the Trust Agreement, the Trustee is authorized to purchase shares of
Series D Preferred Stock and the Company wishes to issue and sell such shares of
Series D Preferred Stock to the Trustee, and no commission will be paid by the
Trustee in connection with the purchase of such shares of Series D Preferred
Stock; and
WHEREAS, the Trustee is required under the Trust Agreement to
independently determine (i.e., without direction from the Company) the purchase
price that shall be paid for any stock of the Company, and the Trustee has
received an opinion of Whitman Heffernan & Rhein Co., Inc. (the "Valuation
Opinion") that the purchase of the shares of Series D Preferred Stock pursuant
to the terms to this Agreement is fair and equitable to the participants in the
Plan and the price to be paid for the Series D Preferred Stock is not in excess
of adequate consideration.
<PAGE>
100
NOW THEREFORE, in consideration of these premises and the mutual
promises contained herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. The Trustee hereby agrees to purchase (the "Purchase") with the funds
directed by the Committee, and the Company hereby agrees to issue and sell for
cash to the Trust 13,426 shares of Series D Preferred Stock (the "Shares") for
an aggregate purchase price (the "Purchase Price") of $725,000 (or approximately
$54.00 per share). The Company will pay all stamp and other transfer taxes, if
any, which may be payable in respect of the issuance, sale and delivery of the
Shares and shall be entitled to any refund thereof.
2. The Purchase shall be consummated at or about 5:30 P.M. Central
Standard Time on December 29, 1995 (such date of delivery being hereinafter
called the "Delivery Date") at the offices of the Company, Des Moines, Iowa or
as otherwise agreed by the parties hereto. On the Delivery Date, the Trustee
shall deliver to the Company the Purchase Price in immediately available funds
together with an opinion of Goodwin, Proctor & Hoar, counsel to the Trustee, in
the form attached as Annex A hereto and a copy of the Valuation Opinion, and the
Company will deliver to the Trustee a certificate or certificates representing
the Shares which shall be registered in the name of the Trustee, as trustee
under the Plan, or in the name of its nominee, together with an opinion of
Katherine E. Schmidt, Associate Corporate Counsel of the Company, in the form
attached as Annex B hereto.
3. The Company hereby represents, warrants and covenants to
the Trustee as follows:
a. the Company (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State
of Iowa and (ii) has full corporate power and authority
to execute and deliver this Agreement, to carry out the
transactions contemplated hereby, to own, lease and
operate its assets and properties, and to carry on its
business as now being conducted;
b. this Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against
the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting
creditors' rights generally and to general principles of
equity (regardless of whether considered in a proceeding
at law or in equity);
<PAGE>
101
c. the execution, delivery and performance of this Agreement
by the Company and the consummation of the transactions
contemplated hereby will not violate (i) the Company's
Certificate of Incorporation or By-laws, each as amended
to date or, (ii) any provision of any agreement,
instrument, order, award, judgment or decree to which the
Company is a party or by which it or any of its
businesses or properties are bound, or (iii) any statute,
rule or regulation of any federal, state or local
government or governmental agency applicable to the
Company except in the case of subparagraphs (ii) or (iii)
of this Section 3(c) for any such violations which either
individually or in the aggregate do not have a material
adverse effect on the business or properties of the
Company and its subsidiaries taken as a whole;
d. except for any necessary applications with the National
Association of Securities Dealers Automated Quotation
system with respect to any newly issued shares of Common
Stock which may be issued upon conversion of the Shares,
no approval, authorization or other action by, or filing
(other than such filings of the Company as may be
necessary in connection with any registration for sale of
the common stock that may be issuable upon conversion of
the Shares) with, any government authority is required to
be obtained or made by the Company in connection with the
execution, delivery and performance by the Company of
this Agreement and the consummation of the transactions
contemplated hereby;
e. the Shares have been duly and validly authorized and,
when issued and delivered to and paid for by the Trustee
pursuant to this Agreement, (i) will be validly issued,
fully paid and nonassessable and not liable to any
further call or assessment, (ii) the certificates
representing the Shares comply with the applicable
requirements of Iowa law and (iii) the Trustee will
acquire full right, title and interest in and to the
Shares free and clear of any and all liens, claims,
charges and encumbrances (other than rights of
participants in the Plan);
f. the Company (i) has duly and validly authorized and
reserved for issuance a sufficient number of shares of
Common Stock, as may be issued, from time to time, upon
conversion of the Shares and (ii) such shares of Common
Stock, when issued upon conversion of the Shares in
accordance with the Certificate of Designations, will be
validly issued, fully paid and nonassessable and not
liable to any further call or assessment and will not be
subject to preemptive rights;
<PAGE>
102
g. the Plan has been duly authorized and established, and
the Trust Agreement has been duly authorized, by all
necessary corporate action on the part of the Company;
the Plan constitutes in all material respects in form an
employee stock ownership plan within the meaning of
Section 4975(e)(7) of the Code, Code Regulation Section
54.4975-11 and Section 407(d)(6) of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"); and each of the Shares constitute a qualifying
employer security within the meaning of Section
4975(e)(8) of the Code; provided, however, that in making
the representations contained in this Section 3(g) the
Company has relied upon the correctness of the Trustee's
representations contained in Section 4(f) of this
Agreement;
h. the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 and quarterly reports on Form
10-Q for the quarterly periods ended March 31, June 30,
and September 30, 1995, on the respective dates filed
with the Securities and Exchange Commission ("SEC"),
conformed in all material respects to the requirements of
the Securities Exchange Act of 1934, as amended;
i. no person or other entity is entitled to any fees or
commissions due to the Company's actions in connection
with the purchase and sale of the Shares;
j. the Company shall use its best efforts during the term of
the Trust to cause the Plan to maintain its qualification
as an employee stock ownership plan within the meaning of
Section 4975 of the Code; and
k. the Company has furnished and will continue to furnish to
the Trustee from time to time copies of all reports and
financial statements which the Company shall send or make
available to its public stockholders generally, all other
written communications from the Company to public
shareholders generally and each regular or periodic
report, proxy statement, registration statement or
prospectus, if any, filed by the Company with the SEC;
and
4. The Trustee represents and warrants to the Company as
follows:
a. the Trustee (i) is a duly organized and validly existing
Massachusetts trust company in good standing and with
full power and authority to act as Trustee and exercise
trust powers, including without limitation, the trust
powers provided in and contemplated by the Trust
Agreement, and (ii) has full corporate power and
<PAGE>
103
authority to execute and deliver this Agreement and to
carry out the transactions contemplated hereby;
b. this Agreement has been duly authorized, executed and
delivered by the Trustee and constitutes a valid and
binding obligation of the Trustee, enforceable against
the Trustee in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting
creditors' rights generally and to general principles of
equity (regardless of whether considered in a proceeding
at law or in equity);
c. the execution, delivery and performance of this Agreement
by the Trustee and the consummation of the transactions
contemplated hereby will not violate (i) the Trustee's
Corporate Charter or By-laws, each as amended to date, or
(ii) any provision of any agreement, instrument, order,
award, judgment or decree to which the Trustee is a party
or by which it or any of its businesses or properties are
bound or (iii) any statute, rule or regulation of any
federal, state or local government or governmental agency
applicable to the Trustee except in the case of
subparagraphs (ii) or (iii) of this Section 4(c) for any
such violations which either individually or in the
aggregate do not have a material adverse effect on the
business or properties of the Trustee; provided, however,
that in making the representations contained in clause
(iii) of this Section 4(c), the Trustee has relied upon
the correctness of the Company's representations in
Sections 3(g), as limited by the proviso therein, and
3(i) of this Agreement and (2) the Committee's direction
letter dated December 28, 1995;
d. no approval, authorization or other action by, or filing
with, any governmental authority is required to be
obtained or made by the Trustee in connection with the
execution, delivery and performance by the Trustee of
this Agreement and the consummation of the transactions
contemplated hereby;
e. the Trustee is acquiring the Shares on behalf of the Plan
solely for investment purposes and not with a view to, or
for sale in connection with, any distribution thereof;
provided, however, that the Shares will be allocated to
the accounts of the participants in the Plan pursuant to
the terms of the Plan and distributions may be made to
participants and beneficiaries of the Plan in shares of
Common Stock issuable upon conversion of the Series D
Preferred Stock or payable upon redemption of Series D
Preferred Stock, including upon exercise of the rights
set forth
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104
in Section 7 of the Certificate of Designations, or in
shares of Common Stock otherwise acquired by the Trustee
pursuant to the terms of the Plan, it being understood
that the Shares are being sold to the Trustee pursuant to
an exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Securities
Act"), in reliance upon this representation and warranty;
f. the purchase of the Shares on the Delivery Date by the
Trust for the Purchase Price is for not greater than
"adequate consideration" as that phrase is defined in
Section 3(18) of ERISA, and any proposed regulations
thereunder, and will not constitute a prohibited
transaction under Section 406 of ERISA or Section 4975(c)
of the Code by reason of the exemptions set forth in
Section 408(e) of ERISA and Section 4975(d) (13) of the
Code; provided that in making the representations
contained in this Section 4(f), the Trustee has relied
upon the correctness of the Company's representations
contained in Sections 3(g), as limited by the proviso
therein, and 3(i) of this Agreement as well as the
Valuation Opinion;
g. the Shares purchased by the Trust have a conversion price
which is reasonable as of the date hereof; provided,
however, that in making the representations contained in
this Section 4(g), the Trustee has relied upon the
correctness of the Valuation Opinion; and
h. no person or other entity is entitled to any commissions
due to the Trustee's actions in connection with the
purchase and sale of the Shares.
5. The Trustee hereby (i) acknowledges that the Shares purchased on
behalf of the Trust pursuant to this Agreement may, by their terms, be issued
only to the Trustee or a successor trustee acting on behalf of the Trust, (ii)
acknowledges that the Trust Agreement provides that none of the Series D
Preferred Shares shall be transferred in any manner to participants under the
Plan but in lieu thereof shares of Common Stock shall be distributed to
participants or transferred to the participants' Section 401(k) accounts
pursuant to the terms of the Plan, (iii) acknowledges that the Certificate of
Designations provides that any Shares that are transferred sold or otherwise
disposed of by the Trustee shall be automatically, and without any action on the
part of the Company, converted into shares of Common Stock, and (iv) agrees not
to transfer, sell or otherwise dispose of any of the Shares or other shares of
Series D Preferred Stock or to attempt to do so, except in compliance with the
Trust Agreement. Nothing contained in this Section 5 shall be deemed to restrict
the ability of the Trustee to convert shares of Series D Preferred Stock into
shares of Common
<PAGE>
105
Stock or to require the Company to redeem shares of Series D Preferred Stock, in
each case in accordance with the Certificate of Designations, or the ability of
the Trustee to transfer, sell or otherwise dispose of shares of Common Stock of
the Company issued upon conversion of shares of Series D Preferred Stock or upon
a redemption of shares of Series D Preferred Stock.
6. The Trustee understands that the certificate(s) representing the
Shares will bear the following legend and that a notation restricting their
transfer will be made on the stock transfer books of the Company:
Series D: The shares of Series D preferred stock represented by
this certificate have not been registered under the Securities
Act of 1933, as amended. Such shares of stock may not be sold,
assigned, pledged or otherwise transferred in the absence of an
effective registration statement under said Securities Act
covering such transfer or an opinion of counsel satisfactory to
the issuer that registration under said Securities Act is not
required.
The shares of stock represented by this certificate are subject
to restrictions on transfer set forth in the Certificate of
Designations relating to the Corporation's Series D ESOP
Convertible Preferred Stock and in a Stock Purchase Agreement
dated as December 29, 1995. The Corporation will furnish a copy
of such agreement to the holder of this certificate without
charge upon written request.
7. The Company has at its expense, prepared, filed, and obtained the
effectiveness of, and will use its best efforts to cause to remain effective, a
registration statement on an appropriate form, including a final prospectus (the
"Registration Statement"), under and complying with the Securities Act and the
rules and regulations thereunder, relating to the number of shares of the
Company's Common Stock into which the Shares are from time to time convertible
or as are acquired upon a redemption or repurchase, including a redemption
pursuant to the provisions of Section 7 of the Certificate of Designations, as
shall be necessary, in the opinion of counsel to the Company, for the Trustee to
carry out its responsibilities under the Plan and Trust Agreement. Whenever
shares of Common Stock are so registered, the Company shall also use its best
efforts to register or qualify such shares covered by the Registration Statement
under the "blue sky" or securities laws of such jurisdictions within the United
States as the Trustee may reasonably request; provided, however, that the
Company shall not be required to consent to the general service of process for
all purposes in any jurisdiction where it is not then qualified to do business.
<PAGE>
106
8. The Company agrees that it will use its best efforts to maintain the
qualification of the Plan as an employee stock ownership plan within the meaning
of Section 4975(e)(7) of the Code.
9. The representations, warranties and agreements in this
Agreement shall survive the date hereof and the Delivery Date.
10. This Agreement shall be governed by and construed in accordance
with the laws of the State of Iowa applicable to contracts to be executed,
delivered and performed in such state, to the extent not preempted by the laws
of the United States of America. The parties hereby irrevocably and
unconditionally consent to submit to the exclusive jurisdiction of the courts of
the State of Iowa and the United States of America located in Polk County, Iowa
for any actions, suits or proceedings arising out of or relating to this
Agreement. This Agreement, the Plan and Trust Agreement (including documents
referred to therein or delivered pursuant thereto) set forth the entire
Agreement of the parties with respect to the subject matter contained herein and
supersede all prior oral and written agreements, if any, between the parties
with respect to such subject matter. This Agreement shall bind and inure to the
benefit of all successors to, and assigns of, the parties hereto; provided,
however, that the Trustee shall not assign or otherwise transfer its interest
in, or obligations under, this Agreement without the written consent of the
Company, except that the Trustee may assign, without the Company's written
consent, all its rights hereunder to any institution exercising trust powers in
connection with any such institution assuming the duties of a trustee under the
Trust Agreement. In the event that any provision of this Agreement shall be
declared unenforceable by a court of competent jurisdiction, such provision
shall be stricken herefrom and the remainder of this Agreement shall remain
binding on the parties hereto. In the event any such provision shall be so
declared unenforceable due to its scope or breadth, then it shall be narrowed to
the scope or breadth permitted by law.
11. This Agreement may be executed in two counterparts, each of
which shall be deemed an original, but each of which taken together
shall constitute one and the same instrument.
12. This Agreement may not be modified with respect to the obligations
of a party hereto except by an instrument in writing signed by such party.
13. The terms and provisions of the Trust Agreement relating to the
nature of the responsibilities of the Trustee and the indemnification by the
Company of the Trustee are incorporated herein by reference and made applicable
to this Agreement.
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107
14. All notices, requests, or other communications required or
permitted to be delivered hereunder shall be in writing, delivered to each party
hereto at its address specified in the Trust Agreement and shall become
effective as therein provided. Any party hereto may from time to time, by
written notice given as aforesaid, designate any other address to which notices,
requests or other communications addressed to it shall be sent.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date first above written.
ALLIED GROUP, INC.
By ________________________________
Name ______________________________
Title _____________________________
STATE STREET BANK AND TRUST COMPANY
solely in its capacity as Trustee
under the Plan and Trust Agreement
referred to herein and not
individually
By _________________________________
Name _______________________________
Title ______________________________
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108
Annex A
December 29, 1995
ALLIED Group, Inc.
