<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 March 31, 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 April 30, 1996:
13,955,692 shares of Common Stock.
<PAGE>
2
PART I
Item 1. Financial Statements
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------------- ---------------
(in thousands)
<S> <C> <C>
Assets
Investments
Fixed maturities - available for sale at fair value
(amortized cost $730,859 and $726,726) $ 745,712 $ 754,547
Equity securities at fair value (cost $10,308 and $7,527) 11,054 7,948
Short-term investments at cost (note 2 and 3) 10,640 9,802
Other investments at equity 12 2
---------------- ---------------
Total investments 767,418 772,299
Cash 805 1,465
Accrued investment income 10,682 10,467
Accounts receivable 78,918 76,118
Current income taxes recoverable --- 1,330
Reinsurance receivables for losses and loss settlement expenses 19,771 19,293
Mortgage loans held for sale (note 3) 17,084 13,673
Deferred policy acquisition costs 41,908 41,688
Prepaid reinsurance premiums 6,594 6,784
Mortgage servicing rights 34,799 35,705
Deferred income taxes 679 ---
Other assets 33,088 31,776
---------------- ---------------
Total assets $ 1,011,746 $ 1,010,598
================ ===============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
3
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------------- ---------------
(in thousands)
<S> <C> <C>
Liabilities
Losses and loss adusting expenses $ 342,548 $ 341,864
Unearned premiums 197,009 196,461
Outstanding drafts 13,982 13,708
Indebtedness to affiliates 2,757 1,019
Current income taxes 2,280 ---
Notes payable to nonaffiliates (note 3) 37,496 35,965
Notes payable to affiliates (note 2) 2,925 3,500
Guarantee of ESOP obligations (note 4) 26,120 26,270
Deferred income taxes --- 2,854
Other liabilities 32,417 37,371
---------------- ---------------
Total liabilities 657,534 659,012
---------------- ---------------
Stockholders' equity
Preferred stock, no par value, issuable in series,
authorized 7,500 shares
6-3/4% Series, 1,827 shares issued and outstanding 37,813 37,813
ESOP Series, issued and outstanding 2,993 shares in 1995 (note 5) --- 45,835
Common stock, no par value, $1 stated value, authorized 40,000 shares, issued
and outstanding 13,951 shares in
1996 and 9,445 shares in 1995 13,951 9,445
Additional paid-in capital 146,454 104,596
Retained earnings 169,218 159,470
Unrealized appreciation of investments (net of deferred
income tax expense of $5,474 in 1996 and $9,907 in 1995) 10,125 18,335
Unearned compensation related to ESOP (23,349) (23,908)
---------------- ---------------
Total stockholders' equity 354,212 351,586
---------------- ---------------
Total liabilities and stockholders' equity $ 1,011,746 $ 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
March 31,
-----------------------------------
1996 1995
---------------- ---------------
(in thousands, except per share data)
<S> <C> <C>
Revenues
Earned Premiums $ 118,870 $ 109,481
Investment income 12,119 11,275
Realized investment gains 8 15
Other income 12,338 11,505
---------------- ---------------
143,335 132,276
---------------- ---------------
Losses and expenses
Losses and loss adjusting expenses 80,982 74,431
Amortization of deferred policy acquisition costs 26,162 24,132
Other underwriting expenses 6,214 6,272
Other expenses 10,026 9,734
Interest expense 167 447
---------------- ---------------
123,551 115,016
---------------- ---------------
Income before income taxes 19,784 17,260
---------------- ---------------
Income taxes
Current 4,990 5,381
Deferred 846 (505)
---------------- ---------------
5,836 4,876
---------------- ---------------
Net income $ 13,948 $ 12,384
================ ===============
Net income applicable to common stock $ 12,474 $ 10,564
================ ===============
Earnings per share
Primary $ 1.17 $ 1.17
================ ===============
Fully diluted $ .94 $ .83
================ ===============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
5
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1996 1995
---------------- ---------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 13,948 $ 12,384
Adjustments to reconcile net income to net cash provided by
operating activities
Losses and loss adjusting expenses 684 6,978
Unearned premiums, net 738 4,329
Deferred policy acquisition costs (220) (988)
Accounts receivable, net (3,278) (5,999)
Depreciation and amortization 2,620 2,022
Realized investment gains (8) (15)
Mortgage loans held for sale, net (781) (144)
Indebtedness with affiliates 1,738 1,701
Accrued investment income (215) (411)
Other assets 258 1,420
Cost of ESOP shares allocated 559 350
Income taxes
Current 3,610 5,134
Deferred 846 (505)
Other, net (3,614) (7,160)
---------------- ---------------
Net cash provided by operating activities 16,885 19,096
---------------- ---------------
Cash flows from investing activities
Purchase of fixed maturities - available for sale (32,565) (26,004)
Purchase of equity securities (2,823) (177)
Purchase of equipment (4,234) (1,431)
Sale of fixed maturities - available for sale --- 3,021
Maturities, calls, and principal reductions of fixed maturities
Available for sale 28,172 2,906
Held to maturity --- 7,582
Sale of equity securities 44 66
Short-term investments, net (838) (4,891)
Sale of equipment 44 80
---------------- ---------------
Net cash used in investing activities (12,200) (18,848)
---------------- ---------------
Cash flows from financing activities
Notes payable to nonaffiliates, net (1,099) (1,830)
Notes payable to affiliates, net (575) 4,150
Issuance of common stock 529 625
Dividends paid to stockholders, net of income tax benefit (4,200) (3,146)
---------------- ---------------
Net cash used in financing activities (5,345) (201)
---------------- ---------------
Net (decrease) increase in cash (660) 47
Cash at beginning of year 1,465 1,541
---------------- ---------------
Cash at end of quarter $ 805 $ 1,588
================ ===============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
6
ALLIED Group, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
ALLIED Group, Inc. (the Company) and its property-casualty, excess & surplus
lines, and noninsurance subsidiaries on a consolidated basis.
At March 31, 1996, The ALLIED Group Employee Stock Ownership Trust (ESOP Trust)
owned 26.4% of the outstanding voting stock of the Company. ALLIED Mutual
Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance
company, controlled 18% of the voting stock of the Company.
