<PAGE>
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
---------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 50391-2000
(Address of principal executive offices) (Zip Code)
515-280-4211
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 28, 1997 the number of Registrant's Common Stock, no par value,
outstanding was 20,398,117. The aggregate market value of the Common Stock of
the Registrant held by nonaffiliates at February 28, 1997 was $668,516,603.
Documents Incorporated By Reference
The Registrant's definitive proxy statement (1997 Proxy Statement), which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1996, is incorporated by reference under Part III.
The index to the exhibits is located on page 74.
This document contains 142 pages.
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2
TABLE OF CONTENTS
Part I
Item 1. Business....................................................... 3
Item 2. Properties......................................................18
Item 3. Legal Proceedings...............................................18
Item 4. Submission of Matters to a Vote of Security Holders.............18
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................19
Item 6. Selected Financial Data..........................................20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................21
Item 8. Financial Statements and Supplementary Data......................28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................57
Part III
Item 10.Directors and Executive Officers of the Registrant..................58
Item 11.Executive Compensation..............................................58
Item 12.Security Ownership of Certain Beneficial Owners and Management......58
Item 13.Certain Relationships and Related Transactions......................58
Part IV
Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K....59
Index to Financial Statement Schedules.......................................59
Signatures...................................................................73
Index to Exhibits............................................................74
<PAGE>
3
Part I
Item 1. Business
ALLIED Group, Inc. (ALLIED) was incorporated in 1971 as an Iowa corporation and
operates as a regional insurance holding company headquartered in Des Moines,
Iowa. ALLIED and its subsidiaries (collectively, the Company) operate
exclusively in the United States and primarily in the central and western
states. At year-end 1996, The ALLIED Group Employee Stock Ownership Trust owned
26.5% and ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated
property-casualty insurance company, controlled 18.3% of the outstanding voting
stock of ALLIED. The Company has two reportable business segments:
property-casualty insurance and excess & surplus lines insurance.
Property-casualty insurance was the most significant segment in 1996, accounting
for 86.5% of consolidated revenues. The Company's segment information is
contained in note 17 of Notes to Consolidated Financial Statements.
Property-casualty Insurance
The property-casualty segment operates through three subsidiaries: AMCO
Insurance Company (AMCO), ALLIED Property and Casualty Insurance Company (ALLIED
Property and Casualty), and Depositors Insurance Company (Depositors), which
write personal lines (primarily automobile and homeowners) and small commercial
lines. The segment and ALLIED Mutual pool their property-casualty business. See
notes 4 and 6 of Notes to Consolidated Financial Statements and
"Business-Relationship with ALLIED Mutual-Pooling Agreement."
A.M. Best has assigned a rating of A+ (Superior) to each of property-casualty
subsidiaries and to ALLIED Mutual for 1996 with respect to their financial
strength and their ability to meet policyholder and other contractual
obligations based on the review of the pool's 1995 statutory results and
operating performance.
The profitability of the property-casualty segment is affected by many factors,
including industry price competition, the severity and frequency of
weather-related claims, the adequacy of prior-year estimates of loss and loss
adjusting expense reserves, insurance laws and regulations, fluctuations in the
financial markets, interest rates, reinsurance costs, and general business and
economic conditions.
The property-casualty segment pursues a strategy of growth in personal lines of
insurance primarily through a system of more than 2,250 independent agencies, a
growing number of which represent the property-casualty subsidiaries on an
exclusive basis for their personal lines of insurance. For the year ended
December 31, 1996, 66.8% of the property-casualty subsidiaries' net earned
premiums were attributable to personal lines of insurance. While the majority of
the revenues are attributable to personal lines, the segment also writes
commercial lines of insurance for small businesses through such agents. Because
the primary focus, and the primary market served by the segment's independent
agency force, is personal lines of insurance and because management perceives
the risks to be greater in commercial lines, the property-casualty segment has
been conservative in the types of commercial risks it underwrites and in the
pricing of the commercial risks. Historically, this has resulted in writing less
commercial business than the segment might otherwise have if a more aggressive
strategy in commercial lines was adopted. It has also resulted in a lower
combined ratio for the commercial lines compared with its core personal lines
business.
The property-casualty segment markets its products through three distribution
systems: independent agencies, exclusive agencies, and direct response
marketing. Generally, AMCO writes, through independent agencies, personal and
commercial property-casualty insurance lines, consisting primarily of private
passenger automobile and homeowners, with lesser emphasis on special multiple
peril, workers' compensation, inland marine, and other miscellaneous lines of
business. ALLIED Property and Casualty generally writes personal lines insurance
products through agents who sell ALLIED Property and Casualty personal lines
exclusively, and Depositors generally writes personal lines through a direct
mail and telemarketing agency, ALLIED Group Insurance Marketing Company, an
affiliate of ALLIED Mutual.
<PAGE>
4
Neither the insurance subsidiaries in the property-casualty segment nor ALLIED
Mutual appoint managing general agents, and each retains all underwriting,
claims, and reinsurance authority. While the insurers provide contractual
binding authority to most agents, such authority is subject to express
limitations on the nature, type, and extent of each risk. With respect to the
ability of the agents to bind the insurers, the insurers have no right to reject
any contracts entered into by the agents even if the agent exceeds the express
limitations; however, such instances occur infrequently and constitute no
material financial risk to the Company.
The pooling agreement provides that ALLIED Mutual, ALLIED Property and Casualty,
and Depositors cede to AMCO (pool administrator) premiums, losses, allocated
loss adjusting expenses, commissions, premium taxes, service charge income, and
dividends to policyholders and assume from AMCO an amount of this pooled
property-casualty business equal to their participation in the pooling
agreement. ALLIED Mutual's crop hail business is not pooled. AMCO pays certain
underwriting expenses, unallocated loss adjusting expenses, and premium
collection expenses for all of the pool participants and receives a fee equal to
a specified percentage of premiums as well as a contingent fee based on the
attainment of certain combined ratios from each of the pool participants.
The pooling arrangement provides ALLIED Mutual, ALLIED Property and Casualty,
and Depositors more predictable expense levels by limiting such expenses to a
specified percentage of their premiums. AMCO has opportunities to profit from
the efficient administration of such underwriting, loss adjusting, and premium
collection activities and to provide similar services to nonaffiliated insurance
companies in the future. The property-casualty segment's participation in the
pool was 64% for 1996, 1995, and 1994. As of December 31, 1996, the statutory
capital and surplus of ALLIED Mutual and AMCO was $231.5 million and $223.3
million, respectively.
The following table sets forth statutory and generally accepted accounting
principles (GAAP) basis information for the property-casualty subsidiaries for
the years indicated.
<TABLE>
<CAPTION>
At or for the year ended December 31,
-------------------------------------------
1996 1995 1994
----------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Reinsurance pool percentage 64% 64% 64%
Net written premiums $ 488,189 $ 440,838 $ 403,066
=========== ========== ==========
Earned premiums $ 466,211 $ 425,838 $ 386,732
Losses and loss adjusting expenses 335,615 295,583 268,302
Underwriting expenses 124,622 114,511 110,259
----------- ---------- ----------
Statutory underwriting gain 5,974 15,744 8,171
GAAP adjustments 3,965 1,943 1,637
----------- ---------- ----------
GAAP underwriting gain 9,939 17,687 9,808
Investment income excluding realized gains 42,296 39,110 35,279
Realized investment gains 180 236 2,956
Other income 7,020 6,850 6,143
----------- ---------- ----------
Income before income taxes $ 59,435 $ 63,883 $ 54,186
=========== ========== ==========
Statutory combined ratio 97.7 95.7 97.1
Wind and hail losses, net of reinsurance $ 39,111 $ 28,664 $ 24,383
Impact of wind and hail losses on combined ratio 8.4 6.7 6.3
Invested assets $ 710,629 $ 658,044 $ 565,490
Loss and loss adjusting expense reserves, net of reinsurance $ 297,343 $ 277,819 $ 252,608
Statutory capital and surplus $ 285,854 $ 257,845 $ 233,407
</TABLE>
The underwriting experience of the pool is indicated by the statutory combined
ratio, a measure of underwriting profitability which excludes investment income
and income taxes. Generally, a ratio below 100 indicates underwriting
<PAGE>
5
profitability and a ratio exceeding 100 indicates an underwriting loss. The
following table sets forth the net earned premiums and the statutory combined
ratios (after policyholder dividends) by line of insurance business for the
property-casualty segment for the years indicated.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ -------------------------
Net Statutory Net Statutory Net Statutory
earned combined earned combined earned combined
premiums ratio premiums ratio premiums ratio
----------- --------- ----------- --------- ---------- ---------
Line of business (dollars in thousands)
----------------
<S> <C> <C> <C> <C> <C> <C>
Personal automobile $ 229,894 98.9 $ 208,873 96.5 $ 192,712 97.4
Homeowners 81,617 102.4 71,035 99.2 60,204 107.4
----------- ---------- ----------
Personal lines 311,511 99.8 279,908 97.2 252,916 99.8
----------- ---------- ----------
Commercial automobile 25,272 98.8 23,873 95.2 22,384 98.4
Workers' compensation 25,499 76.5 29,443 70.2 28,251 83.3
Other property and liability 101,591 97.3 90,302 100.2 80,908 94.0
Other lines 2,338 45.7 2,312 50.2 2,273 66.6
----------- ---------- ----------
Commercial lines 154,700 93.5 145,930 92.7 133,816 92.0
----------- ---------- ----------
Total $ 466,211 97.7 $ 425,838 95.7 $ 386,732 97.1
=========== ========== ==========
</TABLE>
The following table sets forth the components of the statutory combined ratio
and wind and hail loss information for the property-casualty segment for the
years indicated.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory combined ratio
- ------------------------
Loss ratio 62.6 60.1 60.1
Loss adjusting expense ratio 9.4 9.3 9.3
Underwriting expense ratio 25.5 26.0 27.3
Dividend ratio 0.2 0.3 0.4
----- ----- -----
Total 97.7 95.7 97.1
===== ===== =====
Impact of wind and hail losses
on the statutory combined ratio
- ---------------------------------
Personal automobile 3.9 1.8 2.1
Homeowners 23.6 21.7 21.5
Personal lines 9.1 6.8 6.7
Commercial lines 7.1 6.5 5.5
Total 8.4 6.7 6.3
</TABLE>
Wind and hail losses are calculated by adding together all claims with a cause
of loss from wind or hail and then deducting the related reinsurance recoveries.
The information provides an indication of how weather-related losses impact the
property-casualty segment's operating results for the years presented. Losses
not resulting from either wind or hail are excluded from these calculations.
<PAGE>
6
The following table sets forth premium information and agency counts for the
property-casualty pool (including ALLIED Mutual) for the years indicated.
<TABLE>
<CAPTION>
At or for the year ended December 31,
-----------------------------------------
1996 1995 1994
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Direct written premiums by distribution system
----------------------------------------------
Independent agency system $ 549,598 $ 503,922 $ 479,351
Exclusive agency system 210,648 180,799 148,777
Direct response marketing system 28,437 22,136 18,418
---------- ---------- ----------
Total direct written premiums,
excluding crop hail premiums 788,683 706,857 646,546
Crop hail premiums (non-pooled) 7,049 7,781 6,024
---------- ---------- ----------
Total direct written premiums $ 795,732 $ 714,638 $ 652,570
========== ========== ==========
Agency counts
-------------
Independent agencies 2,000 1,968 1,910
Exclusive agencies 257 192 164
Net written premiums $ 773,593 $ 699,608 $ 638,301
Net earned premiums $ 739,251 $ 676,169 $ 612,799
</TABLE>
The following table sets forth the geographic percentage distribution of
property-casualty pool (including ALLIED Mutual) direct written premiums for the
years indicated.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
California 24.5% 24.0% 24.0%
Iowa 21.7 23.3 24.6
Kansas 8.1 8.4 8.4
Nebraska 7.4 7.9 8.1
Minnesota 7.3 7.6 7.9
Missouri 4.8 4.8 4.8
Colorado 3.6 3.6 3.5
Illinois 3.5 3.1 2.8
Utah 2.9 2.5 2.2
Tennessee 2.7 2.4 2.2
Washington 2.3 2.1 1.7
Other * 11.2 10.3 9.8
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
*Includes all other states, none of which accounted for more than 2% in 1996.
</TABLE>
Excess & Surplus Lines
Western Heritage Insurance Company (Western Heritage) is an excess & surplus
lines insurance subsidiary, which primarily underwrites commercial lines. A.M.
Best has assigned a rating of A- (Excellent) to Western Heritage for 1996 based
on the review of their 1995 statutory results and operating performance.
For 1996, Western Heritage's net earned premiums were 64.1% specialty commercial
casualty, 9.2% commercial property, 23.9% commercial transportation, and 2.8%
personal lines coverages. Specialty commercial casualty lines include general
liability, multiple peril, and product liability coverages for special events,
such as concerts, fairs, exhibitions, and parades as well as coverages for
merchants and artisan contractors. Specialty commercial property lines include
coverages for buildings that are older, in higher risk locations, or vacant;
agricultural and contractor equipment; and protection against vandalism.
<PAGE>
7
Commercial transportation coverages include liability, physical damage, and
garagekeepers insurance written for used car dealers and repair shops. The
personal lines consist primarily of basic property coverages for dwellings.
Western Heritage agents are accorded contractual binding authority for risks
which meet the insurer's written underwriting guidelines and rules. Western
Heritage appoints no managing general agents, however, and retains all
underwriting, claims, and reinsurance authority. With respect to the ability of
the agents to bind Western Heritage, Western Heritage has no right to reject any
contracts entered into by the agents even if the agent exceeds the express
limitations; however, such instances occur infrequently and constitute no
material financial risk to the Company.
The following table sets forth statutory and GAAP basis information for the
excess & surplus lines segment for the years indicated.
<TABLE>
<CAPTION>
At or for the year ended December 31,
--------------------------------------------
1996 1995 1994
----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Net written premiums $ 28,417 $ 30,606 $ 27,026
=========== =========== ===========
Earned premiums $ 27,314 $ 29,661 $ 25,786
Losses and loss adjusting expenses 17,484 22,357 18,568
Underwriting expenses 8,106 8,202 7,536
----------- ----------- -----------
Statutory underwriting gain (loss) 1,724 (898) (318)
GAAP adjustments 86 43 100
----------- ----------- -----------
GAAP underwriting gain (loss) 1,810 (855) (218)
Investment income excluding realized gains 6,241 5,830 5,241
Realized investment gains (losses) 2 (135) (24)
----------- ----------- -----------
Income before income taxes $ 8,053 $ 4,840 $ 4,999
=========== =========== ===========
Statutory combined ratio 92.5 102.2 99.9
Invested assets $ 104,403 $ 96,435 $ 79,588
Loss and loss adjusting expense reserves, net of reinsurance $ 49,319 $ 47,120 $ 40,066
Statutory capital and surplus $ 33,478 $ 27,770 $ 23,896
</TABLE>
The following table sets forth the net earned premiums and statutory combined
ratios of the commercial casualty, commercial property, commercial
transportation, and personal lines written by Western Heritage for the years
indicated.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ -----------------------
Net Statutory Net Statutory Net Statutory
earned combined earned combined earned combined
premiums ratio premiums ratio premiums ratio
----------- --------- ----------- --------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial casualty $ 17,508 92.1 $ 22,031 103.9 $ 20,800 103.5
Commercial property 2,513 70.2 2,676 91.2 2,579 80.5
Commercial transportation 6,538 103.7 4,254 98.6 1,682 101.8
Personal lines 755 86.9 700 115.1 725 60.4
----------- ----------- -----------
Total $ 27,314 92.5 $ 29,661 102.2 $ 25,786 99.9
=========== =========== ===========
</TABLE>
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8
The following table sets forth the geographic percentage distribution of excess
& surplus lines direct written premiums for the years indicated.
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Texas 25.0% 23.3% 23.9%
Illinois 8.6 9.9 10.9
California 8.0 8.8 11.9
Florida 5.5 7.2 8.4
Oklahoma 4.0 4.3 4.0
Alabama 3.9 3.1 1.5
Missouri 3.9 3.0 1.2
Louisiana 3.2 3.0 3.6
Hawaii 3.0 3.7 3.7
Colorado 2.9 2.8 2.5
Mississippi 2.9 2.6 1.2
Connecticut 2.8 0.6 ---
Ohio 2.7 2.9 2.4
Arkansas 2.0 2.5 1.6
Indiana 2.0 1.9 2.1
Other* 19.6 20.4 21.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
*Includes all other states, none of which accounted for more than 2% in 1996
</TABLE>
Reinsurance
The insurance subsidiaries follow the industry practice of reinsuring a portion
of their insured risks, paying to the reinsurer a portion of the premiums
received on all policies. Insurance is ceded principally to reduce the net
liability on individual risks and to protect against catastrophic losses. The
subsidiaries monitor the availability of replacement coverages in the
reinsurance market, and believe that replacement coverages from financially
responsible reinsurers is available and accordingly do not deem existing
reinsurance arrangements to be material.
The basic reinsurance treaties benefiting the parties to the pooling agreement
insure risks in excess of specific amounts. Except for crop-hail reinsurance,
all reinsurance is obtained by the pool participants directly and the pool
administrator does not have any additional or special reinsurance arrangements
other than as a pool participant. The financial stability of each participating
reinsurer is independently monitored by the pool participants and by their
reinsurance intermediaries. See "Business-Relationship with ALLIED Mutual-Other
Relationships" for the ALLIED Mutual and American Re-Insurance Company property
catastrophe reinsurance agreement.
With the exception of Western Heritage, all retentions discussed in this section
are for the entire pool. The property-casualty subsidiaries are allocated a
portion of the stated pool retentions based upon their respective pool
participation percentage.
The parties to the pooling agreement are covered by a property treaty which
provides per risk property reinsurance in excess of a retention of $500,000 to a
maximum limit of $5,000,000 per risk. Such parties are also covered by a
property treaty that provides coverage on a facultative basis in excess of a
retention of $5,000,000 to a maximum limit of $15,000,000.
The pool participants purchase property catastrophe reinsurance from a large
number of reinsurers each of which provides a relatively small percentage of the
total cover. For 1996, the pool liability limit of the cover is 90% of
$120,000,000 with retention of $10,000,000. A reinstatement agreement exists
allowing purchases of reinsurance for an additional catastrophe occurring in the
same year.
<PAGE>
9
The pool's retention for most casualty risks is $375,000, with a reinsurance
limit of $1,000,000 per occurrence. Other treaties provide reinsurance for each
workers' compensation loss over $375,000 and up to $5,000,000. Catastrophe
workers' compensation treaties increase the reinsurance to $35,000,000.
Western Heritage, which is not a participant in the property-casualty pool,
purchases surplus share reinsurance on property risks covering 75% of the risk
with limits in excess of $50,000 to a maximum of $1,000,000, which is the
largest property risk insured. Western Heritage also purchases casualty
reinsurance covering 92.5% of the risk in excess of $200,000 to a maximum of
$1,000,000, the largest casualty risk insured. Western Heritage also purchases
two layers of reinsurance, each of which covers $1,000,000 in excess of the
underlying layers for both property and casualty coverages. Each of the layers
contain a reinstallment provision. Western Heritage does not write workers'
compensation or primary auto coverage.
Although reinsurance does not legally discharge an insurer from its primary
liability for the full amount of the policies, it does make the assuming
reinsurer liable to the insurer to the extent of the reinsurance ceded. As of
December 31, 1996, there were no past due amounts from reinsurers. Historically,
the Company has had no adverse collection experience with its reinsurers.
Losses and Loss Adjusting Expense Reserves
In many cases, several years may elapse between the occurrence of an insured
loss, the reporting of the loss to the insurer, and the insurer's payment of
that loss. To recognize liabilities for unpaid losses, the insurance
subsidiaries establish reserves, which are balance sheet liabilities
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events which have occurred. The insurance
subsidiaries do not discount loss reserves for financial statement purposes.
