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, 1997
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, 1997:
20,225,320 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,
1997 1996
-------------- -------------
(in thousands)
<S> <C> <C>
Assets
Investments
Fixed maturities at fair value (amortized cost
$774,254 in 1997 and $775,166 in 1996) $ 779,531 $ 792,268
Equity securities at fair value
(cost $32,731 in 1997 and $17,880 in 1996) 35,808 20,384
Short-term investments at cost (note 2) 7,682 6,993
-------------- -------------
Total investments 823,021 819,645
Cash 3,038 1,067
Accrued investment income 11,440 11,563
Accounts receivable 93,707 84,706
Current income taxes recoverable --- 2,878
Reinsurance receivables for losses
and loss adjusting expenses 19,207 18,183
Mortgage loans held for sale (note 3) 11,081 12,054
Deferred policy acquisition costs 47,331 46,671
Prepaid reinsurance premiums 8,118 7,838
Mortgage servicing rights 32,473 33,094
Deferred income taxes 2,770 ---
Other assets 37,007 39,960
-------------- -------------
Total assets $ 1,089,193 $ 1,077,659
============== =============
</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,
1997 1996
-------------- -------------
(in thousands)
<S> <C> <C>
Liabilities
Losses and loss adjusting expenses $ 367,888 $ 362,191
Unearned premiums 223,849 220,596
Indebtedness to affiliates 1,268 2,130
Notes payable to nonaffiliates (note 3) 36,193 31,744
Notes payable to affiliates (note 2) 5,500 2,350
Guarantee of ESOP obligations 24,370 24,370
Current income taxes 3,057 ---
Deferred income taxes --- 2,244
Other liabilities 58,760 61,443
-------------- -------------
Total liabilities 720,885 707,068
-------------- -------------
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 37,812
Common stock, no par value, $1 stated value, authorized
40,000 shares, issued and outstanding 20,211 shares in
1997 and 20,383 shares in 1996 (note 4) 20,211 20,383
Additional paid-in capital 118,783 126,078
Retained earnings 207,131 195,276
Unrealized appreciation of investments (net of deferred
income tax expense of $2,973 in 1997 and $6,907 in 1996) 5,381 12,699
Unearned compensation related to ESOP (21,010) (21,657)
-------------- -------------
Total stockholders' equity 368,308 370,591
-------------- -------------
Total liabilities and stockholders' equity $ 1,089,193 $ 1,077,659
============== =============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
4
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1997 1996
---------------- ---------------
(in thousands, except per share data)
<S> <C> <C>
Revenues
Earned premiums $ 131,867 $ 118,870
Investment income 12,652 12,119
Realized investment gains (losses) (7) 8
Other income (note 2) 14,233 12,338
---------------- ---------------
158,745 143,335
---------------- ---------------
Losses and expenses
Losses and loss adjusting expenses 87,891 80,982
Amortization of deferred policy acquisition costs 28,938 26,162
Other underwriting expenses 5,518 6,214
Other expenses 13,426 10,026
Interest expense 395 167
---------------- ---------------
136,168 123,551
---------------- ---------------
Income before income taxes and minority interest 22,577 19,784
---------------- ---------------
Income taxes
Current 7,614 4,990
Deferred (1,081) 846
---------------- ---------------
6,533 5,836
---------------- ---------------
Income before minority interest 16,044 13,948
Minority interest in net income
of consolidated subsidiary 102 ---
---------------- ---------------
Net income $ 15,942 $ 13,948
================ ===============
Net income applicable to common stock $ 15,063 $ 12,474
================ ===============
Earnings per share
Primary $ .74 $ .78
================ ===============
Fully diluted $ .74 $ .63
================ ===============
</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,
-----------------------------------
1997 1996
---------------- ---------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 15,942 $ 13,948
Adjustments to reconcile net income to net cash
provided by operating activities
Realized investment gains 7 (8)
Depreciation and amortization 2,449 2,620
Indebtedness with affiliates (862) 1,738
Accounts receivable, net (10,025) (3,278)
Accrued investment income 123 (215)
Deferred policy acquisition costs (660) (220)
Mortgage loans held for sale, net (2,738) (781)
Other assets 2,927 258
Losses and loss adjusting expenses 5,697 684
Unearned premiums, net 2,973 738
Cost of ESOP shares allocated 647 559
Current income taxes 5,935 3,610
Deferred income taxes (1,081) 846
Other, net (2,101) (3,614)
---------------- ---------------
Net cash provided by operating activities 19,233 16,885
---------------- ---------------
Cash flows from investing activities
Purchase of fixed maturities (29,641) (32,565)