The accompanying interim consolidated financial statements should be read in
conjunction with the following notes and with the Notes to Consolidated
Financial Statements included in the ALLIED Group, Inc. 1995 Annual Report to
Stockholders. The interim consolidated financial statements have been prepared
in conformity with generally accepted accounting principles (GAAP) and include
all adjustments which are in the opinion of management necessary for fair
presentation of the results for the interim periods. In the opinion of
management, all such adjustments are of a normal and recurring nature. All
significant intercompany balances and transactions have been eliminated. Certain
amounts have been reclassified to conform to current-period presentation.
(2) Transactions with Affiliates
The Company leases employees to its subsidiaries and ALLIED Mutual and certain
of ALLIED Mutual's subsidiaries pursuant to the terms of the Intercompany
Operating Agreement. Each company that leases employees is charged a fee based
upon costs incurred for salaries, related benefits, taxes, and expenses
associated with the employees it leases. The Company received revenues of
$648,000 and $675,000 for employees leased to affiliates for the three months
ended March 31, 1996 and 1995, respectively, which are included in other income.
A subsidiary of the Company provides data processing and other services for
ALLIED Mutual and its subsidiaries. Included in other income are revenues of
$506,000 and $519,000 relating to services performed for ALLIED Mutual and
subsidiaries for the first quarter 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 participations in such agreement
are 90% and 10%, respectively. Premiums paid by the property-casualty segment to
ALLIED Mutual were $388,000 and $363,000 in the first three months of 1996 and
1995, respectively. There were no recoveries in the first three months of 1996
and recoveries of $51,000 from ALLIED Mutual under the agreement in the first
three months of 1995.
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 March 31, 1996, the
Company had $7.8 million invested in the fund and had several unsecured notes
payable to the fund totaling $2.9 million. The interest rates on the borrowings
range from 5.5% to 8.5%.
<PAGE>
7
ALLIED Group, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
The Company had interest income from affiliates of $166,000 and $75,000 in the
first three months of 1996 and 1995, respectively. Interest expense with
affiliates was $53,000 and $60,000 in the first three months of 1996 and 1995,
respectively.
(3) Notes Payable to Nonaffiliates
At March 31, 1996, ALLIED Group Mortgage Company (ALLIED Mortgage) had borrowed
$23.6 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 base. At March 31, 1996, the outstanding borrowings of ALLIED
Mortgage were secured by $17.1 million of pledged mortgage loans held for sale,
mortgage servicing rights on loans with a principal balance of $2.9 billion and
foreclosure loans. Interest rates applicable to ALLIED Mortgage's borrowing
arrangements vary with the level of investable deposits maintained at the
respective commercial banks.
ALLIED Mortgage had $13.5 million of 8.4% senior secured notes outstanding as of
March 31, 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 that
expires March 1997. Interest on any outstanding borrowings is payable at an
annual rate equal to the federal funds unsecured rate for Federal Reserve member
banks. There was an outstanding balance of $400,000 at March 31, 1996.
Borrowings with the Federal Home Loan Bank of Des Moines were secured by United
States Government securities with a carrying value of $8.3 million at March 31,
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) 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.
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8
ALLIED Group, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
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>
Three Months Ended
March 31,
-----------------------------------
1996 1995
---------------- ---------------
(in thousands)
<S> <C> <C>
Revenues (1)
Property-casualty $ 123,874 $ 113,777
Excess & surplus lines 8,682 8,158
Eliminations and other 10,779 10,341
---------------- ---------------
Total $ 143,335 $ 132,276
================ ===============
Income before income taxes (1)
Property-casualty $ 17,450 $ 16,018
Excess & surplus lines 1,748 1,081
Eliminations and other 586 161
---------------- ---------------
Total $ 19,784 $ 17,260
================ ===============
March 31, December 31,
1996 1995
---------------- ---------------
(in thousands)
Assets
Property-casualty $ 846,694 $ 847,401
Excess & surplus lines 119,567 122,200
Eliminations and other 45,485 40,997
---------------- ---------------
Total $ 1,011,746 $ 1,010,598
================ ===============
(1) Including realized investment gains or losses.
</TABLE>
<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. (the Company) is a regional insurance holding company. Its
largest segment includes three property-casualty insurance companies that write
personal lines (primarily automobile and homeowners) and small commercial lines
of insurance. The Company operates exclusively in the United States and
primarily in the central and western states. The Company's other reportable
segment is excess & surplus lines insurance. Property-casualty insurance was the
most significant segment, accounting for 86.4% of consolidated revenues for the
three months ended March 31, 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.
As of March 31, 1996, The ALLIED Group Employee Stock Ownership Trust (ESOP
Trust) owned 26.4% of the outstanding voting stock, and ALLIED Mutual 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 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 three months ended March 31, 1996 were $143.3
million, up 8.4% over the $132.3 million reported for the first three months of
1995. The increase occurred primarily because of the 8.6% growth in earned
premiums for the three months ended March 31, 1996.
Income before income taxes for the first three months of 1996 was up to $19.8
million from $17.3 million for the same period in 1995. Income before income
taxes was up primarily due to the growth in earned premiums. The
property-casualty segment was the dominant contributor to improved operating
results with an increase of $1.4 million.
Net income was up 12.6% to $13.9 million, bringing fully diluted earnings per
share to $0.94 for the three months ended March 31, 1996, from $12.4 million for
the corresponding period in 1995. Fully diluted earnings per share before net
realized gains were $0.94 for the first three months of 1996 compared with $0.83
for the same period of 1995.
<PAGE>
10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Book value per share increased only slightly in the first quarter of 1996 to
$24.36 from $24.23 at December 31, 1995. The growth in book value was stalled by
the recent upward trend in interest rates. At March 31, 1996, the fair value of
investments in fixed maturities were $14.9 million above amortized cost compared
to $27.8 million above amortized cost at December 31, 1995. If the effect of
reporting fixed maturity investments at market were excluded, the book value at
March 31, 1996 was $23.67 compared to $22.94 at December 31, 1995.
Property-casualty
Revenues for the property-casualty segment increased to $123.9 million from
$113.8 million for the three months ended March 31, 1996 and 1995, respectively.
Direct premiums earned for the segment were $116.6 million for the first three
months of 1996 compared with $103.3 million one year earlier. Earned premiums
increased 8.7% for the first three months of 1996 to $111.7 million from $102.7
million. The increase resulted primarily from growth in insurance exposure.