When a claim is reported, a case reserve for the estimated amount of the
ultimate payment is established. The estimate reflects an informed judgment
based on general corporate reserving practices and the Company's experience and
knowledge regarding the nature and value of the specific type of claim. Reserves
are also established on an aggregate basis to provide for losses incurred but
not yet reported to the insurer and the overall adequacy of case reserves. The
insurance subsidiaries also establish reserves representing the estimated
expenses of settling claims, including legal and other fees and general expenses
of administering the claims adjustment process.
As part of the reserving process, historical data is reviewed and consideration
is given to the anticipated impact of various factors such as known and
anticipated legal developments, changes in social attitudes, inflation, and
economic conditions. This process relies on the basic assumption that past
experience, adjusted for the effect of current developments and likely trends,
is an appropriate basis for predicting future events. Reserve amounts are
necessarily based on management's informed estimates, and as other data becomes
available and is reviewed, these estimates and judgments are revised, resulting
in increases or decreases to existing reserves.
While the methods for setting the reserve structure are well tested, some
assumptions about loss patterns have changed. In particular, recent higher jury
verdicts and judicial decisions which expand coverage to new theories of
liability have increased the demands against the loss and loss adjusting expense
reserves of the insurance subsidiaries. Not only have anticipated claims
increased in severity, but unanticipated claims have arisen. In establishing
reserves, management considers exposure the Company may have to environmental
claims. Because reported claim activity levels are minimal and the emphasis of
the Company's property-casualty business is primarily on personal lines and
small commercial business, management believes exposure to material liability on
environmental claims to be remote as of December 31, 1996. Management continues
to monitor legal developments as they relate to the Company's exposure to
environmental claims.
The following table presents the development of losses and loss adjusting
expense reserves for 1986 to 1995 for the pool (which includes ALLIED Mutual)
and Western Heritage. The top line of the table shows the estimated reserve for
losses and loss adjusting expenses at the balance sheet date for each of the
indicated years. These figures represent the estimated amount of losses and loss
adjusting expenses, net of reinsurance recoverables, for claims arising in the
current and all prior years that were unpaid at the balance sheet date,
including losses that had been incurred but not yet reported. The lower portion
<PAGE>
10
of the table shows the re-estimated amount of net reserves as a percentage of
the previously recorded net reserves based on experience as of the end of each
succeeding year. The re-estimated reserves change as more information becomes
known about the frequency and severity of claims for individual years.
<TABLE>
<CAPTION>
At or for the year ended December 31,
------------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for
losses and loss
adjusting
expenses, net $126,150 $160,152 $210,746 $248,870 $280,443 $312,089 $355,092 $386,936 $424,595 $471,247 $503,638
Paid (cumulative)
as of (1)
1 year later 42.7% 47.5% 41.7% 43.6% 44.2% 43.6% 40.1% 40.8% 39.9% 43.1%
2 years later 68.8 70.8 64.0 65.8 67.2 66.3 61.9 60.7 61.7
3 years later 84.0 85.8 77.2 79.3 80.4 79.8 72.6 73.2
4 years later 93.3 93.6 84.1 86.3 88.5 86.0 78.8
5 years later 98.2 97.9 87.7 91.5 92.5 89.6
6 years later 100.7 101.0 90.2 94.1 95.2
7 years later 103.3 102.8 92.1 96.0
8 years later 104.8 104.3 93.6
9 years later 106.7 106.0
10 years later 108.5
Net reserves re-
estimated as of
end of year (1) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
1 year later 102.7 103.6 98.3 100.4 101.0 100.2 97.7 98.3 100.1 100.0
2 years later 104.2 106.3 97.6 99.6 101.1 101.1 96.8 98.9 98.9
3 years later 106.9 106.8 97.3 99.6 102.6 102.4 97.2 97.4
4 years later 107.9 107.1 97.5 101.5 104.6 103.1 96.3
5 years later 107.8 107.8 98.1 103.4 105.7 102.9
6 years later 108.7 108.9 99.3 104.5 105.7
7 years later 109.9 110.5 100.4 104.8
8 years later 111.7 111.8 100.7
9 years later 113.2 112.1
10 years later 113.2
Net cumulative redundancy (deficiency)
Dollars $(16,694) $(19,400) $ (1,370) $(11,872) $(16,098) $ (8,953) $ 13,043 $ 9,887 $ 4,875 $ (187)
Percentage (13.2)% (12.1)% (0.7)% (4.8)% (5.7)% (2.9)% 3.7% 2.6% 1.1% (0.0)%
Gross reserves - end of year $373,958 $400,912 $447,311 $492,304 $522,366
Reinsurance recoverables 18,866 13,976 22,716 21,057 18,728
-------- -------- -------- -------- --------
Net reserves - end of year $355,092 $386,936 $424,595 $471,247 $503,638
======== ======== ======== ======== ========
Gross re-estimated reserves - latest (2) 98.3% 100.1% 100.2% 100.5%
Re-estimated recoverables - latest (2) 135.7% 173.9% 125.6% 110.2%
Net re-estimated reserves - latest (2) 96.3% 97.4% 98.9% 100.0%
Gross cumulative redundancy
Dollars $ 6,315 $ (435) $ (942) $ (2,341)
Percentage 1.6% (0.1)% (0.2)% (0.5)%
(1) Shown as a percentage of reserves for losses and loss adjusting expenses.
(2) Shown as a percentage of gross reserves, reinsurance recoverables and net reserves.
</TABLE>
The cumulative redundancy or deficiency represents the aggregate change in the
estimates over all prior years. It should be emphasized that the table presents
a run-off of balance sheet reserves rather than accident or policy year loss
development. Therefore, each amount in the table includes the effects of changes
in reserves for all prior years.
The following table reconciles the reserves for losses and loss adjusting
expenses from the previous table to the amount shown on the Company's
consolidated balance sheets.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
Loss and loss adjusting expense reserves for the property-casualty pool
and Western Heritage $ 503,638 $ 471,247
Less: Loss and loss adjusting expense reserves of ALLIED Mutual 156,975 146,308
---------- ----------
346,663 324,939
Add: Reinsurance recoverables 15,528 16,925
---------- ----------
Loss and loss adjusting expense reserves (GAAP) $ 362,191 $ 341,864
========== ==========
</TABLE>
<PAGE>
11
The next table sets forth a reconciliation of beginning and ending GAAP reserves
for losses and loss adjusting expenses for the years indicated, net of
reinsurance recoverables. The table includes property-casualty and excess &
surplus lines insurance loss and loss adjusting expense reserves. Developments
for losses and loss adjusting expenses on prior years is immaterial to the
Company's consolidated financial statements taken as a whole.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1996 1995 1994
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Net reserves for losses and loss adjusting
expenses at beginning of year $ 324,939 $ 292,674 $ 268,050
---------- ---------- ----------
Incurred losses and loss adjusting expenses
Provision for insured events of current year 353,675 315,956 288,574
(Decrease) increase in provision for
insured events of prior years (680) 1,984 (1,630)
---------- ---------- ----------
Total incurred losses and loss adjusting expenses 352,995 317,940 286,944
---------- ---------- ----------
Payments
Losses and loss adjusting expenses
attributable to insured events of current year 194,735 169,254 151,479
Losses and loss adjusting expenses
attributable to insured events of prior years 136,536 116,421 110,841
---------- ---------- ----------
Total payments 331,271 285,675 262,320
---------- ---------- ----------
Net reserves for losses and loss
adjusting expenses at end of year $ 346,663 $ 324,939 $ 292,674
========== ========== ==========
</TABLE>
Noninsurance Operations
ALLIED Group Mortgage Company (ALLIED Mortgage), purchases, originates, and
services single-family residential mortgages. It acquires mortgage servicing
rights from savings and loan associations, banks, other mortgage companies, the
Resolution Trust Corporation, and other financial institutions. The market in
which ALLIED Mortgage originates mortgages is primarily Polk County, Iowa, which
includes the Des Moines area. ALLIED Mortgage purchases and services mortgages
on a nationwide basis. See "Business--Competition."
ALLIED Mortgage began operations in 1987, and by year-end 1996, its servicing
portfolio included 51,125 mortgages for a total value of $2.8 billion. ALLIED
Mortgage is an approved seller-servicer of mortgages guaranteed by Government
National Mortgage Association, Federal National Mortgage Association, and
Federal Home Loan Mortgage Corporation. See "Business--Regulation." Working
capital requirements are managed through short-term financing with commercial
banks. See note 8 of Notes to Consolidated Financial Statements.
ALLIED's data processing segment consists of The Freedom Group, Inc. (Freedom)
and its subsidiary ALLIED Group Information Systems, Inc. (AGIS), which have a
line of property-casualty and life insurance software products and data
processing services which are marketed under the name "Freedom Group" primarily
to, affiliated and nonaffiliated, insurance companies. Prior to March 1, 1996,
AGIS provided management information services to ALLIED Mutual, ALLIED Life
Insurance Company (ALLIED Life), ALLIED and other company subsidiaries. These
services included the processing of policies and claims, billing, rating,
statistical and regulatory reporting, and recordkeeping. AGIS also provided
automated systems to the property-casualty segment's agency force. Prior to
March 1, 1996, the majority of the AGIS's revenues and operating profits came
from affiliated companies. See note 4 of Notes to Consolidated Financial
Statements.
<PAGE>
12
Through its direct sales force, AGIS licenses property-casualty insurance
software to property-casualty insurance companies generally on a national basis.
AGIS also provides certain consulting services and software maintenance
services. On a nationwide basis, Freedom licenses statutory accounting insurance
software to property-casualty and life insurance companies on primarily a direct
sales basis.
Investments
The Company uses its investments to generate the majority of its operating
profit and provide liquidity. Investments in fixed maturities are classified as
available for sale. See note 1--"Investments" of Notes to Consolidated Financial
Statements. The Company's invested assets are managed by Conning & Company,
subject to restrictions on permissible investments under applicable state
insurance codes and the Company's investment policies. Those policies require
that the fixed maturity portfolio be invested primarily in debt obligations
rated "BBB" (investment grade) or higher by Standard & Poor's Corporation
(Standard & Poor's) or a recognized equivalent at the time the security is
acquired by the Company. The policy also states that equity securities are to be
of United States and Canadian Corporations listed on established exchanges or
publicly traded in the over-the-counter market. Preferred stock is to be
comprised primarily of issues rated at least A3/A- by Standard & Poor's
Corporation or Moody's. The Company monitors the investment quality of the fixed
maturity portfolio subsequent to acquisition by reviewing on a quarterly basis
the current debt ratings assigned to each of the securities in the fixed
maturity portfolio.
Fixed income securities comprised 96.7% of the Company's invested assets, 99.7%
of those had a "BBB" rating or higher from Standard & Poor's (or the equivalent
from Moody's) at December 31, 1996. The portfolio contained no real estate or
mortgage loans. At year-end 1996, the Company held $2.7 million of nonrated
securities. Evaluation of the issuers' rating and ratings for the issuers' other
securities supports management's view that the nonrated securities are
investment grade. At December 31, 1996, the fair value of the Company's fixed
maturity portfolio was $17.1 million over amortized cost.
The carrying values of all the Company's investments in fixed maturities are
reviewed for impairment on an ongoing basis. If this review indicates a decline
in fair value below cost is other than temporary, the Company's carrying value
in the investment is reduced to its estimated realizable value and a specific
write-down is taken. Such reductions in carrying value are recognized as
realized losses and charged to income.
The table below shows the classifications of the Company's investments at
December 31, 1996.
<TABLE>
<CAPTION>
Carrying Percent
value of total
---------- --------
(dollars in thousands)
<S> <C> <C>
Fixed maturities
U.S. Government obligations (1) $ 102,819 12.5%
U.S. Government corporations and agencies 129,328 15.8
State municipalities and political subdivisions 336,720 41.1
Foreign governments 2,086 0.3
Public utilities 11,956 1.5
All other corporate bonds 209,359 25.5
---------- -----
Total fixed maturities 792,268 96.7
Equity securities 20,384 2.5
Short-term investments at cost 6,993 0.8
---------- -----
$ 819,645 100.0%
========== =====
(1) All such securities are backed by the full faith and credit of the United States Government.
</TABLE>
<PAGE>
13
The following table sets forth the composition of the Company's fixed maturity
investment portfolio by rating at December 31, 1996.
<TABLE>
<CAPTION>
Carrying Percent of
value portfolio
---------- ----------
Rating (1) (dollars in thousands)
---------
<S> <C> <C>
AAA $ 538,846 68.0%
AA 113,653 14.4
A 128,120 16.2
BBB 8,952 1.1
Nonrated 2,697 0.3
---------- -----
Total $ 792,268 100.0%
========== =====
(1) Ratings are assigned primarily by Standard & Poor's with
remaining ratings assigned by Moody's and converted to the
equivalent Standard & Poor's ratings.
</TABLE>
The following table sets forth contractual maturities in the fixed maturity
investment portfolio at December 31, 1996. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Carrying Percent of
value portfolio
---------- -----------
Maturity (dollars in thousands)
--------
<S> <C> <C>
One year or less $ 52,335 6.6%
Over 1 year through 5 years 267,058 33.7
Over 5 years through 10 years 285,887 36.1
Over 10 years 16,759 2.1
---------- ------
622,039 78.5
Mortgaged-backed securities 170,229 21.5
---------- ------
Total $ 792,268 100.0%
========== ======
</TABLE>
Investment results of the Company for each year in the three years ended
December 31, 1996 are shown in the following table.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Average invested assets $ 784,247 $ 714,720 $ 627,677
Investment income (1) 49,222 47,242 41,070
Average annual yield on total investments 6.3% 6.6% 6.5%
Tax equivalent yield on total investments (2) 7.4% 7.8% 7.9%
Realized investment gains $ 49 $ 505 $ 2,888
(1) Investment income is net of investment expenses and does not include realized
investment gains or losses or provision for income taxes.
(2) Assuming an effective tax rate of 35%.
</TABLE>
Competition
The insurance industry is highly competitive. The insurance subsidiaries compete
with numerous insurance companies, many of which are substantially larger and
have considerably greater financial resources. Because the insurance
subsidiaries operate through independent agents and such agents represent more
than one company, they face competition within each agency. The insurance
<PAGE>
14
subsidiaries compete by underwriting criteria, pricing, automation, service, and
product design. The Company believes that its management information systems and
procedures for selecting and rating risks accord it a competitive advantage.
Competition in the excess & surplus lines market stiffened in recent years as
standard market capacity increased and prices decreased. Western Heritage
competes in its chosen market (approximately 40 states in the Midwest, West, and
South) with numerous insurers on the basis of service, price, and financial
strength.
ALLIED Mortgage, in originating residential mortgages in central Iowa and
servicing residential mortgages nationally, competes through competitive pricing
and service. Nationally, ALLIED Mortgage is a small-sized company servicing
mortgages with remaining principal balances aggregating $2.8 billion at December
31, 1996. The largest competitors service in excess of $205 billion of
mortgages. With greater capital and greater efficiencies, the larger companies
have an advantage in originating and purchasing mortgages to obtain the
servicing rights. ALLIED Mortgage has access to capital due to its association
with ALLIED and competes in the purchase of servicing on the basis of price and
in mortgage originations on the basis of price and quality of service.
Regulation
The insurance subsidiaries are subject to varying degrees of regulation and
supervision in the jurisdictions in which they transact business under statutes
which delegate regulatory, supervisory, and administrative powers to state
insurance commissioners. Such regulation is designed generally to protect
policyholders rather than investors and relates to such matters as the standards
of solvency which must be met and maintained; the licensing of insurers and
their agents; the nature of and examination of the affairs of insurance
companies, which includes periodic market conduct and financial examinations by
the regulatory authorities; annual and other reports, prepared on a statutory
accounting basis, required to be filed on the financial condition of insurers
for other purposes; establishment and maintenance of reserves for unearned
premiums and losses and loss adjusting expenses; and requirements regarding
numerous other matters. In general, the insurance subsidiaries must file all
rates for insurance directly underwritten with the insurance department of each
state in which they operate; reinsurance generally is not subject to rate
regulation. Further, state insurance statutes typically place limitations on the
amount of dividends or other distributions payable by insurance companies in
order to protect their solvency. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Regulations" and note 13 of Notes
to Consolidated Financial Statements for a discussion of dividend limitations.
Until January 1997, AMCO and ALLIED Property and Casualty were also commercially
domiciled insurers within the State of California and subject to regulation
(including limitations on dividend payments) as California domiciled insurers by
the California Insurance Commissioner.
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.
ALLIED is also subject to statutes governing insurance holding company systems
in various jurisdictions. Typically, such statutes require ALLIED periodically
to file information with the state insurance regulatory authority, including
information concerning its capital structure, ownership, financial condition and
general business operations. Under the terms of applicable state statutes, any
person or entity desiring to acquire more than a specified percentage (commonly
10%) of the ALLIED's outstanding voting securities is required first to obtain
approval from the applicable state insurance regulators. Chapter 521A of the
Iowa Code relating to holding companies, to which the ALLIED is subject,
requires disclosure of transactions between the ALLIED and its insurance
subsidiaries or between an insurer and another subsidiary, that such
transactions satisfy certain standards, including that they be fair, equitable,
and reasonable and that certain material transactions be specifically
non-disapproved by the Iowa Insurance Division. Further, prior approval by the
Iowa Insurance Division is required of affiliated sales, purchases, exchanges,
loans or extensions of credit, guarantees, or investments, any of which involve
5% or more of the insurer's admitted assets as of the preceding December 31st.
<PAGE>
15
Under insolvency or guaranty fund laws in most states in which the insurance
subsidiaries and ALLIED Mutual operate, insurers doing business in those states
can be assessed, up to prescribed limits, for losses incurred by policyholders
as a result of the insolvency of other insurance companies. The amounts and
timing of such assessments are beyond the control of the Company and generally
have an adverse impact on the Company's earnings. Additionally, the insurance
subsidiaries are required to participate in various mandatory pools or
underwriting associations in amounts related to the amount of direct writings in
the applicable state.
Recently, the insurance regulatory framework has received increased scrutiny by
various states, the federal government, and the National Association of
Insurance Commissioners (NAIC). The NAIC has recommended to the states for
adoption and implementation several regulatory initiatives designed to reduce
the risk of insurance company insolvencies. None of these are expected to be
significant to the Company.
ALLIED Mortgage is subject to the rules and regulations of, and examination by,
the United States Department of Housing and Urban Development, Federal National
Mortgage Association (FNMA), and Government National Mortgage Association (GNMA)
with respect to originating, processing, selling, and servicing mortgage loans.
These rules and regulations, among other things, prohibit discrimination,
provide for inspection and appraisals of properties, require credit reports on
prospective borrowers, and sometimes fix maximum interest rates, fees, and loan
amounts. GNMA requires the maintenance of specified amounts of net worth that
vary with the amount of GNMA mortgage-backed securities issued by ALLIED
Mortgage. There are also various state laws affecting mortgage banking
operations.
Relationship with ALLIED Mutual
The Company is operated as a part of the ALLIED Group of insurance companies.
ALLIED Mutual has operated as a mutual property-casualty insurance company since
1929. In 1971, it organized ALLIED as a wholly owned subsidiary and transferred
to it certain assets, including the stock of AMCO, which had operated as a
subsidiary of ALLIED Mutual since 1959. In 1985, ALLIED effected an initial
public offering which then resulted in public ownership of approximately 22% of
its common stock. As of December 31, 1996, ALLIED Mutual controlled 18.3% of the
outstanding voting stock of ALLIED.
The operations of the Company are interrelated with the operations of ALLIED
Mutual. ALLIED and ALLIED Mutual share common executive officers, and three
directors of ALLIED are also directors of ALLIED Mutual.