Purchase of equity securities (14,901) (2,823)
Purchase of equipment (1,837) (4,234)
Sale of fixed maturities 5,069 ---
Maturities, calls, and principal reductions of fixed maturities 24,895 28,172
Sale of equity securities 52 44
Short-term investments, net (689) (838)
Sale of equipment 35 44
---------------- ---------------
Net cash used in investing activities (17,017) (12,200)
---------------- ---------------
Cash flows from financing activities
Notes payable to nonaffiliates, net 8,160 (1,099)
Notes payable to affiliates, net 3,150 (575)
Issuance of common stock 636 529
Repurchase of common stock (7,012) ---
Minority interest in additional paid-in capital (1,092) ---
Dividends paid to stockholders, net of income tax benefit (4,087) (4,200)
---------------- ---------------
Net cash used in by financing activities (245) (5,345)
---------------- ---------------
Net increase (decrease) in cash 1,971 (660)
Cash at beginning of year 1,067 1,465
---------------- ---------------
Cash at end of quarter $ 3,038 $ 805
================ ===============
</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 consolidated financial statements include the accounts
of ALLIED Group, Inc. (the Company) and its subsidiaries. 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. 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, 1996.
At March 31, 1997, The ALLIED Group Employee Stock Ownership Trust (ESOP Trust)
owned 26.2% and ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated
property-casualty insurance company, controlled 18.4% of the outstanding voting
stock of the Company.
Minority interest
The minority interest in a subsidiary represents the minority common
stockholders' proportionate share of the net assets and results of operations of
the majority-owned mortgage banking subsidiary. Options exercised by key
employees of the mortgage banking subsidiary resulted in a 20% ownership in the
outstanding common stock of the subsidiary on January 2, 1997. No additional
options are outstanding. The minority interest in the subsidiary was $1.9
million and is included in other liabilities. This transaction did not have a
material impact on the Company's financial position, results of operations, or
liquidity.
Earnings per share
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) 128, "Earnings per Share" in February of 1997. SFAS
128 specifies the computation, presentation, and disclosure requirements for
earnings per share (EPS) for entities with publicly-held common stock effective
for annual periods ending after December 15, 1997. Early application is not
permitted, but pro forma disclosure is allowed under SFAS 128. Presented below
are the pro forma EPS that the Company would have reported for the three months
ended March 31, 1997 and 1996 under SFAS 128.
1997 1996
----- -----
Basic EPS $0.74 $0.78
Diluted EPS 0.73 0.61
(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,
benefits, taxes, and expenses associated with the employees it leases. For the
three months ended March 31, 1997 and 1996, the Company received revenues of
$651,000 and $648,000 for employees leased to affiliates, respectively, which
are included in other income.
Subsidiaries of the Company provide data processing and other services for
ALLIED Mutual and its subsidiaries. Included in other income are revenues of
$490,000 and $506,000 relating to services performed for ALLIED Mutual and its
subsidiaries for the first three months of 1997 and 1996, respectively.
<PAGE>
7
Effective January 1, 1997, the Company's property-casualty subsidiaries entered
into a property catastrophe reinsurance agreement with ALLIED Mutual and a
nonaffiliated reinsurer. ALLIED Mutual's participation in the agreement is 90%.
The reinsurance agreement is an aggregate catastrophe program that covers pooled
losses up to $30 million in excess of $20 million in the aggregate for any one
quarter or in excess of $50 million in the aggregate for any one year. Premiums
paid by the property-casualty segment to ALLIED Mutual were $720,000 in the
first three months of 1997. The property-casualty segment had no recoveries from
ALLIED Mutual under the agreement in the first quarter of 1997.
Prior to 1997, ALLIED Mutual participated with a nonaffiliated reinsurance
company in a property catastrophe reinsurance agreement that covered the
property-casualty segment's share of pooled losses up to $5 million in excess of
$5 million. ALLIED Mutual's participation in such agreement was 90%. Effective
December 31, 1996, this agreement was canceled. Premiums paid by the
property-casualty segment to ALLIED Mutual were $388,000 in the first quarter of
1996. There were recoveries of prior-year losses from ALLIED Mutual under this
agreement of $35,000 in the first three months of 1997 and no recoveries for the
same period in 1996.
