<PAGE>
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File Number 0-14243
ALLIED Group, Inc.
(Exact name of registrant as specified in its charter)
Iowa
(State or other jurisdiction of incorporation or organization)
42-0958655
(I.R.S. Employer Identification No.)
701 Fifth Avenue, Des Moines, Iowa
(Address of principal executive offices)
50391-2000
(Zip Code)
515-280-4211
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 1996:
13,556,491 shares of Common Stock.
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2
PART I
Item 1. Financial Statements
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(in thousands)
<S> <C> <C>
Assets
Investments
Fixed maturities at fair value (amortized cost $753,259
in 1996 and $726,726 in 1995) $ 764,157 $ 754,547
Equity securities at fair value
(cost $14,838 in 1996 and $7,527 in 1995) 16,315 7,948
Short-term investments at cost (note 2) 10,097 9,802
Other investments at equity 10 2
------------ ------------
Total investments 790,579 772,299
Cash 1,551 1,465
Accrued investment income 10,963 10,467
Accounts receivable 84,949 76,118
Current income taxes recoverable 1,353 1,330
Reinsurance receivables for losses and loss adjusting expenses 18,066 19,293
Mortgage loans held for sale (note 3) 13,959 13,673
Deferred policy acquisition costs 46,523 41,688
Prepaid reinsurance premiums 7,525 6,784
Mortgage servicing rights 34,043 35,705
Deferred income taxes 1,472 ---
Other assets 35,201 31,776
------------ ------------
Total assets $ 1,046,184 $ 1,010,598
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
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3
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(in thousands)
<S> <C> <C>
Liabilities
Losses and loss adjusting expenses $ 355,307 $ 341,864
Unearned premiums 219,746 196,461
Outstanding drafts 16,416 13,708
Indebtedness to affiliates 2,844 1,019
Notes payable to nonaffiliates (note 3) 33,202 35,965
Notes payable to affiliates (note 2) 2,955 3,500
Guarantee of ESOP obligations 26,120 26,270
Deferred income taxes --- 2,854
Other liabilities 37,114 37,371
------------ ------------
Total liabilities 693,704 659,012
------------ ------------
Stockholders' equity
Preferred stock, no par value, issuable in series,
authorized 7,500 shares
6-3/4% Series, 1,827 shares issued and outstanding 37,812 37,813
ESOP Series, issued and outstanding 2,993 shares in 1995 (note 4) --- 45,835
Common stock, no par value, $1 stated value, authorized 40,000
shares, issued and outstanding 13,553 shares in 1996 and 9,445
shares in 1995 (notes 4 and 5) 13,553 9,445
Additional paid-in capital 131,437 104,596
Retained earnings 183,864 159,470
Unrealized appreciation of investments (net of deferred
income tax expense of $4,362 in 1996 and $9,907 in 1995) 8,013 18,335
Unearned compensation related to ESOP (22,199) (23,908)
------------ ------------
Total stockholders' equity 352,480 351,586
------------ ------------
Total liabilities and stockholders' equity $ 1,046,184 $ 1,010,598
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
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4
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues
Earned premiums $ 124,246 $ 115,768 $ 364,229 $ 336,832
Investment income 12,444 12,396 36,608 35,335
Realized investment gains (losses) 26 (24) 65 238
Other income (note 2) 14,003 12,019 39,737 34,716
----------- ----------- ----------- -----------
150,719 140,159 440,639 407,121
----------- ----------- ----------- -----------
Losses and expenses
Losses and loss adjusting expenses 89,279 82,400 265,317 234,378
Amortization of deferred policy
acquisition costs 27,063 25,445 79,888 74,073
Other underwriting expenses 4,359 3,668 14,226 15,633
Other expenses 9,356 9,380 29,451 27,672
Interest expense 381 250 1,151 1,175
----------- ----------- ----------- -----------
130,438 121,143 390,033 352,931
----------- ----------- ----------- -----------
Income before income taxes 20,281 19,016 50,606 54,190
----------- ----------- ----------- -----------
Income taxes
Current 5,579 4,968 13,485 16,608
Deferred 243 643 1,166 (964)
----------- ----------- ----------- -----------
5,822 5,611 14,651 15,644
----------- ----------- ----------- -----------
Net income $ 14,459 $ 13,405 $ 35,955 $ 38,546
=========== =========== =========== ==========
Net income applicable to common stock $ 13,580 $ 11,604 $ 32,724 $ 33,115
=========== =========== =========== ==========
Earnings per share
Primary $ 1.00 $ 1.25 $ 2.57 $ 3.62