For the year ended December 31, 1996, ALLIED Mutual reported, in accordance with
Statutory Accounting Practices, net income of $6.7 million, a statutory combined
ratio of 107.0, and admitted assets and surplus at December 31, 1996 of $524.1
million and $231.5 million, respectively. As of December 31, 1996, ALLIED
Mutual's invested assets were $474.1 million. Invested assets included a fixed
maturity portfolio of $347 million (at amortized cost), of which over 98.3% was
rated "BBB" or higher by Standard & Poor's or a recognized equivalent rating
agency. Invested assets also included $77 million in equity investments in
affiliates (which includes ALLIED, ALLIED Life Financial Corporation (ALFC),
which is a 54.4% owned subsidiary of ALLIED Mutual, and AID Finance Services,
Inc.). ALLIED Mutual files its statutory-basis financial reports with the state
insurance departments in the territories in which it operates.
ALLIED and ALLIED Mutual formalized their relationship by entering into an
Intercompany Operating Agreement, a Pooling Agreement, and a Stock Rights
Agreement.
Intercompany Operating Agreement
ALLIED, ALLIED Mutual, ALFC, and each of their respective subsidiaries are
parties to an Intercompany Operating Agreement providing for the sharing of
employees, office space, agency forces, data processing, and other services and
facilities. The Company receives from and pays to ALLIED Mutual and its
subsidiaries fees and cost reimbursements for the employees, services, and
facilities provided. In determining the allocated costs to the companies, each
provider of the various services (e.g., ALLIED Mutual leases office facilities,
ALLIED leases employees etc.) attempts to set fees on a basis consistent with
that which would apply in an arm's length transaction with nonaffiliates.
However, there can be no assurance that the actual rates charged reflect those
which would be obtained if ALLIED and ALLIED Mutual were not affiliated and had
<PAGE>
16
agreed upon rates following arm's length negotiation. See "Relationship with
ALLIED Mutual-Pooling Agreement" for a discussion of changes that impact expense
sharing arrangements between ALLIED Mutual and ALLIED.
ALLIED leases to ALLIED Mutual and certain of its subsidiaries all of the
employees utilized in their operations for a fee and reimbursement of personnel
costs based on certain allocation methods. ALLIED is obligated to provide the
entire requirements for employees of ALLIED Mutual and certain of its
subsidiaries, but ALLIED Mutual reserves the right to hire employees
independently rather than leasing them from ALLIED. In 1996, 1995, and 1994,
ALLIED Mutual and its subsidiaries paid ALLIED $2.5 million, $2.5 million, and
$2.4 million, respectively, for leased employees, substantially all of which
represented cost reimbursement.
The Intercompany Operating Agreement also provides for the leasing by ALLIED
Mutual to the Company of substantially all of the office space utilized by the
Company. ALLIED Mutual and ALLIED's property-casualty subsidiaries share agency
forces as well as other services and facilities. The Intercompany Operating
Agreement contains a covenant not to compete that binds each of ALLIED, ALLIED
Mutual, and ALFC not to engage in a business Intercompany Operating Agreement
and five years thereafter. The Intercompany Operating Agreement is in effect to
December 31, 2004 and continues thereafter subject to any party providing two
years notice that such party intends to cease participation. Termination prior
to December 31, 2004 requires the Coordinating Committee's approval.
In addition, ALLIED Mutual, ALLIED, and ALFC have certain rights under the
Pooling Agreement and the Intercompany Operating Agreement in the event a
nonaffiliated party acquires the ownership of 50% or more of the voting stock of
the Company or ALFC. If such an event were to occur, ALLIED Mutual, ALLIED, or
ALFC, as the case may be, have the right to (i) terminate such agreements upon
six months notice (ii) extend the term such agreements for up to ten additional
years beyond December 31, 2004, upon six months notice, or (iii) allow such
agreements to continue in effect.
Pooling Agreement
The Pooling Agreement provides that ALLIED Mutual, ALLIED Property and Casualty,
and Depositors cede to AMCO premiums, losses, allocated loss adjusting expenses,
commissions, premium taxes, service charge income, and dividends to
policyholders and assume from AMCO an amount of this pooled property-casualty
business equal to their participation in the Pooling Agreement. ALLIED Mutual's
crop hail business is not pooled. AMCO pays certain underwriting expenses,
unallocated loss adjusting expenses, and premium collection expenses for all of
the pool participants and receives a fee equal to a specified percentage of
premiums as well as a contingent fee based on the attainment of certain combined
ratios from each of the pool participants. AMCO charges each of the other pool
participants 12.85% of written premiums for underwriting services, 7.25% of
earned premiums for unallocated loss adjusting expenses, and 0.75% of earned
premiums for premium collection services. AMCO received pool administrative fees
of $61.3 million, $55.7 million, and $50.4 million from ALLIED Mutual in 1996,
1995, and 1994, respectively. The administrative fees are subject to
renegotiation during the term of the pooling agreement upon five years notice.
The pooling agreement provides ALLIED Mutual, ALLIED Property and Casualty, and
Depositors more predictable expense levels by limiting such expenses to a
specified percentage of their premiums in lieu of the prior arrangement, where
such expenses were allocated based on the pool participation percentages. These
arrangements give AMCO opportunities to profit from the efficient administration
of such underwriting, loss settlement, and premium collection activities and to
provide similar services to nonaffiliated insurance companies in the future.
The Pooling Agreement may be terminated by a participant to the agreement on or
after December 31, 2004 upon giving notice at least five years prior to the date
of termination. Termination of the Pooling Agreement prior to December 31, 2004
must be approved by the Coordinating Committee. The Pooling Agreement may also
be terminated or extended by ALLIED Mutual upon the occurrence of certain
events. See "Relationship with ALLIED Mutual-Intercompany Operating Agreement."
<PAGE>
17
Stock Rights Agreement
ALLIED and ALLIED Mutual are parties to a Stock Rights Agreement, which grants
certain rights to, and imposes certain restrictions on, ALLIED Mutual in respect
of its holdings of ALLIED's common and preferred stock. This Agreement expires
in 2005.
Pursuant to the Stock Rights Agreement, ALLIED Mutual is entitled to nominate,
and ALLIED is required to use its best efforts to cause the election or
retention of, a number of members of ALLIED's Board of Directors in proportion
to ALLIED Mutual's percentage ownership of the total number of shares of
ALLIED's voting stock outstanding at the time of nomination. In addition, ALLIED
is required to elect to its Executive Committee at least one director who has
been nominated by ALLIED Mutual but who is not an officer or employee of ALLIED
Mutual. The Stock Rights Agreement also restricts the ability of ALLIED Mutual
to grant proxies and solicit other shareholders of ALLIED. Under the Stock
Rights Agreement, ALLIED Mutual is prohibited from initiating or accepting a
tender offer for shares of ALLIED's common stock except under certain
conditions. ALLIED has a right of first refusal with respect to any sale by
ALLIED Mutual of ALLIED's common stock, subject to certain exceptions, including
a distribution of such stock to the public in a registered public offering or
sale pursuant to Rule 144. ALLIED Mutual has incidental registration rights and
three demand registration rights with respect to ALLIED's common and 6-3/4%
Series preferred stock (6-3/4% Series) it owns.
The limitations on ALLIED Mutual's ability to initiate, or tender shares, in a
tender offer as well as the limitations on its ability to grant proxies and
solicit other shareholders of ALLIED terminate upon a consolidation or merger of
the ALLIED with another corporation in which ALLIED is not the surviving
corporation, a sale of substantially all of its assets, or the holding, by any
person other than ALLIED Mutual, of 50% or more of the voting securities of
ALLIED then outstanding. The Agreement will be suspended for as long as ALLIED
Mutual holds less than 10% of the outstanding common stock and 6-3/4% Series
stock of ALLIED.
The Coordinating Committee
Under the Intercompany Operating Agreement, ALLIED, ALLIED Mutual, and ALFC have
formed a Coordinating Committee comprised of two independent directors of
ALLIED, two directors of ALLIED Mutual, and two independent directors of ALFC,
none of whom serve on other ALLIED boards. All disputes arising under the
Intercompany Operating Agreement as well as other intercompany agreements are to
be submitted to the Coordinating Committee for resolution. Decisions of this
Coordinating Committee must be unanimous and are binding on the parties.
Historically, all issues that have been submitted to the Coordinating Committee
have been resolved by the Committee. ALLIED anticipates that any future issues
would be similarly resolved. If an issue is not resolved by the Coordinating
Committee, it will be submitted to arbitration. In such arbitration, each party
to the dispute selects one arbitrator, and if such dispute involves only two
parties, such arbitrators select a third arbitrator.
Other Relationships
ALLIED Mutual participates with American Re-Insurance Company in a property
catastrophe reinsurance agreement covering the property-casualty segment's share
of pooled losses. In 1996, 1995, and 1994, ALLIED Mutual's and American
Re-Insurance Company's respective participation in the reinsurance agreement
were 90% and 10% and covered the property-casualty segment's share of pooled
losses up to $5,000,000 in excess of $5,000,000. See notes 4 and 6 of Notes to
Consolidated Financial Statements for additional information concerning
transactions between the Company and ALLIED Mutual.
Employees
At December 31, 1996, ALLIED was the direct employer of personnel for all
subsidiaries of ALLIED and of ALLIED Mutual and its subsidiaries other than
ALFC, employing 2,398 persons. None of ALLIED's employees are members of a
collective bargaining unit. Management believes that its employee relations are
good.
<PAGE>
18
Item 2. Properties
The majority of the real property occupied by the Company are owned or leased by
ALLIED Mutual. A portion of the costs of the properties is paid by the Company.
See "Relationship with ALLIED Mutual-Intercompany Operating Agreement."
Management considers the properties to be adequate for its needs. The primary
properties owned by ALLIED Mutual are the home office in Des Moines, Iowa, a
data processing facility and claims center in Urbandale, Iowa, and regional
offices in Denver, Colorado and Lincoln, Nebraska. The Santa Rosa, California
regional office building is leased by ALLIED Mutual. The Company and its
subsidiaries lease office space in Des Moines and Cedar Rapids, Iowa,
Minneapolis, Minnesota, Lincoln, Nebraska, and Scottsdale, Arizona.
Item 3. Legal Proceedings
The Company is party to various lawsuits arising in the normal course of
business. The Company believes the resolution of these lawsuits will not have a
material adverse effect on its financial condition, results of operations, or
liquidity.
Item 4. Submission of Matters to a Vote of Securities Holders
During the fourth quarter of 1996 no matters were submitted to a vote of holders
of ALLIED Group, Inc. stock.
<PAGE>
19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders' Matters
Effective February 11, 1997, ALLIED Group, Inc.'s common stock began trading on
The New York Stock Exchange under the symbol GRP. During 1996, the Company's
common stock traded on The Nasdaq Stock Market under the symbol ALGR during
1996. As of December 31, 1996, there were 1,179 stockholders of record. The
following table shows the high and low market prices and dividends paid per
share for each calendar quarter for the two most recent years. The prices and
dividends per share have been restated for the November 29, 1996 3-for-2 stock
split and rounded to the nearest 1/64.
- --------------------------------------------------------------------------------
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
--------- ---------- ---------- ---------- ----------
High $ 29- 1/2 $ 29 $ 28-53/64 $ 33- 1/4
Low 23-11/32 23-21/32 22-11/32 25-11/32
Dividends 0.14-2/3 0.14-2/3 0.14-2/3 0.15
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
--------- ---------- ---------- ---------- ----------
High $ 19-11/64 $ 20-11/64 $ 22 $ 24- 1/2
Low 15-17/32 18-11/64 18-11/32 21
Dividends 0.11-1/3 0.11-1/3 0.11-1/3 0.11-1/3
- --------------------------------------------------------------------------------
There are certain regulatory restrictions relating to the payment of dividends
(see note 13 of Notes to Consolidated Financial Statements). It is the present
intention of the Board of Directors to declare quarterly cash dividends.
<PAGE>
20
<TABLE>
<CAPTION>
Item 6. Selected Financial Data *
- ------------------------------------------------------------------------------------------------------------------
At or for the year ended December 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Premiums earned
Personal $ 311,511 $ 279,908 $ 252,916 $ 225,594 $ 191,059
Commercial 154,700 145,930 133,816 118,728 101,364
------------ ----------- ---------- ---------- ----------
Total property-casualty 466,211 425,838 386,732 344,322 292,423
Excess & Surplus Lines 27,314 29,661 25,786 24,014 27,738
------------ ----------- ---------- ---------- ----------
Total 493,525 455,499 412,518 368,336 320,161
Investment income 49,222 47,242 41,070 39,030 32,716
Realized investment gains 49 505 2,888 1,396 1,975
Other income 53,558 49,519 50,888 73,680 91,739
------------ ----------- ---------- ---------- ----------
Total revenues 596,354 552,765 507,364 482,442 446,591
Losses and expenses 525,043 478,917 440,665 425,685 407,584
------------ ----------- ---------- ---------- ----------
Income from before
income taxes 71,311 73,848 66,699 56,757 39,007
Income taxes 20,227 21,471 19,074 16,835 10,332
------------ ----------- ---------- ---------- ----------
Net income $ 51,084 $ 52,377 $ 47,625 $ 39,922 $ 28,675
============ =========== ========== ========== ==========
Fully diluted earnings per share
Net income $ 2.31 $ 2.35 $ 2.12 $ 1.74 $ 1.29
============ =========== ========== ========== ==========
Realized investment gain $ .01 $ .02 $ .09 $ .04 $ .06
============ =========== ========== ========== ==========
Property-casualty wind and
hail losses $ 1.23 $ .90 $ .77 $ .60 $ .49
============ =========== ========== ========== ==========
Dividends paid $ .59 $ .45 $ .40 $ .34 $ .29
============ =========== ========== ========== ==========
Balance Sheet Data
Total investments $ 819,645 $ 772,299 $ 655,906 $ 606,511 $ 460,038
Total assets 1,077,659 1,010,598 892,751 855,525 688,488
Notes payable 34,094 39,465 43,541 82,459 66,543
Guarantee of ESOP obligations 24,370 26,270 28,150 29,500 30,590
Other Data
Pool percentage 64% 64% 64% 64% 60%
Book value per share $ 17.39 $ 16.16 $ 13.12 $ 11.98 $ 9.56
Closing stock price per share $ 32.63 $ 24.00 $ 16.50 $ 17.50 $ 14.11
Return on average book value
per share 14.0% 16.1% 16.9% 15.9% 14.2%
Pretax investment yield 6.3% 6.6% 6.5% 7.1% 7.6%
Pretax profit on revenues 12.0% 13.4% 13.1% 11.8% 8.7%
Effective tax rate 28.4% 29.1% 28.6% 29.7% 26.5%
Cash dividends to closing
stock price 1.8% 1.9% 2.4% 1.9% 2.0%
Closing stock price to
earnings ratio 14.1 10.2 7.8 10.1 10.9
Property-casualty statutory
combined ratio 97.7 95.7 97.1 99.3 102.5
Shares outstanding
Preferred shares 1,827 4,820 4,981 5,070 5,141
Common shares 20,383 9,445 9,000 9,026 4,469
* Per share data has been restated to retroactively reflect the 3-for-2 stock split issued in 1996.
</TABLE>
<PAGE>
21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking Information
The Private Securities Litigation Reform Act of 1995 provides a safe harbor to
encourage companies to provide prospective information so long as it is
identified as forward-looking and accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed. Forward-looking statements are related
to the plans and objectives of management for the future operations, economic
performance, of projections of revenues, income, earnings per share, capital
expenditures, dividends, capital structure, or other financial items. In the
following discussion and elsewhere in this report, statements containing words
such as "expect," "anticipate," "believe," "goal," "objective," or similar words
are intended to identify forward-looking statements. ALLIED Group, Inc. (ALLIED)
undertakes no obligation to update such forward-looking statements, and it
wishes to identify important factors that could cause actual results to differ
materially from those projected in the forward-looking statements contained in
the following discussion and elsewhere in this report. The risks and
uncertainties that may affect the operations, performance, development, and
results of ALLIED's business include but are not limited to the following: (1)
heightened competition, particularly intensified price competition; (2) adverse
state and federal legislation and regulations; (3) changes in interest rates
causing a reduction of investment income; (4) general economic and business
conditions which are less favorable than expected; (5) unanticipated changes in
industry trends; (6) adequacy of loss reserves; (7) catastrophic events or the
occurrence of a significant number of storms and wind and hail losses; and (8)
other risks detailed herein and from time to time in ALLIED's other reports.
Overview
The following analysis of the consolidated results of operations and financial
condition of ALLIED should be read in conjunction with the Selected Financial
Data and Consolidated Financial Statements and related footnotes included
elsewhere herein.
ALLIED, a regional insurance holding company, and its subsidiaries
(collectively, the Company) operate exclusively in the United States and
primarily in the central and western states. The Company's largest segment
includes three property-casualty insurance companies that write personal lines
(primarily automobile and homeowners) and small commercial lines of insurance.
The other reportable segment is excess & surplus lines insurance. The
property-casualty insurance segment accounted for 86.5% of consolidated revenues
in 1996 and 85.4% in 1995.
At December 31, 1996, The ALLIED Group Employee Stock Ownership Trust (ESOP
Trust) owned 26.5% and ALLIED Mutual Insurance Company (ALLIED Mutual), an
affiliated property-casualty insurance company, controlled 18.3% of the
outstanding voting stock of ALLIED.
The Board of Directors authorized a 3-for-2 stock split issuable November 29,
1996 to common stockholders of record on November 15, 1996. All fractional
shares were paid in cash. All share and per share amounts included throughout
this report have been restated to reflect the stock split.
1996 Compared to 1995
Consolidated revenues for 1996 were $596.4 million, up 7.9% over the $552.8
million reported for 1995. The increase occurred primarily because of the 8.3%
growth in earned premiums.
Income before income taxes decreased 3.4% to $71.3 million from $73.8 million
for 1995. The decrease was due primarily to the highest ever wind and hail
losses for the year ended December 31, 1996. Wind and hail losses increased
36.4% to $39.1 million from $28.7 million in 1995.
<PAGE>
22
Net income for the year ended December 31, 1996 was down 2.5% to $51.1 million,
lowering fully diluted earnings per share to $2.31 from $2.35 in 1995. Fully
diluted earnings per share excluding net realized investment gains were $2.30
for 1996 compared with $2.33. On a fully diluted basis, the impact of wind and
hail losses was $1.23 per share versus $0.90 in 1995.
Book value per share at December 31, 1996 increased to $17.39 from $16.16. The
increase in book value was constrained by higher dividend payments, increased
wind and hail losses, and the share repurchase program. The fair value of
investments in fixed maturities was $17.1 million above amortized cost compared
with $27.8 million above amortized cost at December 31, 1995. If the investments
in fixed maturities were reported at amortized cost, book value per share at
December 31, 1996 would have been $16.85 compared with $15.29 at December 31,
1995.
Property-casualty
Revenues for the property-casualty segment increased to $515.7 million from $472
million for 1995. Direct earned premiums for the segment were $497.1 million for
1996 compared with $435.2 million one year earlier. Earned premiums increased
9.5% to $466.2 million from $425.8 million. The increase resulted primarily from
growth in insurance exposure as well as a larger average premium per policy.
Pooled net written premiums (including ALLIED Mutual) totaled $767.2 million, a
10.8% increase over 1995 production. The average premium per policy for personal
lines was up 4.6% to $613 while the policy count grew 8.7%. The average premium
per policy for commercial lines increased 2.2% to $1,110, and policy count was
up 4.3%. Earned premiums for the property-casualty segment were 66.8% personal
lines and 33.2% commercial lines in 1996. The business mix for 1995 was 65.7%
personal and 34.3% commercial lines.
Investment income for 1996 was $42.3 million compared with $39.1 million. The
pretax yield on invested assets was 6.3%, down from 6.4% one year earlier.
Investment income increased due to a larger average balance of invested assets
in 1996, which more than offset the decrease experienced in the pretax yield.