Pooled net premiums written (including ALLIED Mutual) totaled $177.5 million, a
6.5% increase over production in the first three months of 1995. The average
premium per policy for personal lines was up 3.5% from the first three months of
1995 to $592 while the policy count grew 6.5%. The average premium per policy
for commercial lines excluding crop-hail increased slightly from the first three
months of 1995 to $1,080 and the policy count was up 4.6%. Earned premiums for
the property-casualty segment were 66.5% personal lines and 33.5% commercial
lines in the first three months of 1996. The business mix for the first three
months of 1995 was 65.4% personal lines and 34.6% commercial lines.
Income before income taxes increased to $17.5 million from $16 million in the
first three months of 1995 primarily due to increased earned premiums.
Investment income for the first three months of 1996 was $10.3 million compared
to $9.4 million for the same period in 1995. The pretax yield on invested assets
was 6.3% and 6.5% for the three months ended March 31, 1996 and 1995,
respectively. Realized investment gains were $8,000 compared with $21,000 in the
first three months of 1995. Other income for the first three months of 1996
increased to $1.9 million from $1.7 million for the same period in 1995.
The statutory combined ratio (after policyholder dividends) for the first three
months of 1996 worsened to 95.2 from the 94.9 reported in the first three months
of 1995. The change in the combined ratio was primarily attributed to a 0.5
point increase in the loss and loss adjusting expense ratio. Wind and hail
losses for the first three months of 1996 improved to $3.6 million from $5.4
million for the same period of 1995. The impact of wind and hail losses on the
combined ratio was 3.2 points and 5.3 points for the three months ended March
31, 1996 and 1995, respectively. The underwriting gain (on a generally accepted
accounting principles basis) was $5.3 million compared with a gain of $5 million
for the first three months of 1995. On a fully diluted basis, the impact of wind
and hail losses on the results of operations was $0.17 per share versus $0.26
per share in the first three months of 1995.
<PAGE>
11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The following table presents the property-casualty's statutory combined ratio by
line of business for the three months ended March 31, 1996 and 1995:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1996 1995
------- -------
<S> <C> <C>
Personal automobile 98.2 94.0
Homeowners 97.2 103.8
Personal lines 97.9 96.4
Commercial automobile 100.5 97.7
Workers' compensation 69.0 77.7
Other property/liability 93.2 96.3
Other lines 56.7 54.0
Commercial lines 89.7 91.9
Total 95.2 94.9
</TABLE>
The personal auto statutory combined ratio increased to 98.2 for the first three
months of 1996 from 94.0 for the same period in 1995. The increase was primarily
due to a 4.4 point deterioration in the loss and loss adjusting expense ratio.
The statutory combined ratio for the homeowners line was 97.2 for the first
three months of 1996 compared with 103.8 for the same period of 1995. The
improvement was primarily due to a 5.9 point improvement in the loss and loss
adjusting expense ratio. The impact of wind and hail losses on the combined
ratio for the homeowners line decreased to 9.2 points from 20.4 points for the
first three months of 1995. Overall, the personal lines statutory combined ratio
increased to 97.9 in the first three months of 1996 from 96.4 in the same period
of 1995. The statutory combined ratio for commercial lines improved to 89.7 in
the first three months of 1996 from 91.9 for three months of 1995. The
improvement was primarily attributable to the underwriting results achieved in
other property and liability and workers' compensation.
Excess & Surplus Lines
Earned premiums increased to $7.2 million for the first three months of 1996
from $6.8 million for the first three months of 1995. Net premiums written
decreased 14.6% to $6.4 million through March 31, 1996 from $7.5 million through
March 31, 1995. The decrease is attributed to the soft market that the segment
operates in and management's decision not to sacrifice underwriting results for
premium growth. Direct earned premiums increased 2.6% to $9 million for the
three months ended March 31, 1996 from $8.7 million for the same period in 1995.
As of March 31, 1996, the segment's book of business was comprised of 2.3%
personal lines and 97.7% commercial lines. For the first three months of 1995,
the business mix was 2.5% personal lines and 97.5% commercial lines.
<PAGE>
12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The statutory combined ratio (after policyholder dividends) was 98.3, which
produced an underwriting gain (on a generally accepted accounting principles
basis) of $247,000 for the first three months of 1996. The combined ratio of
104.0 for the first quarter of 1995 resulted in an underwriting loss of
$305,000. The combined ratio decreased primarily because of a 5.8-point decrease
in the loss and loss adjusting expense ratio in the first three months of 1996.
Income before income taxes for the three months ended March 31, 1996 increased
61.7% to $1.7 million from $1.1 million. The segment had no realized gains for
the first quarter of 1996. Realized investment gains were $2,000 for the first
three months in 1995. Investment income for the first three months of 1996
increased 8.4% to $1.5 million from $1.4 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 three months of 1995. Invested assets increased 14.2% to $94.1 million
at March 31, 1996 from the same period one year earlier.
Noninsurance Operations
Revenues for the noninsurance operations (including investment services, data
processing, and employee lease fees from affiliates) increased 2.1% for the
first three months of 1996 to $39.7 million from $38.9 million for the same
period last year. Income before income taxes was $586,000 for the first quarter
of 1996 compared to $161,000 for the three months ended March 31, 1995.
Revenues for investment services in the first three months of 1996 increased to
$4.6 million from $4.3 million for the same period in 1995. Income before income
taxes increased 21.2% to $1.2 million from $965,000 for the first three months
of 1995. The servicing portfolio was $2.9 billion at March 31, 1996 and $3
billion at December 31, 1995. Investment Income
The investment policy for the Company's insurance segments requires that the
fixed maturity portfolio be invested primarily in debt obligations rated "BBB"
or higher by Standard & Poor's Corporation or a recognized equivalent at the
time of acquisition. The policy also states that equity securities are to be of
United States and Canadian corporations listed on established exchanges or
publicly traded in the over-the-counter market. Preferred stock is to be
comprised primarily of issues rated at least A3/A- by Standard and Poor's
Corporation or Moody's. The Company's investment portfolio consisted almost
entirely of fixed income securities; 98.3% were rated investment grade or higher
at March 31, 1996. The investment portfolio contained no real estate or mortgage
loans.
Invested assets were down less than 1% to $767.4 million from $772.3 million at
year-end 1995. The decrease in invested assets was due to a write down of $12.9
million in market value caused by rising interest rates. Three-month
consolidated investment income increased 7.5% to $12.1 million from $11.3
million through March 31, 1995. The Company's pretax rate of return on invested
assets was down to 6.3% from last year's 6.7%.