=========== =========== =========== ==========
Fully diluted $ 1.00 $ .90 $ 2.41 $ 2.59
=========== =========== =========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
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5
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 35,955 $ 38,546
Adjustments to reconcile net income to net cash
provided by operating activities
Realized investment gains (65) (238)
Depreciation and amortization 8,037 6,808
Indebtedness with affiliates 1,825 (75)
Accounts receivable, net (7,604) (8,750)
Accrued investment income (496) (643)
Deferred policy acquisition costs (4,835) (3,646)
Mortgage loans held for sale, net (4,859) (372)
Other assets (2,837) (2,933)
Losses and loss adjusting expenses 13,443 19,049
Unearned premiums, net 22,544 16,886
Cost of ESOP shares allocated 1,709 1,589
Income taxes
Current (23) (398)
Deferred 1,166 (964)
Other, net 3,576 4,294
---------- ----------
Net cash provided by operating activities 67,536 69,153
---------- ----------
Cash flows from investing activities
Purchase of fixed maturities (173,170) (119,215)
Purchase of equity securities (7,824) (260)
Purchase of equipment (7,079) (5,714)
Sale of fixed maturities 64,168 32,323
Maturities, calls, and principal reductions of fixed maturities 81,263 36,860
Sale of equity securities 554 239
Short-term investments, net (295) (18,477)
Sale of equipment 116 360
---------- ----------
Net cash used in investing activities (42,267) (73,884)
---------- ----------
Cash flows from financing activities
Notes payable to nonaffiliates, net 1,810 12,820
Notes payable to affiliates, net (545) (1,460)
Issuance of common stock 1,638 2,827
Repurchase of common stock (16,525) ---
Dividends paid to stockholders, net of income tax benefit (11,561) (9,483)
---------- ----------
Net cash (used in) provided by financing activities (25,183) 4,704
---------- ----------
Net increase in cash 86 (27)
Cash at beginning of year 1,465 1,541
---------- ----------
Cash at end of quarter $ 1,551 $ 1,514
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
6
ALLIED Group, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The accompanying interim financial statements include the accounts of ALLIED
Group, Inc. and its subsidiaries (collectively, the Company) on a consolidated
basis. The interim consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP) and include all
adjustments which are in the opinion of management necessary for fair
presentation of the results for the interim periods. All such adjustments are of
a normal and recurring nature. All significant intercompany balances and
transactions have been eliminated and certain amounts have been reclassified to
conform to current-period presentation. The accompanying interim consolidated
financial statements should be read in conjunction with the following notes and
with the Notes to Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
At September 30, 1996, The ALLIED Group Employee Stock Ownership Trust (ESOP
Trust) owned 26.5% of the outstanding voting stock of the Company. ALLIED Mutual
Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance
company, controlled 18.5% of the voting stock of the Company.
(2) Transactions with Affiliates
Pursuant to the terms of the Intercompany Operating Agreement, the Company
leases employees to 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.
For the nine months ended September 30, 1996 and 1995, the Company received
revenues of $1.9 million and $1.9 million for employees leased to affiliates,
respectively, which are included in other income.
The Company provides data processing and other services for ALLIED Mutual and
its subsidiaries. Included in other income are revenues of $1 million and $1.9
million relating to services performed for ALLIED Mutual and subsidiaries for
the first nine months of 1996 and 1995, respectively.
ALLIED Mutual participates with a nonaffiliated reinsurance company in a
property catastrophe reinsurance agreement that covers the property-casualty
segment's share of pooled losses up to $5 million in excess of $5 million.
ALLIED Mutual's and the reinsurance company's participation in such agreement
are 90% and 10%, respectively. Premiums paid by the property-casualty segment to
ALLIED Mutual were $2.2 million and $1.7 million in the first nine months of
1996 and 1995, respectively. There were recoveries from ALLIED Mutual under the
agreement of $3.3 million and $2.4 million in the first nine months of 1996 and
1995, respectively.