Realized investment gains for 1996 were $180,000 compared with $236,000. Other
income increased slightly to $7 million from $6.9 million in 1995.
Income before income taxes decreased 7% to $59.4 million from $63.9 million. The
decrease was due primarily to higher losses and loss adjusting expenses in 1996,
brought on by higher wind and hail losses in the second and third quarters.
The statutory combined ratio (after policyholder dividends) deteriorated to 97.7
from the 95.7 reported in 1995, primarily due to a 2.6-point increase in the
loss and loss adjusting expense ratio. Higher wind and hail losses accounted for
2.2 points of the deterioration. The deterioration was partially offset by a
0.5-point reduction in the Company's underwriting expense ratio, achieved
through improved efficiency and productivity. Wind and hail losses increased to
$39.1 million from $28.7 million in 1995. The impact of wind and hail losses on
the statutory combined ratio was 8.4 points for 1996 and 6.7 points for 1995.
The 1996 underwriting gain (on a generally accepted accounting principles basis)
was $9.9 million compared with $17.7 million for 1995.
The personal auto statutory combined ratio increased to 98.9 from 96.5 for 1995,
reflecting a 2.8-point increase in the loss and loss adjusting expense ratio.
The statutory combined ratio for the homeowners line was 102.4 compared with
99.2 for 1995. Wind and hail losses increased the homeowners combined ratio 23.6
points in 1996 and 21.7 points in 1995. Overall, the personal lines statutory
combined ratio deteriorated to 99.8 from 97.2 in 1995. The statutory combined
ratio for commercial lines increased to 93.5 from 92.7 for the previous year.
Excess & Surplus Lines
Earned premiums for 1996 decreased to $27.3 million from $29.7 million for 1995,
primarily because of higher reinsurance costs. Direct earned premiums were
nearly flat at $37.6 million compared with $37.2 million. Net written premiums
were down 7.2% to $28.4 million from $30.6 million, reflecting a continuing soft
market and management's decision not to sacrifice underwriting results for
premium growth. For the year ended December 31, 1996, the segment's book of
business was comprised of 2.8% personal and 97.2% commercial lines. For 1995,
the business mix was 2.4% personal and 97.6% commercial lines.
<PAGE>
23
The subsidiary's invested assets rose 8.3% from the previous year-end to $104.4
million at December 31, 1996. Investment income increased 7% to $6.2 million
from $5.8 million because a larger average balance of invested assets more than
offset a 30 basis-point decline in the pretax yield to 6.4% from last year's
6.7%. Realized investment gains were $2,000 compared with losses of $136,000 for
1995.
The statutory combined ratio (after policyholder dividends) was 92.5, which
produced an underwriting gain (on a generally accepted accounting principles
basis) of $1.8 million. The statutory combined ratio of 102.2 for 1995 resulted
in an underwriting loss of $855,000. The 1996 combined ratio improved primarily
because of a 21.8% decrease in losses and loss adjusting expenses (11.4 points
on the combined ratio). The decrease in the loss and loss adjusting expense
ratio was primarily due to favorable loss development in 1996.
Income before income taxes for 1996 increased 66.4% to $8.1 million from $4.8
million. The increase was primarily due to favorable loss development.
Noninsurance Operations
Revenues for the noninsurance operations (including investment services, data
processing, and employee lease fees from affiliates) decreased 8.8% to $147.2
million from $161.3 million in 1995. The decrease was primarily due to a decline
in data processing revenues from affiliates. Income before income taxes was $3.8
million for the year ended December 31, 1996 compared with $5.1 million in 1995.
Effective March 1, 1996, certain personnel of ALLIED previously providing
computer-related services to a certain affiliate were employed by the affiliate.
Since the effective date, those employees have been paid directly by the
affiliate.
Investments and Investment Income
The investment policy for the Company's insurance segments requires that the
fixed maturity portfolio be invested primarily in debt obligations rated
investment grade (BBB) or higher by Standard & Poor's Corporation or a
recognized equivalent at the time of acquisition. The policy also states that
equity securities are to be of United States and Canadian corporations listed on
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 & Poor's Corporation or Moody's. At December 31, 1996 the Company's
investment portfolios consisted almost exclusively of fixed income securities;
99.7% were rated investment grade or higher. The portfolios contained no real
estate or mortgage loans at December 31, 1996.
Consolidated invested assets were up 6.1% to $819.6 million from $772.3 million
at year-end 1995. Fixed maturities at amortized cost increased 6.7%.
Consolidated investment income increased 4.2% to $49.2 million from $47.2
million in 1995. The increase was due primarily to a larger average balance of
invested assets. The tax-equivalent yield was down in 1996 to 7.4% compared with
7.8% one year earlier. The aftertax yield for 1996 and 1995 was 4.8 and 5%,
respectively.
Income Taxes
The Company's effective income tax rate was 28.4% compared with 29.1% for 1995.
The decrease in the effective rate was due primarily to a higher percentage of
income from tax-exempt securities. The income tax expense for 1996 decreased
5.8% to $20.2 million.
1995 Compared to 1994
Consolidated revenues for 1995 were $552.8 million, up 8.9% over the $507.4
million reported for 1994. Excluding realized investment gains, revenues grew
9.5% for 1995. The increase occurred primarily because of the 10.4% growth in
earned premiums.
Income before income taxes was up 10.7% to $73.8 million from $66.7 million for
1994 primarily because of revenue growth and improved underwriting margins for
the property-casualty segment. The property-casualty segment was the dominant
contributor, generating operating income of $63.9 million.
<PAGE>
24
Net income for the year ended December 31, 1995 was up 10% to $52.4 million,
raising fully diluted earnings per share to $2.35 from $2.12. Fully diluted
earnings per share before net realized investment gains were $2.33 for 1995
compared with $2.03 in 1994. Book value per share increased to $16.16 from
$13.12.
Property-casualty
Revenues for the property-casualty segment increased to $472 million from $431.1
million for 1994. Direct earned premiums for the segment were $435.2 million for
1995 compared with $383.5 million one year earlier. Earned premiums increased
10.1% to $425.8 million from $386.7 million. The increase resulted from growth
in insurance exposures as well as higher rates.
Net written premiums for the pool (including ALLIED Mutual) totaled $692.6
million, a 9.4% increase over 1994 production. The average premium per policy
for personal lines was up 3.4% to $586 while the policy count grew 6.5%. The
average premium per policy for commercial lines increased 2% to $1,086, and
policy count was up 5.3%. Earned premiums for the property-casualty segment were
65.7% personal lines and 34.3% commercial lines. The business mix for 1994 was
65.4% personal and 34.6% commercial lines.
Income before income taxes increased to $63.9 million from $54.2 million
primarily as a result of lower underwriting expenses in 1995 and an increase in
earned premiums. Investment income was $39.1 million compared with $35.3
million. The pretax yield on invested assets was 6.4%, down from 6.6% one year
earlier.
Realized investment gains were $236,000 compared with $3 million. Realized
investment gains for 1994 included $2.6 million from the sale of the segment's
20% interest in a savings and loan holding company. Other income increased to
$6.9 million from $6.1 million in 1994.
The statutory combined ratio (after policyholder dividends) improved to 95.7
from the 97.1 reported in 1994. Improvement was attributed primarily to a
1.3-point decrease in the underwriting expense ratio. The decrease was the
result of the Company's continuing efforts to improve efficiency and
productivity. Wind and hail losses for 1995 increased to $28.7 million from
$24.4 million in 1994. The impact of wind and hail losses on the statutory
combined ratio was 6.7 points for the year ended December 31, 1995 and 6.3
points for 1994. The underwriting gain (on a generally accepted accounting
principles basis) was $17.7 million compared with $9.8 million for 1994. On a
fully diluted basis, the impact of wind and hail losses on the results of
operations was $0.90 per share versus $0.77 in 1994.
The personal auto statutory combined ratio improved to 96.5 for 1995 from 97.4
for 1994. The improvement was due to a 1.4-point decrease in the underwriting
expense ratio that more than offset the increase in the loss and loss adjusting
expense ratio. The statutory combined ratio for the homeowners line was 99.2
compared with 107.4 for 1994. The impact of wind and hail losses on the
homeowners combined ratio increased slightly to 21.7 points from 21.5 points.
Results for the homeowners line were favorably affected by better pricing in
1995. Overall, the personal lines statutory combined ratio improved to 97.2 in
1995 from 99.8 in 1994. The statutory combined ratio for commercial lines
increased to 92.7 from 92.0 for the previous year.
Excess & Surplus Lines
Earned premiums increased to $29.7 million for 1995 from $25.8 million for 1994.
Net written premiums increased 13.2% to $30.6 million from $27 million. Direct
earned premiums were $37.2 million compared with $32.3 million. As of December
31, 1995, the segment's book of business was comprised of 2.4% personal and
97.6% commercial lines. For 1994, the business mix was 2.8% personal and 97.2%
commercial lines.
The statutory combined ratio (after policyholder dividends) was 102.2, which
produced an underwriting loss (on a generally accepted accounting principles
basis) of $855,000. The statutory combined ratio of 99.9 for 1994 resulted in an
underwriting loss of $218,000. The 1995 combined ratio increased primarily
because of a 20.4% increase in losses and loss adjusting expenses (3.4 points on
the combined ratio).
Income before income taxes for 1995 decreased 3.2% to $4.8 million from $5
million. The decrease was due primarily to poor loss development. Realized
investment losses were $136,000 compared with losses of $24,000 for 1994.
<PAGE>
25
Investment income increased 11.2% to $5.8 million from $5.2 million. Investment
income increased because a larger average balance of invested assets more than
offset a 10 basis-point decline in the pretax yield from the previous year's
6.8%. Invested assets rose 21.2% from the previous year-end to $96.4 million at
December 31, 1995.
Noninsurance Operations
Revenues for the noninsurance operations (including investment services, data
processing, and employee lease fees from affiliates) increased 4.5% to $161.3
million from $154.5 million in 1994. The increase was primarily the result of an
increase in employee lease fees in 1995. The increase in revenues generated from
employee lease fees more than offset the decreases in revenue from investment
services and data processing. Investment services was affected by a decrease in
investment income brought on by a low average balance of mortgage loans held for
sale, and data processing was down primarily as a result of the reduction in
revenues generated from the affiliated property-casualty segment.
Income before income taxes was $5.1 million for the year ended December 31, 1995
compared with $7.5 million in 1994. Fees paid to data processing for processing
and product maintenance services were lowered during 1995 to approximate more
closely the cost for providing such services to the property-casualty segment's
companies.
Investments and Investment Income
Invested assets were up 17.7% to $772.3 million from $655.9 million at year-end
1994. Fixed maturities at amortized cost increased 11.2%. In 1995, the Company
reclassified all fixed maturities in held to maturity to available for sale.
Therefore, all fixed maturities were marked to market at December 31, 1995.
Consolidated investment income increased 15% to $47.2 million from $41.1 million
in 1994. The increase was due primarily to a larger average balance of invested
assets. The tax-equivalent yield was down in 1995 to 7.8% compared with 7.9% one
year earlier. The aftertax yield for 1995 and 1994 was 5.1%.
Income Taxes
The Company's effective income tax rate was 29.1% compared with 28.6% for 1994.
The income tax expense for 1995 rose to $21.5 million from $19.1 million due to
higher operating income and a smaller percentage of tax-exempt investment
income.
Regulations
The insurance subsidiaries are subject to regulation and supervision by the
states in which they are admitted to transact business. State insurance laws
generally establish supervisory agencies with broad administrative and
supervisory powers related to granting and revoking licenses to transact
business, establishing guaranty fund associations, licensing agents, regulating
premium rates for some lines of business, establishing reserve requirements,
prescribing the form and content of required financial statements and reports,
determining the reasonableness and adequacy of statutory capital and surplus,
and regulating the type and amount of permitted investments.
Recently, the insurance regulatory framework has received increased scrutiny
from various states, the federal government, and the National Association of
Insurance Commissioners (NAIC). The NAIC has recommended to the states for
adoption and implementation several regulatory initiatives. None of these is
expected to be significant to the Company.
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 continues to believe the insurance subsidiaries will not
be liable for any material rollback of premiums.
<PAGE>
26
Liquidity and Capital Resources
Substantial cash inflows for the Company are generated from premiums, pool
administration fees, investment income, and proceeds from maturities of
investments. The principal outflows of cash are payments of claims, commissions,
premium taxes, operating expenses, and income taxes and the purchase of fixed
income and equity securities. In developing its strategy, the Company
establishes a level of cash and highly liquid short- and intermediate-term
securities that, combined with expected cash flow, is believed adequate to meet
anticipated short-term and long-term payment obligations.
In 1996, operating activities generated cash flows of $95.1 million; in 1995,
the total was $97.9 million; in 1994, the total was $85.5 million. For each
year, the primary source of funds was premium growth in the property-casualty
insurance operations. In each of the years, funds generated from operating
activities were primarily used to purchase investment grade fixed income
securities, accounting for the majority of cash used in investing activities.
The net cash used in investing activities in 1996, 1995, and 1994 was $65.7
million, $88.8 million, and $69.5 million, respectively. In 1996, 1995, and
1994, ALLIED paid dividends of $16.3 million, $13.5 million, and $12.7 million,
respectively.
Dividend payments to common stockholders totaled $12.2 million for the year
ended December 31, 1996, up from $6.3 million and $5.4 million in 1995 and 1994,
respectively. In 1996, 1995, and 1994, dividends paid on the ESOP Series
Preferred Stock (ESOP Series) were $595,000, $3.7 million, and $3.8 million,
respectively. In each year, dividends of $3.5 million on the 6-3/4% Series
Preferred Stock were paid. The increase in dividends to common shareholders and
the decrease in ESOP Series were due to the conversion of the ESOP Series
completed on March 7, 1996 (see note 10 of the Notes to Consolidated Financial
Statements for a further discussion of the conversion). Prior to the conversion,
ALLIED and the ESOP Trustee entered into an agreement whereby ALLIED agrees to
release additional shares held by the ESOP Trustee if the dividend paid on
common stock is less than $0.20 per share per quarter, which calculates to $0.13
per share per quarter on a post-split basis. The agreement is in effect from
March 7, 1996 through March 7, 2000. The agreement ensures that the allocated
shares in the ESOP Trust receive at least the same amount of dividends that
would have been paid on the ESOP Series had they not been converted to common
stock.
ALLIED relies primarily on dividends from its insurance subsidiaries to pay
preferred and common stock dividends to stockholders. The Iowa state insurance
regulations restrict the maximum amount of dividends the property-casualty
subsidiaries can pay without prior regulatory approval. The maximum dividend
allowed is the greater of either 10% of the subsidiary's statutory capital stock
and surplus as of the preceding December 31 or net income of the preceding
calendar year. In 1997 the maximum amount legally available for distribution to
ALLIED without prior approval is $52.6 million.
The excess & surplus lines subsidiary is domiciled in Arizona and operates under
Arizona state laws. The maximum amount available for distribution as dividends
from the excess & surplus lines subsidiary is limited to the lesser of 10% of
stockholders' surplus as of the preceding December 31 or net investment income
of the preceding year. The excess & surplus lines segment could pay $3.3 million
in 1997 without prior notice to the insurance commissioner. ALLIED anticipates
the excess & surplus lines segment will not pay dividends in 1997.
During 1996, ALLIED received dividend payments of $23.7 million from the
property-casualty subsidiaries and $916,000 from noninsurance subsidiaries.
During 1995 and 1994, the property-casualty subsidiaries paid ALLIED dividends
of $12 million and $7.8 million, respectively; noninsurance subsidiaries paid
dividends of $974,000 and $1.1 million, respectively.
In 1996 and 1994, ALLIED also used funds to repurchase $16.5 million and $6.4
million of its common stock, respectively. No shares were repurchased in 1995.
During 1996, ALLIED repurchased 443,000 shares of its common stock on the open
market at an average price per share of $37.31, which, reflecting the November
1996 stock split, was 664,500 shares at $24.87 per share. Pursuant to SEC Rule
10b-18, the Board of Directors (Board) authorized stock repurchase programs on
December 14, 1994 and July 16, 1996, each for 250,000 shares (375,000 shares on
a post-split basis). The stock repurchase program the Board approved on December
14, 1994 was completed on July 15, 1996. The stock repurchase program the Board
approved on July 16, 1996 is not complete; 57,000 shares remain to be
repurchased. During 1994, ALLIED repurchased 250,000 shares (375,000 shares on a
post-split basis) of its common stock at an average price per share of $25.44
($16.96 on a post-split basis) under a stock repurchase program the Board
approved on February 11, 1994, which was completed in November 1994.
<PAGE>
27
ALLIED's mortgage banking subsidiary, ALLIED Group Mortgage Company (ALLIED
Mortgage), has separate credit agreements to support its operations. Short-term
and long-term notes payable to nonaffiliated companies are used by ALLIED
Mortgage to finance its mortgage loans held for sale, to purchase servicing
rights, and to purchase short-term investments. These notes payable are not
guaranteed by ALLIED. At December 31, 1996, ALLIED Mortgage had short-term
borrowings of $19.7 million, which are to be repaid through the subsequent sale
of its mortgage loan inventory. The amount of short-term borrowings fluctuates
daily depending on the level of inventory being financed. Long-term borrowings
amounted to $12 million to be repaid over the next eight years. See note 8 of
Notes to Consolidated Financial Statements for a further discussion of ALLIED
Mortgage's finance arrangements. In the normal course of its business, ALLIED
Mortgage also makes commitments to buy and sell securities that may result in
credit and market risk in the event the counterparty is unable to fulfill its
obligation. See note 14 of Notes to Consolidated Financial Statements for a
further discussion of such commitments.
In 1990, the ESOP Trust issued floating rate notes totaling $35 million (ESOP
obligations) to acquire ESOP Series stock for the Employee Stock Ownership Plan
(ESOP). In March 1995, the ESOP Trust refinanced the notes pursuant to a Term
Credit Agreement and Guaranty (Agreement) with two separate commercial banks.
ALLIED guaranteed the ESOP Trust's obligations under the Agreement. See note 9
of Notes to Consolidated Financial Statements for a discussion of ESOP
obligations. At December 31, 1996, the balance of the obligations was $24.4
million. Contributions plus dividends on leveraged shares held by the ESOP 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 ALLIED to fund the
amounts paid to the ESOP Trust. ALLIED made contributions to the ESOP Trust of
$529,000 in 1996, $733,000 in 1995, and $35,000 in 1994. ALLIED paid dividends
of $3.5 million in 1996, $2.8 million in 1995, and $2.8 million in 1994, which
were used for such debt service. In connection with its guarantee of ESOP
obligations, ALLIED is required to maintain minimum stockholders' equity and to
comply with certain other financial covenants.
Historically, the insurance subsidiaries have generated sufficient funds from
operations to pay their claims. While the property-casualty and excess & surplus
lines insurance companies have maintained adequate investment liquidity, they
have in the past required additional capital contributions to support premium
growth. Industry guidelines suggest that a property-casualty insurer's annual
net written premiums should not exceed approximately 300% of statutory surplus.
At December 31, 1996, the property-casualty and excess & surplus lines segments'
net written premiums were 173% and 85% of their statutory surplus, respectively.
Management anticipates that short-term and long-term capital expenditures, cash
dividends, and operating cash needs will be met from existing capital and
internally generated funds. In 1994, additional funds of $9.4 million were
generated from the sale of the 20% interest in a savings and loan holding
company. In 1996, the Company received an additional $620,000 as the final
payment on that 1994 sale. The payment represents the Company's share of the
contingent purchase price that was distributed when all known claims were
settled. As of December 31, 1996, the Company 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.
At its March 4, 1997 meeting, the Board of Directors approved a first-quarter
1997 common stock dividend of $0.17 per share. The dividend is $0.02 per share
(13.3%) higher than the amount paid in the fourth quarter of 1996.