The Company invests excess cash in a short-term investment fund with other
affiliated companies. 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, 1997, the
Company had $7.4 million invested in the fund and had several short-term
unsecured notes payable to the fund totaling $5.5 million. The interest rates on
the borrowings ranged from 5.6% to 8.5%.
The Company had interest income from affiliates of $125,000 and $166,000 in the
first three months of 1997 and 1996, respectively. Interest paid to affiliates
was $74,000 and $53,000 in the first three months of 1997 and 1996,
respectively.
(3) Notes Payable to Nonaffiliates
At March 31, 1997, the mortgage banking subsidiary had borrowed $16 million
under the terms of three separate mortgage loan warehousing agreements with
different commercial banks. Under the terms of the agreements, the subsidiary
can borrow up to the lesser of $67 million or 98% of the mortgage credit
borrowing base. The outstanding borrowings were secured by $11.1 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 the mortgage loan warehousing agreements vary with the level of
investable deposits maintained at the respective commercial banks.
The mortgage banking subsidiary also had $12 million of 8.4% senior secured
notes outstanding as of March 31, 1997. 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 February 27, 1998. 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 5.7% at March 31, 1997. AMCO had an outstanding
balance under this line of credit of $3 million at March 31, 1997. AMCO also had
$5.2 million outstanding at the end of the first quarter on an uncommitted
basis. The borrowings were secured by United States Government securities with a
carrying value of $9.9 million.
(4) Common Stock
During the first three months of 1997, the Company canceled 197,200 shares of
its common stock purchased on the open market at an average price per share of
$35.56. The first 57,000 shares were repurchased under a program approved by the
<PAGE>
8
Board of Directors (Board) on July 15, 1996 and completed on March 13, 1997. The
remaining 140,200 shares were repurchased under a program approved by the Board
on March 4, 1997, whereby an additional 250,000 shares of common stock were
authorized to be repurchased pursuant to SEC 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.
(5) Segment Information
The Company's principal products, services, and effect on revenues, income
before income taxes and minority interest, 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 mortgage
banking, data processing, and employee lease fees from affiliates).
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1997 1996
---------------- ---------------
(in thousands)
<S> <C> <C>
Revenues *
Property-casualty $ 135,838 $ 123,874
Excess & surplus lines 9,615 8,682
Eliminations and other 13,292 10,779
---------------- ---------------
Total $ 158,745 $ 143,335
================ ===============
Income before income taxes and minority interest *
Property-casualty $ 21,041 $ 17,450
Excess & surplus lines 2,065 1,748
Eliminations and other (529) 586
---------------- ---------------
Total $ 22,577 $ 19,784
================ ===============
March 31, December 31,
1997 1996
---------------- ---------------
(in thousands)
Assets
Property-casualty $ 937,697 $ 917,537
Excess & surplus lines 135,693 131,405
Eliminations and other 15,803 28,717
---------------- ---------------
Total $ 1,089,193 $ 1,077,659
================ ===============
* 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 ALLIED Group, Inc. (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, 1996.
The Company, a regional insurance holding company, and its subsidiaries operate
exclusively in the United States and primarily in the central and western
states. The 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. The property-casualty insurance segment, accounted for 85.6%
and 86.4% of consolidated revenues for the three months ended March 31, 1997 and
1996, respectively.
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 in the reinsurance pool has
been 64% since January 1, 1993.
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,
but not limited to, the effect of competition on pricing, the frequency and
severity of losses incurred in connection with weather-related and other
catastrophic events, adequacy of reserves, general economic and business
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, 1997 were $158.7
million, up 10.8% over the $143.3 million reported for the first three months of
1996. The increase occurred primarily because of the growth in earned premiums
(10.9%) for the three months ended March 31, 1997.
Income before income taxes for the first three months of 1997 was up to $22.6
million from $19.8 million for the same period in 1996. The increase was due to
higher revenues, lower underwriting expense, and improved loss experience in the
first quarter of 1997.
Net income was up 14.3% to $15.9 million, bringing fully diluted earnings per
share to $0.74 for the three months ended March 31, 1997, from $13.9 million
($0.63 per share) for the corresponding period in 1996. Fully diluted earnings
per share before realized investment gains and losses were $0.74 for the first
three months of 1997 compared with $0.62 for the same period of 1996.