<PAGE>
13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
As of March 31, 1996, the Company held collateralized mortgage obligation (CMO)
investments with a carrying and fair value of $74.9 million compared to a
carrying and fair value of $77.7 million as of December 31, 1995. Substantially
all of the Company's CMO investments are in planned amortization class bonds or
sequential pay bonds with anticipated durations of approximately 5 years at the
time of acquisition. The Company has not invested in the more volatile types of
CMO products such as companion or accrual (Z-bond) tranches. All of the
Company's CMO investments have an active secondary market; accordingly their
effect on the Company's liquidity does not differ from that of other fixed
income investments.
Income Taxes
The Company's year-to-date effective income tax rate was up slightly to 29.5%
from 29.1% at year-end 1995. The income tax expense for the first three months
of 1996 was up to $5.8 million from $4.9 million for the same period in 1995.
The increase was due in part to increased operating income and a decreased
amount of tax-exempt investment income in the first quarter of 1996.
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 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 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 three months of 1996, operating activities generated cash flows of
$16.9 million; in the first three months of 1995, the total was $19.1 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 three months of 1996
and 1995 were used primarily to purchase investment-grade fixed securities,
equity securities, and equipment which accounted for the majority of the
investing activities. Operating cash flows were also used to pay $4.5 million of
dividends to stockholders in the first three months of 1996. For the same period
in 1995, the funds generated from the operating activities were used to pay
dividends to stockholders of $3.4 million.
<PAGE>
14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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 March 31, 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 March 31, 1996,
short-term borrowings amounted to $23.6 million to be repaid through the
subsequent sale of securities inventory and long-term borrowings amounted to
$13.5 million to be repaid over the next 9 years. These notes payable are not
guaranteed by the Company. In the normal course of its business, ALLIED Mortgage
also makes commitments to buy and sell securities that may result in credit and
market risk in the event the counterparty is unable to fulfill its obligation.
Historically, the Company's insurance subsidiaries have generated sufficient
funds from operations to pay their claims. While the property-casualty and
excess & surplus lines insurance companies have maintained adequate investment
liquidity, they have in the past required additional capital contributions to
support premium growth.
A source of cash flows for the holding company is dividend payments from its
subsidiaries. During the first three months of 1996, the Company received
dividend payments of $3.7 million from the property-casualty subsidiaries and
$19,000 from noninsurance subsidiaries. During the same period of 1995, the
Company received dividend payments of $2.7 million from the property-casualty
subsidiaries and $169,000 from noninsurance subsidiaries. Dividend payments to
common stockholders totaled $3.1 million for the three months ended March 31,
1996, up from $1.5 million for the same period in 1995. In the first three
quarters of 1996 and 1995, the Company paid dividends of $879,000 on the 6-3/4%
Series preferred stock. The Company also paid dividends of $595,000 and $941,000
on the ESOP Series preferred stock in the three months ended March 31, 1996 and
1995, respectively.
On March 6, 1996, the ESOP Trustee elected to convert the ESOP Series to common
stock. The conversion was completed on March 7, 1996 (see note 4 of the Notes to
Interim Consolidated Financial Statements).
Company contributions plus dividends on the ESOP leveraged common stock are used
by the ESOP Trust to service the ESOP obligations. Dividends and payments for
the employee lease fees from its subsidiaries are used by the Company to fund
the amounts. In connection with its guarantee of ESOP obligations, the Company
is required to maintain minimum stockholders' equity and to comply with certain
other financial covenants.
<PAGE>
15
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
3.1 Restated Articles of Incorporation of the Company as of May 1,
1996.
10.33 Second Amendment to the Term Credit Agreement and Guaranty, dated
March 6, 1996
11 Statement re Computation of Per Share Earnings.
27 Financial Data Schedule
(b) The Company filed two reports on Form 8-K during the first
quarter ended March 31, 1996.
Financial
Items Reported Statements Dated Filed
-------------- ---------- -------------
Item 5 - Other None March 6, 1996
Item 5 - Other None March 7, 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: May 3, 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
3.1 Restated Articles of Incorporation of the Company 18
as of May 1, 1996
10.33 Second Amendment to the Term Credit Agreement and 32
Guaranty, dated March 6, 1996
11 Statement re Computation of Per Share Earnings 33
27 Financial Data Schedule 34
<PAGE>
18
EXHIBIT 3.1
ARTICLES OF RESTATEMENT
of
ALLIED Group, Inc.
TO THE SECRETARY OF STATE OF THE STATE OF IOWA:
Pursuant to Section 1007 of the Iowa Business Corporation Act, the
undersigned corporation adopts the following amendment to the corporation's
articles of incorporation.
1. The name of the corporation is ALLIED Group, Inc.
2. The text of the Restated Articles of Incorporation is as follows:
ARTICLE I.
The name of the Corporation is ALLIED Group, Inc.
ARTICLE II.
The period of its duration is perpetual.
ARTICLE III.
The Corporation shall have unlimited power to engage in and to do any
lawful act concerning any or all lawful business for which corporations
may be organized.
ARTICLE IV.
(a) The total number of shares of stock which the Corporation shall have
authority to issue is forty-seven million five hundred thousand
(47,500,000) shares consisting of forty million (40,000,000) shares of
common stock without par value and seven million five hundred thousand
(7,500,000) shares of preferred stock without par value.
(b) The Board of Directors is authorized, subject to limitations
prescribed by law and the provisions of this Article IV, to provide for
the issuance of the shares of preferred stock in series, and by filing a
certificate pursuant to the applicable law of the State of Iowa, to
establish from time to time, by duly adopted resolution, the number of
shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
<PAGE>
19
The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
(1) The number of shares constituting that series and the
distinctive designation of that series;
(2) The dividend rate on the shares of that series, whether
dividends shall be cumulative, and, if so, from which
date or dates, and the relative rights or priority, if
any, of payment of dividends on shares of that series;
(3) Whether that series shall have voting rights, in addition
to the voting rights provided by law, and, if so, from
which date or dates, and the terms of such voting rights;
(4) Whether that series shall have conversion privileges,
and, if so, the terms and conditions of such conversion,
including provision for adjustment of the conversion rate
in such events as the Board of Directors shall determine;
(5) Whether or not the shares of that series shall be
redeemable, and, if so, the terms and conditions of such
redemption, including the date or dates upon or after
which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary
under different conditions and at different redemption
dates;
(6) Whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if
so, the terms and amount of such sinking fund;
(7) The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, and the relative rights of
priority, if any, of payment of shares of that series;
(8) Any other relative rights, preferences and limitations of
that series.