Insurance premiums are established before the amount of losses and loss
adjusting expenses or the extent to which inflation may affect such expenses is
known. Consequently, the Company attempts to anticipate the impact of inflation
in establishing premiums. Inflation is implicitly considered in the
determination of reserves for losses and loss adjusting expenses since portions
of the reserves are expected to be paid over extended periods of time. The
importance of continually reviewing reserves is even more pronounced in periods
of extreme inflation.
<PAGE>
28
Item 8. Financial Statements and Supplementary Data
Management Representation
The management of ALLIED Group, Inc. is responsible for the integrity and fair
presentation of the consolidated financial statements, related notes, and all
other information presented herein. The statements were prepared in accordance
with generally accepted accounting principles and include amounts that are based
on management's best estimates and judgments.
Management maintains a system of internal control designed to provide reasonable
assurance as to the integrity and reliability of the financial statements, the
protection of assets from unauthorized use of disposition, the prevention and
detection of fraudulent financial reporting, and the appropriate division of
responsibility. In addition, the Company's internal audit department
systematically reviews these controls, evaluates their adequacy and
effectiveness, and reports thereon. Management has considered internal audit
recommendations and those of KPMG Peat Marwick LLP and has in its opinion
responded appropriately to those recommendations. Management believes that as of
December 31, 1996 the Company's system of internal control is adequate to
accomplish the objectives discussed herein.
The Company's financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The audit was conducted in accordance
with generally accepted auditing standards, which included consideration of the
Company's system of internal control to the extent necessary to form an
independent opinion on the financial statements prepared by management.
The audit committee of the Board of Directors, composed solely of outside
directors, oversees management's discharge of its financial reporting
responsibilities. The committee meets periodically with management, internal
auditors, and representatives of KPMG Peat Marwick LLP to discuss auditing,
financial reporting, and internal control matters. Both internal and independent
auditors have access to the audit committee without management's presence.
/s/ Jamie H. Shaffer
- ---------------------------------
Jamie H. Shaffer
Chief Financial Officer
<PAGE>
29
Report of Independent Auditors
The Board of Directors and Stockholders
ALLIED Group, Inc.
We have audited the accompanying consolidated balance sheets of ALLIED Group,
Inc. and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ALLIED Group, inc.
and subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
- ----------------------------------
KPMG Peat Marwick LLP
Des Moines, Iowa
February 3, 1997
<PAGE>
30
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Assets
Investments (note 2)
Fixed maturities at fair value (note 3) $ 792,268 $ 754,547
Equity securities at fair value (note 3) 20,384 7,948
Short-term investments at cost (notes 3 and 4) 6,993 9,802
Other investments at equity --- 2
------------- -------------
Total investments 819,645 772,299
Cash 1,067 1,465
Accrued investment income 11,563 10,467
Accounts receivable 84,706 76,118
Current income taxes recoverable (note 16) 2,878 1,330
Reinsurance receivables for losses and loss adjusting expenses 18,183 19,293
Mortgage loans held for sale (notes 2 and 8) 12,054 13,673
Deferred policy acquisition costs 46,671 41,688
Prepaid reinsurance premiums 7,838 6,784
Mortgage servicing rights (note 8) 33,094 35,705
Other assets 39,960 31,776
------------- -------------
Total assets $ 1,077,659 $ 1,010,598
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
31
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Liabilities
Losses and loss adjusting expenses (notes 5 and 6) $ 362,191 $ 341,864
Unearned premiums 220,596 196,461
Indebtedness to affiliates (note 4) 2,130 1,019
Notes payable to nonaffiliates (notes 2 and 8) 31,744 35,965
Notes payable to affiliates (notes 2 and 4) 2,350 3,500
Guarantee of ESOP obligations (notes 2 and 9) 24,370 26,270
Deferred income taxes (note 16) 2,244 2,854
Other liabilities (notes 14 and 15) 61,443 51,079
------------- -------------
Total liabilities 707,068 659,012
------------- -------------
Stockholders' equity
Preferred stock, no par value, issuable in series,
authorized 7,500 shares (note 10)
6-3/4% Series, 1,827 shares issued and outstanding 37,812 37,812
ESOP Series, issued and outstanding 2,993 shares in 1995 --- 45,836
Common stock, no par value, $1 stated value, authorized 40,000
shares, issued and outstanding 20,383 shares in 1996 and 9,445
shares in 1995 (notes 11 and 12) 20,383 9,445
Additional paid-in capital 126,078 104,596
Retained earnings (note 13) 195,276 159,470
Unrealized appreciation (depreciation) of investments
(net of deferred income tax expense of $6,907 and $9,907) 12,699 18,335
Unearned compensation related to ESOP (note 9) (21,657) (23,908)
------------- -------------
Total stockholders' equity 370,591 351,586
------------- -------------
Commitments and contingent liabilities (notes 6 and 14)
Total liabilities and stockholders' equity $ 1,077,659 $ 1,010,598
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
32
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Earned premiums (notes 4 and 6) $ 493,525 $ 455,499 $ 412,518
Investment income (note 3) 49,222 47,242 41,070
Realized investment gains (notes 3 and 7) 49 505 2,888
Income from affiliates (note 4) 4,880 5,285 4,737
Other income 48,678 44,234 46,151
------------- ------------- -------------
596,354 552,765 507,364
------------- ------------- -------------
Losses and expenses (note 4)
Losses and loss adjusting expenses (notes 5 and 6) 352,995 317,940 286,944
Amortization of deferred policy acquisition costs 108,315 100,120 90,858
Other underwriting expenses 20,438 20,583 25,090
Other expenses 41,650 38,713 35,419
Interest expense (note 8) 1,645 1,561 2,354
------------- ------------- -------------
525,043 478,917 440,665
------------- ------------- -------------
Income before income taxes 71,311 73,848 66,699
------------- ------------- -------------
Income taxes (note 16)
Current 17,890 22,293 17,499
Deferred 2,337 (822) 1,575
------------- ------------- -------------
20,227 21,471 19,074
------------- ------------- -------------
Net income $ 51,084 $ 52,377 $ 47,625
============= ============= =============
Net income applicable to common stock $ 46,974 $ 45,160 $ 40,319
============= ============= =============
Earnings per share
Primary $ 2.42 $ 3.27 $ 2.98
============= ============= =============
Fully diluted $ 2.31 $ 2.35 $ 2.12
============= ============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
33
ALLIED Group, Inc. and Subsidiaries
Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Preferred stock, beginning of year $ 83,648 $ 85,566 $ 87,125
Issuance of shares of ESOP Series (note 10) --- 699 794
ESOP Series shares converted to
common shares (note 11) (45,836) (2,617) (2,353)
------------- ------------- -------------
Preferred stock, end of year 37,812 83,648 85,566
------------- ------------- -------------
Common stock, beginning of year 9,445 9,000 9,026
Issuance of shares of common stock (notes 11 and 12 4,597 445 224
Repurchase of shares of common stock (note 11) (443) --- (250)
Effect of 3-for-2 stock split 6,784 --- ---
------------- ------------- -------------
Common stock, end of year 20,383 9,445 9,000
------------- ------------- -------------
Additional paid-in capital, beginning of year 104,596 98,926 101,541
Issuance of shares of common stock (notes 11 and 12) 44,356 5,670 3,258
Repurchase of shares of common stock (note 11) (16,082) --- (6,110)
Effect of 3-for-2 stock split (6,792) --- ---
Other, net --- --- 237
------------- ------------- -------------
Additional paid-in capital, end of year 126,078 104,596 98,926
------------- ------------- -------------
Retained earnings, beginning of year 159,470 119,752 83,922
Net income 51,084 52,377 47,625
Dividends paid on preferred stock (note 10) (4,111) (7,217) (7,306)
Dividends paid on common stock (note 11) (12,156) (6,291) (5,396)
Tax benefits attributable to tax-deductible dividends
on unallocated shares of the ESOP 989 849 907
------------- ------------- -------------
Retained earnings, end of year 195,276 159,470 119,752
------------- ------------- -------------
Unrealized appreciation (depreciation) of investments,
beginning of year 18,335 (5,241) 5,900
Change in unrealized (depreciation) appreciation, net (5,636) 23,576 (11,141)
------------- ------------- -------------
Unrealized appreciation (depreciation) of
investments, end of year 12,699 18,335 (5,241)
------------- ------------- -------------
Unearned compensation related to ESOP,
beginning of year (23,908) (26,122) (27,874)
Cost of ESOP Series shares allocated 2,251 2,214 1,752
------------- ------------- -------------
Unearned compensation related to ESOP,
end of year (21,657) (23,908) (26,122)
------------- ------------- -------------
Total stockholders' equity $ 370,591 $ 351,586 $ 281,881
============= ============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
34
ALLIED Group, Inc. and Subsidiaries
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 51,084 $ 52,377 $ 47,625
Adjustments to reconcile net income to net cash
provided by operating activities
Losses and loss adjusting expenses 20,327 30,868 31,140
Unearned premiums, net 23,081 15,945 17,575
Deferred policy acquisition costs (4,983) (3,419) (3,861)
Accounts receivable, net (7,478) (6,009) (13,151)
Depreciation and amortization 11,030 9,583 6,576
Realized investment gains (49) (505) (2,888)
Mortgage loans held for sale, net (2,602) (1,529) 9,944
Indebtedness with affiliates 1,111 1,591 1,815
Accrued investment income (1,096) (118) (992)
Other assets (8,376) (6,644) (15,386)
Cost of ESOP shares allocated 2,251 2,214 1,752
Current (1,548) 1,264 (81)
Deferred 2,337 (822) 1,575
Other, net 10,053 3,109 3,902
------------- ------------- -------------
Net cash provided by operating activities 95,142 97,905 85,545
------------- ------------- -------------
Cash flows from investing activities
Purchase of fixed maturities (222,566) (184,600) (195,955)
Purchase of equity securities (10,990) (4,819) (814)
Purchase of equipment (8,313) (7,794) (5,653)
Sale of fixed maturities (note 3) 81,689 48,012 32,339
Maturities, calls, and principal reductions of
fixed maturities 90,907 61,966 89,357
Sale of equity securities 682 2,072 215
Short-term investments, net 2,809 (4,146) 1,263
Sale of other investment (note 7) --- --- 9,395
Sale of equipment 86 470 358
------------- ------------- -------------
Net cash used in investing activities (65,696) (88,839) (69,495)
------------- ------------- -------------
Cash flows from financing activities
Notes payable to nonaffiliates, net --- (2,180) 380
Notes payable to affiliates, net (1,150) 1,500 (1,500)
Issuance of preferred stock --- 699 794
Issuance of common stock 3,109 3,498 1,129
Repurchase of common stock (16,525) --- (6,360)
Dividends paid to stockholders, net of
income tax benefit (15,278) (12,659) (11,795)
------------- ------------- -------------
Net cash used in financing activities (29,844) (9,142) (17,352)
------------- ------------- -------------
Net decrease in cash (398) (76) (1,302)
Cash at beginning of year 1,465 1,541 2,843
------------- ------------- -------------
Cash at end of year $ 1,067 $ 1,465 $ 1,541
============= ============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
35
ALLIED Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(1) Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying financial statements include the accounts of ALLIED Group, Inc.
(ALLIED) and its subsidiaries (collectively, the Company) on a consolidated
basis. The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles (GAAP), which differ in some
respects from those followed in reports to insurance regulatory authorities. The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities for
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. All significant intercompany balances and transactions have been
eliminated. Certain amounts in the financial statements for prior years have
been reclassified to conform to the current year's presentation.
The Company's property-casualty segment operates through three subsidiaries:
AMCO Insurance Company (AMCO), ALLIED Property and Casualty Insurance Company
(ALLIED Property and Casualty), and Depositors Insurance Company (Depositors),
which underwrite personal lines (primarily automobile and homeowners) and small
commercial lines. The property-casualty segment operates exclusively in the
United States and primarily in central and western states. Iowa and California
accounted for 21.7% and 24.5%, respectively, of 1996 direct written premiums.
The property-casualty segment sells its products through three distribution
systems: independent agencies, exclusive agencies, and direct response
marketing. The property-casualty segment accounted for 86.5% of 1996
consolidated revenues.
Western Heritage Insurance Company (Western Heritage) is the excess & surplus
lines subsidiary, which primarily underwrites commercial lines. The excess &
surplus lines segment operates exclusively in the United States. In 1996, the
segment accounted for 5.6% of consolidated revenues.
The noninsurance subsidiaries are ALLIED Group Mortgage Company (ALLIED
Mortgage), The Freedom Group, Inc. (Freedom Group), ALLIED Group Information
Systems, Inc. (AGIS), Midwest Printing Services, Ltd., and ALLIED General Agency
Company.
During 1996, the Board of Directors authorized a 3-for-2 stock split issuable
November 29, 1996 to stockholders of record on November 15, 1996. All fractional
shares were paid in cash. All weighted average shares outstanding, per share
amounts, and references in the footnotes to share information have been restated
retroactively to reflect the stock split.
At year-end 1996, the ALLIED Group Employee Stock Ownership Trust (ESOP Trust)
owned 26.5% and ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated
property-casualty insurance company, controlled 18.3% of the outstanding voting
stock of ALLIED.
Investments
Investments in fixed maturities where there is the positive intent and ability
to hold to maturity are classified as held to maturity and carried at cost
adjusted for amortization of premium or discount. Amortization of premiums and
discounts on mortgage-backed securities incorporates a prepayment assumption to
estimate the securities' expected lives. Except for declines that are other than
temporary, changes in fair value are not reflected in the financial statements.
Investments in fixed maturities that may be sold prior to maturity and are not
bought and held principally for the purpose of selling in the near term are
segregated into an available for sale portfolio and are carried at fair value.
Unrealized appreciation and depreciation of securities classified as available
for sale are excluded from income and reported as a separate component of
stockholders' equity net of deferred income taxes.
<PAGE>
36
The carrying values of all investments in fixed maturities are reviewed for
impairment on an ongoing basis. If this review indicates that a decline in fair
value below cost is other than temporary, the Company's carrying value in the
investment is reduced to its estimated realizable value and a specific
write-down is taken. Such reductions in carrying value are recognized as
realized losses and charged to income. Realized gains and losses on disposition
of investments are based on specific identification of the investments sold.
Equity securities are carried at fair value with any unrealized appreciation and
depreciation reported net of deferred income taxes as a separate component of
stockholders' equity. All short-term investments are recorded at cost, which
approximates fair value. Other investments are reported using the equity method.
Other investments at December 31, 1996 and 1995 included a 20% ownership in an
abstract and title holding company. In 1996, the investment was written down to
zero.
Property-casualty and Excess & Surplus Lines
Premiums are recognized as revenue ratably over the terms of the respective
policies. Unearned premiums are calculated on the monthly pro rata basis.
Amounts paid for ceded reinsurance premiums are reported as prepaid reinsurance
premiums and amortized over the remaining contract period in proportion to the
amount of insurance protection provided. Premiums receivable from policyholders
and agents are recorded at cost less an allowance for doubtful accounts.
Policy acquisition costs such as commissions, premium taxes, and certain other
underwriting and agency expenses that vary with and are directly related to the
production of business have been deferred. Such deferred policy acquisition
costs are being amortized as premium revenue is recognized. The method followed
in computing deferred policy acquisitions costs limits the amount of such
deferred costs to their estimated realizable value, which gives effect to the
premium to be earned, related investment income, losses and loss adjusting
expenses, and certain other costs expected to be incurred as the premium is
earned.
Liabilities for losses are based upon case-basis estimates of reported losses,
estimates of unreported losses based upon prior experience adjusted for current
trends, and estimates of losses expected to be paid under assumed reinsurance
contracts. Liabilities for loss adjusting expenses are provided by estimating
expenses expected to be incurred in settling the claims provided for in the loss
reserve. Changes in estimates are reflected in current operating results (note
5).
Ceded reinsurance amounts with unaffiliated reinsurers relating to reinsurance
receivables for paid and unpaid losses and loss adjusting expenses and prepaid
reinsurance are reported on the balance sheets on a gross basis. Amounts ceded
to ALLIED Mutual relating to the affiliated reinsurance pooling agreement and
the property catastrophe reinsurance agreement have not been grossed up because
the contracts provide that receivables and payables may be offset upon
settlement.
The liabilities for losses and loss adjusting expenses are considered adequate
to cover the ultimate cost of losses and claims incurred to date net of
estimated salvage and subrogation recoverable. Since the provisions are
necessarily based on estimates, the ultimate liability may be more or less than
such provisions.
Noninsurance Operations
Mortgage loans held for sale by ALLIED Mortgage are reported at the lower of
cost or fair value on an aggregate basis. The fair value calculation includes
consideration of all open positions, outstanding commitments from investors,
related fees paid, and unrealized gains and losses from open options and
financial futures contracts. Loan origination fees and certain direct costs
related to loan origination are deferred and recognized at the time the related
loans are sold. In the normal course of business, ALLIED Mortgage protects its
position in mortgages by taking positions in options, futures, and cash markets.
Market risk exists in the event of fluctuations in market prices on the unhedged
portions of mortgage loans held for sale and outstanding commitments.
ALLIED Mortgage recognizes as separate assets the rights to service mortgage
loans for others, whether acquired through purchases or loan originations.
Capitalized mortgage servicing rights are assessed periodically for impairment
<PAGE>
37
based on the fair value of those rights. ALLIED Mortgage stratifies its mortgage
servicing portfolio on the basis of certain risk characteristics, including loan
type and note rate, and determines fair value based upon the present value of
estimated future cash flows. Impairment is recognized through a valuation
allowance for each impaired stratum. The total valuation allowance for
capitalized mortgage servicing rights was $2.7 million as of December 31, 1996
and $1.4 million at December 31, 1995. The fair value of capitalized mortgage
servicing rights as of December 31, 1996 was approximately $44.2 million.
Capitalized mortgage servicing rights are amortized over twelve years using the
straight-line method, which management believes approximates the realization of
the related net servicing income. Amortization of servicing rights for the years
ended December 31, 1996, 1995, and 1994 was $5.4 million, $4.7 million, and $3.5
million, respectively.
Depreciation and Amortization
Equipment and software are included in other assets at historic cost net of
accumulated depreciation and amortization. For financial reporting purposes,
depreciation and amortization are provided primarily on the straight-line basis
over the estimated useful lives of the assets, ranging from two to seven years.
Accelerated depreciation methods are utilized for income tax purposes.
Retirement Plan Costs
The amount of compensation cost related to The ALLIED Group Employee Stock
Ownership Plan (ESOP) is based on the cost of the shares allocated to
participants plus interest expense incurred related to the debt of the ESOP
reduced by dividends paid used to service the ESOP's debt (the shares allocated
method). The income tax benefit for the tax deductibile dividends paid on
unallocated shares of the ESOP available for debt service is included as a
direct addition to retained earnings.
Income Taxes
Deferred income taxes reflect the impact of temporary differences between the
tax basis of assets and liabilities and the reported amounts of those assets and
liabilities for financial reporting purposes. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Income tax expense provisions increase or decrease in the
same period in which a change in tax rates is enacted.
Earnings per Share
Primary and fully diluted earnings per share calculations are based on the
weighted average number of shares of common stock and common stock equivalents
outstanding for a period. Securities that are in substance equivalent to common
stock (primarily stock options) are referred to as common stock equivalents. To
calculate primary earnings per share, net income is reduced by dividends on the
preferred stock. For fully diluted earnings per share, net income is reduced by
dividends on the 6-3/4% Series preferred stock.
Cash Flows
For purposes of reporting cash flows, changes in notes payable issued by ALLIED
Mortgage to purchase mortgage loans held for sale are included in cash flows
from operating activities.