701 Fifth Avenue
Des Moines, Iowa 50391-2003
Re: The ALLIED Group Employee Stock Ownership Trust
Ladies and Gentlemen:
We have acted as special counsel for State Street Bank and Trust
Company ("State Street"), as trustee (the "Trustee") of The ALLIED Group
Employee Stock Ownership Trust (the "Trust"), which forms a part of the ALLIED
Group Employee Stock Ownership Plan ("Plan"), and which is evidenced by the
Trust Agreement dated April 16, 1991 (the "ESOP Trust Agreement") between
Trustee and ALLIED Group, Inc. (the "Company") in connection with the purchase
by the Trustee of _______ shares Series D ESOP Convertible Preferred Stock of
the Company, no par value (the "Preferred Stock") pursuant to the Stock Purchase
Agreement between the Company and the Trustee dated as of December 29, 1995 (the
"Stock Purchase Agreement"). Capitalized terms used herein that are not defined
herein have the meanings set forth in the Stock Purchase Agreement.
In connection therewith, we have reviewed executed copies of: (i) the
Stock Purchase Agreement; (ii) the ESOP Trust Agreement; (iii) the Certificate
of Designations of Series D ESOP Convertible Preferred Stock of ALLIED Group,
Inc.; (iv) the corporate charter and by-laws of State Street, both as amended to
date; (v) other records, documents, and instruments relating to the powers and
organization of State Street and to State Street's acceptance of fiduciary
duties, obligations and trusts; and (vi) such other certificates and documents
as we have deemed relevant or necessary as a basis for the opinion expressed
below.
In our examination, we have assumed without any investigation (i) the
legal capacity of each natural person, (ii) the full power and authority of each
person other than State Street to execute, deliver and perform its obligations
under each document heretofore executed and delivered or hereafter to be
executed and delivered and to do each other act heretofore done or hereafter to
be done by such person, (iii) the due authorization, execution and delivery by
each person other than State Street of each document heretofore executed and
delivered by such person, (iv) the legality, validity, binding effect and
enforceability as to each person other than State Street of each document
heretofore executed and delivered or hereafter to be executed and delivered and
of each other act heretofore done or hereafter to be done by such person, (v)
the genuineness of each signature other than those of officers of State Street
and the
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109
ALLIED Group, Inc.
December 29, 1995
completeness and authenticity of each document submitted to us as an original,
(vi) the conformity to the original of each document submitted to us as a copy,
(vii) the authenticity of the original of each document submitted to us as a
copy and (viii) no amendment or modification hereafter of any provision of any
document. Insofar as our opinion relates to, or depends on, any matter of fact,
we have relied on representations as set forth in the Stock Purchase Agreement,
and upon written statements and certificates of officers of State Street and of
public officials.
We are members of the Bar of the Commonwealth of Massachusetts and,
accordingly, we express no opinion herein concerning any law other than the laws
of the Commonwealth of Massachusetts and the Federal laws of the United States
of America, to the extent specifically referred to herein.
As used in this opinion with respect to any matter, the qualifying
phrase "to the best of our knowledge" means that, without independent review or
verification, nothing has come to our attention in the course of our performing
legal services for the
Trustee with respect to said matter.
We express no opinion as to matters governed by the Internal Revenue
Code of 1986 (the "Code") or the Employee Retirement Income Security Act of 1974
("ERISA"), both as amended, or federal or state
securities laws.
Based on and subject to the foregoing, we are of the opinion that:
1. State Street, acting solely in its capacity as Trustee, has all
requisite power and authority to execute, deliver and perform its obligations
under the Stock Purchase Agreement.
2. The execution, delivery and performance of the Stock Purchase
Agreement by State Street, as Trustee, will not violate the charter or the
by-laws of State Street or, to the best of our knowledge, any order, judgment or
decree binding on State Street (individually or as trustee).
3. The Stock Purchase Agreement has been duly executed and
delivered by State Street, as Trustee.
4. No authorization, approval or consent of, and no filings or
registrations with, any governmental or regulatory authority or agency are
necessary for the execution, delivery or performance by State Street of the
Stock Purchase Agreement or for the validity or enforceability thereof, except
for filings with the Internal Revenue Service or the Department of Labor which
may from time to time be required by ERISA or the Code.
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110
ALLIED Group, Inc.
December 29, 1995
We express no opinion as to any matter other than as expressly set
forth above, and no other opinion is intended to be implied nor may be inferred
herefrom. The opinions expressed herein are given as of the date hereof and we
undertake no obligation hereby and disclaim any obligation to advise you of any
change after the date hereof pertaining to any matter referred to herein.
Neither this opinion nor any part hereof may be delivered to, used or relied
upon by any person or entity other than you without our prior written consent.
Very truly yours,
------------------------------
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111
Annex B
December 29, 1995
State Street Bank and Trust Company
Legal Division, Q6N
200 Newport Avenue
North Quincy, MA 02171
Ladies and Gentlemen:
I have acted as legal counsel of ALLIED Group, Inc., an Iowa corporation (the
"Company"), and in such capacity I have advised the Company in connection with
The ALLIED Group Employee Stock Ownership Trust (the "ESOP Trust"), a trust
established under that certain Trust Agreement amended and restated as of April
16, 1991 (the "Trust Agreement"), between the Company and State Street Bank and
Trust Company, as trustee (the "Trustee" or "State Street"), which implements
and forms a part of the ALLIED Group Employee Stock Ownership Plan (the "Plan"),
and in connection with the purchase by the Trustee of _______ shares of Series D
ESOP Convertible Preferred Stock of the Company, no par value (the "Preferred
Stock"), pursuant to the Stock Purchase Agreement between the Company and the
Trustee dated December 29, 1995 (the "Stock Purchase Agreement"). Capitalized
terms used herein without definition shall have the meanings ascribed to them in
the Stock Purchase Agreement.
In connection therewith, I have reviewed executed copies of (i) the Stock
Purchase Agreement, (ii) the Certificate of Designations in respect to the
Series D Convertible Preferred Stock (the "Certificate of Designations"), and
(iii) such other certificates and documents as I have deemed relevant or
necessary as a basis for the opinion expressed below.
In such connection, I have assumed the genuineness of all signatures, the
authenticity of all documents submitted to me as originals, the conformity to
original documents of all documents submitted to me as photostatic or certified
copies, and the authenticity of the originals of such copies. I have relied, to
the extent I deem such reliance proper, upon representations made in the
documents and certificates or representations made in writing by duly authorized
representatives of the Company.
In rendering the opinions contained herein, I have assumed that (a) State
Street, as Trustee, has all requisite power and authority to execute, deliver,
and perform its obligations under the Stock Purchase Agreement; (b) that the
execution, delivery, and performance of the Stock Purchase Agreement by State
Street, as Trustee, will not violate the charter or bylaws of State Street; and
(c) that the Stock Purchase Agreement has been executed and delivered by State
Street as Trustee and constitutes the legal, valid, and binding obligation of
the ESOP Trust, enforceable in
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112
December 29, 1995
accordance with its terms, except as enforcement may be limited by (i)
bankruptcy, insolvency, reorganization, or similar laws affecting the
enforcement of creditors' rights generally, or (ii) equitable principles of
general applicability (regardless of whether such enforceability is considered
in a proceeding in equity or law).
I express no opinion with respect to the laws of any jurisdiction other than the
State of Iowa and the United States of America. These opinions are expressed as
of the date hereof and are therefore subject to subsequent interpretive,
regulatory, legislative, and judicial developments.
Based on and subject to the foregoing, I am of the opinion that:
1. The Company is validly existing and in good standing under the
laws of the State of Iowa and has all requisite corporate power
to execute, deliver, and perform the Stock Purchase Agreement.
The Company has taken all necessary corporate action to
authorize the execution, delivery, and performance of the Stock
Purchase Agreement.
2. The Stock Purchase Agreement has been duly executed and
delivered by the Company and is the legal, valid, and binding
agreement of the Company, enforceable against the Company in
accordance with its respective terms, except as the
enforceability thereof may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance,
or similar laws affecting the enforcement of creditors' rights
generally or (ii) equitable principles of general applicability
(regardless of whether such enforceability is considered in a
proceeding in equity or at law).
3. The Preferred Shares have the rights, preferences, and
qualifications set forth in the Certificate of Designations,
have been validly authorized, and upon payment therefor as
provided in the Stock Purchase Agreement, will be validly
issued and outstanding and will constitute fully-paid and
nonassessable shares of Series D Convertible Preferred Stock of
the Company. The shares of the Company's common stock, no par
value ("Common Stock") initially reserved for issuance and to
be issued upon conversion of the Preferred Shares in accordance
with their terms have been duly and validly authorized and are
sufficient in number for conversion of all the Preferred
Shares, and such Common Stock, when so issued upon such
conversion, will be duly and validly issued, fully-paid, and
nonassessable.
4. Upon payment by the Trust as provided in the Stock Purchase
Agreement, the Company will convey to the Trust good and valid
title to the Preferred Shares free and clear of any liens,
claims, security interests, and
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113
December 29, 1995
encumbrances, except for beneficial interests accruing to Plan
participants and their beneficiaries.
5. As of the date hereof, the Plan and the ESOP Trust in form meet
in all material respects (a) the applicable requirements of
Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), (b) the requirements applicable to an employee
stock ownership plan for purposes of Section 4975(e)(7) of the
Code and the regulations promulgated thereunder, and (c) the
requirements for exemption from tax under Section 501(a) of the
Code.
6. The shares of Preferred Stock to be purchased by the ESOP Trust
constitute "employer securities" within the meaning of Section
409(1) of the Code and "qualifying employer securities" within
the meaning of Section 407(d)(5) of ERISA.
7. The shares of Preferred Stock to be purchased by the ESOP Trust
have voting rights equivalent to the common stock into which
such shares may be converted, and the Plan meets the voting
rights requirements of Section 409(e)(2) of the Code with
respect to such shares.
In rendering the foregoing opinions and any other opinions expressed
in this letter, I have relied on the following assumptions:
a. Except as to matters expressly opined on herein, the Plan
and ESOP Trust have been, and will continue to be,
administered and operated at all times strictly in
accordance with their terms and with all requirements of
applicable law including, but not limited to, all of the
requirements applicable to a qualified plan under Section
401(a); the requirements applicable to an "employee stock
ownership plan" (within the meaning of Section
4975(e)(7)) under Section 4975 and 409 of the Code; and
the requirements applicable to a tax-exempt trust under
Section 501(a); and with the provisions of ERISA and all
regulations thereunder.
b. The conversion price at which the shares of Preferred
Stock may be converted to common stock of the Company is
reasonable as of the date of acquisition of such
Preferred Stock by the ESOP Trust.
c. No fiduciary of the Plan has received any consideration
of the type described in Section 4975(c)(1)(F) of the
Code and Section 406(b)(3) of ERISA in connection with
the transactions described herein.
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December 29, 1995
d. The fiduciaries of the Plan and the ESOP Trust have acted
prudently and in good faith, and have given appropriate
consideration to those facts and circumstances that are
relevant to the transactions in accordance with the
fiduciary requirements of part 4 of Title I of ERISA.
In connection with the assumptions made in paragraph (b) above, I understand
that the Trustee has received an opinion from Whitman Heffernan and Rhein Co.,
Inc. to effect that (i) the price to be paid by the ESOP Trust per share of
Preferred Stock is not in excess of fair market value or adequate consideration,
as defined under Title I of the Employee Retirement Income Security Act of 1974,
as amended, including the regulations thereunder ("ERISA"); and (ii) the terms
and conditions of the proposed transaction, including the terms governing the
right to convert the Preferred Stock into Common Stock of the Company, are fair
and reasonable to the ESOP Trust from a financial point of view.
These opinions are rendered solely to the Trustee in connection with the
transactions of the Trustee contemplated by the Stock Purchase Agreement. No
other person, firm, or corporation may rely upon these opinions for any purpose
without my prior written consent.
Yours very truly,
- -------------------------
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115
EXHIBIT 10.7
AMENDED AND RESTATED
MANAGEMENT INFORMATION SERVICES AGREEMENT
Effective January 1, 1995
<PAGE>
116
TABLE OF CONTENTS
Page
----
I. Definitions...........................................................1
Section 1.1 AGI and Its Subsidiaries..........................1
Section 1.2 ALFC and Its Subsidiaries.........................1
Section 1.3 Coordinating Committee............................1
Section 1.4 Licensee..........................................1
Section 1.5 Management Information Services...................1
Section 1.6 Methods/Procedures................................2
Section 1.7 Mutual and Its Subsidiaries.......................2
Section 1.8 PC................................................2
Section 1.9 PC Support........................................2
Section 1.10 Pooling Agreement.................................2
Section 1.11 Pool Participants.................................2
Section 1.12 Programming/Development...........................2
Section 1.13 Software..........................................2
II. Services To Be Performed..............................................3
Section 2.1 General MIS.......................................3
Section 2.2 PC Support........................................3
Section 2.3 PC Maintenance....................................3
Section 2.4 PC Rating Disc Updates............................3
Section 2.5 Agency Automation.................................3
Section 2.6 Flexible Premium Payment Plans....................3
Section 2.7 Printing..........................................4
Section 2.8 Policy Assembly...................................4
Section 2.9 Postage/Mail Processing...........................4
Section 2.10 Supply Services...................................4
Section 2.11 Telephone/Communications..........................4
Section 2.12 Equipment Leasing.................................4
Section 2.13 License of Software...............................5
Section 2.14 Other Services....................................5
Section 2.15 ALIC Rights.......................................6
III. Payment For Services..................................................6
Section 3.1 General...........................................6
Section 3.2 Fees..............................................6
IV. Term, Termination, and Change of Control..............................6
Section 4.1 Term and Termination..............................6
Section 4.2 Change of Control of ALFC.........................6
Section 4.3 Change of Control of AGI..........................7
V. Dispute Resolution....................................................7
Section 5.1 AGI and Its Subsidiaries..........................7
Section 5.2 Mutual and Its Subsidiaries.......................8
Section 5.3 ALFC and Its Subsidiaries.........................8
Section 5.4 All Other Disputes................................8
Section 5.5 Arbitration.......................................8
VI. Confidential Information and Trade Secrets............................9
Section 6.1 Obligation to Keep Confidential ..................9
VII. Miscellaneous........................................................10
Section 7.1 Assignment.......................................10
Section 7.2 Waiver; Remedies.................................10
Section 7.3 Permissive Release of Confidential Information...10
Section 7.4 Notices..........................................11
Section 7.5 Governing Law....................................11
Section 7.6 Enforceability...................................11
Section 7.7 Survival of Representations, Warranties,
and Covenants....................................11
Section 7.8 Counterparts ....................................11
Section 7.9 Headings.........................................11
Section 7.10 Entire Agreement.................................11
Section 7.11 Amendments.......................................12
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117
Signature Page...............................................................13
Addendum A
Addendum B
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118
AMENDED AND RESTATED
MANAGEMENT INFORMATION SERVICES AGREEMENT
THIS AGREEMENT is made as of this ____ day of December, 1995, to be
effective January 1, 1995, by and among ALLIED Group Information Systems, Inc.
("AGIS"), ALLIED Mutual Insurance Company ("Mutual"), ALLIED Group, Inc.
("AGI"), AMCO Insurance Company ("AMCO"), ALLIED General Agency Company ("AGA"),
ALLIED Group Mortgage Company ("AGMC"), ALLIED Group Leasing Corporation
("AGLC"), ALLIED Life Financial Corporation ("ALFC"), ALLIED Life Insurance
Company ("ALLIED Life"), ALLIED Life Brokerage Agency ("ALBA"), ALLIED Group
Merchant Banking Corporation ("AGMBC"), and ALLIED Group Insurance Marketing
Company ("AGIMC"). Mutual, AGI, AMCO, AGA, AGMC, AGLC, ALLIED Life, ALBA, ALFC,
AGMBC, and AGIMC shall be hereinafter referred to collectively as the
"Companies".