Book value per share at March 31, 1997 remained unchanged at $17.39 compared to
December 31, 1996. Growth in the book value per share was constrained by the
cost of the stock repurchase program, the increase in the dividends, and the
effect of higher interest rates on the investment portfolio. The fair value of
investments in fixed maturities were $5.3 million above amortized cost at March
31, 1997 compared to $17.1 million above amortized cost at December 31, 1996. If
the investments in fixed maturity were reported at amortized cost, the book
value would have been $17.22 at March 31, 1997 compared to $16.85 at December
31, 1996.
<PAGE>
10
Property-casualty
Net written premiums for the pool (including ALLIED Mutual) totaled $199.5
million, a 12.4% increase over production in the first three months of 1996. The
average premium per policy for personal lines was up 3.8% from the first three
months of 1996 to $603 while the policy count grew 8.7%. The average premium per
policy for commercial lines excluding crop-hail increased 4.4% from the first
three months of 1996 to $1,128 and the policy count was up 4.4%. Earned premiums
for the property-casualty segment were 67.9% personal lines and 32.1% commercial
lines in the first three months of 1997. The business mix for the first three
months of 1996 was 66.5% personal lines and 33.5% commercial lines.
Revenues for the property-casualty segment increased to $135.8 million from
$123.9 million for the three months ended March 31, 1997 and 1996, respectively.
Direct earned premiums for the segment were $135.2 million for the first three
months of 1997 compared with $116.6 million one year earlier. Earned premiums
increased 11% for the first three months of 1997 to $123.9 million from $111.7
million. The increase resulted primarily from growth in insurance exposure.
Investment income for the first three months of 1997 was $10.9 million compared
to $10.3 million for the same period in 1996. The pretax yield on invested
assets was 6.1% and 6.3% for the three months ended March 31, 1997 and 1996,
respectively. Realized investment losses were $6,000 in the first quarter of
1997 compared with realized gains of $8,000 in the first three months of 1996.
Other income for the first three months of 1997 and 1996 was $1 million and $1.9
million, respectively.
Income before income taxes increased to $21 million from $17.5 million in the
first three months of 1996. The increase was due to the growth in revenues,
improved loss experience, and lower underwriting expense in the first quarter of
1997.
The statutory combined ratio (after policyholder dividends) for the first three
months of 1997 was 92.5 compared to 95.2 reported in the first three months of
1996. The improvement in the combined ratio was attributed to a 1.5-point
decrease in the three month loss and loss adjusting expense ratio and a
1.2-point decrease in underwriting expense ratio. Lower wind and hail losses
account for half of the improvement in the loss and loss adjusting expense
ratio. Wind and hail losses for the first three months of 1997 decreased to $2.7
million from $3.6 million for the same period of 1996. The impact of wind and
hail losses on the combined ratio was 2.2 points and 3.2 points for the three
months ended March 31, 1997 and 1996, respectively. The generally accepted
accounting principles (GAAP) underwriting gain was $9.1 million compared with a
gain of $5.3 million for the first three months of 1996. On a fully diluted
basis, the impact of wind and hail losses on the results of operations was $0.09
per share versus $0.11 per share in the first three months of 1996.
The following table presents the property-casualty's statutory combined ratio by
line of business for the three months ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
----- -----
<S> <C> <C>
Personal automobile 95.4 98.2
Homeowners 90.1 97.2
Personal lines 93.9 97.9
Commercial automobile 105.3 100.5
Workers' compensation 85.8 69.0
Other property/liability 87.1 93.2
Other lines 61.3 56.7
Commercial lines 89.4 89.7
Total 92.5 95.2
</TABLE>
<PAGE>
11
The personal auto statutory combined ratio improved to 95.4 for the first three
months of 1997 from 98.2 for the same period in 1996. The improvement was due to
a 1.5-point decrease in the loss and loss adjusting expense ratio and a decrease
of 1.4-point in the underwriting expense ratio. The statutory combined ratio for
the homeowners line was 90.1 for the first three months of 1997 compared with
97.2 for the same period of 1996. The improvement was primarily due to a
6.4-point decrease in the loss and loss adjusting expense ratio. The impact of
lower wind and hail losses on the combined ratio for the homeowners line
decreased to 5.7-points from 9.2-points for the first three months of 1996.