New Accounting Pronouncements
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) 121,"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," on January 1, 1996. This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
<PAGE>
38
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
The Financial Accounting Standards Board (FASB) issued SFAS 123, "Accounting for
Stock-Based Compensation," in October of 1995. SFAS 123 specifies a fair value
method of accounting for stock-based compensation plans and recognizes
compensation cost over the vesting period of the option granted. An entity is
permitted to determine its net income by continuing to apply Accounting
Principles Board Opinion 25 (APB 25), "Accounting for Stock Issued to
Employees," but must comply with the disclosure requirements of SFAS 123. The
Company adopted the disclosure requirements of SFAS 123 (note 12) for the year
ended December 31, 1996, but accounts for stock-based compensation plans under
APB 25.
(2) Fair Value of Financial Instruments
The estimated fair value amounts have been determined by using available market
information and appropriate valuation methods. The estimates presented herein
are not necessarily indicative of the amounts that would be realized in a
current market exchange, and the use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
Fixed maturities--The estimated fair value is based upon the quoted market
prices for the same or similar issues or from independent pricing services (note
3).
Equity securities--The estimated fair value is based upon the quoted market
prices where available or from independent pricing services (note 3).
Short-term investments--Due to their short-term nature, their carrying amount
approximates fair value.
Mortgage loans held for sale--The fair value is estimated using quoted market
prices and includes commitments to extend credit and forward sales commitments
(note 14).
Excess servicing rights--The fair value represents the present value of
estimated future servicing revenues in excess of normal servicing revenues over
the assumed life of the servicing portfolio.
Notes payable to affiliates and nonaffiliates--Due to the short maturity of the
short-term notes payable, carrying value approximates fair value. The fair value
of the long-term notes payable is estimated using current rates available for
similar issues (notes 4 and 8).
Guarantee of ESOP obligations--Due to its floating interest rate, the guarantee
approximates its fair value (note 9).
Interest rate swap agreement (derivative)--The fair value reflects the estimated
amount the Company would pay to terminate the contract at year-end, thereby
taking into account the current unrealized gains or losses of the open contract.
Dealer quotes are available for the Company's derivative (note 9).
Other financial instruments--Due to their short-term nature, their carrying
amount approximates fair value.
<PAGE>
39
The following table presents the carrying value and estimated fair value of the
financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Fixed maturities $ 792,268 $ 792,268 $ 754,547 $ 754,547
Equity securities 20,384 20,384 7,948 7,948
Short-term investments 6,993 6,993 9,802 9,802
Mortgage loans held for sale 12,054 12,115 13,673 13,821
Excess servicing rights 566 566 538 538
Notes payable to nonaffiliates (31,744) (31,604) (35,965) (36,364)
Notes payable to affiliates (2,350) (2,350) (3,500) (3,500)
Guarantee of ESOP obligations (24,370) (24,370) (26,270) (26,270)
Interest rate swap agreement --- (449) --- (1,052)
</TABLE>
The estimated fair values presented herein are based on pertinent information
available to management as of December 31, 1996 and 1995. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been revalued for purposes of these
financial statements since those dates; current estimates of fair value may
differ significantly from the amounts presented herein.
<PAGE>
40
(3) Investments
Following is a schedule of amortized costs and estimated fair values of
investments in fixed maturities and equity securities as of December 31, 1996
and 1995. The estimated fair values for fixed maturities and equity securities
are based on quoted market prices for the same or similar issues or from
independent pricing services.
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ----------- ----------- -----------
1996 (in thousands)
<S> <C> <C> <C> <C>
Fixed maturities
U.S. Treasury securities $ 61,557 $ 1,074 $ 9 $ 62,622
U.S. Government corporations and agencies 27,453 480 13 27,920
Obligations of states and political subdivisions 327,487 9,613 379 336,721
Foreign governments 2,064 32 9 2,087
Corporate securities and public utilities 190,244 2,860 415 192,689
Mortgage-backed securities 166,361 4,049 181 170,229
----------- ----------- ----------- -----------
Totals $ 775,166 $ 18,108 $ 1,006 $ 792,268
=========== =========== =========== ===========
Equity securities $ 17,880 $ 2,740 $ 236 $ 20,384
=========== =========== =========== ===========
1995
Fixed maturities
U.S. Treasury securities $ 79,653 $ 2,493 $ 1 $ 82,145
U.S. Government corporations and agencies 8,186 440 --- 8,626
Obligations of states and political subdivisions 273,822 11,098 280 284,640
Foreign governments 2,091 70 --- 2,161
Corporate securities and public utilities 167,540 6,089 22 173,607
Mortgage-backed securities 195,434 8,017 83 203,368
----------- ----------- ----------- -----------
Totals $ 726,726 $ 28,207 $ 386 $ 754,547
=========== =========== =========== ===========
Equity securities $ 7,527 $ 486 $ 65 $ 7,948
=========== =========== =========== ===========
</TABLE>
<PAGE>
41
The table below presents the amortized cost and estimated fair value of fixed
maturities by contractual maturity at December 31, 1996. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
----------- -----------
(in thousands)
<S> <C> <C>
Due in 1 year or less $ 51,955 $ 52,335
Due after 1 year through 5 years 262,073 267,058
Due after 5 years through 10 years 278,329 285,887
Due after 10 years 16,448 16,759
----------- -----------
608,805 622,039
Mortgage-backed securities 166,361 170,229
----------- -----------
Totals $ 775,166 $ 792,268
=========== ===========
</TABLE>
The following table presents the gross realized gains and losses by portfolio
included in the proceeds from calls, principal reductions, and sales of fixed
maturities for the years ended December 31, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Available for sale
Gross realized gains $ 406 $ 957 $ 621
Gross realized losses (1,022) (910) (138)
----------- ----------- -----------
(616) 47 483
----------- ----------- -----------
Held to maturity
Gross realized gains --- 54 8
Gross realized losses --- (1) (246)
----------- ----------- -----------
--- 53 (238)
----------- ----------- -----------
Net realized (losses) gains $ (616) $ 100 $ 245
=========== =========== ===========
</TABLE>
In November of 1995, the Company reclassified $359.4 million of fixed maturities
as held to maturity to available for sale. The reclassification increased
unrealized appreciation of investments by $7.7 million net of deferred income
taxes, and was permitted under the implementation guide issued by the FASB, "A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities."
For the year ended December 31, 1994, gross realized losses of the held to
maturity portfolio included a realized loss of $195,000 on the sale of an
investment. The investment had an amortized cost of $4.9 million and was
disposed of due to the significant downgrade of the issuer's credit rating in
1994. Additionally, the Company sold from the held to maturity portfolio an
investment with an amortized cost of $1 million for a realized loss of $10,000.
There were no transfers in 1994.
As required by law, fixed maturities and short-term investments were on deposit
with various insurance regulatory authorities, amounting to $10.5 million at
December 31, 1996 and $10.5 million at year-end 1995.
<PAGE>
42
As of December 31, 1996 and 1995, there were no investments that were non-income
producing for the previous twelve months.
A summary of net investment income for the years ended December 31, 1996, 1995,
and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Interest on fixed maturities $ 48,770 $ 47,160 $ 40,760
Dividends on equity securities 478 167 220
Interest on short-term investments 771 665 367
Equity earnings in unconsolidated subsidiaries 52 11 555
Other, net 703 20 54
----------- ----------- -----------
Total investment income 50,774 48,023 41,956
Investment expense 705 584 703
Interest expense 847 197 183
----------- ----------- -----------
Net investment income $ 49,222 $ 47,242 $ 41,070
=========== =========== ===========
</TABLE>
A summary of net realized investment gains (losses) and net changes in
unrealized appreciation (depreciation) of investments for the years ended
December 31, 1996, 1995, and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Net realized investment gains (losses)
Fixed maturities
Available for sale $ (616) $ 47 $ 483
Held to maturity --- 53 (238)
Equity securities 45 405 (3)
Other investments (note 7) 620 --- 2,646
----------- ----------- -----------
49 505 2,888
----------- ----------- -----------
Net changes in unrealized appreciation (depreciation) of investments
Fixed maturities
Available for sale (10,719) 36,063 (17,293)
Held to maturity --- 13,231 (32,016)
Equity securities 2,083 289 104
------------ ----------- -----------
(8,636) 49,583 (49,205)
----------- ----------- -----------
Net realized investment gains (losses) and changes in
unrealized appreciation (depreciation) of investments $ (8,587) $ 50,088 $ (46,317)
=========== =========== ===========
</TABLE>
<PAGE>
43
(4) Transactions with Affiliates
The property-casualty segment and ALLIED Mutual participate in a reinsurance
pooling agreement. The pooling agreement provides that AMCO (pool administrator)
assumes from the pool participants premiums, losses, allocated loss adjusting
expenses, commissions, premium taxes, service charge income, and dividends to
policyholders. Then the pool participants assume from AMCO an amount of this
pooled property-casualty business equal to their participation in the pooling
agreement. AMCO pays certain underwriting expenses, unallocated loss adjusting
expenses, and premium collection expenses for all of the pool participants and
receives a fee equal to a specified percentage of premiums as well as a
contingent fee based on the attainment of certain combined ratios from each of
the pool participants. AMCO charges each of the participants 12.85% of written
premiums for underwriting services, 7.25% of earned premiums for unallocated
loss adjusting expenses, and 0.75% of earned premiums for premium collection
services. The administrative fees are subject to renegotiation during the term
of the agreement upon at least five years' notice. AMCO received pool
administrative fees of $61.3 million, $55.7 million, and $50.4 million from
ALLIED Mutual in 1996, 1995, and 1994, respectively. The pooling agreement
extends through December 31, 2004, after which it can be terminated by the
participating parties upon five years' notice. Changes to the pooling agreement
must be approved by the coordinating committee of the Board of Directors.
Pursuant to the terms of the Intercompany Operating Agreement, ALLIED leases
employees to its subsidiaries and ALLIED Mutual and certain of its subsidiaries.
Each company that leases employees is charged a fee based upon costs incurred
for salaries, related benefits, taxes, and expenses associated with the
employees it leases. For the years ended December 31, 1996, 1995, and 1994,
ALLIED received revenues of $2.5 million, $2.5 million, and $2.4 million,
respectively, for employees leased to affiliates which are included in income
from affiliates and in eliminations and other within segment information.
The Intercompany Operating Agreement between the Company and ALLIED Mutual also
provides for the continued availability of office space, marketing services,
agency forces, and computer and other facilities. Expenses are charged to the
Company based on specific identification or, if undeterminable, the expenses are
allocated on the basis of cost and time studies that are updated annually. The
agreement extends through December 31, 2004, after which it may be terminated on
two years' notice given after December 31, 2002 by either ALLIED Mutual or the
Company.
Included in income from affiliates are revenues of $2.4 million, $2.8 million,
and $2.3 million for the years ended December 31, 1996, 1995, and 1994,
respectively, relating to data processing services provided by the Company to
ALLIED Mutual and its subsidiaries under a Management Information Services
Agreement. Effective March 1, 1996, the agreement was amended and certain
personnel previously providing computer-related services to a certain affiliate
were employed by the affiliate. As a result, fees paid for services provided by
such employees prior to the amendment date are now paid directly by the
affiliate.
ALLIED Mutual participates with a nonaffiliated reinsurance company in a
property catastrophe reinsurance agreement to cover the property-casualty
segment's share of pooled losses. In 1996, 1995, and 1994, the coverage was $5
million in excess of $5 million. ALLIED Mutual's and the reinsurance company's
respective participation in such agreement was 90% and 10% in 1996, 1995, and
1994. Related premiums paid by the property-casualty segment to ALLIED Mutual
were $2.7 million in 1996, $2.3 million in 1995, and $1.9 million in 1994. There
were recoveries of $3.4 million, $2.6 million, and $2.2 million from ALLIED
Mutual in 1996, 1995, and 1994, respectively.
All expenses incurred on the Company's behalf by its affiliates have been
reflected in the accompanying financial statements. Management believes the
costs incurred by its affiliates and allocated to the Company are reasonable and
would not be materially different than if they had been incurred from a third
party nonaffiliate. During the normal course of business the aforementioned
transactions result in intercompany balances that are created and are settled on
a monthly basis.
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
<PAGE>
44
subsidiary of ALLIED Mutual, is the administrator of the fund. At December 31,
1996 and 1995, the Company had $3.4 million and $7.8 million, respectively,
invested in the fund. The Company also had three unsecured notes payable to the
fund at December 31, 1996 totaling $2.4 million. Interest rates ranged from 5.6%
to 8.5%, and the notes mature in January of 1997. At December 31, 1995 the
Company had two unsecured notes payable totaling $3.5 million to the investment
fund.
The Company paid interest to affiliates of $270,000, $127,000, and $123,000 in
1996, 1995, and 1994, respectively.
(5) Losses and Loss Adjusting Expenses
The following table sets forth the reconciliation of beginning and ending
reserves for losses and loss adjusting expenses for the years indicated.
Reinsurance recoverables on unpaid losses and loss adjusting expenses are
included on the consolidated balance sheets within reinsurance receivables for
losses and loss adjusting expenses. The following table includes
property-casualty and excess & surplus lines reserves for losses and loss
adjusting expenses.
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Reserves for losses and loss adjusting expenses
at beginning of year $ 341,864 $ 310,996 $ 279,856
Less reinsurance recoverables 16,925 18,322 11,806
----------- ----------- -----------
Net reserves for losses and loss adjusting expenses
at beginning of year 324,939 292,674 268,050
----------- ----------- -----------
Incurred losses and loss adjusting expenses
Provision for insured events of current year 353,675 315,956 288,574
(Decrease) increase in provisions for insured
events of prior years (680) 1,984 (1,630)
----------- ----------- -----------
Total incurred losses and loss adjusting expenses 352,995 317,940 286,944
----------- ----------- -----------
Payments
Losses and loss adjusting expenses attributable
to insured events of current year 194,735 169,254 151,479
Losses and loss adjusting expenses attributable
to insured events of prior years 136,536 116,421 110,841
----------- ----------- -----------
Total payments 331,271 285,675 262,320
----------- ----------- -----------
Net reserves for losses and loss adjusting expenses at end of year 346,663 324,939 292,674
Plus reinsurance recoverables 15,528 16,925 18,322
----------- ----------- -----------
Reserves for losses and loss adjusting expenses at end of year $ 362,191 $ 341,864 $ 310,996
=========== =========== ===========
</TABLE>
The reserving process relies on the basic assumption that past experience,
adjusted for current developments and likely trends, is an appropriate basis for
predicting future events. Reserve amounts are necessarily based on management's
informed estimates; as other data becomes available and is reviewed, these
estimates and judgments are revised, resulting in increases and decreases to
existing reserves. As a result of changes in estimates of insured events in
<PAGE>
45
prior years, the provision for losses and loss adjusting expenses decreased
$680,000 in 1996, increased $2 million in 1995, and decreased $1.6 million in
1994. Development for losses and loss adjusting expenses on prior years is
immaterial to the financial statements taken as a whole.
In establishing reserves, management considers exposure the Company may have to
environmental claims. Because reported claim activity levels are minimal and the
emphasis of the property-casualty business is primarily on personal lines and
small commercial business, management believes exposure to material liability on
such claims to be remote as of December 31, 1996. The Company routinely reviews
its overall reserve position and reserving techniques as they relate to its
exposure to environmental claims.
(6) Reinsurance
In the ordinary course of business the property-casualty and excess & surplus
lines subsidiaries cede insurance to other insurers for the purpose of limiting
their maximum loss exposure through diversification of their risks. See note 4
for discussion of reinsurance contracts with ALLIED Mutual. Reinsurance
contracts do not relieve the Company from its obligations to policyholders as
the primary insurer. Failure of reinsurers to honor their obligations could
result in losses to the Company; consequently, allowances are established for
amounts deemed uncollectible. The Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies. As of
December 31, 1996, reinsurance receivables and prepaid reinsurance premiums
associated with three nonaffiliated reinsurers aggregated approximately $12.8
million, which represented a significant portion of the total prepaid
reinsurance premiums and reinsurance receivables for losses and loss adjusting
expenses. The property-casualty subsidiaries also assume insurance as members of
various pools and associations.
The effect of reinsurance on premiums written and earned and losses and loss
adjusting expenses incurred for the years ended December 31, 1996, 1995, and
1994 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Direct written premiums $ 568,277 $ 494,462 $ 436,988
Assumed from nonaffiliates 6,536 8,572 8,667
Net (ceded to) assumed from ALLIED Mutual (26,639) (6,151) 8,793
Ceded to nonaffiliates (31,568) (25,439) (24,356)
----------- ----------- -----------
Net written premiums $ 516,606 $ 471,444 $ 430,092
=========== =========== ===========
Direct earned premiums $ 534,738 $ 472,407 $ 415,767
Assumed from nonaffiliates 7,231 8,831 8,536
Net (ceded to) assumed from ALLIED Mutual (17,933) (703) 11,863
Ceded to nonaffiliates (30,511) (25,036) (23,648)
----------- ----------- -----------
Net earned premiums $ 493,525 $ 455,499 $ 412,518
=========== =========== ===========
Direct losses and loss adjusting expenses $ 398,748 $ 335,779 $ 303,318
Assumed from nonaffiliates 4,239 5,889 5,821
Net (ceded to) assumed from ALLIED Mutual (37,957) (14,648) (9,450)
Ceded to nonaffiliates (12,035) (9,080) (12,745)
----------- ----------- -----------
Net losses and loss adjusting expenses incurred $ 352,995 $ 317,940 $ 286,944
=========== =========== ===========
</TABLE>
<PAGE>
46
(7) Dispositions
On June 1, 1994, the Company completed the sale of its investment in a savings
and loan holding company for $9.4 million. The 20% interest was acquired for
investment purposes and was reported in other investments. The pretax gain of
$2.6 million is included in realized investment gains for 1994 in the
consolidated statements of income.
During July of 1996, the Company received $620,000 as the final settlement on
the 1994 sale of its investment in the savings and loan holding company. The
payment represents the Company's share of the contingent purchase price held by
the buyer until all known claims were settled.
(8) Notes Payable to Nonaffiliates
The short-term notes payable to nonaffiliated companies include line of credit
agreements used by ALLIED Mortgage primarily to finance its mortgage loans held
for sale. At December 31, 1996 and 1995, ALLIED Mortgage had borrowed $19.7
million and $22.5 million, respectively, under mortgage loan warehousing
agreements with three different commercial banks; the agreements expire in May
and June of 1997. Under the terms of the agreements, ALLIED Mortgage can borrow
up to the lesser of $67 million or 98% of the mortgage credit borrowing base,
which includes related sublines. At December 31, 1996, the outstanding
borrowings of ALLIED Mortgage under these line of credit agreements were secured
by mortgage loans held for sale of $12.1 million, mortgage servicing rights on
loans with a principal balance of $2.8 billion, and foreclosure loans of $5.4
million. Interest rates applicable to these borrowing arrangements vary with the
level of investable deposits maintained at the respective commercial banks.
ALLIED Mortgage entered into an agreement with a life insurance company for $15
million of 8.4% senior secured notes due September 1, 2004. The notes are
secured by mortgage servicing rights and are payable in equal annual
installments of $1.5 million every September 1; interest is payable
semiannually. At December 31, 1996 and 1995, the outstanding balance was $12
million and $13.5 million, respectively.
The Federal Home Loan Bank of Des Moines provides a $3 million committed credit
facility through a line of credit agreement with AMCO that expires March 1,
1997. Interest on any outstanding borrowings is payable at an annual rate equal
to the federal funds unsecured rate for federal reserve member banks. The
Company had no outstanding balance as of December 31, 1996 and December 31,
1995.
The Company paid interest to nonaffiliates of $1.5 million, $1.6 million, and
$2.2 million in 1996, 1995, and 1994, respectively.