WITNESSETH:
WHEREAS, the Companies and AGIS entered into an Amended and Restated
Management Information Services Agreement effective January 1, 1994 (the
"Agreement") on February 27, 1995; and
WHEREAS, the parties desire to amend and restate the terms of the
Agreement to update the fees and other services that AGIS is providing to the
Companies for the 1995 calendar year.
NOW, THEREFORE, in consideration of the foregoing premises, and for and
in consideration of the mutual covenants and agreements contained herein, the
parties agree as follows:
I. DEFINITIONS
1.1. "AGI and Its Subsidiaries" shall mean the following companies which
are parties to this Agreement: AGI, AMCO, AGA, AGMC, AGLC, and AGIS.
1.2 "ALFC and Its Subsidiaries" shall mean the following companies which
are parties to this Agreement: ALFC, ALLIED Life, ALBA and AGMBC.
1.3. "Coordinating Committee" shall mean the joint meeting of the
coordinating committees established by Mutual, AGI, and ALFC in accordance with
their respective bylaws or pursuant to resolution for the purpose, among others,
of resolving issues under this Agreement.
1.4 "Licensee" shall mean AMCO.
1.5. "Management Information Services" or "MIS" shall mean the
Programming/Development, Methods/Procedures, processing, and support of all
insurance-related information and data functions, including, but not limited to,
policy processing, claims processing, data processing, accounting, billing,
rating, marketing, recordkeeping, statistical and regulatory reporting, and
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119
insurance-related services necessary or helpful in the operation of the
Companies. MIS does not include: (a) third-party data processing services
provided to any of the Companies by contract; (b) processing flexible premium
payment plans; or (c) printing services, unless otherwise provided herein.
1.6. "Methods/Procedures" shall mean studies or work flow analysis,
training on software systems, and other computer support.
1.7. "Mutual and Its Subsidiaries" shall mean the following companies
which are parties to this Agreement: Mutual and AGIMC.
1.8. "PC" shall mean personal computer.
1.9. "PC Support" shall mean PC installation, training, and assistance,
but shall not include PC maintenance.
1.10. "Pooling Agreement" shall mean the Second Amended and Restated
Reinsurance Pooling Agreement dated December 14, 1992, as amended February 18,
1993, pursuant to which AMCO as the pool administrator provides certain services
to Mutual, ALLIED Property and Casualty Insurance Company, and Depositors
Insurance Company.
1.11. "Pool Participants" shall mean AMCO, Mutual, ALLIED Property and
Casualty Insurance Company, and Depositors Insurance Company.
1.12. "Programming/Development" shall mean the analysis, design,
programming, and development of PC and mainframe Software and shall include
mainframe Software consulting and maintenance services. The maintenance services
shall include, but not be limited to, error corrections, enhancements, and
updates. Programming/Development shall not include those programming functions
performed by any of the Companies on personal computers, which are generally
limited to actuarial functions, unique branch office recordkeeping requirements,
and internal accounting reports.
1.13. "Software" shall mean any and all computer programs, models,
plans, outlines, packages, or systems thereof and related documentation or
manuals as developed, or which may be developed in the future by AGIS, and used
by the Companies for MIS, but does not include those computer programs which are
used by any of the Companies pursuant to license agreements with third parties.
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120
II. SERVICES TO BE PERFORMED
2.1. General MIS. AGIS shall provide all MIS required by AMCO, ALLIED
Life, AGI's human resources department, and AGIMC. The MIS to be provided during
the term of this Agreement shall be substantially the same as those services
presently provided to or utilized by AMCO, ALLIED Life, AGI's human resources
department, and AGIMC as of the effective date of this Agreement. In addition,
AGIS shall provide MIS to any of the Companies if requested by such Companies.
The scope and extent of MIS provided under this Agreement may be amended or
modified from time to time by written agreement between AGIS and the party
receiving the MIS.
2.2. PC Support. AGIS shall provide PC Support to AMCO, ALLIED Life,
ALBA, AGI's human resources department, AGA, AGMC, AGLC, AGMBC, and AGIMC. AGIS
shall also provide AGIMC with PC Support for its phone system.
2.3. PC Maintenance. AGIS will assist in coordinating with each of the
Companies for third-party vendor maintenance on the personal computers, and each
of the Companies shall be responsible for payment to such third-party vendor.
2.4. PC Rating Disc Updates. AGIS shall provide to AMCO custom software
updates to the branch office PC rating discs.
2.5. Agency Automation. AGIS shall provide to AMCO access to data
processing on an automated management and accounting ("AMANDA+") data processing
system which will be offered by the Pool Participants to certain of their
insurance agencies until December 31, 1995 and AGIS and the Pool Participants
will negotiate, in good faith, fees applicable to this continued service.
2.6. Flexible Premium Payment Plans. AGIS shall perform the processing,
billing, scanline, and remittance services with regard to the flexible premium
payment plan offered by the Pool Participants to their insureds. All service
charges and reinstatement fees assessed to insureds pursuant to the flexible
premium payment plan shall be retained by the Pool Participants. AGIS also shall
perform the remittance services for the Motor Club of Iowa Insurance Company
pursuant to the Assumption Reinsurance Agreement between AMCO and the Motor Club
of Iowa Insurance Company. It is contemplated that AMCO may enter similar
agreements with other insurance companies for which AGIS will perform
processing, billing, scanline, or remittance services for these other insurance
companies, and AGIS agrees to provide such services provided that AMCO obtains
AGIS' written consent prior to entering such agreements. AMCO shall be
responsible for payment to AGIS for the services rendered with respect to the
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121
flexible premium payment plan and the remittance services for the Motor Club of
Iowa Insurance Company and other insurance companies which may be provided these
services as contemplated above.
2.7. Printing.
(a) Forms and Reports. AGIS shall generate the following data and
record output for AMCO and ALLIED Life: (i) policy forms, (ii) claim forms,
(iii) billing forms, and (iv) internal reports not generated by personal
computers. AGIS shall generate internal reports for AGI's human resources
department which cannot be generated by personal computers.
(b) Typesetting and Other Printing. AGIS shall provide typesetting
services to such Companies requesting typesetting services. Any other printing
services including, but not limited to, specialty printing or brochures, shall
be provided by AGIS to the Companies, or any of them, if requested.
2.8. Policy Assembly. AGIS shall provide policy assembly for AMCO and
ALLIED Life. The policy assembly shall include the preparing, handling, and
mailing of insurance policies.
2.9. Postage and Mail Processing. AGIS shall provide mail processing for
the offices of the Companies which are located in Polk County, State of Iowa.
This mail processing shall include internal and external distribution of mail
among such Companies and to the proper post office facilities and may include
inserting and sorting mail services.
2.10. Supply Services. For those Companies which desire to use the
supply service, AGIS shall administer and manage the storage, warehousing, and
distribution of the inventory of office supplies owned by such Companies. The
supply service provided by AGIS shall include, but not be limited to, the
ordering of paper used in processing forms for AMCO and ALLIED Life.
2.11. Telephone and Communications. AGIS shall provide telephone
equipment, long-distance communication services, or both, for such Companies
requesting equipment and/or service upon mutually agreeable terms and
conditions. AGIS shall also provide computer and telephone port access to those
Companies which office at 701 Fifth Avenue, Des Moines, Iowa.
2.12. Equipment Leasing. AGIS shall lease to each of AMCO, ALLIED Life,
AGI, and AGIMC certain electronic data processing equipment as agreed to by the
parties and under such specific lease term and fees as follows:
(a) Reports will be given to AMCO, ALLIED Life, AGI, and AGIMC by
AGIS on a monthly basis which shall identify the items of equipment
subject to the lease (the "Equipment"). For each item of Equipment, the
report shall specify any serial or model number, the term of the lease,
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122
the monthly lease fee, the Equipment location, and the amount of lease
deposit, if any.
(b) AGIS shall be responsible for the installation of the
Equipment and for the coordination of any movement of such Equipment.
(c) AMCO, ALLIED Life, AGI, and AGIMC shall notify AGIS if there
is a change in the location of each piece of leased Equipment.
(d) AMCO, ALLIED Life, AGI, and AGIMC shall be responsible for the
use and maintenance of the Equipment and shall bear all risks of loss,
theft, damage, or destruction of the Equipment.
(e) The Equipment shall have no warranties, and AGIS supplies the
Equipment "as is".
(f) At the expiration of the lease term for each item of
Equipment, the lease term will automatically extend on a month-to-month
basis unless AMCO, ALLIED Life, AGI, or AGIMC provide AGIS with 30 days
written notice of termination for identified equipment.
(g) After the expiration of the lease term for each item of
Equipment, AMCO, ALLIED Life, AGI, and AGIMC shall promptly return to
AGIS the Equipment unencumbered and in the same operating order, repair,
condition, and appearance as when received (excepting only reasonable
wear and tear resulting from proper use).
(h) This lease may be assigned and may be terminated by AMCO,
ALLIED Life, AGI, and AGIMC with thirty (30) days written notice.
(i) This lease shall be construed and interpreted under the laws
of the State of Iowa.
2.13 License of Software. AGIS shall license Software to the Licensee
pursuant to the License Agreement effective January 1, 1993 which is
incorporated into this Agreement and is included as Addendum A hereto. AGIS
recognizes that AMCO, the Pool Participants, Motor Club of Iowa Insurance
Company, and other third-party insurance companies which AMCO may enter into
agreements with and AGIS may consent to, will utilize the Software set forth in
Addendum A. In the event of a termination of this Agreement, the License
Agreement will continue in effect in perpetuity.
2.14. Other Services. Any other services provided by AGIS to the
Companies, or any of them, shall be negotiated between AGIS and such company on
such terms and conditions as are mutually agreeable.
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123
2.15. ALIC Service Rights. AGIS shall have a right of first refusal to
provide MIS to ALIC. Prior to ALIC obtaining MIS from a source other than AGIS,
ALIC shall present its requirements to AGIS in the form of a specifications
sheet which will include a description of the services requested and a pricing
target or range, and AGIS shall within 30 days (i) provide the MIS as specified
by ALIC at the pricing target or within the range or (ii) decline in writing to
provide the MIS. If AGIS declines in writing to provide the MIS, ALIC shall be
entitled to seek and obtain such MIS from whatever source available.
III. PAYMENT FOR SERVICES
3.1. General. The fees described in this Article III may be renegotiated
in the future at the agreement of the affected parties. The amount of the
renegotiated fee to be paid by any of the Companies shall reflect any market
prices charged by AGIS under agreements with, or available to the Companies
from, unaffiliated third parties for similar services; provided, however, that
the services requested and provided to the Companies under this Agreement and
contracted to or available from unaffiliated third-party purchasers of AGIS'
services are reasonably comparable. If there are no unaffiliated third-party
comparisons available, the fees shall be renegotiated on an arm's length basis.
3.2. Fees. The Companies shall pay the fees set forth in Addendum B to
this Agreement.
IV. TERM, TERMINATION, AND CHANGE OF CONTROL
4.1. Term and Termination. This Agreement shall be effective on January
1, 1995 and shall continue in effect until December 31, 2004, and shall continue
thereafter unless prior to December 31, 2002, a party to this Agreement delivers
to the other parties a written notice that such party intends to cease
participation and terminate the Agreement as to it on December 31, 2004 or as of
a specified date thereafter. This Agreement may be terminated by a party to this
Agreement, as to such party's participation in the Agreement, effective after
December 31, 2004, provided that such party has given written notice of
termination to the others at least two (2) years prior to the proposed
termination date. In the event of a termination of this Agreement, the License
Agreement will continue in effect in perpetuity.
4.2. Change of Control of ALFC. In the event of a Change of Control (as
hereinafter defined in this section) of ALFC, either Mutual or AGI may, in its
sole discretion, at any time after such Change of Control: (i) terminate the
Intercompany Operating Agreement ("IOA Agreement") and this Agreement upon six
(6) months notice to ALFC; (ii) extend the term of the IOA Agreement and this
Agreement for up to ten (10) additional years beyond December 31, 2004 upon six
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124
(6) months notice to ALFC; or (iii) allow such agreements to continue in effect.
"Change of Control" for purposes of this section shall mean an event whereby a
person, group, or entity that is not affiliated with ALFC or Mutual acquires the
ownership of 50% or more of the voting stock of ALFC. A person, group, or entity
"affiliated" with ALFC or Mutual shall mean a person, group, or entity that
directly or indirectly through one or more intermediaries controls, is
controlled by, or is under common control with ALFC or Mutual.
4.3 Change of Control of AGI.
(a) In the event of a Change of Control (as hereinafter defined in this
section) of AGI, Mutual may, in its sole discretion, at any time after such
Change of Control: (i) terminate all three of the Pooling Agreement, IOA
Agreement, and this Agreement upon six (6) months notice to AGI; (ii) extend the
term of the Pooling Agreement, IOA Agreement, and this Agreement for up to ten
(10) additional years beyond December 31, 2004 upon six (6) months notice to
AGI; or (iii) allow such agreements to continue in effect. "Change of Control"
for purposes of this section shall mean an event whereby a person, group, or
entity that is not affiliated with AGI or Mutual acquires the ownership of 50%
or more of the voting stock of AGI. A person, group, or entity "affiliated" with
AGI or Mutual shall mean a person, group, or entity that directly or indirectly
through one or more intermediaries controls, is controlled by, or is under
common control with AGI or Mutual.
(b) In the event of a Change of Control (as hereinafter defined in this
section) of AGI, ALFC may, in its sole discretion, at any time after such Change
of Control: (i) terminate both the IOA Agreement and this Agreement upon six (6)
months notice to AGI; (ii) extend the term of the IOA Agreement and this
Agreement for up to ten (10) additional years beyond December 31, 2004 upon six
(6) months notice to AGI; or (iii) allow such agreements to continue in effect.
"Change of Control" for purposes of this section shall mean an event whereby a
person, group, or entity that is not affiliated with AGI or Mutual acquires the
ownership of 50% or more of the voting stock of AGI. A person, group, or entity
"affiliated" with AGI or Mutual shall mean a person, group, or entity that
directly or indirectly through one or more intermediaries controls, is
controlled by, or is under common control with AGI or Mutual.
V. DISPUTE RESOLUTION
5.1. AGI and Its Subsidiaries. Any controversy, claim, or dispute
arising out of or relating to this Agreement, or breach thereof, among or
between AGI and Its Subsidiaries shall be resolved by AGI's Board of Directors,
the decision of which shall be binding.
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125
5.2. Mutual and Its Subsidiaries. Any controversy, claim, or dispute
arising out of or relating to this Agreement, or breach thereof, among or
between Mutual and Its Subsidiaries shall be resolved by Mutual's Board of
Directors, the decision of which shall be binding.
5.3. ALFC and Its Subsidiaries. Any controversy, claim, or dispute
arising out of or relating to this Agreement, or breach thereof, among or
between ALFC and Its Subsidiaries shall be resolved by ALFC's Board of
Directors, the decision of which shall be binding.
5.4. All Other Disputes. All other disputes under this Agreement shall
be referred for resolution to the Coordinating Committee. Each of the
coordinating committees of Mutual, AGI, and ALFC (a) has the right to
participate in each and every Coordinating Committee deliberation unless it
elects to abstain therefrom and (b) has one vote which shall be cast for or
against any such decision unless it elects to abstain. Each such coordinating
committee shall be comprised of two persons, one of whom shall constitute a
quorum for the transaction of any business. All decisions of the Coordinating
Committee must be unanimous, except for abstentions. All decisions of the
Coordinating Committee are binding on the parties hereto.