Overall, the personal lines statutory combined ratio decreased to 93.9 in the
first three months of 1997 from 97.9 in the same period of 1996. The statutory
combined ratio for commercial lines decreased to 89.4 in the first three months
of 1997 from 89.7 for the first three months of 1996. The improvement of
personal and commercial lines combined ratio was primarily attributable to lower
losses and loss adjusting expenses due to favorable loss experience in the first
quarter.
Excess & Surplus Lines
Earned premiums increased to $7.9 million for the first three months of 1997
from $7.2 million for the same period in 1996. Net written premiums increased
$1.5 million to $7.9 million for the three months ended March 31, 1997 from $6.4
million in the first quarter of 1996 due to lower production in the first three
months of 1996. Compared with net written premiums for the fourth quarter of
1996, production was down 3.6%. The segment continues to operate in a soft
market. Direct earned premiums increased to $10.2 million for the three months
ended March 31, 1997 from $9 million for the same period in 1996. For the three
month period ended March 31, 1997, the segment's book of business was comprised
of 2.7% personal lines and 97.3% commercial lines. The business mix for the
first three months of 1996 was 2.3% personal lines and 97.7% commercial lines.
Investment income for the first three months of 1997 increased 11.3% to $1.7
million from $1.5 million for the same period in 1996. Investment income
increased due to a larger average balance in the investment portfolio. The
pretax yield on those assets was 6.3% in the first three months of 1997 and
1996. Invested assets increased to $107.1 million at March 31, 1997 from $104.4
million at year-end 1996. Invested assets at March 31, 1996 were $94.1 million.
The statutory combined ratio (after policyholder dividends) was 95.0, which
produced a GAAP underwriting gain of $396,000 for the first three months of
1997. The combined ratio of 98.3 for the first three months of 1996 resulted in
a GAAP underwriting gain of $247,000. The combined ratio improved primarily
because of a 2.3-point improvement in the underwriting expense ratio in the
first three months of 1997. The loss and loss adjusting expense ratio improved
0.9-point due to an improved loss experience in the first three months of 1997
over the same period last year.
Income before income taxes for the three months ended March 31, 1997 increased
to $2.1 million from $1.7 million. The segment had realized losses of $2,000 for
the first three months of 1997 and no realized gains or losses in the same
period of 1996.
Noninsurance Operations
Revenues for the noninsurance operations (including mortgage banking, data
processing, and employee lease fees from affiliates) decreased slightly for the
first three months of 1997 to $37.9 million from $38.9 million for the same
period last year. Loss before income taxes was $529,000 for the first three
months of 1997 compared to income before taxes of $586,000 for the three months
ended March 31, 1996. The decrease was primarily due to higher operating
expenses. The servicing portfolio at March 31, 1997 remained unchanged from
year-end 1996 at $2.8 billion.
Investments and Investment Income
The investment policy for the Company's insurance segments require 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
<PAGE>
12
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 stocks are 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 primarily
of fixed income securities and equity securities; 94.6% and 4.4% respectively.
The ratings on 99.7% of the fixed income securities at March 31, 1997 were
investment grade or higher. The investment portfolio contained no real estate or
mortgage loans at March 31, 1997.
Invested assets were up slightly to $823 million from $819.6 million at year-end
1996. The growth in invested assets was slowed by the rising interest rate
environment in the first quarter of 1997. The rising interest rates reduce the
unrealized appreciation over amortized cost $11.3 million. Three-month
consolidated investment income increased 4.4% to $12.7 million from $12.1
million through March 31, 1996. The increase was due to a larger average balance
of invested assets. The Company's pretax rate of return on invested assets was
down to 6.2% from last year's 6.3%.
Income Taxes
The Company's year-to-date effective income tax rate increased slightly to 28.9%
at March 31, 1997 compared to 28.4% year-end 1996. The income tax expense for
the first three months of 1997 rose on higher operating income up to $6.5
million from $5.8 million for the same period in 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 of business exceeded 10%. The rollback liability, if any, has not been
finalized. 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 income and equity
securities. 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 1997, operating activities generated cash flows of
$19.2 million; in the first three months of 1996, the total was $16.9 million.
For both years, the primary source of funds was premium growth in the Company's
property-casualty insurance operations. The funds were used primarily to
purchase equity securities and in the first quarter of 1997 to repurchase the
Company's common stock which accounted for the majority of the investing
activities.