(9) Guarantee of ESOP Obligations
On July 12, 1990, the ESOP Trust issued Remarketed Floating Rate Notes (FRN)
totaling $35 million with a final maturity of July 12, 2005. The proceeds from
the FRN were used to acquire Series A ESOP Convertible Preferred Stock. During
1995, the ESOP Trust refinanced its $28.2 million of FRN under the terms of a
Term Credit Agreement and Guaranty (Credit Agreement) with two separate
commercial banks. The loans mature July 12, 2005, and interest rates applicable
to the borrowings are adjusted at the beginning of each interest period. The
interest periods may be one, three, or six months at the discretion of the ESOP
Trust.
ALLIED has guaranteed on an unsecured basis the ESOP Trust's reimbursement
obligations under the Credit Agreement. The guarantee has been recorded in the
consolidated balance sheets as a liability under the caption, "Guarantee of ESOP
obligations." At December 31, 1996 and 1995, ALLIED had an outstanding guarantee
of principal of $24.4 million, and $26.3 million, respectively. Contributions to
the ESOP Trust plus dividends on leveraged shares held by the ESOP Trust are
used to meet interest and principal payments on the notes. As principal payments
are made, the recorded ESOP guarantee is reduced.
ALLIED is party to an interest rate swap agreement with a broker-dealer to
reduce the financial statement impact of fluctuations in the Credit Agreement
interest rate. The interest rate resets at the beginning of each interest
period. The interest rate swap involves the exchange of fixed and floating rate
<PAGE>
47
interest payments without the exchange of the underlying principal amount. As of
December 31, 1996, the amount of principal covered under the swap agreement was
$17.6 million with a fixed interest rate of 7.4%. The amount of principal
covered under the swap agreement reduces over time; the final swap maturity date
is December 12, 1997. During 1996, the actual Credit Agreement interest rate
ranged from 6% to 6.6%. During 1995 and 1994, the actual interest rates ranged
from 6% to 6.8% and from 2.9% to 6.3%, respectively. Though nonperformance of
the broker-dealer is not expected, ALLIED is exposed to credit loss should such
an event occur.
The Credit Agreement includes various financial and operating covenants with
which ALLIED must comply. The covenants include the maintenance of certain
contractual relationships with ALLIED Mutual, continued ownership of certain
subsidiaries, limitations on the issuance of security interests in certain
assets, maintenance of various financial ratios, and minimum net equity
requirements.
(10) Preferred Stock
ALLIED is authorized to issue 7,500,000 shares of preferred stock without par
value. The preferred stock may be issued from time to time by the Board of
Directors in one or more series with such dividend rights, conversion rights,
voting rights, redemption provisions, liquidation preferences, and other rights
and restrictions as the Board of Directors may determine.
6-3/4% Series
The 6-3/4% Series preferred stock (6-3/4% Series), issued to ALLIED Mutual at a
value of $28.50 per share, is perpetual, nonconvertible, voting, and cumulative
with respect to dividends. The 6-3/4% Series has no preemptive rights and is not
registered or traded. Upon any transfer by ALLIED Mutual, the 6-3/4% Series is
callable under certain conditions and becomes nonvoting. Each share of the
6-3/4% Series has 2-1/4 votes. The annual dividend rate is 6-3/4% of the
liquidation preference of $28.50 ($1.92 per share) and is payable quarterly.
ALLIED entered into a Stock Rights Agreement with ALLIED Mutual to grant both
parties certain rights in terms of registration, transfer, voting, board
nominations, and other matters. Pursuant to the Stock Rights Agreement executed
July 5, 1990, ALLIED Mutual is entitled to nominate for election to ALLIED's
Board of Directors a number of director nominees that most closely approximates
the same percentage of the total number of members of ALLIED's Board of
Directors as is equal to ALLIED Mutual's percentage ownership of the total
number of shares of ALLIED voting stock.
ESOP Series
On March 7, 1996, the commercial bank acting on behalf of the ESOP participants
as the trustee for the ESOP Trust (Trustee) converted all of its shares of ESOP
Convertible Preferred Stock (ESOP Series) to shares of common stock. The ESOP
Series shares were convertible into 2-1/4 common shares and had 2-1/4 votes,
subject to anti-dilution adjustments. In 1995 the ESOP Trust purchased 13,426
shares of ESOP Series for $54.00 per share of Series D. In 1994 the ESOP Trust
purchased 22,223 shares of ESOP Series for $37.12 per share: 9,247 shares of
Series C and 12,976 shares of Series D.
(11) Common Stock
ALLIED has reserved 2,025,000 shares of common stock to be issued through the
ALLIED Group, Inc. Dividend Reinvestment and Stock Purchase Plan. Any
stockholder of record may participate in the plan and have cash dividends
reinvested in additional shares of common stock. The plan also provides for
optional cash payments. During 1996, 61,447 shares, purchased on the open
market, were issued at a weighted average price per share of $26.48. During 1995
and 1994, 64,058 and 75,458 shares, purchased on the open market, were issued at
the weighted average prices per share of $20.01 and $17.37, respectively. At
December 31, 1996, 878,967 shares were available for issuance.
<PAGE>
48
ALLIED has reserved 375,000 shares of common stock for issuance under the ALLIED
Life Employee Stock Purchase Plan. ALLIED receives fair market value for the
shares issued under the plan. During 1996, 556 shares were issued at a weighted
average price per share of $26.71. During 1995 and 1994, 3,008 and 464 shares
were issued at a weighted average price per share of $19.17 and $17.53,
respectively. At December 31, 1996, 370,903 shares were available for issuance.
During 1996, ALLIED canceled 664,500 shares of its common stock repurchased on
the open market at an average cost of $24.87 per share. No shares were
repurchased in 1995. During 1994, ALLIED canceled 375,000 shares of its common
stock repurchased on the open market at an average cost of $16.96 per share.
During 1996, 2,992,710 ESOP Series shares were converted to 6,733,598 shares of
common stock and the ESOP Trust purchased 24,381 shares at an average price per
share of $32.89. As of December 31, 1996, the ESOP Trust was the holder of
6,482,223 shares, or 31.8% of ALLIED's common stock. The Trustee is entitled to
vote the shares held in the ESOP Trust on all matters submitted to a vote of the
holders of the common stock of ALLIED. The ESOP Trust generally provides that
each ESOP participant is entitled to direct the Trustee how to vote (or whether
to tender or exchange) the shares allocated to the participant's account.
During 1995 and 1994, 174,960 and 110,956 ESOP Series shares were converted to
393,660 and 249,651 shares of common stock, respectively.
The dividend rate per common share was $0.59, $0.45, and $0.40 for 1996, 1995,
and 1994, respectively.
(12) Stock-based Compensation Plans
ALLIED has granted stock options to key employees under four nonqualified plans
as defined by the Internal Revenue Service: the ALLIED Group, Inc. Restated and
Amended Stock Option Plan (Option Plan), the ALLIED Group, Inc. Nonqualified
Stock Option Plan (Nonqualified Plan), the ALLIED Group Executive Equity
Incentive Plan (Equity Plan), and the Freedom Group Incentive Plan (Freedom
Plan). No options remain to be granted under the plans, and during 1996 all
Equity Plan options were exercised. Upon exercise of the stock options under
each plan, ALLIED receives an amount equal to the common stock's fair market
value at the grant date. The options vest at various times and must be exercised
ten years after the date of grant.
In addition, ALLIED has reserved 900,000 shares of common stock for issuance to
key employees under the ALLIED Group, Inc. Long-Term Management Incentive Plan
(Incentive Plan). Under the Incentive Plan, shares of common stock are available
for grant until December 31, 2003 as incentive and nonqualified stock options
(collectively, Options), SARs, and restricted stock. The Options, SARs, and
restricted stock begin to vest two years after the date of grant. Options, SARs,
and restricted stock prices are based upon the fair market values as of the date
of grant.
<PAGE>
49
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Weighted average
----------------------------
Weighted
Exercise price Remaining average
Compensation range per Options contractual Exercise Options exercise
plan share outstanding life price exercisable price
- ----------------- --------------- ----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Option Plan $ 14.08 - 19.42 223,467 6.7 $ 17.27 52,832 $ 16.85
Nonqualified Plan 18.33 - 19.42 86,549 7.8 18.67 2,183 19.42
Freedom Plan 5.06 27,000 1.3 5.06 27,000 5.06
Incentive Plan 16.17 - 29.08 283,688 8.0 21.78 20,996 18.82
--------- ---------
620,704 103,011
========= =========
</TABLE>
A summary of stock option activity and prices for 1996, 1995, and 1994 is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ---------------------- -----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Stock options Shares price Shares price Shares price
- ----------------------------------- --------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 567,356 $ 16.07 603,246 $ 11.63 592,502 $ 11.05
Granted 129,000 26.97 195,000 18.37 94,500 16.20
Exercised (75,652) 10.71 (205,506) 6.27 (48,000) 5.55
Canceled --- --- (25,384) 7.45 (35,756) 18.04
--------- -------- --------
Outstanding at end of year 620,704 $ 18.99 567,356 $ 16.07 603,246 $ 11.63
========= ======== ========
Options exercisable at end of year 103,011 70,457 287,748
========= ======== ========
Weighted average fair value of
options granted during the year $ 9.20 $ 6.91
========= ========
</TABLE>
The issuance of SARs and restricted stock under the Incentive Plan reduces the
number of options available for future issuance. During 1996 and 1995, 6,387 and
19,967 shares of restricted stock were awarded at $28.75 per share and $18.25
per share, respectively. During 1996, the restriction was lifted on 417 shares
and 173 restricted shares were canceled. In 1995, 609 restricted shares were
canceled. At December 31, 1996, 25,586 restricted shares were outstanding. The
following table presents SAR activity and prices for the years ended December
31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Number average average average
SARs of shares price Shares price Shares price
- --------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 22,001 $ 17.38 12,000 $ 16.23 --- $ ---
Granted 12,750 26.83 11,501 18.42 12,750 16.23
Exercised (1,875) 16.31 (1,500) 16.17 --- ---
Canceled --- --- --- --- (750) 16.17
--------- --------- ---------
Outstanding at end of year 32,876 $ 21.03 22,001 $ 17.38 12,000 $ 16.23
========= ========= =========
</TABLE>
<PAGE>
50
ALLIED has reserved 1,125,000 and 562,500 shares of common stock for issuance
under the ALLIED Group, Inc. Employee Stock Purchase Plan (ESPP) and the ALLIED
Group, Inc. Outside Director Stock Purchase Plan (DSPP), respectively. Under the
plans, participants pay 85% of the fair market value of the shares issued which
are fully vested on the dates purchased. During 1996, 41,631 shares were issued
at a weighted average price per share of $21.93. During 1995 and 1994, 46,043
and 49,252 shares were issued at a weighted average price per share of $17.09
and $15.17, respectively. At December 31, 1996, 385,893 and 529,313 shares were
available for issuance under the ESPP and DSPP, respectively.
The Company applies APB 25 and related interpretations in accounting for its
stock-based compensation plans, as permitted by SFAS 123. Accordingly, no
compensation cost for the Company's stock option plans has been recognized in
the accompanying financial statements. Compensation cost of $386,000, $167,000,
and $24,000 was recognized in 1996, 1995, and 1994, respectively, under ALLIED's
other stock-based compensation plans. Had compensation cost been determined
based on the fair market value at the grant date of the stock option plans in
accordance with SFAS 123, the Company's net income and earnings per share could
have been reduced to the pro forma amounts presented in the following table:
<TABLE>
<CAPTION>
Fully
Primary diluted
Net earnings earnings
income per share per share
----------- ----------- -----------
(in thousands, except per share data)
1996
<S> <C> <C> <C>
As reported $ 51,084 $ 2.42 $ 2.31
Pro forma 50,624 2.40 2.28
1995
As reported $ 52,377 $ 3.27 $ 2.35
Pro forma 52,140 3.25 2.34
</TABLE>
The proforma amounts presented are not necessarily indicative of future amounts;
SFAS 123 does not apply to awards granted prior to 1995.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996 and 1995:
<TABLE>
<CAPTION>
Risk-free
Dividend interest Expected Expected
yield rate volatility life (yrs)
-------- --------- ---------- ---------
1996
<S> <C> <C> <C> <C>
Incentive Plan 2.0% 6.2% 32.8% 5.5
1995
Option and Nonqualified Plans 2.0% 7.2% 31.7% 7.0
Incentive Plan 2.0 7.1 33.4 5.5
</TABLE>
<PAGE>
51
(13) Retained Earnings
In 1996, 1995, and 1994, ALLIED paid dividends of $16.3 million, $13.5 million,
and $12.7 million, respectively.
Retained earnings of the property-casualty and excess & surplus lines
subsidiaries available for distribution as dividends are limited by law to the
amount of statutory unassigned surplus as of the date the dividend is authorized
or paid. The maximum dividend the property-casualty subsidiaries may pay without
prior approval of the state of Iowa (state of domicile) insurance regulatory
authorities is the greater of either 10% of the property-casualty statutory
capital stock and surplus as of the preceding December 31 or statutory net
income of the preceding year. The maximum amount legally available for
distribution from the property-casualty segment in 1997 to ALLIED without
regulatory approval is $52.6 million. The maximum dividend the excess & surplus
lines subsidiary may pay without prior approval of the state of Arizona (state
of domicile) insurance regulatory authorities is the lesser of either 10% of the
statutory capital stock and surplus as of the preceding year or net investment
income of the preceding year. The maximum amount legally available for
distribution in 1997 without regulatory approval is $3.3 million.
The following table includes selected information for ALLIED's insurance
subsidiaries as determined in accordance with accounting practices prescribed or
permitted by insurance regulatory authorities:
<TABLE>
<CAPTION>
As of December 31, 1996 1995
------------ -------------
(in thousands)
<S> <C> <C>
Statutory capital and surplus
Property-casualty $ 285,854 $ 257,845
============ =============
Excess & surplus lines $ 33,478 $ 27,770
============ =============
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
------------ ------------ -------------
(in thousands)
<S> <C> <C> <C>
Statutory net income
Property-casualty $ 47,492 $ 41,995 $ 40,699
============ ============ =============
Excess & surplus lines $ 5,669 $ 2,773 $ 3,047
============ ============ =============
</TABLE>
(14) Commitments and Contingent Liabilities
The Company leases data processing equipment and certain office facilities under
operating leases expiring in various years through 2003. Rental expense amounted
to $2.6 million, $2.6 million, and $3.8 million for the years ended December 31,
1996, 1995, and 1994, respectively. At December 31, 1996, future minimum lease
payments under operating leases amounted to $13.2 million: $2.5 million in 1997,
$2.4 million in 1998, $2.3 million in 1999, $869,000 in 2000, $401,000 in 2001,
and $4.7 million in later years.
In the normal course of business, ALLIED Mortgage grants mortgage loan
commitments to borrowers, subject to normal loan underwriting standards. As of
December 31, 1996, ALLIED Mortgage had granted loan commitments of approximately
$28.2 million, including floating rate commitments of $10.6 million. To hedge
loan commitments, ALLIED Mortgage may enter into options, futures, or cash
delivery contracts. As of December 31, 1996, ALLIED Mortgage had commitments to
sell mortgage securities totaling approximately $15.4 million and no outstanding
options. In connection with its commitments to buy and sell mortgages, ALLIED
Mortgage is exposed to credit risk in the event the counterparty is unable to
fulfill its contractual obligations.
<PAGE>
52
Although loans serviced for others are not on the accompanying balance sheets,
ALLIED Mortgage has credit risk associated with the mortgage servicing
portfolio. As the loan servicer, ALLIED Mortgage is required to process
delinquent loans through the foreclosure process, thereby incurring certain
direct expenses which generally are, but may not be, reimbursed. At December 31,
1996, ALLIED Mortgage had sold loans totaling approximately $16.2 million while
retaining recourse risk. ALLIED Mortgage established allowances for losses in
connection with these various risks. These are included in other liabilities on
the accompanying balance sheets.
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%. 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.
The Company is party to various lawsuits arising in the normal course of
business. Management believes the resolution of these lawsuits will not have a
material adverse effect on its financial condition or its results of operations.
(15) Employee Benefit Plans
Retirement Plan
The ESOP established by ALLIED covers all of its employees who meet age and
service requirements. Shares of common stock are allocated annually to each
employee's account pursuant to a formula and held in trust until the employee's
termination, retirement, or death. As shares of common stock are allocated to
participants, the cost of such shares is expensed and deducted from "Unearned
compensation related to ESOP" included in stockholders' equity.
The Company's ESOP expense was $1 million in 1996, $2.7 million in 1995, and
$1.8 million in 1994. Of those respective amounts, $14,000, $65,000, and $30,000
were included in the employee lease fee received from affiliates pursuant to the
terms of the Intercompany Operating Agreement for the years ended December 31,
1996, 1995, and 1994, respectively.
During 1996, 1995, and 1994, the ESOP Trust received $3.5 million, $2.8 million,
and $2.8 million, respectively, from dividends on the leveraged shares used to
service debt on the ESOP obligations and to purchase stock for participants.
ALLIED made ESOP contributions of $529,000 in 1996, $733,000 in 1995, and
$35,000 in 1994. Interest incurred on the ESOP debt, which is included as a
component of ESOP expense, was $1.6 million, $1.8 million, and $1.2 million in
1996, 1995, and 1994, respectively. The ESOP shares as of December 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Allocated shares 2,879,194 2,823,264
Unallocated shares 3,603,029 3,910,334
-------------- --------------
Total ESOP shares 6,482,223 6,733,598
============== ==============
</TABLE>
In 1996, ALLIED and the ESOP Trustee entered into an agreement, whereby ALLIED
agreed to release additional shares held by the ESOP Trustee in the event ALLIED
pays a dividend on the common stock of less than $0.20 per share per quarter,
which is equivalent to $0.13 per share per quarter on a post-split basis. The
agreement is in effect from March 7, 1996 through March 7, 2000. The purpose of
the agreement is to ensure that the allocated shares in the ESOP Trust receive
at least the same amount of dividends that would have been paid on the ESOP
Convertible Preferred Shares had they not been converted to common stock.
<PAGE>
53
Other Postretirement Benefit Plan
In addition to the ESOP, ALLIED sponsors a health care plan that provides
postretirement medical benefits to full-time employees who meet age and service
requirements. The plan is contributory with retiree contributions adjusted
annually, and contains other cost-sharing features such as deductibles and
coinsurance. ALLIED's policy is to fund the cost of medical benefits in amounts
determined at the discretion of management.
The following table presents the plan's postretirement benefit obligations as of
December 31, 1996 and 1995 reconciled with the plan's funded status and the
amount recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $ (3,520) $ (3,170)
Other fully eligible plan participants (680) (620)
Other active plan participants (2,700) (2,470)
----------- -----------
Obligation at year-end (6,900) (6,260)
Plan assets --- ---
----------- -----------
Funded status (6,900) (6,260)
Unrecognized transition obligation 3,860 4,100
Unrecognized net loss 230 50
Fourth-quarter payments 80 70
----------- -----------
Accrued postretirement benefit liability at year-end $ (2,730) $ (2,040)
=========== ===========
</TABLE>
A 7.5% weighted average discount rate was used to determine the accumulated
postretirement benefit obligation at December 31, 1996 and 1995.
Net periodic postretirement benefit cost for the years ended December 31, 1996,
1995, and 1994 included the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Service cost $ 340 $ 350 $ 360
Interest cost 460 420 390
Return on assets
Amortization of transition obligation 240 240 240
----------- ----------- -----------
Net periodic postretirement benefit cost $ 1,040 $ 1,010 $ 990
=========== =========== ===========
</TABLE>
For measurement purposes, an 8% annual rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) was assumed for 1997;
the rate was assumed to decrease in equal annual increments to 5% by the year
2000 and to remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation by
approximately $430,000 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost by approximately $40,000.