(c) Each holder of common stock of record shall have one vote for each
share of common stock standing in his name on the books of the
Corporation and entitled to vote, except that in the election of
directors he shall have the right to vote such number of shares for as
many persons as there are directors to be elected. Cumulative voting
shall not be allowed in the election of directors or for any other
purpose.
<PAGE>
20
(d) At all meetings of stockholders, a majority of the shares entitled
to vote at such meeting represented in person or by proxy, shall
constitute a quorum, and at any meeting at which a quorum is present
the affirmative vote of a majority of the shares represented at such
meeting and entitled to vote on the subject matter shall be the act of
the stockholders; except that the following actions shall require the
affirmative vote or concurrence of a majority of all of the outstanding
shares of the Corporation entitled to vote thereon: (1) adopting an
amendment or amendments to these Articles of Incorporation, (2) lending
money to, guaranteeing the obligations of or otherwise assisting any of
the directors of the Corporation, (3) authorizing the sale, lease,
exchange or other disposition of all or substantially all of the
property and assets of the Corporation, with or without its goodwill,
not in the usual and regular course of business, (4) approving a plan
of merger or consolidation, (5) adopting a resolution submitted by the
Board of Directors to dissolve the Corporation, and (6) adopting a
resolution submitted by the Board of Directors to revoke voluntary
dissolution proceedings.
(e) No stockholder of the Corporation shall have any preemptive or
similar right to acquire or subscribe for any additional unissued or
treasury shares of stock, or other securities of any class, or rights,
warrants or options to purchase stock or scrip, or securities of any
kind convertible into stock or carrying stock purchase warrants or
privileges.
(f) The Board of Directors may from time to time distribute to the
stockholders in partial liquidation, out of either stated capital or
capital surplus of the Corporation, a portion of its assets, in cash or
property, subject to the limitations contained in the statutes of Iowa.
ARTICLE V.
The Bylaws may contain provisions restricting the transfer of stock of
the Corporation. No stockholder shall sell, assign, transfer, dispose of
or encumber any shares of stock in violation of any conditions stated in
the Bylaws.
ARTICLE VI.
The address of the registered office of the Corporation is 701 Fifth
Avenue, Des Moines, Iowa 50309, and the name of the registered agent at
such address is Jamie H. Shaffer.
<PAGE>
21
ARTICLE VII.
Deeds, mortgages and all instruments affecting title to real estate,
except mortgage releases, shall be signed by the President and
countersigned or attested by the Secretary. Mortgage releases may be
executed by any one or more of the officers of the Corporation.
ARTICLE VIII.
The number of directors constituting the Board may be increased or
decreased as provided in the Bylaws. Directors are divided into three
classes and are elected for three-year terms.
ARTICLE IX.
The stockholders and their private property shall be exempt from all
liability from corporate debts, obligations and undertakings.
ARTICLE X.
A director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of the law, (iii) for any
transaction from which the director derived an improper personal
benefit, or (iv) under Section 496A.44 of the Iowa Business Corporation
Act, or any successor Act thereto. No amendment to or repeal of this
Article shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment or
repeal. If Iowa law is hereinafter changed to permit further elimination
or limitation of the liability of directors for monetary damages to the
Corporation or its stockholders, then the liability of a director of
this Corporation shall be eliminated or limited to the full extent then
permitted. The directors of this Corporation have agreed to serve as
directors in reliance upon the provisions of this Article.
This Corporation shall indemnify a director of this Corporation, and
each director of this Corporation who is serving or who has served, at
the request of this Corporation, as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint
venture, trust, other enterprise or employee benefit plan to the fullest
extent possible against expenses, including attorneys' fees, judgments,
<PAGE>
22
penalties, fines, settlements and reasonable expenses, actually incurred
by such director or person relating to his conduct as a director of this
Corporation or as a director, officer, partner, trustee, employee or
agent of another corporation, partnership, joint venture, trust, other
enterprise or employee benefit plan, except that the mandatory
indemnification required by this sentence shall not apply (i) to a
breach of a director's duty of loyalty to the Corporation of its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of the law, (iii)
for a transaction from which a director derived an improper personal
benefit, (iv) under Section 496A.44 of the Iowa Business Corporation
Act, or any successor Act thereto, or (v) against judgments, penalties,
fines and settlements arising from any proceeding by or in the right of
the Corporation, or against expenses in any such case where such
director shall be adjudged liable to the Corporation.
ARTICLES OF AMENDMENT
CERTIFICATE OF DESIGNATIONS
6-3/4% SERIES PREFERRED STOCK
OF
ALLIED GROUP, INC.
Pursuant to Section 490.602 of the Iowa Code (1992)
RESOLVED, that pursuant to the authority vested in the Board of
Directors of ALLIED Group, Inc. (the "Company") in accordance with the
provisions of its Amended and Restated Articles of Incorporation, as
amended, a series of Preferred Stock is hereby authorized to be issued
with voting powers, designations, preferences, and other special rights,
qualifications, limitations and restrictions as follows:
1. Designation and Amount.
The shares of this series of Preferred Stock shall be designated
as the 6-3/4% Series Preferred Stock with no par value
(hereinafter referred to as "6-3/4% Preferred Stock"), and the
number of shares constituting this series shall be 1,827,222.