Operating cash flows were also used to pay $4.3 million of dividends to
stockholders in the first three months of 1997. For the same period in 1996, the
funds generated from the operating activities were used to pay dividends to
stockholders of $4.5 million. Dividend payments to common stockholders totaled
$3.5 million for the three months ended March 31, 1997, up from $3.1 million for
the same period in 1996. In the first three months of 1997 and 1996, the Company
paid dividends of $879,000 on the 6-3/4% Series preferred stock. The Company
also paid dividends of $595,000 on the ESOP Series preferred stock (ESOP Series)
in the three months ended March 31, 1996 prior to its conversion to common stock
in the first quarter of 1996.
<PAGE>
13
The Company relies primarily on dividend payments from its property-casualty
subsidiaries to pay preferred and common stock dividends to stockholders. During
the first three months of 1997, the Company received dividend payments of $4.1
million from the property-casualty subsidiaries and $19,000 from noninsurance
subsidiaries. During the same period of 1996, the Company received dividend
payments of $3.7 million from the property-casualty subsidiaries and $19,000
from noninsurance subsidiaries.
In the first quarter of 1997, the Company canceled 197,200 shares of its common
stock purchased on the open market at an average price per share of $35.56. The
first 57,000 shares were repurchased under a program approved by the Board of
Directors (Board) on July 15, 1996 and completed on March 13, 1997. An
additional 140,200 shares were repurchased under a program approved by the Board
on March 4, 1997, whereby an additional 250,000 shares of common stock were
authorized to be repurchased pursuant to SEC Rule 10b-18. The Company can
repurchase up to 109,800 shares under the current program.
The mortgage banking subsidiary has separate credit arrangements to support its
operations. Short-term and long-term notes payable to nonaffiliated companies
are used 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, 1997, short-term
borrowings amounted to $16 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 eight years. These notes payable are not guaranteed by
the Company. In the normal course of its business, the subsidiary 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 companies
and the excess & surplus lines company have maintained adequate investment
liquidity, they have in the past required additional capital contributions to
support premium growth.
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, 1997, 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.
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>
14
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 first
quarter ended March 31, 1997.
<PAGE>
15
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 5, 1997 /s/ Jamie H. Shaffer
----------------------------------------
Jamie H. Shaffer, Senior Vice President,
Chief Financial Officer, and Treasurer
<PAGE>
16
ALLIED Group, Inc. and Subsidiaries
INDEX TO EXHIBITS
EXHIBIT
NUMBER ITEM PAGE
11 Statement re Computation of Per Share Earnings 17
27 Financial Data Schedule 18
<PAGE>
17
Exhibit 11
ALLIED Group, Inc. and Subsidiaries
Computation of Per Share Earnings
For the Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
---------- -----------
(in thousands, except per share data)
<S> <C> <C>
Primary
Net income $ 15,942 $ 13,948
Preferred stock dividends (879) (1,474)
---------- -----------
Adjusted net income $ 15,063 $ 12,474
========== ===========
Earnings per share $ 0.74 $ 0.78
========== ===========
Weighted average shares outstanding 20,360 15,984
========== ===========
Fully Diluted
Net income $ 15,942 $ 13,948
Preferred stock dividends (879) (879)
---------- -----------
Adjusted net income $ 15,063 $ 13,069
========== ===========
Earnings per share $ 0.74 $ 0.63
========== ===========
Weighted average shares outstanding 20,360 20,911
========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
GROUP, INC.'S MARCH 31, 1997 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-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 779,531
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 35,808
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 823,021
<CASH> 3,038
<RECOVER-REINSURE> 19,207
<DEFERRED-ACQUISITION> 47,331
<TOTAL-ASSETS> 1,089,193
<POLICY-LOSSES> 367,888
<UNEARNED-PREMIUMS> 223,849
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 41,693
0
37,812
<COMMON> 138,994
<OTHER-SE> 191,502
<TOTAL-LIABILITY-AND-EQUITY> 1,089,193
131,867
<INVESTMENT-INCOME> 12,652
<INVESTMENT-GAINS> (7)
<OTHER-INCOME> 14,233
<BENEFITS> 87,891
<UNDERWRITING-AMORTIZATION> 28,938
<UNDERWRITING-OTHER> 5,518
<INCOME-PRETAX> 22,577
<INCOME-TAX> 6,533
<INCOME-CONTINUING> 15,942
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,942
<EPS-PRIMARY> 0.740
<EPS-DILUTED> 0.740
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