The Company and its affiliates deposit their excess cash into a short-term
investment fund. The fund was established to concentrate short-term cash in a
single account to maximize yield. AID Finance Services, Inc., a wholly owned
subsidiary of ALLIED Mutual, is the fund administrator. At September 30, 1996,
the Company had $7.9 million invested in the fund and had several unsecured
notes payable to the fund totaling $3 million. The interest rate on the
borrowings was 8.5%.
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7
Interest income from affiliates of $360,000 and $259,000 in the first nine
months of 1996 and 1995, respectively. Interest expense with affiliates was
$211,000 and $89,000 in the first nine months of 1996 and 1995, respectively.
(3) Notes Payable to Nonaffiliates
At September 30, 1996, ALLIED Group Mortgage Company (ALLIED Mortgage) had
borrowed $19.4 million under the terms of three separate mortgage loan
warehousing agreements with different commercial banks. Under the terms of the
agreements, ALLIED Mortgage can borrow up to the lesser of $67 million or 98% of
the mortgage credit borrowing base. The outstanding borrowings of ALLIED
Mortgage were secured by $14 million of pledged mortgage loans held for sale,
mortgage servicing rights on loans with a principal balance of $2.8 billion, and
foreclosure loans. Interest rates applicable to ALLIED Mortgage's borrowing
arrangements vary with the level of investable deposits maintained at the
respective commercial banks.
ALLIED Mortgage had $12 million of 8.4% senior secured notes outstanding as of
September 30, 1996. The notes are payable to a nonaffiliated life insurance
company and are secured by pledged mortgage servicing rights. The notes are
payable in equal annual installments of $1.5 million each September 1, with
interest payable semi-annually. The final installment and interest is due
September 1, 2004.
The Federal Home Loan Bank of Des Moines provides a $3 million committed credit
facility through a line of credit agreement with AMCO Insurance Company (AMCO)
that expires March 1, 1997. Interest on any outstanding borrowings is payable at
an annual rate equal to the federal funds unsecured rate for Federal Reserve
member banks, which was 5.5% at September 30, 1996. AMCO had an outstanding
balance under this line of credit of $1.8 million at September 30, 1996.
Borrowings with the Federal Home Loan Bank of Des Moines were secured by United
States Government securities with a carrying value of $10 million at September
30, 1996.
(4) ESOP Convertible Preferred Stock
On March 6, 1996, the ESOP Trustee elected to convert the ESOP Convertible
Preferred Stock (ESOP Series) to common stock. Each share of ESOP Series was
convertible to 1.5 shares of common stock. The ESOP Trustee converted 2.9
million shares of ESOP Series into 4.4 million shares common stock, raising the
total common shares issued and outstanding to 13.9 million. The conversion was
completed on March 7, 1996.
(5) Common Stock
During 1996, the Company repurchased 443,000 shares of its common stock on the
open market at an average price per share of $37.30. The first 250,000 shares
were repurchased under a program approved by the Board of Directors (Board) on
December 14, 1994 and completed on July 15, 1996. An additional 193,000 shares
were repurchased under a program approved by the Board on July 16, 1996 whereby
an additional 250,000 shares of its common stock was authorized to be
repurchased pursuant to Rule 10b-18. The actual number of shares to be
repurchased is dependent upon market conditions, and the program may be
terminated at the Company's discretion.
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8
(6) Segment Information
The Company's operations include two major segments: property-casualty and
excess & surplus lines. Their principal products, services, and effect on
revenues, income before income taxes, and assets are identified by segment.
Property-casualty--Predominantly private passenger automobile, homeowners,
and small commercial lines of insurance.
Excess & surplus lines--Primarily commercial casualty and commercial property
lines of insurance coverage that standard insurers are unable or unwilling to
provide.
Eliminations and other--Eliminations between segments plus other noninsurance
operations not reported as segments (including investment services, data
processing, and employee lease fees from affiliates).
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1996 1995
-------------- --------------
(in thousands)
<S> <C> <C>
Revenues *
Property-casualty $ 381,715 $ 349,251
Excess & surplus lines 24,423 26,185
Eliminations and other 34,501 31,685
-------------- --------------
Total $ 440,639 $ 407,121
============== ==============
Income before income taxes *
Property-casualty $ 41,432 $ 47,985
Excess & surplus lines 5,274 3,368
Eliminations and other 3,900 2,837
-------------- --------------
Total $ 50,606 $ 54,190
============== ==============
September 30, December 31,
1996 1995
-------------- --------------
(in thousands)
Assets
Property-casualty $ 892,448 $ 847,401
Excess & surplus lines 126,351 122,200
Eliminations and other 27,385 40,997
-------------- --------------
Total $ 1,046,184 $ 1,010,598
============== ==============
</TABLE>
* Including realized investment gains or losses.