2. Dividends and Distributions.
(a) The holders of shares of 6-3/4% Preferred Stock shall be
entitled to receive, when, as and if declared by the Board
of Directors of the Company out of funds legally available
therefor, cumulative cash dividends ("Dividends") in an
amount per share equal to the annual rate of 6-3/4% of the
<PAGE>
23
Liquidation Preference (as defined in Section 4), payable
quarterly, one-fourth on the last day of each December,
March, June, and September (each a "Dividend Payment Date"),
commencing on December 31, 1992, to holders of record at the
start of business on such Dividend Payment Date. In the
event that any Dividend Payment Date shall fall on any day
other than a business day, the dividend payment due on such
Dividend Payment Date shall be paid on the business day
immediately preceding such Dividend Payment Date. Dividends
shall begin to accrue on outstanding shares of 6-3/4%
Preferred Stock from the date of issuance of such shares of
6-3/4% Preferred Stock. Dividends shall accrue on a daily
basis whether the Company shall have earnings or surplus at
the time, but Dividends accrued on the shares of 6-3/4%
Preferred Stock for any period less than a full quarterly
period between Dividend Payment Dates shall be computed on
the basis of a 360-day year of 30-day months. For the period
from the date of issuance until the first Dividend Payment
Date, Dividends shall accrue on a daily basis and shall be
computed on the basis of a 360-day year of 30-day months.
Accrued but unpaid Dividends shall cumulate as of the
Dividend Payment Date on which they first become payable,
but no interest shall accrue on accumulated but unpaid
Dividends.
(b) So long as any 6-3/4% Preferred Stock shall be outstanding,
no dividend shall be declared or paid or set apart for
payment on any other series of stock ranking on a parity
with the 6-3/4% Preferred Stock as to dividends, unless
there shall also be or have been declared or paid or set
apart for payment on the 6-3/4% Preferred Stock, like
dividends for all dividend payment periods of the 6-3/4%
Preferred Stock ending on or before the dividend payment
date of such parity stock, ratably in proportion to the
respective amounts of dividends accumulated and unpaid
through such dividend payment period of the 6-3/4% Preferred
Stock and accumulated and unpaid or payable on such parity
stock through the dividend payment period on such parity
stock next preceding such dividend payment date. In the
event that full cumulative dividends on the 6-3/4% Preferred
Stock have not been declared and paid or set apart for
payment when due, the Company shall not declare or pay or
set apart for payment any dividends or make any other
distributions on, or make any payment on account of the
purchase, redemption or other retirement of any other class
of stock or series thereof of the Company ranking, as to
<PAGE>
24
dividends or as to distributions in the event of a
liquidation, dissolution or winding-up of the Company,
junior to the 6-3/4% Preferred Stock until full cumulative
dividends on the 6-3/4% Preferred Stock shall have been
declared and paid or set apart for payment; provided,
however, that the foregoing shall not apply to (i) any
dividend payable solely in any shares of stock ranking, as
to dividends or as to distributions in the event of a
liquidation, dissolution or winding-up of the Company,
junior to the 6-3/4% Preferred Stock, or (ii) the
acquisition of shares of any stock ranking, as to dividends
or as to distributions in the event of a liquidation,
dissolution or winding-up of the Company, junior to the
6-3/4% Preferred Stock either (A) pursuant to any employee
or director incentive or benefit plan or arrangement
(including any employment, severance or consulting
agreement) of the Company or any subsidiary of the Company
heretofore or hereafter adopted or (B) in exchange solely
for shares of any other stock ranking junior to the 6-3/4%
Preferred Stock.
3. Voting Rights. Except as provided for in Section 3(d) hereof, the
holders of the shares of 6-3/4% Preferred Stock shall have the
following voting rights:
(a) The holders of 6-3/4% Preferred Stock shall be entitled to
vote on all matters submitted to a vote of the holders of
common stock, without par value, of the Company (the "Common
Stock"), voting together with the holders of Common Stock as
one class. Each share of the 6-3/4% Preferred Stock shall be
entitled to one vote.
(b) Except as otherwise required by law or set forth herein,
holders of 6-3/4% Preferred Stock shall have no special
voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders
of Common Stock as set forth herein) for the taking of any
corporate action; provided, however, that if shareholder
voting is otherwise required by law or these articles, the
vote of at least a majority of the outstanding 6-3/4%
Preferred Stock, voting as a separate voting group, shall be
necessary to adopt any alteration, amendment or repeal of
any provision of the Amended and Restated Articles of
Incorporation of the Company, as amended, or this Resolution
(including any such alteration, amendment or repeal effected
by any merger or consolidation in which the Company is the
surviving or resulting corporation) if such amendment,
<PAGE>
25
alteration or repeal would alter or change the powers,
preferences or special rights of the shares of 6-3/4%
Preferred Stock so as to affect them adversely.
(c) In the event the Company shall, at any time, declare or pay
any dividend on its Common Stock or on its voting preferred
stock of any series (herein referred to as "voting stock"),
payable in shares of its voting stock, or effect a
subdivision or combination of the outstanding shares of its
voting stock (by reclassification or otherwise than by
payment of a dividend in shares of voting stock) either (i)
the Company shall take all comparable action necessary to
preserve the relative voting power of the holders of the
6-3/4% Preferred Stock outstanding by subdividing or
combining the outstanding shares of 6-3/4% Preferred Stock,
or otherwise; or (ii) each outstanding share of 6-3/4%
Preferred Stock outstanding shall thereafter have that
number of votes which is equal to the number of votes which
the holder of an outstanding share of voting stock on which
such dividend was paid or which was so subdivided or
combined held immediately after the payment of such dividend
or the subdivision or combination of such share.
(d) In the event of any assignment, transfer, or other
disposition of shares of 6-3/4% Preferred Stock to any
person other than ALLIED Mutual Insurance Company ("ALLIED
Mutual") or an affiliate or successor corporation to ALLIED
Mutual, the shares of 6-3/4% Preferred Stock so disposed,
upon such disposition and without any further action by the
Company or the holder thereof, shall become non-voting, and
no such person or entity receiving the disposed of shares
shall have any of the voting powers ascribed to shares of
6-3/4% Preferred Stock hereunder except as may be required
by law. Whenever the 6-3/4% Preferred Stock is non-voting,
pursuant to the preceding sentence, in the event that
Dividends shall remain unpaid for more than six quarterly
periods, the holders shall thereafter, commencing with the
following annual meeting of the stockholders of the Company,
be entitled to elect one director to the Board of Directors
of the Company, upon notice to the Company sufficient to
permit its compliance with all regulatory requirements.
Certificates representing shares of 6-3/4% Preferred Stock
shall be legended to reflect the provisions of this Section
3(d).
<PAGE>
26
(e) For purposes of this Certificate of Designation, the
following definitions shall apply:
An "affiliate" of, or person "affiliated" with, a
specified person shall mean a person that directly, or
indirectly through one or more intermediaries,
controls or is controlled by, or is under common
control with, the person specified.