5.5. Arbitration. If a controversy, claim, or dispute cannot be resolved
by the Coordinating Committee pursuant to Section 5.4, then it will be submitted
to 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.
<PAGE>
126
(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.
(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.
VI. CONFIDENTIAL INFORMATION AND TRADE SECRETS
6.1. Obligation to Keep Confidential.
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127
(a) 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.
(b) Upon termination of this Agreement for any reason whatsoever
each party shall promptly surrender and deliver to each other party all records,
materials, equipment, drawings, documents, data, and all Confidential
Information of the other parties and shall not retain any description containing
or pertaining to any Confidential Information of the other parties, unless
otherwise consented to in writing by a duly authorized officer of the other
party.
VII. MISCELLANEOUS
7.1. 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.
7.2 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.
7.3 Permissive Release of Confidential Information. Notwithstanding the
provisions of Section VI 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
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128
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.
7.4 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 7.4, 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 7.4.
7.5 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.
7.6 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
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.
7.7 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.
7.8 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.
7.9 Headings. The headings in the sections and subsections of this
Agreement are inserted for convenience only and shall not constitute a part
hereof.
7.10 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
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129
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.
7.11 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.
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130
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Management Information Services Agreement to be signed by their
duly-authorized officers all as of the date and year first written above.
ALLIED Mutual Insurance Company ALLIED Group, Inc.
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2000 Des Moines, IA 50391-2000
By:S/S Douglas L. Andersen By:S/S Jamie H. Shaffer
------------------------------- -------------------------------
Title: President Title: President
--------------------------- ---------------------------
AMCO Insurance Company ALLIED General Agency Company
701 5th Avenue 701 5th Ave.
Des Moines, IA 50391-2013 Des Moines, IA 50391-2002
By:S/S Douglas L. Andersen By:S/S Thomas K. Fever
------------------------------- -------------------------------
Title: President Title: Vice President
--------------------------- ---------------------------
ALLIED Life Financial ALLIED Group Leasing Corporation
Corporation
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2003 Des Moines, IA 50391-2015
By:S/S Samuel J. Wells By:S/S Jamie H. Shaffer
------------------------------- -------------------------------
Title: President Title: President
--------------------------- ---------------------------
ALLIED Group Mortgage Company ALLIED Life Insurance Company
1701 48th St. 701 5th Ave.
West Des Moines, IA 50391-2009 Des Moines, IA 50391-2003
By:S/S Rolland K. Riley By:S/S Samuel J. Wells
------------------------------- -------------------------------
Title: President Title: President
--------------------------- ---------------------------
ALLIED Group Merchant Banking ALLIED Group Insurance
Corporation Marketing Company
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2003 Des Moines, IA 50391-2010
By:S/S Paul G. McGillivray By:S/S William G. Stevenson
------------------------------- -------------------------------
Title: President Title: President
--------------------------- ---------------------------
ALLIED Group Information ALLIED Life Brokerage Agency
Systems, Inc.
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-1002 Des Moines, IA 50391-2003
By:S/S Bob O. Myers By:S/S Samuel J. Wells
------------------------------- -------------------------------
Title: President Title: President
--------------------------- ---------------------------
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ADDENDUM A
LICENSE OF SOFTWARE
This Computer Software License Agreement ("Agreement") between ALLIED Group
Information Systems, Inc. ("AGIS") and AMCO Insurance Company ("Licensee") shall
be effective January 1, 1993.
1. Definitions.
1.1. "Distribution" or "to distribute" means any act or failure to act
by Licensee, its employees, or its agents which violates accepted business
practices for protecting the confidentiality of computer software and which
results, directly or indirectly, in the possession of the Software Product by
any person(s) or entity(ies) other than AGIS or Licensee for any purpose other
than Licensee's business operations.
1.2. "Documentation" means the written description of a computer program
in the form of a manual(s) which shall accompany the Program in order to assist
the Licensee.
1.3. "Mainframe Computer" means a large computer occupying a specially
air-conditioned room and supporting typically 100-500 users at a time.
1.4. "Object Code" means the Program after compilation or interpretation
and in a form understandable only to a computer unless disassembled.
1.5. "Personal Computer" means a computer designed to be used by only
one person.
1.6. "Program" means the computer programs and modules thereof in Source
Code. A "computer program" is an organized set of instructions developed for the
purpose of causing a computer to accomplish a desired result or outcome by
acting on data.
1.7. "Reproduction" or "to reproduce" means to make copies of the Source
or Object Code version of the Software Product for purposes of "distribution".
Reproduction shall include the making of copies of the Software Product in any
form currently used in the industry or in any form which may be developed.
1.8. "Software Product" means the Program(s) listed in Paragraph 3 and
the Documentation, collectively, in the form in which it is distributed to
Licensee.
1.9. "Source Code" means the Program when written in human
understandable form in a higher level computer language.
1.10. All terms used herein are defined in the Management Information
Services Agreement dated August 25, 1993 ("MIS Agreement"), and shall have the
meaning therein attributed to them unless they are defined otherwise herein,
whether or not the MIS Agreement has been terminated.
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2. Grant of License. AGIS hereby grants to Licensee a non-exclusive right to use
the Software Product specifically set forth in Paragraph 3 herein for the
purposes of Licensee's business operations. As used in this Agreement,
Licensee's "business operations" shall mean the corporate business activities of
Licensee and its affiliates inclusive of its arrangement with Motor Club of Iowa
Insurance Company and other insurance companies which Licensee and AGIS agree in
writing shall be allowed access to the Software Product. Such business
operations shall expressly include use of the Software Product by Pool
Participants' insurance agents via the AMANDA+ program and by Licensee in its
position as administrator of the Pooling Agreement. AGIS and Licensee
acknowledge that full and adequate consideration for the granting of the license
has been provided to AGIS pursuant to the Asset Transfer Agreement dated
December 31, 1986, the Management Information Services Agreement dated December
31, 1986 (as amended from time to time), and among other things, the assistance
of Pool Participants' employees to AGIS programmers in the development of the
Software Product licensed hereunder. AGIS and Licensee further acknowledge that
it was the intent of the parties to the Asset Transfer Agreement and the
Management Information Services Agreement, both dated December 31, 1986, that
AGIS provide a perpetual license of the Software Product to AMCO and the other
Pool Participants.
3. Software Product Licensed. The Software Product referenced in said Agreement
shall consist of the following Programs:
<TABLE>
<S> <C> <C>
ABC DAILY EDIT AND BALANCE MICROFILM INDEXING
ACCOUNTING REPORTING DIRECT MARKETING MOTOR VEHICLE REPORT
SYSTEM ACCOUNT PAK CONTROL
ADVICE/REVIEW DIVIDENDS PAYROLL
AGENCY PROCESSING GUIDES DRAFT LOG SYSTEM PERSONAL AUTO
AGENCY PRODUCTION DRAFT RECONCILIATION PERSONNEL
AGENTS ACCOUNT CURRENT DWELLING FIRE PLANNING DEPARTMENT
AGENTS CONTEST ENDORSEMENT TEXT FILE PLEASURE BOATOWNERS
AGENTS MASTERFILE EXPENSE REPORTING POLICY ENTRY
AGENTS STATEMENT AND EXPERIENCE RATING POLICY EXPIRATIONS
AGING SYSTEM POLICY REGISTER
ALPHA SEARCH EXPIRATIONS PROCESS CASH/SUSPENSE
AMANDA PLUS FARM PROCESSING SUSPENSE AND
ASSIGNED RISK FLEX BILLING CASH PRODUCTIVITY
BALANCING SYSTEM FLEXIBLE BENEFITS INFORMATION DEPARTMENT
BONDS FORM LETTER GENERATOR PROFIT SHARE
BUREAU AND STATISTICAL FORMATION PROMPTING
BUSINESSOWNERS FORMS AND PRINTING RECORDS MANAGEMENT
CASH CONCENTRATION FUND FREEDOM PACKAGE RECREATIONAL VEHICLE
CASH DISBURSEMENT GENERAL LIABILITY REINSURANCE
CBI GROUP 1 REMINDER/REMARKS
CERTIFICATE SYSTEM HOMEOWNERS SAFETY MANAGEMENT
CHECK RECONCILIATION HUMAN RESOURCES STATISTIC CLASS MASTER
CLAIMS REPORTS INLAND MARINE STATUTORY AND FINANCIAL
CLAIMS INPUT/OUTPUT MODULES SURETY BOND BILLING
CODE CARD ENTRY INTERNAL REVENUE SYSM
CODING MANUAL AND BUREAU INVENTORY AND SUPPLY TABLE SYSTEM
COMMERCIAL AUTO MANAGEMENT EXPERIENCE TELEMARKETING
COMMERCIAL PROPERTY REPORTS UNDERWRITING
CORRESPONDENCE SYSTEM MANUAL POLICY WORKMAN'S COMPENSATION
CRIME PROCESSING ASSIGNED RISK
CROP SYSTEM ENTRY MARK IV PROGRAMS
MARKETING REPORTING
MCIIC
</TABLE>
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133
Licensee will be provided the aforementioned Software Product for use on
both the Mainframe Computer and Personal Computer. Licensee will be provided the
Source Code for the Mainframe Computer and the Object Code for the Personal
Computer.
4. Updates, Corrections, Modifications. AGIS shall provide Licensee with the
correction, modification, improvement, enhancement, upgrade, and update of the
Software Product in consideration for payment of the Annual Product
Support/Maintenance Fee of $250,000 on the first business day of each year in
order to obtain all enhancements and upgrades made to the Software Product for
that year.
5. Taxes. In addition to the payments provided for herein, Licensee shall pay
any excise, sales, use, privilege, or other similar taxes levied or based upon
payments made pursuant to this Agreement.
6. AGIS' Warranties. AGIS warrants that it is the sole owner of all rights to
the Software Product and has full and unrestricted authority to copyright it and
to enter into this Agreement, that the Software Product is an original work, and
that it has not previously entered into a contract involving this work which
would prohibit this Agreement. AGIS warrants further that the Software Product
has not been assigned, transferred, or otherwise encumbered, that the Software
Product does not infringe upon any copyright, patent, or trade secret of any
third party, and that the Programs reasonably conform to Documentation. All
warranties set forth herein shall be null and void in the event Licensee makes
unauthorized use of or an unauthorized modification to the Software Product. THE
WARRANTY PROVIDED HEREIN IS IN LIEU OF ANY AND ALL WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
7. Limitation of Liability. AGIS will defend, indemnify, and hold Licensee
harmless against all claims, costs, damages, and expenses, including attorney's
fees, that Licensee may sustain or incur by reason of an infringement or other
similar violation by the Software Product of any copyright, patent, or
trademark. AGIS and Licensee agree to notify each other promptly of any third
party claim and to fully cooperate in the defense thereof. Notwithstanding the
foregoing, it is expressly agreed and understood that AGIS shall not be liable
for any direct, indirect, incidental, consequential, or similar damages or for
lost data or profits to Licensee or any other entity or person which arise from
Licensee's use of the Software Product. Licensee shall indemnify and hold AGIS
harmless against any such damages, including attorney's fees, which arise from
Licensee's use of the Software Product. Licensee further acknowledges and agrees
that AGIS' liability to Licensee under this Agreement shall not exceed and shall
be limited to, regardless of Licensee's damage or injury, the total amount
received by AGIS under this Agreement.
8. Prohibited Use. Licensee agrees that it shall not create software that
emulates the functionality of the Software Product. Licensee further agrees that
it shall not reverse engineer the Software Product by decompilation and
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134
disassembly. It is expressly understood and agreed that the reproduction or
distribution of the Software Product, Source Code, Object Code, or any copy
thereof by Licensee is strictly prohibited at any time.
9. Copying. Licensee may copy the Software Product or any part thereof at
Licensee's cost for the sole purpose of Licensee's business operations and
disaster recovery; provided, however, that Licensee shall have sole
responsibility for insuring that no distribution of any such copy occurs. All
copies shall display all copyright notices and be labeled externally as the
property of AGIS. The use of any copies is subject to the terms and conditions
of this Agreement. Licensee shall keep an accurate and complete record of all
such copies made.
10. Use with Multiple Computers or Terminals. Licensee may use the Software
Product on any computer(s) or terminals it deems necessary. Licensee shall have
the right to make back-up copies of the Mainframe Computer Source Code and any
number of copies of the Personal Computer Object Code and Documentation, if any.
11. Third-Party Processing. It is expressly understood and agreed that Licensee
shall not use the Software Product for any transaction which does not involve
its business operations. It is further expressly understood and agreed that
Licensee's business operations as described in Paragraph 2 herein shall not
include, without AGIS' express written consent, any use of the Software Product
for the purpose of any transaction (1) undertaken for a fee or other
consideration which is not contemplated herein or (2) which is not reasonably
related to Licensee's business operations.
12. Proprietary Rights and Nondisclosure. Licensee hereby acknowledges the
proprietary status of the Software Product, including, but not limited to, trade
secret, copyright and trademark interests. The Software Product embodies
substantial creative efforts and contains trade secrets comprised of
confidential information, ideas, and expressions, including, but not limited to,
specific design and structure of the individual Programs. Access to the Software
Product by Licensee employees and agents shall be limited to a need-to-know
basis, and Licensee shall use reasonable means, in any event not less than that
used to protect Licensee's own proprietary materials, to safeguard the
confidential status of the Software Product. Licensee acknowledges that
unauthorized disclosure of the Source Code will cause material damage to AGIS.
Licensee recognizes that a substantial piracy problem exists in the software
industry. Licensee shall notify AGIS of any instance of illegal copying of AGIS
products which comes to its attention and shall assist in prosecuting any
infringers.
13. Source Code. AGIS shall make available to Licensee without charge the Source
Code for the Software Product set forth in Paragraph 3 herein.
14. Term. This Agreement shall survive the termination of the MIS Agreement and
continue in perpetuity.
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135
15. Amendments. Any changes to this Agreement and further obligations of the
parties to each other must be in writing and executed by their respective duly
authorized officers.
16. Arbitration.
(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 either party hereto delivered to the other party. 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 each party selects a Party Arbitrator, the three Party Arbitrators
selected shall constitute the Arbitrators without further selection.
(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.
(c) Expenses; Location. Each party to the dispute shall bear the
expenses of its respective Party Arbitrator and 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.
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(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.
17. 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 party. 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.
18. 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 Paragraph
16 of this Agreement.
19. Permissive Release of Confidential Information. Notwithstanding the
provisions of Paragraph 13 of this Agreement, any proprietary 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.
20. 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 ALLIED Group Information Systems at 3820 109th Street, Urbandale,
Iowa 50391-1001 and to AMCO Insurance Company at 701 5th Avenue, Des Moines,
Iowa 50391-2013. Any notice given as provided in this Paragraph 20, 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 Paragraph 20.
21. 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.
22. Enforceability. If any one or more of the covenants, agreements, provisions,
or other terms of this Agreement shall be for any reason whatsoever determined
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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
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.
23. Survival of Representations, Warranties and Covenants. All covenants,
representations, and warranties made in this Agreement by any of the parties
hereto shall be effective on the effective date hereof and thereafter.
24. 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.
25. Headings. The headings in the sections and subsections of this Agreement are
inserted for convenience only and shall not constitute a part hereof.
26. 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 transaction 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.
Agreed to and effective as of the date set forth above.