(7) Subsequent Events
At its October meeting, the Board of Directors approved a 3-for-2 stock split to
be distributed November 29, 1996 for shareholders of record on November 15 and
declared a fourth-quarter dividend of $0.15 on the post-split shares. The split
will increase the Company's common shares outstanding to approximately 20.3
million.
<PAGE>
9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the interim
consolidated financial statements and related footnotes included elsewhere
herein, and with the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
ALLIED Group, Inc., a regional insurance holding company, and its subsidiaries
(collectively, the Company) operate exclusively in the United States and
primarily in the central and western states. The Company's largest segment
includes three property-casualty insurance companies that write personal lines
(primarily automobile and homeowners) and small commercial lines of insurance.
The other reportable segment is excess & surplus lines insurance.
Property-casualty insurance was the most significant segment, accounting for
86.6% of consolidated revenues for the nine months ended September 30, 1996.
The property-casualty segment participates in a reinsurance pooling agreement
with ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated
property-casualty insurance company. The agreement generally provides that the
property-casualty insurance business is combined and then prorated among the
participants according to predetermined percentages. Participation percentages
are based on certain factors such as capitalization and business produced by the
respective companies. The segment's participation is currently 64% in the
reinsurance pool.
The operating results of the property-casualty insurance industry are subject to
significant fluctuations from quarter to quarter and from year to year due to
the effect of competition on pricing, the frequency and severity of losses
incurred in connection with weather-related and other catastrophic events,
general economic conditions, and other factors such as changes in tax laws and
the regulatory environment.
Results of Operations
Consolidated revenues for the nine months ended September 30, 1996 were $440.6
million, up 8.2% over the $407.1 million reported for the first nine months of
1995. For the third quarter only, consolidated revenues increased 7.5% to $150.7
million over the third quarter in 1995. The increase occurred primarily because
of the growth in earned premiums and other income for the three and nine months
ended September 30, 1996.
Income before income taxes for the nine months of 1996 was down to $50.6 million
from $54.2 million for the same period in 1995 due to the higher wind and hail
losses experienced in the second quarter and the third quarter. The third
quarter only, income before income taxes increased 6.7% to $20.3 million from
$19 million for the same quarter in 1995 due primarily to the growth in earned
premiums and other income that more than offset the increased losses and loss
adjusting expenses. Wind and hail losses were up 43.4% for the first nine months
of 1996 compared to the same period in 1995.
Net income was down 6.7% to $36 million, bringing fully diluted earnings per
share to $2.41 for the nine months ended September 30, 1996, from $38.5 million
($2.59 per share) for the corresponding period in 1995. Fully diluted earnings
per share before net realized gains were $2.41 for the first nine months of 1996
compared with $2.58 for the same period of 1995. For the three months ended
September 30, 1996 and 1995, fully diluted earnings before net realized gains
were $1.00 and $0.90, respectively.
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10
Book value per share at September 30, 1996 was $24.86 up from $24.23 at December
31, 1995. At September 30, 1996, the fair value of investments in fixed
maturities were $10.9 million above amortized cost compared to $27.8 million
above amortized cost at December 31, 1995. If the fixed maturity investments
were reported at amortized cost, the book value would have been $24.33 at
September 30, 1996 compared to $22.94 at December 31, 1995.
Property-casualty
Pooled net written premiums (including ALLIED Mutual) totaled $576.4 million, a
10.9% increase over production in the first nine months of 1995. For the third
quarter only, pooled net written premiums increased 13.4% to $204.3 million from
$180.2 million for the same quarter in 1995. The average premium per policy for
personal lines was up 4.3% from the first nine months of 1995 to $606 while the
policy count grew 8.2%. The average premium per policy for commercial lines
excluding crop-hail increased slightly from the first nine months of 1995 to
$1,093 and the policy count was up 6.3%. Earned premiums for the
property-casualty segment were 66.6% personal lines and 33.4% commercial lines
in the first nine months of 1996. The business mix for the first nine months of
1995 was 65.7% personal lines and 34.3% commercial lines.