The term "control" (including the term "controlled
by") means the possession, direct or indirect, of the
power to direct or cause the direction of the
management and policies of a person, whether through
the ownership of voting securities, by contract, or
otherwise.
A "successor" to a specified person shall mean a
person that directly, or indirectly, and whether alone
or acting in concert with others, acquires, by any
means, substantially all of the business or assets of
such specified person.
4. Liquidation, Dissolution or Winding-up.
(a) Upon any voluntary or involuntary liquidation, dissolution
or winding-up of the Company, the holders of shares of
6-3/4% Preferred Stock shall be entitled to receive out of
the assets of the Company which remain after the debts or
obligations of the Company have been paid and which are
available for payment to stockholders and subject to the
rights of the holders of stock of the Company ranking senior
to or on a parity with the 6-3/4% Preferred Stock in respect
of distributions upon liquidation, dissolution or winding-up
of the Company, before any amount shall be paid or
distributed among the holders of Common Stock or any other
shares ranking junior to the 6-3/4% Preferred Stock in
respect of distributions upon liquidation, dissolution or
winding-up of the Company, liquidating distributions in cash
in the amount of $28.50 per share (the "Liquidation
Preference"), plus an amount in cash equal to all accrued
and unpaid dividends thereon to the date fixed for
distribution. If upon any liquidation, dissolution or
winding-up of the Company, the amounts payable with respect
to the 6-3/4% Preferred Stock and any other stock ranking as
to any such distribution on a parity with the 6-3/4%
Preferred Stock are not paid in full, the holders of the
6-3/4% Preferred Stock and such other stock shall share
ratably in any distribution of assets in proportion to the
<PAGE>
27
full respective preferential amounts to which they are
entitled. After payment of the full amount to which they are
entitled as provided by the foregoing provisions of this
paragraph 4(a), the holders of shares of 6-3/4% Preferred
Stock shall not be entitled to any further right or claim to
any of the remaining assets of the Company.
(b) Neither the merger or consolidation of the Company with or
into any other corporation, nor the merger or consolidation
of any other corporation with or into the Company, nor the
sale, transfer, exchange or lease of all or any portion of
the assets of the Company, shall be deemed to be a
dissolution, liquidation or winding-up of the affairs of the
Company for purposes of this Section 4.
(c) Written notice of any voluntary or involuntary liquidation,
dissolution or winding-up of the Company, stating the
payment date or dates when, and the place or places where,
the amounts distributable to holders of 6-3/4% Preferred
Stock in such circumstances shall be payable, shall be given
by first-class mail, postage prepaid, mailed not less than
twenty (20) days prior to any payment date stated therein,
to the holders of shares of 6-3/4% Preferred Stock at the
address shown on the books of the Company or any transfer
agent for the 6-3/4% Preferred Stock.
5. Redemption Rights of the Company Upon Disposition.
(a) In the event of any assignment, transfer, or other
disposition of shares of 6-3/4% Preferred Stock to any
person other than ALLIED Mutual or an affiliate or successor
corporation to ALLIED Mutual, all or any portion of the
shares of 6-3/4% Preferred Stock that have been disposed of
shall be redeemable, out of funds legally available
therefor, at the option of the Company at any time after
five (5) years from the date on which the shares of 6-3/4%
Preferred Stock were transferred at a redemption price of
the Liquidation Preference (the "Redemption Price"), plus,
in each case, an amount equal to all accrued and unpaid
dividends thereon to the date fixed for redemption. Payment
of the Redemption Price shall be made by the Company in
cash. From and after the date fixed for redemption,
dividends on shares of 6-3/4% Preferred Stock called for
redemption will cease to accrue, such shares will no longer
be deemed to be outstanding and all rights in respect of
such shares of the Company shall cease, except the right to
receive the Redemption Price. If less than all of the
<PAGE>
28
outstanding shares of 6-3/4% Preferred Stock are
transferred, the Company shall have the option only to
redeem some portion or all of those shares that have been
transferred. If less than all of the shares of 6-3/4%
Preferred Stock are to be redeemed, the Company shall redeem
such shares as determined by lot.
(b) Unless otherwise required by law, notice of redemption will
be sent to the holders of 6-3/4% Preferred Stock at the
address shown on the books of the Company or any transfer
agent for the 6-3/4% Preferred Stock by first class mail,
postage prepaid, mailed not less than twenty (20) days nor
more than sixty (60) days prior to the redemption date. Each
such notice shall state: (i) the redemption date; (ii) the
total number of shares of the 6-3/4% Preferred Stock to be
redeemed and, if fewer than all the shares held by such
holder are to be redeemed, the number of such shares to be
redeemed from such holder; (iii) the Redemption Price; (iv)
the place or places where certificates for such shares are
to be surrendered for payment of the Redemption Price; and
(v) that dividends on the shares to be redeemed will cease
to accrue on such redemption date. Upon surrender of the
certificates for any shares so called for redemption, such
shares shall be redeemed by the Company at the date fixed
for redemption and at the Redemption Price set forth in this
Section 5. Payment of the Redemption Price shall be made by
the Company within five (5) days after the date fixed for
redemption.
6. Ranking; Retirement Of Shares.
(a) The 6-3/4% Preferred Stock shall rank senior to the Common
Stock as to the payment of dividends and the distribution of
assets upon liquidation, dissolution and winding-up of the
Company, and, unless otherwise provided in the Restated
Articles of Incorporation of the Company, or a Certificate
of Designations relating to any other series of preferred
stock of the Company, the 6-3/4% Preferred Stock shall rank
on a parity with all other series of the Company's Preferred
Stock (including any series of ESOP Convertible Preferred
Stock), as to the payment of dividends and the distribution
of assets on liquidation, dissolution or winding-up.
(b) Any shares of 6-3/4% Preferred Stock acquired by the Company
by reason of redemption of such shares as provided by this
Resolution, or otherwise so acquired, shall be retired as
<PAGE>
29
shares of 6-3/4% Preferred Stock and restored to the status
of authorized but unissued shares of preferred stock of the
Company, undesignated as to series, and may thereafter be
reissued as part of a new series of such preferred stock as
permitted by law.