ALLIED Group Information AMCO Insurance Company
Systems, Inc.
By:___________________________ By____________________________
Title:________________________ Title:________________________
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ADDENDUM B
I. AMCO. AMCO, as administrator of the Pooling Agreement, shall reimburse
AGIS for its Net Operating Costs in exchange for AGIS providing
AMCO the services under this Agreement. AGIS' Net Operating Costs, as
used in this Agreement, is the difference between all costs AGIS incurs
on a monthly basis less the sum of income AGIS accrues on a monthly
basis from providing services to all companies other than AMCO as
administrator of the Pooling Agreement. In order to reimburse AGIS for
its Net Operating Costs, AMCO will forward to AGIS $1,000,000 on the
first of each month and $600,000 on the fifteenth of each month. At the
end of each month, AGIS will either bill AMCO if the amount forwarded
does not cover the Net Operating Costs or credit AMCO if the amount
forwarded exceeds the Net Operating Costs. AMCO will promptly pay AGIS
any bill it incurs hereunder and AGIS will promptly pay AMCO any credit
it incurs hereunder. AMCO shall incur no other charges for services
under this Agreement.
II. ALLIED Life. ALLIED Life shall pay AGIS on a monthly basis fees for
services under this Agreement in accordance with the following:
(a) $37.50 per hour for Programming/Development time and
Methods/Procedures time.
(b) For the services provided under Section 2.12 ("Equipment
Leasing"), lease payments shall be made by ALLIED Life monthly
upon receipt of a bill from AGIS. The interest rate used to
calculate the lease payments shall be 2 basis points over the
T-bill rate adjusted quarterly. At the expiration of the lease
term for each item of Equipment, ALLIED Life may elect to continue
using the Equipment at no charge.
(c) ALLIED Life shall also pay fees in accordance with Sections VI
through X of this Addendum.
(d) ALLIED Life shall reimburse AGIS for the actual costs AGIS incurs
on a monthly basis for providing ALLIED Life the services provided
under Sections 2.1 ("General MIS"), 2.2 ("PC Support"), 2.7 (a)
("Printing--Forms and Reports"), and 2.8 ("Policy Assembly"). In
order to reimburse AGIS for the cost of these services, ALLIED
Life will forward $56,250 at the end of each month as an
estimation of the costs of providing the services for that month.
(e) At the end of the calendar year, AGIS will calculate its actual
cost of providing these services and compare it to the monthly
payments forwarded to AGIS for the services by ALLIED Life. If the
total actual costs exceed the total monthly payments made, ALLIED
Life will promptly pay the difference to AGIS. If the total actual
costs are less than the total monthly payments made, AGIS will
promptly refund the difference to ALLIED Life.
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The aforementioned fees shall be renegotiated by ALLIED Life and AGIS
each calendar year. If ALLIED Life and AGIS are unable to agree on an
annual fee for the next calendar year by December 15th of each year, the
calculation of a reasonable annual fee for the next calendar year shall
be submitted to the Coordinating Committee for resolution.
III. AGI Human Resources. For the services provided by AGIS to AGI's human
resources department under Sections 2.1 ("General MIS"), 2.2 ("PC
Support"), and 2.7(a) ("Printing--Forms and Reports"), AGI shall pay to
AGIS $42.00 per hour for Programming/Development time and $40.00 per
hour for Methods/Procedures time. Each year, beginning January 1, 1996,
this hourly rate shall be recalculated based upon estimated costs for
the year in question. Such fees shall be billed and paid monthly. If
applicable, AGI shall also pay fees in accordance with Sections VI
through XI of this Addendum.
IV. AGIMC. AGIMC shall pay AGIS for services under this Agreement in
accordance with the following:
(a) For the services provided under Sections 2.1 ("General MIS") and
2.2 ("PC Support"), AGIMC shall pay to AGIS $42.00 per hour for
Programming/Development time and $40.00 per hour for
Methods/Procedures. Such fees shall be billed and paid monthly.
Each year, beginning January 1, 1996, this hourly rate shall be
recalculated based upon estimated costs for the year in question.
(b) For the services provided under Section 2.12 ("Equipment
Leasing"), lease payments shall be made by AGIMC monthly upon
receipt of a bill from AGIS. The interest rate used to calculate
the lease payments shall be adjusted on the first business day of
each quarterly period to a rate equal to 2% over the prime rate on
such day. At the expiration of the lease term for each item of
Equipment, AGIMC may elect to continue using the Equipment at no
charge.
(c) If applicable, AGIMC shall also pay fees in accordance with
Sections VI through XI of this Addendum.
V. Programming. Each of the Companies (except as may be provided elsewhere
for AMCO, ALLIED Life, AGI, and AGIMC) which request that AGIS provide
Programming/Development services shall pay a rate of $52.50 per hour.
Each of the Companies (except for AMCO, ALLIED Life, AGI, and AGIMC)
which request that AGIS provide Methods/Procedures services shall pay
$40.00 per hour. Such fees shall be billed and paid monthly. Each year,
beginning January 1, 1996, this hourly rate shall be recalculated based
upon estimated costs for the year in question.
VI. Typesetting/Other Printing. The Companies which request that AGIS
provide typesetting services in accordance with Section 2.7(b)
("Printing--Typesetting/Other Printing") shall pay a rate of $22.00 per
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hour. Such fees shall be billed and paid monthly. Any other printing
services shall be provided by AGIS to any of the Companies for a fee to
be negotiated between AGIS and such company in addition to the fees
specified in this Addendum B.
VII. PC Maintenance. If AGIS assists in coordinating third-party vendor
maintenance for the personal computers of any of the Companies, such
Companies agree to pay upon receipt of an invoice from AGIS the
third-party vendor's actual charges as billed to AGIS.
VIII. Postage/Mail Processing. For the services provided under Section 2.9,
the Companies which have offices located in Polk County, State of Iowa,
shall pay AGIS for mail processing as follows:
(a) the Companies shall reimburse AGIS for the actual cost of postage
utilized,
(b) if AGIS performs any mail inserting services for any of the
Companies, such Companies shall pay AGIS $0.027 per item,
(c) if AGIS performs any proof of mail services for any of the
Companies, such Companies shall pay AGIS $0.051 per item,
(d) if AGIS performs any outgoing mail sorting services for any of the
Companies, such Companies shall pay AGIS $0.027 per item,
(e) if AGIS performs incoming mail sorting services for any of the
Companies, such Companies shall pay AGIS $0.027 per item,
(f) if AGIS performs special handling services in mail processing, it
will be billed at $0.051 per item, and
(g) if AGIS performs remittance processing, it will be billed at $0.10
per item.
The number of items and the fees shall be billed to each of the
Companies utilizing the services and paid by each of them monthly.
IX. Telephone/Communications. The Companies which request that AGIS provide
telephone/communications equipment under Section 2.11 ("Telephone and
Communications") shall pay to AGIS a mutually agreed upon monthly fee
for the equipment. Each of the Companies requesting long-distance
communication services (the "Long-Distance Companies") will pay a
monthly charge based upon the proportion of their actual long distance
minutes to the total actual long distance minutes used by the
Long-Distance Companies overall.
X. Taxes. AGIS shall pay any sales, use, and personal property taxes which
may be due and owing with respect to the Equipment leased or with
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respect to the services provided under this Agreement. AGIS shall
receive reimbursement from the appropriate Companies for any sales or
use tax paid. AGIS shall be ultimately responsible for any personal
property tax which may be due and owing with respect to the purchase or
ownership of any Equipment leased under this Agreement.
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EXHIBIT 10.17
TAX SHARING AGREEMENT
Agreement effective January 1, 1996 by and among ALLIED Group, Inc.
("Parent") and each of its undersigned subsidiaries.
WHEREAS, the parties hereto are members of an affiliated group ("Affiliated
Group") as defined in Section 1504(a) of the Internal Revenue Code of 1986
as amended; and
WHEREAS, some of the parties hereto may be members of a unitary group
("Unitary Group") as defined by various state laws; and
WHEREAS, the parties hereto may elect or be required to file their federal
income tax returns on a consolidated basis and file their various state
income tax returns on a consolidated, unitary or separate basis and desire
to properly account for the economic consequences of this arrangement,
WHEREAS, it is the intent and desire of the parties hereto that a method be
established for reimbursing the Parent for payment of tax liability, for
compensating any party for use of its losses or tax credits, and to provide
for the allocation and payment of any refund arising from a carryback of
losses or tax credits from subsequent taxable years,
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1. Parent to Prepare and File Returns. A consolidated federal income tax
return and consolidated, unitary, or separate state tax income tax returns
shall be prepared and filed by the Parent for the taxable year ended
December 31, 1996 and for each subsequent taxable period in respect of
which this agreement is in effect. Each subsidiary shall execute and file
such consent, elections, and other documents that may be required or
appropriate for the proper filing of such returns.
2. Federal Tax Allocation. For each taxable period, each member of the
Affiliated Group shall compute its separate tax liability as if it had
filed a separate tax return and shall pay such amount to the Parent. The
separate return tax liability of each member shall be computed pursuant to
the provision of Regulations Section 1.1502-33(d)(3) in a manner provided
by Regulations Section 1.1502-33(d)(2)(ii) in conjunction with the method
described in Regulations Section 1.1552-1(a)(2).
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3. State Tax Allocation.
(a) Separate Returns.
The Parent and each subsidiary shall be allocated its own
separately computed state income tax liability from those states
requiring tax to be computed on a separate return basis.
(b) Unitary Group and Affiliated Group Returns.
The Unitary or Affiliated Group shall allocate to each member the
total state income tax liability from those states requiring a
consolidated or unitary return filing based on the following formula:
[each members separate company state taxable income or loss
before apportionment and net operating loss deduction] divided by
[total sum of all members separate state taxable income or loss
before apportionment and net operating loss deduction] multiplyed
by [total affiliated or unitary state income tax on taxable
income before net operating deduction and tax credits]
All prior tax year carryover tax credits and tax benefits of net
operating loss deductions shall be specifically allocated to
those members based on the allocation used in the tax year in
which the net operating loss or tax credit was originally
created.
All tax credits except prior tax year carryover credits shall be
specifically allocated to the unitary members computed on a
separate return basis.
All tax credits and net operating losses carried forward from
years prior to a member joining the Affiliated or Unitary Group
shall be specially allocated to that member.
4. Payments. Each subsidiary shall pay to the Parent its allocation of
quarterly estimated, final or amended return taxes payable to the Internal
Revenue Service and any other state taxing authority within five days of
receiving notice of such payment from the Parent.
5. Refund of Overpayment. If for any taxable period the separate return
liability of each member of the Affiliated Group, including the Parent or
Unitary Group, exceeds the consolidated or unitary tax liability for such
period as a result of any excess losses or tax credits of one or more
members, then the Parent shall pay to each such member its allocable
portion of such excess amount within sixty days after the date of filing of
the consolidated or unitary return for such period. The excess federal tax
amount to be reimbursed to such member shall be computed in a manner
consistent with the provisions of Regulation Section 1.1502-33(d)(2)(ii).
In utilization of this Regulation Section, the percentage referred to in
Regulation Section 1.1502-33(d)(2)(ii)(b) shall be 100 percent.
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6. Carryback or Forward of Unused Federal Loss or Tax Credit. If part of
all of an unused loss or tax credit is allocated to a member of the
Affiliated Group pursuant to Regulation Section 1.1502-79, and it is
carried back or forward to a year in which such member filed a separate
return or a consolidated return with another affiliated group, any refund
or reduction in tax liability arising from the carryback or carryover shall
be retained by such member. Notwithstanding the above, the Parent shall
determine whether an election shall be made not to carryback part or all of
the consolidated net operating loss for any taxable year in accordance with
Section 172(b)(3)(c) of the Internal Revenue Code of 1986 as amended.
7. Adjustment of Taxable Period. If the consolidated or unitary tax
liability is adjusted for any taxable period, whether by means of an
amended return, claim for refund or after a tax audit by the Internal
Revenue Service or respective states, the liability of each member shall be
recomputed to give effect to such adjustments, and in the case of a refund,
the Parent shall make payment to each member for its share of the refund,
determined in the same manner as in paragraph (5) above, within thirty days
after the refund is received by the Parent, and in the case of an increase
in tax liability, each member shall pay to the parent its allocable share
of such increased tax liability within five days after receiving notice of
such liability from the Parent. In the event that the taxing authority
levies upon a member's assets in excess of its adjusted portion of the
consolidated tax liability, the member will be adequately indemnified by
the other members.
8. Acquisition through Organization or Additional Corporation. If during a
consolidated return period the Parent or any subsidiary acquires or
organizes another corporation that is required to be included in the
consolidated return, then such corporation shall join in and be bound by
this agreement.
9. Term. This agreement shall apply to the taxable year ending December 31,
1996 and all subsequent taxable periods unless the Parent and the
subsidiaries agree to terminate the agreement. Notwithstanding such
termination, this agreement shall continue in effect with respect to any
payment or refund for all taxable periods prior to termination.
10. Application to Successors in Interest. This agreement shall be binding
upon and inure to the benefit of any successor, whether by statutory
merger, acquisition of assets or otherwise, to any parties hereto, to the
same extent as if the successor had been an original party to the
agreement.
11. Arbitration. Any dispute arising out of or relating to this Tax Sharing
Agreement("Agreement") or the breach thereof between Parent and any of the
subsidiaries signatory hereto shall be settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association. Arbitration may be initiated by any party to a dispute, giving
notice to each other party two copies of such notice with the American
Arbitration Association and by complying with other applicable provisions
of the Association's Rules.
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12. Modification of Agreement. No party has the authority to change
any provisions of this Agreement or waive any of its provisions. No
change in this Agreement shall be binding, unless first expressed in
writing and signed by each party hereto.
13. Superseding Agreement. The parties hereto acknowledge that this
agreement shall supersede all other agreements, oral or written,
between the parties.
14. Exchange of Information. The parties hereto acknowledge that the
exchange and flow of information is critical to the operation of this
agreement. Having acknowledged this fact, the parties hereby agree to grant
free and unrestricted access, at reasonable times, to those books and
records necessary for the operation of this agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their duly authorized representatives.
ALLIED Group, Inc.
By _________________________ Date __________________________
Jamie H. Shaffer
President (Financial)/Treasurer
AMCO Insurance Company
By _________________________ Date __________________________
Randall J. Covey
Assistant Vice President
ALLIED Property and Casualty
Insurance Company
By _________________________ Date __________________________
Randall J. Covey
Assistant Vice President
Depositors Insurance Company
By _________________________ Date __________________________
Randall J. Covey
Assistant Vice President
Western Heritage Insurance Company
By _________________________ Date __________________________
Scott A. Wilson
Treasurer/Assistant Secretary
ALLIED Group Mortgage Company
By _________________________ Date __________________________
Randall J. Covey
Assistant Vice President
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ALLIED General Agency Company
By _________________________ Date __________________________
Randall J. Covey
Assistant Vice President
ALLIED Group Information Systems, Inc.
By _________________________ Date __________________________
Randall J. Covey
Assistant Vice President
The Freedom Group, Inc.
By _________________________ Date __________________________
Randall J. Covey
Assistant Vice President
Midwest Printing Services, Ltd.
By _________________________ Date __________________________
Randall J. Covey
Assistant Vice President
ALLIED Group Leasing Corporation
By _________________________ Date __________________________
Jamie H. Shaffer
Treasurer
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EXHIBIT 10.52
ALLIED GROUP
SHORT TERM MANAGEMENT
INCENTIVE PLAN
1. PURPOSE
The initial ALLIED Group Short Term Management Incentive Plan (the
"Plan") and the beginning of the first performance period was January 1, 1988.