Revenues for the property-casualty segment increased to $381.7 million from
$349.3 million for the nine months ended September 30, 1996 and 1995,
respectively. For the third quarter only, revenues increased to $131.8 million
from $119.6 million for the same quarter in 1995. Direct earned premiums for the
segment were $365.5 million for the first nine months of 1996 compared with
$321.1 million one year earlier. Earned premiums increased 9.3% for the first
nine months of 1996 to $344.4 million from $315 million; earned premiums for the
third quarter only increased 10% to $118.8 million from $108 million for the
same quarter in 1995. The increase resulted primarily from growth in insurance
exposure.
Investment income for the first nine months of 1996 was $31.4 million compared
to $28.9 million for the same period in 1995. The pretax yield on invested
assets was 6.3% and 6.5% for the nine months ended September 30, 1996 and 1995,
respectively. Realized investment gains were $197,000 compared with $245,000 in
the first nine months of 1995. Other income for the first nine months of 1996
increased to $5.7 million from $5.1 million for the same period in 1995.
Income before income taxes decreased to $41.4 million from $48 million in the
first nine months of 1995 primarily due to increased losses and loss adjusting
expenses. Losses and loss adjusting expenses increased 15.8% for the nine months
ended September 30, 1996 compared to the same period in 1995. For the three
months ended September 30, 1996, income before income taxes increased to $16.3
million compared to $15.6 million in the same period in 1995. The increase for
the quarter was primarily due to the increase in investment income and other
income that more than offset the increase in losses and loss adjusting expenses.
The statutory combined ratio (after policyholder dividends) for the first nine
months of 1996 was 98.5 compared to 95.2 reported in the first nine months of
1995; for the third quarter of 1996 and 1995 the ratio was 96.8 and 96.5,
respectively. The change in the combined ratio was primarily attributed to a
4.1- and 1.1-point increase in the nine and three month loss and loss adjusting
expense ratio, respectively. Wind and hail losses for the first nine months of
1996 increased to $35.3 million from $24.6 million for the same period of 1995.
The impact of wind and hail losses on the combined ratio was 10.3 points and 7.8
points for the nine months ended September 30, 1996 and 1995, respectively. The
GAAP (generally accepted accounting principles) underwriting gain was $4.1
compared with a gain of $13.7 million for the first nine months of 1995. On a
fully diluted basis, the impact of wind and hail losses on the results of
operations was $1.66 per share versus $1.16 per share in the first nine months
of 1995.
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11
The following table presents the property-casualty's statutory combined ratio by
line of business for the three and nine months ended September 30, 1996 and
1995:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Personal automobile 97.4 95.9 98.0 94.9
Homeowners 101.8 103.2 108.1 103.8
Personal lines 98.6 97.9 100.7 97.2
Commercial automobile 92.8 93.6 98.5 93.4
Workers' compensation 81.0 81.4 75.1 73.7
Other property/liability 97.5 99.2 99.1 97.9
Other lines 40.3 48.8 46.9 50.1
Commercial lines 93.4 94.0 94.3 91.5
Total 96.8 96.5 98.5 95.2
</TABLE>
The personal auto statutory combined ratio increased to 98.0 for the first nine
months of 1996 from 94.9 for the same period in 1995. The increase was primarily
due to a 3.8-point deterioration in the loss and loss adjusting expense ratio.
The statutory combined ratio for the homeowners line was 108.1 for the first
nine months of 1996 compared with 103.8 for the same period of 1995. The
increase was primarily due to a 5.5-point deterioration in the loss and loss
adjusting expense ratio. The impact of wind and hail losses on the combined
ratio for the homeowners line increased to 28.7-points from 25.1-points for the
first nine months of 1995. Overall, the personal lines statutory combined ratio
increased to 100.7 in the first nine months of 1996 from 97.2 in the same period
of 1995. The statutory combined ratio for commercial lines increased to 94.3 in
the first nine months of 1996 from 91.5 for the first nine months of 1995. The
deterioration of personal and commercial lines combined ratio was primarily
attributable to higher losses and loss adjusting expenses due to wind and hail.