<PAGE>
30
7. Miscellaneous.
(a) All notices referred to herein shall be in writing, and all
notices hereunder shall be deemed to have been given upon
the earlier of receipt thereof or three (3) business days
after the mailing thereof if sent by registered mail (unless
first-class mail shall be specifically permitted for such
notice under the terms of this Resolution) with postage
prepaid, addressed: (i) if to the Company, to its office at
701 Fifth Avenue, Des Moines, Iowa 50309 (Attention:
Corporate Treasurer) or to the transfer agent for the 6-3/4%
Preferred Stock, or other agent of the Company designated as
permitted by this Resolution, or (ii) if to any holder of
the 6-3/4% Preferred Stock, to such holder at the address of
such holder as listed in the stock record books of the
Company (which may include the records of any transfer agent
for the 6-3/4% Preferred Stock), or (iii) to such other
address as the Company or any such holder, as the case may
be, shall have designated by notice similarly given.
(b) Unless otherwise provided in the Restated Articles of
Incorporation, as amended, of the Company, all payments in
the form of dividends, distributions on voluntary or
involuntary dissolution, liquidation or winding-up or
otherwise made upon the shares of 6-3/4% Preferred Stock and
any other stock ranking on a parity with the 6-3/4%
Preferred Stock with respect to such dividend or
distribution shall be made pro rata, so that amounts paid
per share on the 6-3/4% Preferred Stock and such other stock
shall in all cases bear to each other the same ratio that
the required dividends, distributions or payments, as the
case may be, then payable per share on the shares of the
6-3/4% Preferred Stock and such other stock bear to each
other.
(c) The Company may appoint, and from time to time discharge and
change, a transfer agent for the 6-3/4% Preferred Stock.
Upon any such appointment or discharge of a transfer agent,
the Company shall send notice thereof by first-class mail,
postage prepaid, to each holder of record of 6-3/4%
Preferred Stock.
FURTHER RESOLVED, that any officer of the Company be, and hereby is,
authorized for and on behalf of the Company, to perform any and all acts
and execute any and all documents necessary or advisable to effectuate
the foregoing Resolution.
<PAGE>
31
3. The Restated Articles of Incorporation were adopted by the Board of
Directors.
4. The duly adopted Restated Articles of Incorporation supersede the
restated and amended articles of incorporation and all amendments to
them.
The effective date of this document is May 1, 1996.
ALLIED Group, Inc.
------------------------------
Jamie H. Shaffer
President (Financial)
<PAGE>
32
EXHIBIT 10.33
SECOND AMENDMENT TO
TERM CREDIT AGREEMENT AND GUARANTY
THIS AMENDMENT dated as of March 5, 1996 is entered into by and among
ALLIED Group, Inc. ("Company"), State Street Bank and Trust Company, not in its
individual capacity but as trustee for The ALLIED Group Employee Stock Ownership
Trust ("ESOP Trustee"), Bank of Montreal, Chicago Branch ("BOM"), and Norwest
Bank Iowa, National Assocation ("Norwest") to amend the Term Credit Agreement
and Guaranty dated March 13, 1995, as amended October 12, 1995 ("Agreement").
1. This Amendment shall be effective as of March 5, 1996.
2. Section 5.1(b) is amended by adding to the end of the last
sentence:
and except for certain options to purchase in the aggregate no more
than 20% of the capital stock of The Freedom Group, Inc. held by
certain officers of The Freedom Group, Inc.
3. Section 6.1.18 is deleted in its entirety and shall be left blank
for possible future use.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers as of the day and year first above
written.
ALLIED Group, Inc. The ALLIED Group Employee Stock
Ownership Trust
By:__________________________ By State Street Bank and Trust
Jamie H. Shaffer Company, not individually, but
President (Financial) solely in its capacity as ESOP
Trustee
Bank of Montreal, Chicago
Branch By:___________________________
Title:________________________
By:__________________________
Title:_______________________
Norwest Bank Iowa, National
Association
By:___________________________
Title:________________________
<PAGE>
33
Exhibit 11
ALLIED Group, Inc. and Subsidiaries
Computation of Per Share Earnings
For the three months ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------------- ---------------
<S> <C> <C>
Primary
Net income $ 13,948,264 $ 12,384,323
Preferred stock dividends (1,474,264) (1,819,938)
Stock options in subsidiary (101,756) (78,028)
---------------- ---------------
Adjusted net income $ 12,372,244 $ 10,486,357
================ ===============
Earnings per share $ 1.15 $ 1.14
================ ===============
Weighted average shares outstanding 10,655,914 9,034,294
Dilutive effective of unexercised
stock options* 141,261 140,988
---------------- ---------------
10,797,175 9,175,282
================ ===============
Fully Diluted
Net income $ 13,948,264 $ 12,384,323
Preferred stock dividends (878,780) (878,779)
Stock options in subsidiary (101,902) (78,222)
Additional net ESOP expenses-assuming conversion of
ESOP Series preferred stock --- (45,469)
Adjusted net income $ 12,967,582 $ 11,381,853
================ ===============
Earnings per share $ 0.92 $ 0.82
================ ===============
Weighted average shares outstanding 13,940,742 13,741,115
Dilutive effective of unexercised
stock option* 143,586 148,847
---------------- ---------------
14,084,328 13,889,962
================ ===============
</TABLE>
* Primary - Based on average market price
Fully Diluted - Based on the higher of the average market price or the market
price at March 31 of each year
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
GROUP, INC.'S MARCH 31, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000774624
<NAME> ALLIED GROUP, INC
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 745,712
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 11,054
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 767,418
<CASH> 805
<RECOVER-REINSURE> 19,771
<DEFERRED-ACQUISITION> 41,908
<TOTAL-ASSETS> 1,011,746
<POLICY-LOSSES> 342,548
<UNEARNED-PREMIUMS> 197,009
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 40,421
0
37,813
<COMMON> 13,951
<OTHER-SE> 302,448
<TOTAL-LIABILITY-AND-EQUITY> 1,011,746
118,870
<INVESTMENT-INCOME> 12,119
<INVESTMENT-GAINS> 8
<OTHER-INCOME> 12,338
<BENEFITS> 80,982
<UNDERWRITING-AMORTIZATION> 26,162
<UNDERWRITING-OTHER> 6,214
<INCOME-PRETAX> 19,784
<INCOME-TAX> 5,836
<INCOME-CONTINUING> 13,948
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,948
<EPS-PRIMARY> 1.170
<EPS-DILUTED> 0.940
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