This amended and restated Plan shall be effective January 1, 1996.
The purpose of this Plan is to encourage outstanding performance by
certain key employees of ALLIED Group, Inc. ("AGI") in the attainment of annual
financial and operating goals of AGI, ALLIED Mutual Insurance Company, and all
of their subsidiaries except for ALLIED Life Financial Corporation and its
subsidiaries (collectively, the "ALLIED Group").
2. DEFINITIONS
The capitalized terms used throughout the Plan have the following
meaning:
(a)"AGIMC" means ALLIED Group Insurance Marketing Company.
(b)"AGIS" means ALLIED Group Information Systems, Inc.
(c)"AGMC" means ALLIED Group Mortgage Company.
(d)"ALLIED Group Net Income" means net income after income taxes
(including net realized investment gains/losses) for the consolidated group of
companies comprising the ALLIED Group (excluding crop-hail business) computed in
conformity with generally accepted accounting principles ("GAAP").
(e)"Base Salary" is the annualized weekly base pay of the Participant in
effect as of December 31 of the Plan year.
(f)"Committee" shall mean the Compensation Committee of the Board of
Directors of AGI in consultation with the Joint Compensation Committee of the
Board of AGI and ALLIED Mutual Insurance Company.
(g)"Discretionary Award" is the increment above the Guaranteed Award
which is awarded to a Participant based on the discretion of the Committee.
(h)"DPW" is direct premiums written, net of return premiums, as reported
in the 1996 Planning Package for a particular regional office or company. For
ALLIED Group, it includes all property-casualty companies but excludes (i)
Western Heritage, (ii) crop-hail business, and (iii) flood program. For AGIMC,
DPW shall exclude any premiums generated from business that is purchased by
AGIMC from another entity.
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(i)"Eligible Award Percentage" is that percentage amount set forth on
Exhibit B which shows the direct numeric relationship associated with the
attainment of Threshold, Goal, or Maximum performance, and it is used in
determining potential Eligible Tier Awards. The Eligible Award Percentage is
calculated as follows:
Example Calculation for Eligible Award Percentage for
Profit for a Participant from Des Moines Regional Office
(DMRO) in Tier IV
Step 1: Compare actual profit results for the fiscal year (if the actual
Profit results for the fiscal year do not meet the Threshold, then the
Eligible Award Percentage is 0, and no further calculations are
necessary) to the highest goal specified in Exhibit A that it exceeds
(in this example, assume the actual profit results are $24,750,000).
$1,750,000 = $24,750,000 - $23,000,000
(Threshold)
Step 2: Interpolate between the Threshold and Goal (or between the Goal
and Maximum as the case may be) to determine what percentage the
Participant is above the Threshold or Goal. There is no need to
interpolate if the Maximum has been exceeded. In this example,
$1,750,000 is 50% between Threshold ($23,000,000) and Goal
($26,500,000).
50% = $1,750,000 / ($26,500,000 - $23,000,000)
Step 3: Take the eligible award percentage for Profit from Exhibit B for
the Participant's particular tier category and for the goal level that
has been attained (e.g., Threshold or Goal) and interpolate based on
50% attainment. The eligible award percentages for Profit in Tier IV on
Exhibit B are 12% for Threshold and 24% for Goal.
18% = ((24% - 12%) x 50%) + 12%
In this example, 18% is the Eligible Award Percentage for Profit for a
Participant from DMRO in Tier IV.
The same process is used to compute the Eligible Award Percentage for
Growth.
(j)"Eligible Individual Award" is the award potential for a Participant
based on Profit and Growth results. Eligible Individual Award is the sum of (i)
the Eligible Award Percentage for Profit multiplied by the Base Salary for the
Participant and (ii) the Eligible Award Percentage for Growth multiplied by the
Base Salary for the Participant. The Eligible Individual Award is the base used
to determine the Guaranteed Award and the Discretionary Award.
(k)"Eligible Tier Award" is the award potential for a tier based on
Profit and Growth results. Eligible Tier Award is the sum of all Eligible
Individual Awards for all of the Participants in a particular tier.
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(l)"Goal" is the expected level of performance used to establish
targeted awards as approved by the Committee.
(m) "Growth" is a performance indicator and is the increase in revenue
from the prior year stated in terms of a percentage increase or dollar target.
Generally, revenue is expressed in DPW, except as follows:
TFG Financial Division - total revenues for TFG Financial Division TFG
Insurance Division - total revenues for TFG Insurance Division. Midwest
Printing Services - percentage increase in total revenues.
(n)"Guaranteed Award" is guaranteed to Participants and is 75% of their
Eligible Individual Award.
(o) "Maximum" is the level of performance at which the maximum eligible
award could be made.
(p) "Midwest Printing Services" is Midwest Printing Services, Ltd. but
shall not include the revenues or expenses from the operations acquired in May
1995 from Monaco Computer Services, Inc.
(q)"Operating Profit" is calculated on a GAAP basis, includes net
realized investment gains/losses, and is after income taxes.
(r)"Participant" is a key employee of AGI recommended by the
President(s) of AGI and approved by the Committee to participate in this Plan.
(s)"Persistency" for AGIMC is the year-end persistency percentage as
shown on the ALLIED Group AGIMC Production Report B, which shall include any
business that is purchased by AGIMC from another entity.
(t)"Profit" is a performance indicator and shall be defined based on the
particular area for which a Participant provides services:
Regional Offices and Bonds - "Regional Office Operating
Profit"
AGIMC - "Persistency"
AGI subsidiaries - "Operating Profit"
Staff areas/all other areas - "ALLIED Group Net Income"
TFG Financial Division - net income after tax before
subsidiaries for TFG Financial Division
TFG Insurance Division - net income after tax before
subsidiaries for TFG Insurance Division.
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(u) "Regional Office Operating Profit" is the Regional Office Operating
Statement GAAP net income.
(v)"TFG Financial Division" means The Freedom Group, Inc.
(w) "TFG Insurance Division" means that division of AGIS involved in the
sale/licensing of products and services to companies not affiliated with the
ALLIED Group.
(x)"TFG Insurance and Financial Divisions" means the consolidation of
TFG Insurance Division and TFG Financial Division.
(y)"Threshold" is the minimum level of performance that will warrant an
award.
(z)"WHIC" means Western Heritage Insurance Company.
3. PARTICIPATION AND TIERS
Participation in the Plan is tiered by responsibility level and the
short-term impact of the management position.
Responsibility Levels
Tier I President(s)
Tier II Regional Vice Presidents
Subsidiary Presidents
Profit Center Officers
Tier III Primary Corporate Staff Vice Presidents
Tier IV Regional Office Managers and Subsidiary Managers
Tier V Corporate Staff Vice Presidents and Officers
Subsidiary Managers
Tier VI Subsidiary Managers
Tier VII TFG Managers
A participation list specifying the Participants in each tier shall be
approved by the Committee prior to each fiscal year. The Committee may amend
such list from time to time to add or delete Participants.
Each tier level of participation will have varying award opportunity at
the Threshold, Goal, and Maximum performance levels for each of the performance
indicators.
4. PERFORMANCE INDICATORS
Two performance indicators, Profit and Growth, will be used to measure
the success of ALLIED Group and the level of bonus to be paid under this Plan.
The Threshold for Profit must be attained before any award will be made based on
Growth. Notwithstanding the foregoing, for AGIMC, the Threshold for Profit need
not be attained for there to be an award based on Growth.
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Profit is the only indicator used to measure performance for AGMC, WHIC,
and ALLIED General Agency, and the total bonus amount is paid based upon results
of Profit.
5. AWARDS
(a)A Participant may receive an Eligible Individual Award under the
Plan. No award will be made for performance that does not meet the Threshold
goal for Profit. Upon meeting the Threshold goal for Profit, a Participant will
receive a Guaranteed Award. Depending on the determination of the Committee, a
Participant may or may not receive a Discretionary Award. A Participant's total
award is the sum of the Guaranteed Award and the Discretionary Award. The
Discretionary Award combined with the Guaranteed Award cannot exceed 150% of the
Participant's Eligible Individual Award.
(b)In addition to the requirements in the foregoing paragraph, a
pre-Threshold requirement will be applicable to Staff employees. "Staff
employees" are defined to include those employees with overall corporate
responsibilities, each of whom shall be identified as "Staff" on the
participation list approved by the Committee. Staff employees must attain a 14%
return on average equity based on AGI financial statements before they are
eligible to meet the Threshold goal. "Return on equity" is defined as the
"Return on Average Book Value per Fully-diluted Share" as calculated for and as
disclosed in the ALLIED Group, Inc. Annual Report to Stockholders.
(c)Total awards made to all of the Participants in a particular tier
shall not exceed 100% of the Eligible Tier Award, but the total awards for a
particular tier may be less than the Eligible Tier Award. Notwithstanding the
foregoing, if the Committee determines that a Participant has shown
extraordinary performance in a calendar year, the Committee may exceed the
Eligible Tier Award in order to increase the Discretionary Award for the
Participant showing such extraordinary performance.
(d)In the event a Participant does not meet the Threshold goal for
Profit, the Committee may, in unusual or extraordinary circumstances, award the
Participant a special award under the Plan. This paragraph may only be invoked
by the Committee in rare and extreme situations.
6. PRORATED AWARDS
Employees who become eligible for participation in this Plan after the
beginning of the Plan year may receive a prorated award based on the time the
employee was a Participant and based on active time employed during the Plan
year. Prorated awards will be calculated by determining the number of calendar
weeks that a Participant has been eligible for a tier and dividing that number
by the calendar weeks in that Plan year.
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153
7. DEATH, DISABILITY, OR RETIREMENT
In the event that a Participant dies, becomes disabled, or retires due
to age in accordance with AGI policy, a prorated award will be made based on
active time employed as a Participant during the Plan year.
8. PLAN YEAR
The Plan year will be AGI's fiscal year.
9. TRANSFERABILITY
A Participant may not sell, pledge, donate, or otherwise assign any
interest in this Plan.
10. EMPLOYMENT
Nothing in this Plan confers upon a Participant any right to continued
employment or interferes with or limits in any way ALLIED Group's right to
terminate the employment of a Participant at any time.
11. TERMINATION OF EMPLOYMENT
If a Participant terminates employment or is terminated by ALLIED Group
for any reason other than death, disability, or retirement due to age in
accordance with AGI policy, and if such termination date is prior to the payment
date of an award under this Plan, any right to an award under this Plan is
forfeited.
12. PLAN AMENDMENT OR TERMINATION
The Committee may amend or terminate the Plan at any time. Participants
will be notified of such action as soon as it is practical to do so.
In the event of any change in the corporate structure of AGI affecting
the goals set forth in Exhibit A or the eligible award percentages set forth in
Exhibit B and which change in corporate structure would adversely affect a
Participant, the Committee may adjust or amend the Plan so as not to
disadvantage a Participant.
13. ADMINISTRATION
All matters pertaining to the administration of this Plan will be the
responsibility of the Committee, and any decisions of the Committee shall be
conclusive and binding. This includes all matters of interpretation, areas not
specified in the Plan, and any other issues that may affect the Plan.
14. GOVERNING LAW
The Plan will be administered, enforced, construed, and interpreted in
accordance with the laws of the State of Iowa.
<PAGE>
154
EXHIBIT A GOALS
<TABLE>
<CAPTION>
Threshold Goal Maximum
--------- ---- -------
<S> <C> <C> <C>
PROFIT
Regional Offices:
DMRO $23,000,000 $26,500,000 $30,000,000
LRO $10,000,000 $12,000,000 $14,000,000
RMRO $5,000,000 $5,700,000 $6,400,000
PCRO $14,000,000 $16,000,000 $18,000,000
Bonds $675,000 $700,000 $725,000
Staff 1 $57,000,000 $66,000,000 $75,000,000
AGMC $2,100,000 $2,400,000 $2,700,000
WHIC $5,000,000 $6,000,000 $7,000,000
ALLIED General Agency $25,000 $30,000 $35,000
TFG Insurance Division 2 $300,000 $600,000 $900,000
TFG Financial Division 2 $650,000 $750,000 $850,000
TFG Insurance and
Financial Divisions $950,000 $1,350,000 $1,750,000
Midwest Printing Services $275,000 $350,000 $425,000
AGIMC 86.5% 88.0% 89.5%
GROWTH
Regional Offices, Bonds, AGIS,
and Staff in DPW 10.0% 12.5% 15.0%
AGIMC DPW 18.0% 22.0% 26.0%
Midwest Printing Services 10.0% 14.0% 18.0%
TFG Insurance Division 2 $9,000,000 $10,500,000 $12,000,000
TFG Financial Division 2 $8,500,000 $9,500,000 $10,500,000
TFG Insurance and
Financial Divisions $17,500,000 $20,000,000 $22,500,000
- --------------------
</TABLE>
1 A pre-Threshold requirement will be applicable to Staff employees. Staff
employees must attain a 14% return on equity based on ALLIED Group, Inc.
financial statements before they are eligible to meet the Threshold goal.
2 In the event that The Freedom Group, Inc. receives a capital contribution
in the Plan year, the Threshold, Goal, and Maximum shall each be adjusted
upwards by the addition of the dollar amount derived from the following
formula:
Dollar Amount of x 14% x Remaining / Total Number
Capital Contribution Days in of Days in
Plan Year Plan Year
<PAGE>
155
EXHIBIT B
ELIGIBLE AWARD PERCENTAGES
<TABLE>
<CAPTION>
Threshold Goal Maximum Weight
--------- ---- ------- ------
<S> <C> <C> <C> <C>
Tier I:
Profit 19% 38% 56% 75%
Growth 6% 12% 19% 25%
Total 25% 50% 75%
Tier II:1
Profit 15% 30% 45% 75%
Growth 5% 10% 15% 25%
Total 20% 40% 60%
Tier III:
Profit 13% 27% 40% 75%
Growth 5% 9% 14% 25%
Total 18% 36% 54%
Tier IV:1,2
Profit 12% 24% 36% 75%
Growth 4% 8% 12% 25%
Total 16% 32% 48%
Tier V:
Profit 9% 18% 27% 75%
Growth 3% 6% 9% 25%
Total 12% 24% 36%
Tier VI:
Profit 6% 12% 18% 75%
Growth 2% 4% 6% 25%
Total 8% 16% 24%
Tier VII:2
Profit 3% 6% 9% 50%
Growth 3% 6% 9% 50%
Total 6% 12% 18%
- -------------------
</TABLE>
1 AGIMC award percentage weighting = 25% Persistency, 75% Growth.
2 TFG Financial and Insurance Divisions weighted 50% Profit and 50% Growth
(Revenue)
<PAGE>
156
EXHIBIT 10.53
AMCO INSURANCE COMPANY
ALLIED PROPERTY AND CASUALTY INSURANCE COMPANY
DEPOSITORS INSURANCE COMPANY
MOTOR CLUB OF IOWA INSURANCE COMPANY
PROPERTY SPECIAL CATASTROPHE EXCESS CONTRACT
EFFECTIVE 12:01 A.M., CENTRAL STANDARD TIME, JANUARY 1, 1993
PREAMBLE
The Reinsurers hereby reinsure the excess liability of the Reassured
resulting from losses which may occur during the term of this contract under the
Reassured's policies, subject to the following conditions:
TERM
1. A. The term of this contract shall be from 12:01 A.M., Central Standard
Time, January 1,1993 until cancelled per the conditions of termination
contained in this Agreement.