Excess & Surplus Lines
Earned premiums decreased to $19.8 million for the first nine months of 1996
from $21.9 million for the first nine months of 1995. For the quarter only,
earned premiums decreased 29.9% to $5.4 million from $7.7 million for the same
period in 1995. Net written premiums decreased 12.3% to $20.2 million for the
nine months ended September 30, 1996 from $23 million through September 30,
1995. The decrease is due to an increase in reinsurance costs, which were
retroactive to the beginning of the year. Direct earned premiums increased
slightly to $27.6 million for the nine months ended September 30, 1996 from
$27.5 million for the same period in 1995. The stagnant growth is attributed to
the soft market that the segment operates in and management's decision not to
sacrifice underwriting results for premium growth. For the nine month periods
ended September 30, 1996, the segment's book of business was comprised of 2.7%
personal lines and 97.3% commercial lines. The business mix for the first nine
months of 1995 was 2.3% personal lines and 97.7% commercial lines.
Investment income for the first nine months of 1996 increased 6.3% to $4.6
million from $4.3 million for the same period in 1995. Investment income
increased due to a larger average balance in the investment portfolio. The
pretax yield on those assets was down to 6.3% compared to 6.8% in the first nine
months of 1995. Invested assets increased to $99.8 million at September 30, 1996
from $96.4 million at year-end 1995.
<PAGE>
12
The statutory combined ratio (after policyholder dividends) was 95.7, which
produced a GAAP underwriting gain of $685,000 for the first nine months of 1996.
The combined ratio of 103.6 for the first nine months of 1995 resulted in an
underwriting loss of $951,000. The combined ratio decreased primarily because of
a 9.5-point decrease in the loss and loss adjusting expense ratio in the first
nine months of 1996. The decrease in the loss and loss adjusting expense ratio
was primarily due to improved loss experience in the first nine months of 1996
over the same period last year.
Due to improved loss experience, income before income taxes for the nine months
ended September 30, 1996 increased 56.6% to $5.3 million from $3.4 million. For
the quarter ended September 30, 1996 and 1995, income before income taxes was
$1.7 million. The segment had realized gains of $2,000 and $3,000 for the first
nine months of 1996 and 1995, respectively.
Noninsurance Operations
Revenues for the noninsurance operations (including investment services, data
processing, and employee lease fees from affiliates) decreased 6.2% for the
first nine months of 1996 to $108.7 million from $115.9 million for the same
period last year. Income before income taxes was $3.9 million for the first nine
months of 1996 compared to $2.8 million for the nine months ended September 30,
1995. For the third quarter only, income before income taxes increased to $2.2
million from $1.6 million for the quarter ended September 30, 1995. The
servicing portfolio was $2.8 billion at September 30, 1996 and $3 billion at
December 31, 1995.
Investments and Investment Income
The investment policy for the Company's insurance segments requires that the
fixed maturity portfolio be invested primarily in debt obligations rated "BBB"
or higher by Standard & Poor's Corporation or a recognized equivalent at the
time of acquisition. The policy also states that equity securities are to be of
United States and Canadian corporations listed on established exchanges or
publicly traded in the over-the-counter market. Preferred stock is to be
comprised primarily of issues rated at least A3/A- by Standard and Poor's
Corporation or Moody's. The Company's investment portfolio consisted almost
entirely of fixed income securities; 98.4% were rated investment grade or higher
at September 30, 1996. The investment portfolio contained no real estate or
mortgage loans at September 30, 1996.
Invested assets were up 2.4% to $790.6 million from $772.3 million at year-end
1995. The growth in invested assets was slowed by the $16.9 million decline in
the market value of fixed maturity investments caused by rising interest rates.
Nine-month consolidated investment income increased 3.6% to $36.6 million from
$35.3 million through September 30, 1995. The Company's pretax rate of return on
invested assets was down to 6.3% from last year's 6.7%.
Income Taxes
The Company's year-to-date effective income tax rate decreased slightly to 29%
at September 30, 1996 compared to 29.1% year-end 1995. The income tax expense
for the first nine months of 1996 was down to $14.7 million from $15.6 million
for the same period in 1995. The decrease was due to lower operating income.
New Accounting Standard
In June of 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
<PAGE>
13
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
125 is effective for fiscal years beginning after December 31, 1996. The Company
will adopt SFAS 125 on January 1, 1997 and has determined that the
implementation will not have a material effect on its financial statements.
Regulations
California was the source of approximately 25% of the pool's direct written
premiums for the past ten years. Proposition 103, approved by California voters
in 1988, provides for a rollback of rates on premiums collected in calendar year
1989 to the extent that the insurer's return on equity for each Proposition 103
line of business exceeded 10%. Management of the Company continues to believe
that the insurance subsidiaries will not be liable for any material rollback of
premiums.
Liquidity and Capital Resources
Substantial cash inflows are generated from premiums, pool administration fees,
investment income, and proceeds from maturities of portfolio investments. The
principal outflows of cash are payment of claims, commissions, premium taxes,
operating expenses, and income taxes and the purchase of fixed maturities. In
developing its investment strategy, the Company establishes a level of cash and
highly liquid short- and intermediate-term securities which, combined with
expected cash flow, is believed adequate to meet anticipated short-term and
long-term payment obligations.
In the first nine months of 1996, operating activities generated cash flows of
$67.5 million; in the first nine months of 1995, the total was $69.2 million.
For both years, the primary source of funds was premium growth in the Company's
property-casualty insurance operations.
Funds generated from the operating activities for the first nine months of 1996
and 1995 were used primarily to purchase investment-grade fixed maturities,
equity securities, and equipment which accounted for the majority of the
investing activities. Operating cash flows were also used to pay $12.3 million
of dividends to stockholders and to repurchase $16.5 million of common stock in
the first nine months of 1996. For the same period in 1995, the funds generated
from the operating activities were used to pay dividends to stockholders of
$10.1 million.
Management anticipates that short-term and long-term capital expenditures, cash
dividends, and operating cash needs will be met from existing capital and
internally generated funds. As of September 30, 1996, the Company and its
subsidiaries had no material commitments for capital expenditures. Future debt
and stock issuance will be considered as additional capital needs arise. The
method of funding will depend upon financial market conditions.
The Company's mortgage banking subsidiary, ALLIED Group Mortgage Company (ALLIED
Mortgage), has separate credit arrangements to support its operations.
Short-term and long-term notes payable to nonaffiliated companies are used by
ALLIED Mortgage to finance its mortgage loans held for sale and to purchase
mortgage servicing rights. The level of short-term borrowings fluctuates daily
depending on the level of inventory being financed. At September 30, 1996,
short-term borrowings amounted to $19.4 million to be repaid through the
subsequent sale of mortgage loans held for sale and long-term borrowings
amounted to $12 million to be repaid over the next 8 years. These notes payable
are not guaranteed by the Company. In the normal course of its business, ALLIED
Mortgage also makes commitments to buy and sell securities that may result in
credit and market risk in the event the counterparty is unable to fulfill its
obligation.
<PAGE>
14
Historically, the Company's insurance subsidiaries have generated sufficient
funds from operations to pay their claims. While the property-casualty and
excess & surplus lines insurance companies have maintained adequate investment
liquidity, they have in the past required additional capital contributions to
support premium growth.
A source of cash flows for the holding company is dividend payments from its
subsidiaries. During the first nine months of 1996, the Company received
dividend payments of $11.2 million from the property-casualty subsidiaries and
$107,000 from noninsurance subsidiaries. During the same period of 1995, the
Company received dividend payments of $8.3 million from the property-casualty
subsidiaries and $332,000 from noninsurance subsidiaries. Dividend payments to
common stockholders totaled $9.1 million for the nine months ended September 30,
1996, up from $4.7 million for the same period in 1995. In the first nine months
of 1996 and 1995, the Company paid dividends of $2.6 million on the 6-3/4%
Series preferred stock. The Company also paid dividends of $595,000 and $2.8
million on the ESOP Series preferred stock (ESOP Series) in the nine months
ended September 30, 1996 and 1995, respectively. The increase in dividends to
common stockholders and the decrease in ESOP Series preferred stock was due to
the conversion of the ESOP Series to common shares completed on March 7, 1996,
(see note 4 of the Notes to Interim Consolidated Financial Statements).
During 1996, the Company repurchased and cancelled 443,000 of its own common
stock pursuant to the repurchase program approved by the Board of Directors on
December 14, 1994 and July 16, 1996. The shares were repurchased at an average
cost per share of $37.30. The December 14, 1994 program was completed on July
15, 1996, and 57,000 shares remain available for repurchase in subsequent
periods under the July 16, 1996 program. The program may be terminated at the
Company's discretion.