B. Should this contract terminate while a loss occurrence is in progress, the
Reinsurers shall nevertheless be liable, to the extent oftheir interest and
subject to the other conditions of this contract, for all losses resulting
from such loss occurrence, whether such losses occur before or after such
termination.
TERRITORY
2. The territorial limits of this contract shall be identical with those of
the Reassured's policies.
EXCLUSIONS
3. A. This contract shall not apply to:
(1) All pro rata and excess of loss reinsurance assumed by the Reassured. This
exclusion, however, shall not apply to agency reinsurance, reinsurance
assumed between the member companies of the ALLIED Insurance Group
(Inter-Company Reinsurance), nor to business reinsured 100% by the
Reassured.
(2) Policies or portions thereof classified by the Reassured as: Automobile
(except Automobile Physical Damage (excluding Collision), Casualty (but not
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157
the mandatory coverages under the Property portion of package policies),
fidelity, Surety and Ocean Marine;
(3) Perils of Flood and rising waters when written as such;
(4) Financial guarantee and Insolvency;
(5) Difference in conditions insurance when written as such;
(6) All insurance on growing or standing crops;
(7) Mortgage impairment insurance and similar kinds of insurance,
however styled, providing coverage to be insured as respects its
mortgagee interest in property or its owner interest in foreclosed
property;
(8) Loss or Liability excluded by the provisions of the "Nuclear
Incident Exclusion Clause - Physical Damage - Reinsurance" attached
to and forming part of this contract;
(9) Pool, Association or Syndicate business as excluded by the
provisions of the "Pools Exclusion Clause" attached to and forming
part of this contract. Nevertheless, it is specifically agreed that
liability accruing to the Reassured from its participation in
a. The following so-called "Coastal Pools":-
Alabama Insurance Underwriting Association
Florida Windstorm Underwriting Association
Louisiana Insurance Underwriting Association
Mississippi Insurance Underwriting Association
North Carolina Insurance Underwriting Association
South Carolina Windstorm and Hail Underwriting Association
Texas Catastrophe Property Insurance Association
and,
b. All "FAIR Plan" business for all perils, including riot and
civil disorder,otherwise protected hereunder shall not be
excluded except, however, that this contract does not include
any increase in such liability resulting from:
i the inability of any other participant in such FAIR Plan or
Coastal Pool to meet its liability
<PAGE>
158
ii any claim against such FAIR Plan or Coastal Pool, or any
participant therein, including the Reassured, whether by way of
subrogation or otherwise, brought by or on behalf of any
insolvency fund (as defined in the Insolvency Funds Exclusion
Clause incorporated in this contract);
(10) Loss and/or Damage and/or Costs and/or Expenses arising from Seepage
and/or Pollution and/or Contamination, other than Contamination from
Smoke Damage. Nevertheless, this exclusion does not preclude payment
of the costs of the removal of debris of property damaged or
expenses for extraction of pollutants from land or water caused by
aloss otherwise covered hereunder as follows:
As respects amounts paid by the Reassured subject to this contract
for debris removal, other than for extraction of pollutants from
land or water or the removal, restoration or replacement of polluted
land or water, as respects business classified as Commercial
Property, Reinsurers shall be liable for an amount not to exceed 25%
of the direct physical loss or damage, plus the deductible
applicable to said loss or damage, paid by the Reassured, for any
one loss, any one location, any one insured, plus an additional
amount paid by the Reassured, not to exceed $5,000 for any one loss,
any one location, any one insured, where the sum of loss or damage
and debris removal expense exceeds the Reassured's original policy
limit or the debris removal expense exceeds the amount payable under
the 25% debris removal limitation.
As respects amounts paid by the Reassured subject to this contract
for extraction of pollutants from land or water, the release,
discharge or dispersal of which is caused by or results from a
covered cause of loss as respects business classified as Commercial
Property, Reinsurers shall be liable for an amount not to exceed
$10,000 each location, for the sum of all such expenses paid by the
Reassured arising out of covered causes of loss occurring during
each separate 12 months period of the Reassured's original policy.
The word "pollutant" as used herein shall mean any solid, liquid,
gaseous, or thermal irritant or contaminant, including, but not
limited to smoke, vapor, soot, fumes, acids, alkalis, chemicals and
waste. Waste includes materials to be recycled, reconditioned or
reclaimed.
B. Regarding interests which at time of loss or damage are on shore, no
liability shall attach hereto for any loss or damage which is
occasioned by war, invasion, hostilities, acts of foreign enemies,
civil war, rebellion, insurrection, military or usurped power, or
martial law or confiscation by order of any government or public
authority.
This War Exclusion Clause shall not, however, apply to interests
which at time of loss or damage are within the territorial limits of
the United States of America (comprising the fifty States of the
<PAGE>
159
Union and the District of Columbia and including Bridges between the
U.S.A. and Mexico, provided they are under United States ownership),
Canada, St. Pierre and Miquelon, provided such interests are insured
under policies, endorsements, or binders containing a standard war
or hostilities or warlike operations exclusion clause.
Nevertheless, this clause shall not be construed to apply to riots,
strikes, civil commotion, vandalism, malicious damage, including
acts committed by the agent of any government, party, or faction
engaged in war, hostilities, or other warlike operations, providing
such agent is acting secretly and not in connection with any
operation of military or naval armed forces in the county where the
interest insured is situated.
C. This contract shall exclude all liability of the Reassured arising,
by contract, operation of law, or otherwise, from its participation
or membership, whether voluntary or involuntary, in any insolvency
fund. "Insolvency fund" includes any guaranty fund, insolvency fund,
plan, pool, association, fund or other arrangement, howsoever
denominated, established or governed, which provides for any
assessment of or payment or assumption by the Reassured of part or
all of any claim, debt, charge, fee, or other obligation of an
insurer, or its successors or assigns, which has been declared by
any competent authority to be insolvent, or which is otherwise
deemed unable to meet any claim, debt, charge, fee or other
obligation in whole or in part.
DEFINITION OF POLICIES
4. The term "policies", wherever used herein, shall mean all binders,
policies, contracts, and other obligations of insurance and
reinsurance heretofore issued or which hereafter may be issued by
the Reassured.
RETENTION AND LIMIT
5. A. The Reinsurers shall be liable in each and every loss occurrence,
irrespective of the number and kinds of risks and perils involved,
for 100% of the excess net loss above an initial net loss to the
Reassured and ALLIED Mutual Insurance Company, who together are
partners to an Amended and Restated Reinsurance Pooling Agreement
(which establishes the "Reinsurance Pool") of $5,000,000; but the
Reinsurers shall not be liable for more than the Reassured's
percentage of the Reinsurance Pool at the time of loss multiplied by
$5,000,000 in each and every such loss occurrence, not for more than
the Reassured's percentage of the Reinsurance Pool multiplied by
$10,000,000 in the aggregate during the term of this contract.
REINSTATEMENT PROVISION
6. A. In the event of a claim under this contract, it is agreed that
the amount of liability hereunder is reduced from the time of the
<PAGE>
160
occurrence of the loss by the sum payable on such a claim. However,
the amount so exhausted is immediately reinstated from the time of
the occurrence of the loss.
B. For each amount so reinstated, the Reassured agrees to pay an
additional premium calculated at pro rata of the annual earned
reinsurance premium hereon, being pro rata both as to the fraction
of the face value of this contract so reinstated and as to the
fraction of the unexpired term hereunder at the time of the loss
occurrence subject to a minimum of 50% as to time. Nevertheless, the
liability of the Reinsurers shall not exceed the amounts stated in
5.A above per occurrence and in the aggregate.
DEFINITION OF LOSS OCCURRENCE
7. The term "Loss Occurrence" shall mean the sum of all individual
losses directly occasioned by any one disaster, accident or loss or
series of disasters, accidents or losses arising out of one event
which occurs within the area of one state of the United States or
province of Canada and states or provinces contiguous thereto and to
one another. However, the duration and extent of any one "Loss
Occcurrence" shall be limited to all individual losses sustained by
the Reassured occurring during any period of 168 consecutive hours
arising out of and directly occasioned by the same event except that
the term "Loss Occurrence" shall be further defined as follows:
(A) As regards windstorm, hail, tornado, hurricane, cyclone,
including ensuing collapse and water damage, all individual
losses sustained by the Reassured occurring during any period
of 72 consecutive hours arising out of and directly occasioned
by the same event. However, the event need not be limited to
one state or province or states or provinces contiguous
thereto.
(B) As regards riot, riot attending a strike, civil commotion,
vandalism and malicious mischief, all individual losses
sustained by the Reassured occurring during any period of 72
consecutive hours within the area of one municipality or
county and the municipalities or counties contiguous thereto
arising out of and directly occasioned by the same event. The
maximum duration of 72 consecutive hours may be extended in
respect of individual losses which occur beyond such 72
consecutive hours during the continued occupation of an
assured's premises by strikers, provided such occupation
commenced during the aforesaid period.
(C) As regards earthquake (the epicentre of which need not
necessarily be within the territorial confines referred to in
the opening paragraph of this article) and fire following
directly occasioned by the earthquake, only those individual
fire losses which commence during the period of 168
consecutive hours may be included in the Reassured's "Loss
Occurrence".
<PAGE>
161
(D) As regards "Freeze", only individual losses directly
occasioned by collapse, breakage of glass and water damage
(caused by bursting of frozen pipes and tanks) may be included
in the Reassured's "Loss Occurrence".
Except for those "Loss Occurrences" referred to in (A) and (B) the
Reassured may choose the date and time when any such period of consecutive
hours commences provided that it is not earlier than the date and time of
the occurrence of the first recorded individual loss sustained by the
Reassured arising out of that disaster, accident or loss and provided that
only one such period of 168 consecutive hours shall apply with respect to
one event.
However, as respects those "Loss Occurrences" referred to in (A) and
(B), if the disaster, accident or loss occasioned by the event is of
greater duration than 72 consecutive hours, then the Reassured may divide
that disaster, accident or loss into two or more "Loss Occurrences"
provided no two periods overlap and no individual loss is included in more
than one such period and provided that no period commences earlier than the
date and time of the occurrence of the first recorded individual loss
sustained by the Reassured arising out of that disaster, accident or loss.
No individual losses occasioned by an event that would be covered by
72 hours clauses may be included in any "Loss Occurrence" claimed under the
168 hours provision.
NET RETAINED LINES
8. A. This contract applies only to that portion of any insurance or
reinsurance which the Reassured retains net for its own account; and, in
calculating the amount of loss hereunder and also in computing the
amount or amounts in excess of which this contract attaches, only loss
in respect of that portion of any insurance or reinsurance which the
Reassured retains net for its own account shall be included.
B. The amount of the Reinsurers' liability hereunder in any loss occurrence
shall not be increased by reason of the inability of the Reassured to
collect from any other reinsurers, whether specific or general, any
amount which may have become due from them, whether such inability
arises from the insolvency of such other reinsurers or not.
DEFINITION OF NET LOSS
9. A. The term "net loss" shall mean only such amounts as are actually paid
or payable by the Reassured in settlement of claim or in satisfaction of
judgments and including court costs, interest upon judgments, and
allocated investigation, adjustment, and legal expenses paid by the
Reassured. Nothing in this clause, however, shall be construed to mean
that losses under this contract are not recoverable until the
Reassured's net loss has been ascertained.
<PAGE>
162
B. All salvages, recoveries or payments recovered or received subsequent to
a loss settlement under this contract shall be applied as if recovered
or received prior to loss settlement, and all necessary adjustments
shall be made between the Reassured and the Reinsurers.
LOSSES
10. A The Reassured shall advise the Reinsurers promptly of all loss
occurrences which, in the opinion of the Reassured, may result in a
claim hereunder and of all subsequent developments thereto which, in the
opinion of the Reassured, may materially affect the position of the
Reinsurers.
B. All loss settlements made by the Reassured, provided they are within the
terms of this contract, shall be unconditionally binding upon the
Reinsurers, who agree to pay all amounts for which they may be liable
immediately upon being furnished by the Reassured with reasonable
evidence of the amo unt due or to be due.
PREMIUM
11. A. The premium to the Reinsurers for this contract shall be calculated
by applying a rate of 1.15% to the Reassured's plus ALLIED Mutual
Insurance Companies gross net earned premium income during the term of
this contract times the Reassured's pool percentage.
B. The term "gross net earned premium income" shall mean gross net earned
premiums on business covered hereunder less premiums earned on
reinsurance, recoveries under which would reduce the loss under this
contract. As respects Homeowners Multiple Peril policies, 65% of the
gross net earned premium shall be reported hereunder. As respects
Farmowners Multiple Peril policies, 100% of the gross net earned premium
applicable to the property coverages shall be reported hereunder. As
respects Business Owners policies, 62% of the gross net earned premium
shall be reported hereunder.
C. The minimum premium to the Reinsurers shall be $957,375; however, a
deposit premium equal to $2,127,500 multiplied by the Reassured's
percentage of the Reinsurance Pool shall be payable to Reinsurers in
equal quarterly installments as of January 1, April 1, July 1, and
October 1, 1993. If the Reassured's percentage of the Reinsurance Pool
should change during the term of the agreement, the deposit premium will
adjust at the date of the change to reflect the new Reinsurance Pool
percentage. As promptly as possible after the termination of this
contract, the Reassured shall render a statement to the Reinsurers
showing the actual reinsurance premiums due hereunder, calculated as
provided in Paragraph A of this Article; the difference between the
actual reinsurance premium due and the deposit premium shall, subject to
the minimum premium, be paid by the debtor to the creditor.
<PAGE>
163
CURRENCY
12. The net loss retention of the Reassured and the limit of the Reinsurers'
liability shall be considered in terms of United States currency and all
premiums and losses hereunder shall be payable in United States
currency.
TAXES (Paragraphs A. and B. applicable only to the participation of any
Reinsurers subject to Federal Excise Tax)
13. A. The Reinsurers have agreed to allow, for the purpose of paying the
Federal Excise Tax, one percent of the premium payable hereon to the
extent such premium is subject to Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder, the
Reinsurers will deduct one percent from the amount of the return; the
reassured or its Intermediary hereunder should take steps to recover the
tax from the U.S. Government.
C. In consideration of the terms under which this contract is issued, the
Reassured undertakes not to claim any deduction of the premium hereon
when making Canadian tax returns or when making tax returns, other than
Income or Profits Tax returns, to any State or Territory of the United
States of America or to the District of Columbia.
ERRORS AND OMISSIONS
14. Any inadvertent delay, omission or error shall not be held to relieve
either party hereto from any liability which would attach to it
hereunder if such delay, omission or error had not been made, provided
such delay, omission or error is rectified immediately upon discovery.
ACCESS TO REASSURED'S RECORDS
15. Upon reasonable notice being given to the Reassured, the Reinsurers or
their designated representatives shall have free access at any
reasonable time during the term of this contract and subsequent to its
termination to all records of the Reassured which pertain in any way to
this reinsurance.
INSOLVENCY
16. In the event of the insolvency of the Reassured and the appointment of a
liquidator, receiver, conservator or statutory successor, this
reinsurance shall be payable immediately upon demand, with reasonable
provision for verification, on the basis of the liability of the
reassured as a result of claims allowed against the Reassured by any
court of competent jurisdiction or any liquidator, receiver, conservator
<PAGE>
164
or statutory successor having authority to allow such claims, without
diminution because of such insolvency or because such liquidator,
receiver, conservator or statutory successor has failed to pay all or a
portion of any claims.