At its October meeting, the Board of Directors approved a 3-for-2 stock split to
be distributed November 29, 1996 for shareholders of record on November 15 and
declared a fourth-quarter dividend of $0.15 on the post-split shares. The split
will increase the Company's common shares outstanding to 20.3 million.
Company contributions plus dividends on the leveraged ESOP shares are used by
the ESOP Trust to service the ESOP obligations. Dividends and payments for the
employee lease fees from its subsidiaries are used by the Company to fund the
amounts. In connection with its guarantee of ESOP obligations, the Company is
required to maintain minimum stockholders' equity and to comply with certain
other financial covenants.
<PAGE>
15
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) 11 Statement re Computation of Per Share Earnings.
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the third
quarter ended September 30, 1996.
<PAGE>
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIED Group, Inc.
(Registrant)
Date: November 6, 1996 /s/ Jamie H. Shaffer
---------------------------------------
Jamie H. Shaffer, President (Financial)
and Treasurer
<PAGE>
17
ALLIED Group, Inc. and Subsidiaries
INDEX TO EXHIBITS
EXHIBIT
NUMBER ITEM PAGE
11 Statement re Computation of Per Share Earnings 18
27 Financial Data Schedule 19
<PAGE>
18
Exhibit 11
ALLIED Group, Inc. and Subsidiaries
Computation of Per Share Earnings
For the Three and Nine Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1996 1995 1996 1995
---------- ----------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary
Net income $ 14,459 $ 13,405 $ 35,955 $ 38,546
Preferred stock dividends (879) (1,801) (3,232) (5,431)
Stock options in subsidiaries (119) (112) (338) (273)
---------- ----------- ---------- ----------
Adjusted net income $ 13,461 $ 11,492 $ 32,385 $ 32,842
========== =========== ========== ==========
Earnings per share $ .98 $ 1.23 $ 2.52 $ 3.54
========== =========== ========== ==========
Weighted average shares
outstanding 13,611 9,259 12,729 9,156
Dilutive effective of
unexercised stock options* 113 96 126 110
---------- ----------- ---------- ----------
13,724 9,355 12,855 9,266
========== =========== ========== ==========
Fully Diluted
Net income $ 14,459 $ 13,405 $ 35,955 $ 38,546
Preferred stock dividends (879) (879) (2,636) (2,636)
Stock options in subsidiaries (121) (112) (339) (274)
Additional net ESOP
expenses-assuming
conversion of ESOP Series
preferred stock --- (45) --- (137)
---------- ----------- ---------- ----------
Adjusted net income $ 13,459 $ 12,369 $ 32,980 $ 35,499
========== =========== ========== ==========
Earnings per share $ .98 $ .88 $ 2.36 $ 2.55
========== =========== ========== ==========
Weighted average shares
outstanding 13,611 13,873 13,820 13,815
Dilutive effective of
unexercised stock option* 116 121 138 122
---------- ----------- ---------- ----------
13,727 13,994 13,958 13,937
========== =========== ========== ==========
</TABLE>
* Primary - Based on average market price
Fully Diluted - Based on the higher of the average market price or the market
price at September 30 of each year
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
GROUP, INC.'S SEPTEMBER 30, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY SUCH FINANCIAL STATMENTS
</LEGEND>
<CIK> 0000774624
<NAME> ALLIED GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 764,157
<DEBT-CARRYING-VALUE> 753,259
<DEBT-MARKET-VALUE> 0
<EQUITIES> 16,315
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 790,579
<CASH> 1,551
<RECOVER-REINSURE> 18,066
<DEFERRED-ACQUISITION> 46,523
<TOTAL-ASSETS> 1,046,184
<POLICY-LOSSES> 355,307
<UNEARNED-PREMIUMS> 219,746
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 36,157
0
37,812
<COMMON> 13,553
<OTHER-SE> 301,115
<TOTAL-LIABILITY-AND-EQUITY> 1,046,184
364,229
<INVESTMENT-INCOME> 36,608
<INVESTMENT-GAINS> 65
<OTHER-INCOME> 39,737
<BENEFITS> 265,317
<UNDERWRITING-AMORTIZATION> 79,888
<UNDERWRITING-OTHER> 14,226
<INCOME-PRETAX> 50,606
<INCOME-TAX> 14,651
<INCOME-CONTINUING> 35,955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,955
<EPS-PRIMARY> 2.570
<EPS-DILUTED> 2.410
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