Payments by the Reinsurers as above set forth shall be made directly to
the Reassured or to its liquidator, receiver, conservator or statutory
successor, except as provided by subsection (a) of section 4118 of the
New York Insurance Laws of except (a) where this contract specifies
another payee in the event of the insolvency of the Reassured, and (b)
the Reinsurers with the consent of the direct insureds and, as respects
New York risks, the approval of the Superintendent of the New York
Insurance Department have assumed such policy obligations of the
Reassured as their direct obligations to the payees under such policies,
in substitution for the obligations of the Reassured to such payees.
In the event of the insolvency of the Reassured, the liquidator,
receiver, conservator or statutory successor of the Reassured shall give
written notice to the Reinsurers of the pendency of a claim against the
insolvent Reassured on the policy or policies reinsured within a
reasonable time after such claim is filed in the insolvency proceeding
and during the pendency of such claim any Reinsurer may investigate such
claim and interpose, at its own expense, in the proceeding where such
claim is to be adjudicated any defense or defenses which it may deem
available to the Reassured of its liquidator, receiver, conservator or
statutory successor. The expense this incurred by the Reinsurer shall be
chargeable subject to court approval against the insolvent Reassured as
part of the expense of liquidation to the extent of a proportionate
share of the benefit which may accrue to the Reassured solely as a
result of the defense undertaken by the Reinsurer.
Where two or more Reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim, the
expense shall be apportioned in accordance with the terms of this
contract as though such expense had been incurred by the Reassured.
For the purposes of this Article, the term "Reassured" shall refer to
any one or more of the Companies reinsured hereunder, as applicable.
ARBITRATION
17. Any dispute or other matter in question between the Reassured and the
Reinsurers arising out of or relating to the formation, interpretation,
performance, or breach of this Contract, whether such dispute arises
before or after termination of this Contract, shall be settled by
arbitration. Arbitration shall be initiated by the delivery of a written
notice of demand for arbitration by one party to the other within a
reasonable time after the dispute has arisen.
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165
If more than one Reinsurer is involved in the same dispute, all such
Reinsurers shall constitute and act as one party for the purposes of
this Article, provided, however, that nothing herein shall impair the
rights of such Reinsurers to assert several, rather than joint, defenses
or claims, nor be construed as changing the liability of the Reinsurers
under the terms of this Contract from several to joint.
Each party shall appoint an individual as arbitrator and the two so
appointed shall then appoint a third arbitrator. If either party refuses
or neglects to appoint an arbitrator within sixty days, the other party
may appoint the second arbitrator. If the two arbitrators do not agree
on a third arbitrator within sixty days of their appointment, each of
the arbitrators shall nominate three individuals. Each arbitrator shall
then decline two of the nominations presented by the other arbitrator.
The third arbitrator shall then be chosen from the remaining two
nominations by drawing lots. The arbitrators shall be active or retired
officers of insurance or reinsurance companies or Lloyd's London
Underwriters; the arbitrators shall not have a personal or financial
interest in the result of the arbitration.
The arbitration hearings shall be held in Des Moines, Iowa, or such
other place as may be mutually agreed. Each party shall submit its case
to the arbitrators within sixty days of the selection of the third
arbitrator or within such longer period as may be agreed by the
arbitrators. The arbitrators shall not be obliged to follow judicial
formalities or the rules of evidence except to the extent required by
governming law, that is, the state law of the situs of the arbitration
as herein agreed; they shall make their decisions according to the
practice of the reinsurance business. The decision rendered by a
majority of the arbitrators shall be final and binding on both parties.
Such decision shall be a condition precedent to any right of legal
action arising out of the arbitrated dispute which either party may have
against the other. Judgment upon the award rendered may be entered in
any court having jurisdiction thereof.
Each party shall pay the fee and expenses of its own arbitrator and
one-half of the fee and expenses of the third arbitrator. All other
expenses of the arbitration shall be equally divided between the
parties.
Except as provided above, arbitration shall be based, insofar as
applicable, upon the procedures of the American Arbitration Association.
SERVICE OF SUIT (The first two paragraphs of this Clause only apply to
Reinsurers domiciled outside of the United States and/or
unauthorized in the State of New York)
18. It is agreed that in the event of the failure of the Reinsurers hereon
to pay any amount claimed to be due hereunder, the Reinsurers hereon, at
the request of the Reassured, will submit to the jurisdiction of a Court
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166
of competent jurisdiction within the United States. Nothing in this
Clause constitutes or should be understood to constitute a waiver of
Reinsurers' rights to commence an action in any Court of competent
jurisdiction in the United States, to remove an action to a United
States District Court, or to seek a transfer of a case to another Court
as permitted by the laws of the United States or of any State in the
United States. It is further agreed that in any suit instituted against
any one of them upon this contract, such Reinsurer(s) will abide by the
final decision of such Court or of any Appellate Court in the event of
an appeal.
Further, pursuant to any statute of any state, territory or district of
the United States which makes provision therefore, Reinsurers hereon
hereby designate the Superintendent, Commissioner or Director of
Insurance or other officer specified for that purpose in the statute, or
his successor or successors in office, as their true and lawful attorney
upon whom may be served any lawful process in any action, suit or
proceeding instituted by or on behalf of the Reassured or any
beneficiary hereunder arising out of this contract of reinsurance, and
hereby designate the above-named as the person to whom the said officer
is authorized to mail such process or a true copy thereof.
RESERVES
19. If a jurisdiction of the United States will not permit the Reassured, in
the statements required to be filed with its regulatory authority(ies),
to receive full credit as admitted reinsurance for any Reinsurers's
share of obligations, the Reassured shall forward to such Reinsurer a
statement of the Reinsurer's share of such obligations.
Upon receipt of such statement the Reinsurer shall promptly apply for,
and provide the Reassured with, a "clean", unconditional and irrevocable
Letter of Credit, in the amount specified in the statement submitted,
with terms and bank acceptable to the regulatory authority(ies) having
jurisdiction over the Reassured.
"Obligations", as used in this Article, shall mean the sum of losses
paid and allocated loss adjustment expenses paid by the Reassured but
not yet recovered from the Reinsurer, plus reserves for reported losses
and allocated loss adjustment expenses. It shall not include reserves
for losses incurred but not reported.
The Reinsurer hereby agrees that the Letter of Credit will provide for
automatic extension of the Letter of Credit without amendment for one
year from the date of expiration of said Letter or any future expiration
date unless thirty (30) days prior to any expiration the issuing bank
shall notify the Reassured by registered mail that the issuing bank
elects not to consider the Letter of Credit renewed for any additional
period. An issuing bank, not a "qualified bank" as defined by Regulation
No. 133 promulgated by the Insurance Department of the State of New
York, shall provide sixty (60) days notice to the Reassured prior to any
expiration.
<PAGE>
167
Notwithstanding any other provision of this contract, the Reassured or
any successor by operation of law of the Reassured including, without
limitation, any liquidator, rehabilitator, receiver or conservator of
the Reassured may draw upon such credit, without diminution because of
the insolvency of any party hereto, at any time and undertakes to use
and apply such credit for one or more of the following purposes only:
A. To pay the Reinsurer's share or to reimburse the Reassured for the
Reinsurer's share of any obligations, as 000stipulated in the
statement submitted by the Reassured to the Reinsurer, which is due
to the Reassured 000and not otherwise paid by the Reinsurer.
B. In the event the Reassured has received effective notice f
nonrenewal of the Letter of Credit and the Reinsurer's liability
remains unliquidated and undischarged thirty (30) days prior to the
expiry date of the Letter of Credit, to withdraw the balance of the
Letter of Credit and place such sums in an interest bearing trust
account to secure the continuing liabilities of the Reinsurer under
this contract until a renewal Letter of Credit acceptable to the
regulatory authority(ies) having jurisdiction over the Reassured, or
a substitute in lieu thereof acceptable to the regulatory
authority(ies) having jurisdiction over the Reassured, has been
received by the Reassured. The Reassured shall provide to the
Reinsurer payment of any interest thereon accruing from such
account.
C. To make refund of any sum which is in excess of the actual amount
required for Sections A. and B. of this paragraph.
At annual intervals or more frequently as determined by the Reassured,
but never more frequently than quarterly, the Reassured shall prepare a
specific statement, for the sole purpose of amending the Letter of
Credit, of the Reinsurer's share of any obligations. If the statement
shows that the Reinsurer's share of obligations exceeds the balance of
credit as of the statement date, the Reinsurer shall, within thirty (30)
days after receipt of notice of such excess, secure delivery to the
Reassured of an amendment of the Letter of Credit increasing the amount
of credit by the amount of such difference. If the statement shows,
however, that the Reinsurer's share of obligations is less than the
balance of credit as of the statement date, the Reassured shall, within
thirty (30) days after receipt of written request from the Reinsurer,
release such excess credit by agreeing to secure an amendment to the
Letter of Credit reducing the amount of credit available by the amount
of such excess credit.
The bank shall have no responsibility whatsoever in connection with the
propriety of withdrawals made by the Reassured or the disposition of
funds withdrawn, except to assure that withdrawls are made only upon the
order of properly authorized representatives of the Reassured. The
Reassured shall incur no obligation to the bank in acting upon the
credit, other than as appears in the express terms thereof.
<PAGE>
168
OFFSET CLAUSE
20. Each party hereto shall have, and may exercise at any time and from time
to time, the right to offset any balance or balances, whether on account
of premiums or on account of losses or otherwise, due from such party to
the other (or, if more than one, any other) party hereto under this
Agreement or under any other reinsurance agreement heretofore or
hereafter entered into by and between them, any may offset the same
against any balance or balances due or to become due to the former from
the latter under the same or any other reinsurance agreement between
them; and the party asserting the right of offset shall have and may
exercise such right whether the balance or balances due or to become due
to such party from the other are on account of premiums or on account of
losses or otherwise and regardless of the capacity, whether as assuming
insurer or as ceding insurer, in which each party acted under the
agreement or, if more than one, the different agreements involved,
provided, however, that, in the event of the insolvency of a party
hereto, offsets shall only be allowed in accordance with the provisions
of Section 7427 of the Insurance Law of the State of New York.
COMMENCEMENT & TERMINATION
21. This Agreement shall take effect as of 12:01 A.M. Central Standard Time,
January 1, 1993 and is entered into for an unlimited period but any
parties to this Agreement may terminate their portion of this Agreement
at the end of any Calendar year by giving not less than 90 days notice
in writing by registered letter. Every notice of termination shall be
given by registered letter addressed to the intended recipient at the
recipients primary or home office. In determining whether the requisite
number of days' notice has been given in any case, the date of
termination shall be counted but the date of mailing shall not.
Notwithstanding the termination of this Agreement as hereinabove
provided, the provisions of this Agreement shall continue to apply to
all unfinished business hereunder to the end that all obligations and
liabilities incurred by each party hereunder prior to such termination
shall be fully performed and discharged.
<PAGE>
169
Exhibit 11
ALLIED Group, Inc. and Subsidiaries
Computation of Per Share Earnings
For the years ended December 31, 1995, 1994, 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------------ ------------------- -------------------
<S> <C> <C> <C>
Primary
Net income $ 52,376,829 $ 47,624,996 $ 39,922,421
Preferred stock dividends (7,217,294) (7,305,585) (7,420,557)
Stock options in subsidiary (387,580) (305,974) (296,391)
------------------ ------------------- -------------------
Adjusted net income $ 44,771,955 $ 40,013,437 $ 32,205,473
================== =================== ===================
Earnings per share $ 4.81 $ 4.37 $ 3.68
================== =================== ===================
Weighted average shares outstanding 9,204,321 9,008,497 8,394,366
Dilutive effective of unexercised
stock options* 110,147 146,444 350,019
------------------ ------------------- -------------------
Total 9,314,468 9,154,941 8,744,385
================== =================== ===================
Fully Diluted
Net income $ 52,376,829 $ 47,624,996 $ 39,922,421
Preferred stock dividends (3,515,118) (3,515,118) (3,515,118)
Stock options in subsidiary (389,683) (305,974) (299,237)
Additional net ESOP expenses-
assuming conversion of ESOP
Series preferred stock (168,545) (303,129) (464,762)
------------------ ------------------- -------------------
Adjusted net income $ 48,303,483 $ 43,500,775 $ 35,643,304
================== =================== ===================
Earnings per share $ 3.46 $ 3.13 $ 2.61
================== =================== ===================
Weighted average shares outstanding 13,834,491 13,747,731 13,276,998
Dilutive effective of unexercised
stock option* 124,913 147,423 364,716
------------------ ------------------- -------------------
Total 13,959,404 13,895,154 13,641,714
================== =================== ===================
</TABLE>
* Note: Primary - Based on average market price
Fully Diluted - Based on the higher of the average market price or the
market price at December 31 of each year
<PAGE>
170
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
State of
Name of subsidiary incorporation
- -------------------------------------------------------- -------------
I. AMCO Insurance Company Iowa
A. Western Heritage Insurance Company Arizona
B. ALLIED General Agency Company Iowa
C. ALLIED Group Information Systems, Inc. Iowa
1. The Freedom Group, Inc. Iowa
2. Midwest Printing Services, Ltd. Iowa
II. ALLIED Property and Casualty Insurance Company Iowa
III. Depositors Insurance Company Iowa
IV. ALLIED Group Mortgage Company Iowa
V. ALLIED Group Leasing Corporation Iowa
<PAGE>
171
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ALLIED Group, Inc.
We consent to incorporation by reference in the Registration Statement Nos.
33-48235, 33-6643, 33-6644, 33-48206, 33-24543, 33-28907, 33-48234, 33-76876,
and 33-65037 on Form S-8 and Registration Statement Nos. 33-48233 and 33-61090
on Form S-3 of ALLIED Group, Inc. of our reports dated February 2, 1996,
relating to the consolidated balance sheets of ALLIED Group, Inc. and
subsidiaries as of December 31, 1995 and 1994, and related consolidated
statements of earnings, stockholders' equity, and cash flows and related
schedules for each of the years in the three-year period ended December 31,
1995, which appears in the December 31, 1995 annual report on Form 10-K of
ALLIED Group, Inc. Our report refers to a change in the Company's method of
accounting for investments in 1993.
KPMG Peat Marwick LLP
Des Moines, Iowa
March 7, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED GROUP, INC.'S DECEMBER 31, 1995 FORM 10-K 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> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1.00000
<DEBT-HELD-FOR-SALE> 754,547
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 7,948
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 772,299
<CASH> 1,465
<RECOVER-REINSURE> 19,293
<DEFERRED-ACQUISITION> 41,688
<TOTAL-ASSETS> 1,010,598
<POLICY-LOSSES> 341,864
<UNEARNED-PREMIUMS> 196,461
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 39,465
0
83,648
<COMMON> 9,445
<OTHER-SE> 258,493
<TOTAL-LIABILITY-AND-EQUITY> 1,010,598
455,499
<INVESTMENT-INCOME> 47,242
<INVESTMENT-GAINS> 505
<OTHER-INCOME> 49,519
<BENEFITS> 317,940
<UNDERWRITING-AMORTIZATION> 100,120
<UNDERWRITING-OTHER> 20,583
<INCOME-PRETAX> 73,848
<INCOME-TAX> 21,471
<INCOME-CONTINUING> 52,377
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,377
<EPS-PRIMARY> 4.910
<EPS-DILUTED> 3.520
<RESERVE-OPEN> 292,674
<PROVISION-CURRENT> 315,956
<PROVISION-PRIOR> 1,984
<PAYMENTS-CURRENT> 169,254
<PAYMENTS-PRIOR> 116,421
<RESERVE-CLOSE> 324,939
<CUMULATIVE-DEFICIENCY> (292)
</TABLE>