<PAGE>
54
(16) Income Taxes
Total income taxes for the years ended December 31, 1996, 1995, and 1994 were
allocated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Net income $ 20,227 $ 21,471 $ 19,074
----------- ----------- -----------
Stockholders' equity
Unrealized (depreciation) appreciation of investments (3,000) 12,776 (6,036)
Tax-deductible dividends paid on unallocated ESOP Series shares (989) (849) (907)
Tax-basis compensation expense in excess of amounts recognized
for financial reporting purposes from the exercise
of stock options (371) (1,064) (175)
----------- ----------- -----------
(4,360) 10,863 (7,118)
----------- ----------- -----------
Total $ 15,867 $ 32,334 $ 11,956
=========== =========== ===========
</TABLE>
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 relate to the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(in thousands)
<S> <C> <C>
Deferred tax assets
Loss and loss adjusting expense reserve discounting $ 14,258 $ 13,540
Unearned premium reserve 14,893 13,277
Accrued employee benefits 2,858 3,017
Other 1,314 960
------------ ------------
Total gross deferred tax assets 33,323 30,794
Less valuation allowance --- ---
------------ ------------
Net deferred tax assets 33,323 30,794
------------ ------------
Deferred tax liabilities
Deferred policy acquisition costs (16,335) (14,591)
Mortgage servicing rights (4,533) (3,497)
Unrealized appreciation of investments (6,907) (9,907)
Deferred software development and fees (4,886) (3,106)
Other (2,906) (2,547)
------------ ------------
Total gross deferred tax liabilities (35,567) (33,648)
------------ ------------
Net deferred tax liabilities $ (2,244) $ (2,854)
============ ============
</TABLE>
<PAGE>
55
Since adoption of SFAS 109, there has not been a valuation allowance for
deferred income tax assets. In assessing the realization of deferred tax assets,
management considers whether it is more likely than not that the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the recognition of future taxable income during the periods in
which those temporary differences become deductible. Management considers tax
planning strategies and the scheduled reversal of deferred tax liabilities in
making this assessment and believes it is more likely than not the Company
ultimately will realize the benefits of the deductible differences recognized at
December 31, 1996.
The actual income tax expense for the years ended December 31, 1996, 1995, and
1994 differed from the expected tax expense (computed by applying the federal
corporate tax rate of 35% to income before income taxes). The difference was
primarily a result of investment income exempt from federal income tax, which
decreased tax expense by $4.7 million, $4.5 million, and $4.6 million in 1996,
1995, and 1994, respectively.
Included in income tax expense is state income tax expense of $55,000, $402,000,
and $456,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. The Company paid federal and state income taxes of $18 million,
$19.1 million, and $16.7 million in 1996, 1995, and 1994, respectively.
The IRS is currently examining the 1992 and 1993 income tax returns. Any
proposed adjustments are not expected to have a material impact on the Company's
financial condition, results of operations, or liquidity.
(17) Segment Information
The Company's principal products, services, revenues, income before income
taxes, assets, depreciation and amortization, and capital expenditures are
identified by segment.
Property-casualty--Predominantly private passenger automobile, homeowners, and
small commercial lines of insurance.
Excess & surplus lines--Primarily commercial casualty and commercial property
lines of insurance coverages that standard insurers are unable or unwilling to
provide.
Eliminations and other--Eliminations between segments plus other noninsurance
operations not reported as segments (including investment services, data
processing, and employee lease fees from affiliates).
<PAGE>
56
<TABLE>
<CAPTION>
At or for the year ended December 31, 1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Revenues (1)
Property-casualty $ 515,706 $ 472,034 $ 431,110
Excess & surplus lines 33,557 35,356 31,003
Eliminations and other 47,091 45,375 45,251
----------- ----------- -----------
Total $ 596,354 $ 552,765 $ 507,364
=========== =========== ===========
Income before income taxes
Property-casualty $ 59,435 $ 63,883 $ 54,186
Excess & surplus lines 8,053 4,840 4,999
Eliminations and other 3,823 5,125 7,514
----------- ----------- -----------
Total $ 71,311 $ 73,848 $ 66,699
=========== =========== ===========
Assets
Property-casualty $ 917,537 $ 847,401 $ 749,760
Excess & surplus lines 131,405 122,200 105,722
Eliminations and other 28,717 40,997 37,269
----------- ----------- -----------
Total $ 1,077,659 $ 1,010,598 $ 892,751
=========== =========== ===========
Depreciation and amortization
Property-casualty $ 3,812 $ 851 $ 281
Excess & surplus lines 65 58 58
Other 7,153 8,674 6,237
----------- ----------- -----------
Total $ 11,030 $ 9,583 $ 6,576
=========== =========== ===========
Capital expenditures
Property-casualty $ 7,101 $ 3,390 $ 1,161
Excess & surplus lines 34 131 16
Other 1,178 4,273 4,476
----------- ----------- -----------
Total $ 8,313 $ 7,794 $ 5,653
=========== =========== ===========
</TABLE>
(1) Including realized investment gains or losses.
<PAGE>
57
(18) Unaudited Interim Financial Information
<TABLE>
<CAPTION>
Quarter ended March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
(in thousands, except per share data)
1996 Operating Summary
<S> <C> <C> <C> <C>
Earned premiums $ 118,870 $ 121,114 $ 124,246 $ 129,295
============= ============= ============= =============
Investment income $ 12,119 $ 12,044 $ 12,445 $ 12,614
============= ============= ============= =============
Realized investment gains (losses) $ 8 $ 31 $ 26 $ (16)
============= ============= ============= =============
Total revenues $ 143,335 $ 146,585 $ 150,719 $ 155,715
============= ============= ============= =============
Losses and expenses $ 123,551 $ 136,044 $ 130,438 $ 135,010
============= ============= ============= =============
Net income $ 13,948 $ 7,548 $ 14,459 $ 15,129
============= ============= ============= =============
Fully diluted earnings per share
Net income $ .63 $ .32 $ .67 $ .70
============= ============ ============= =============
1995 Operating Summary
Earned premiums $ 109,481 $ 111,583 $ 115,768 $ 118,667
============= ============ ============= =============
Investment income $ 11,275 $ 11,664 $ 12,396 $ 11,907
============= ============= ============= =============
Realized investment gains (losses) $ 15 $ 248 $ (24) $ 267
============= ============= ============= =============
Total revenues $ 132,276 $ 134,686 $ 140,159 $ 145,644
============= ============= ============= =============
Losses and expenses $ 115,016 $ 116,772 $ 121,143 $ 125,986
============= ============= ============= =============
Net income $ 12,384 $ 12,756 $ 13,405 $ 13,831
============= ============= ============= =============
Fully diluted earnings per share
Net income $ .56 $ .57 $ .60 $ .62
============= ============= ============= =============
</TABLE>
Caution should be exercised in comparing the results of consecutive quarters.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
<PAGE>
58
PART III
Item 10. Directors and Executive Officers of the Registrant
The information under the caption "Directors and Executive Officers" in the 1997
Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
The information under the caption "Compensation of Executive Officers" in the
1997 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Security Ownership of Directors and Executive
Officers" in the 1997 Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions and Relationships" in
the 1997 Proxy Statement is incorporated herein by reference.
<PAGE>
59
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of Financial Statements and Schedules.
Form 10-K
Page(s)
---------
1. Financial Statements.
Independent Auditors' Report. 29
Consolidated Balance Sheets as of December 31, 1996
and 1995. 30 to 31
Consolidated Statements of Income for the Years ended
December 31, 1996, 1995 and 1994. 32
Statements of Stockholders' Equity for the Years ended
December 31, 1996, 1995 and 1994. 33
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996, 1995 and 1994. 34
Notes to Consolidated Financial Statements. 35 to 57
2. Schedules.
Report of Independent Auditors on Schedules. 64
I - Summary of Investments-Other Than Investments in
Related Parties. 65
II - Condensed Financial Information of Registrant. 66 to 69
III - Supplementary Insurance Information. 70
IV - Reinsurance. 71
VI - Supplemental Information. 72
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements and notes thereto.
3. Executive Compensation Plans and Arrangements.
ALLIED Group Restated and Amended Stock Option Plan (Incorporated by
reference to Exhibit 10.19 to the Company's December 31, 1992 Form 10-K
on file with the Commission), Exhibit 10.18.
ALLIED Group, Inc. Nonqualified Stock Option Plan (Incorporated by
reference to Exhibit 10.20 to the Company's December 31, 1992 Form 10-K
on file with the Commission), Exhibit 10.19.
<PAGE>
60
ALLIED Group, Inc. Outside Director Stock Purchase Plan (Incorporated by
reference to Exhibit 10.21 to the Company's December 31, 1992 Form 10-K
on file with the Commission), Exhibit 10.20.
ALLIED Group Short Term Management Incentive Plan for 1994 (Incorporated
by reference to Exhibit 10.40 to the Company's June 30, 1994 Form 10-Q on
file with the Commission), Exhibit 10.40.
ALLIED Group, Inc. Long-Term Management Incentive Plan (Incorporated by
reference to Exhibit 10.42 to the Company's March 31, 1994 Form 10-Q on
file with the Commission), Exhibit 10.42.
Consulting Agreement between John E. Evans and ALLIED Group, Inc., ALLIED
Mutual Insurance Company, and ALLIED Life Financial Corporation
(Incorporated by reference to Exhibit 10.48 to the Company's December 31,
1994 Form 10-K on file with the Commission), Exhibit 10.48.
ALLIED Group Short Term Management Incentive Plan for 1995 (Incorporated
by reference to Exhibit 10.49 to the Company's December 31, 1994 Form
10-K on file with the Commission), Exhibit 10.49.
ALLIED Group Short Term Management Incentive Plan for 1996, (Incorporated
by reference to Exhibit 10.49 to the Company's December 31, 1995 Form
10-K on file with the Commission), Exhibit 10.52.
Amendment to Consulting Agreement between John E. Evans and ALLIED Group,
Inc., ALLIED Mutual Insurance Company, and ALLIED Life Financial
Corporation, Exhibit 10.54.
ALLIED Group Short Term Management Incentive Plan for 1997, Exhibit
10.55.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
NOTE: See "Index to Exhibits" on page number 74, which discloses the
specific page numbers for the exhibits included in this Form 10-K.
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession.
2.2 Stock Rights Agreement between ALLIED Mutual Insurance Company and
ALLIED Group, Inc. dated July 5, 1990 (Incorporated by reference
to Exhibit 2.4 to the Company's July 1, 1990 Form 8-K on file with
the Commission).
2.3 First Amendment to Stock Rights Agreement between ALLIED Mutual
Insurance Company and ALLIED Group, Inc. (Incorporated by
reference to Exhibit 2.5 to the Company's September 30, 1992 Form
10-Q on file with the Commission).
3. Articles of incorporation and bylaws.
3.1 Amended and Restated Articles of Incorporation of ALLIED Group,
Inc. as of May 1, 1996 (Incorporated by reference to Exhibit 3.1
to the Company's March 31, 1996 Form 10-Q on file with the
Commission).
3.2 Bylaws of the Company as of July 9, 1991, as amended March 3,
1992, October 14, 1993, December 14, 1994, and March 4, 1997.
<PAGE>
61
4. Instruments defining the rights of security holders including indentures.
4.7 Agreement between ALLIED Group, Inc. and State Street Bank and
Trust Company, dated March 7, 1996. (Incorporated by reference to
Exhibit 4.7 to the Company's December 31, 1995 Form 10-K on file
with the Commission).
4.8 Stock Purchase Agreement between ALLIED Group, Inc. and State
Street Bank and Trust Company dated December 30, 1994.
(Incorporated by reference to Exhibit 4.8 to the Company's
December 31, 1995 Form10-K on file with the Commission).
4.9 Stock Purchase Agreement between ALLIED Group, Inc. and State
Street Bank and Trust Company dated December 29, 1995.
(Incorporated by reference to Exhibit 4.9 to the Company's
December 31, 1995 Form 10-K on file with the Commission).
4.10 Stock Purchase Agreement between ALLIED Group, Inc. and State
Street Bank and Trust Company dated December 31, 1996.
10. Material contracts.
10.7 Amended and Restated Management Information Services Agreement
between AMCO Insurance Company and certain of its affiliated
companies.
10.8 First Amendment to Amended and Restated Management Information
Services Agreement.
10.14 Second Amended and Restated Reinsurance Pooling Agreement between
ALLIED Mutual Insurance Company and the Company's
property-casualty insurance subsidiaries (Incorporated by
reference to Exhibit 10.13 to the Company's Registration Statement
on Form S-3 filed with the Commission on December 15, 1992,
Registration No. 33-55714).
10.15 First Amendment to the Second Amended and Restated Reinsurance
Pooling Agreement between ALLIED Mutual Insurance Company and the
Company's property-casualty insurance subsidiaries (Incorporated
by reference to Exhibit 10.43 to the Company's March 31, 1993 Form
10-Q on file with the Commission).
10.16 Amended and Restated ALLIED Group Intercompany Operating Agreement
between the Company and its affiliated companies dated August 25,
1993 and amendment thereto dated November 1, 1993 (Incorporated by
reference to Exhibit 10.14 to the Company's September 30, 1993
Form 10-Q on file with the Commission).
10.17 ALLIED Group, Inc. Federal Income Tax Sharing Agreement.
(Incorporated by reference to Exhibit 10.17 to the Company's
December 31, 1995 Form 10-K on file with the Commission).
10.18 ALLIED Group Restated and Amended Stock Option Plan (Incorporated
by reference to Exhibit 10.19 to the Company's December 31, 1992
Form 10-K on file with the Commission).
10.19 ALLIED Group, Inc. Nonqualified Stock Option Plan (Incorporated by
reference to Exhibit 10.20 to the Company's December 31, 1992 Form
10-K on file with the Commission).
10.20 ALLIED Group, Inc. Outside Director Stock Purchase Plan
(Incorporated by reference to Exhibit 10.21 to the Company's
December 31, 1992 Form 10-K on file with the Commission).
10.21 ALLIED Group Executive Equity Incentive Plan (Incorporated by
reference to Exhibit 10.22 to the Company's December 31, 1992 Form
10-K on file with the Commission).
<PAGE>
62
10.22 Agency Agreement between ALLIED Group Insurance Marketing Company
and Depositors Insurance Company, AMCO Insurance Company, and
ALLIED Property and Casualty Insurance Company (Incorporated by
reference to Exhibit 10.17 to the Company's December 31, 1991 Form
10-K on file with the Commission).
10.28 The ALLIED Group Employee Stock Ownership Trust (Incorporated by
reference to Exhibit 10.27 to the Company's March 31, 1991 Form
10-Q on file with the Commission).
10.32 Term Credit Agreement and Guaranty between ALLIED Group, Inc.,
ALLIED Group Employee Ownership Trust, Bank of Montreal, and
Norwest Bank Iowa, N.A. (Incorporated by reference to Exhibit
10.29 to the Company's March 31, 1995 Form 10-Q on file with the
Commission).
10.33 First Amendment to the Term Credit Agreement and Guaranty, dated
October 12, 1995. (Incorporated by reference to Exhibit 10.30 to
the Company's September 30, 1995 Form 10-Q on file with the
Commission).
10.34 Second Amendment to the Term Credit Agreement and Guaranty, dated
March 6, 1996 (Incorporated by reference to Exhibit 10.30 to the
Company's March 31, 1996 Form 10-Q on file with the Commission).
10.38 The ALLIED Group Marketing Agreement between the Company's
property-casualty subsidiaries and certain of its affiliated
companies dated August 25, 1993 and amendment thereto dated
November 1, 1993 (Incorporated by reference to Exhibit 10.39 to
the Companies September 30, 1993 Form 10-Q on file with the
Commission).
10.40 ALLIED Group Short Term Management Incentive Plan for 1994
(Incorporated by reference to Exhibit 10.40 to the Company's June
30, 1994 Form 10-Q on file with the Commission).
10.42 ALLIED Group, Inc. Long-Term Management Incentive Plan
(Incorporated by reference to Exhibit 10.42 to the Company's March
31, 1994 Form 10-Q on file with the Commission).
10.44 Second Amendment to Amended and Restated ALLIED Group Intercompany
Operating Agreement dated May 16, 1994 (Incorporated by reference
to Exhibit 10.42 to the Company's June 30, 1994 Form 10-Q on file
with the Commission).
10.45 Second Amendment to the ALLIED Group Marketing Agreement between
the Company's property-casualty subsidiaries and certain of its
affiliated companies, dated August 25, 1994 (Incorporated by
reference to Exhibit 10.45 to the Company's September 30, 1994
Form 10-Q on file with the Commission).
10.46 Third Amendment to Amended and Restated ALLIED Group Intercompany
Operating Agreement (Incorporated by reference to Exhibit 10.46 to
the Company's December 31, 1994 Form 10-K on file with the
Commission).
10.47 Second Amendment to Amended and Restated Reinsurance Pooling
Agreement (Incorporated by reference to Exhibit 10.47 to the
Company's December 31, 1994 Form 10-K on file with the
Commission).
10.48 Consulting Agreement between John E. Evans and ALLIED Group, Inc.,
ALLIED Mutual Insurance Company, and ALLIED Life Financial
Corporation (Incorporated by reference to Exhibit 10.48 to the
Company's December 31, 1994 Form 10-K on file with the
Commission).
10.49 ALLIED Group Short Term Management Incentive Plan for 1995
(Incorporated by reference to Exhibit 10.49 to the Company's
December 31, 1994 Form 10-K on file with the Commission).
<PAGE>
63
10.50 Intercompany Cash Concentration Fund Agreement, dated April 24,
1995 (Incorporated by reference to Exhibit 10.52 to the Company's
June 30, 1995 Form 10-Q on file with the Commission).
10.51 Amendment to the Nonqualified Stock Option Plan, dated October 20,
1995 (Incorporated by reference to Exhibit 10.53 to the Company's
September 30, 1995 Form 10-Q on file with the Commission).
10.52 ALLIED Group Short Term Management Incentive Plan for 1996.
(Incorporated by reference to Exhibit 10.52 to the Company's
December 31, 1995 Form 10-K on file with the Commission).
10.53 Property Special Catastrophe Excess Contract. (Incorporated by
reference to Exhibit 10.53 to the Company's December 31, 1995 Form
10-K on file with the Commission).
10.54 Amendment to Consulting Agreement between John E. Evans, and
ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED
Life Financial Corporation.
10.55 ALLIED Group Short Term Management Incentive Plan for 1997.
10.56 Amendment dated December 16, 1996, ALLIED Group, Inc. Long-Term
Management Incentive Plan.
10.57 Amendment dated February 11, 1997, ALLIED Group, Inc. Outside
Director Stock Purchase Plan.
10.58 Amendment dated February 11, 1997, ALLIED Group, Inc. Nonqualified
Stock Option Plan.
10.59 Amendment dated February 11, 1997, ALLIED Group, Inc. Restated and
Amended Stock Option Plan.
10.60 Amendment dated February 11, 1997, ALLIED Group, Inc. Long-Term
Management Incentive Plan.
11. Statement re computation of per share earnings.
21. Subsidiaries of the Registrant.
23. Consent of Independent Auditors.
27. Financial Data Schedule.
(d) Financial Statements required by Regulation S-X which are excluded from the
Annual Report to Stockholders by Rule 14a-3(b)(1).
None.
<PAGE>
64
REPORT OF INDEPENDENT AUDITORS ON SCHEDULES
The Board of Directors and Stockholders
ALLIED Group, Inc.:
Under date of February 3, 1997 we reported on the consolidated balance sheets of
ALLIED Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1996, as
contained in the 1996 Annual Report. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related consolidated financial statement schedules listed in Part IV, Item
14(a)2. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
---------------------------------
KPMG Peat Marwick LLP
Des Moines, Iowa
February 3, 1997
<PAGE>
65
ALLIED Group, Inc. and Subsidiaries
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
<TABLE>
<CAPTION>
Amount at
Market which shown in
Type of investment Cost value the balance sheet
------------------ -------------- -------------- -----------------
<S> <C> <C> <C>
Fixed maturities - bonds
U.S. Government and government
agencies and authorities $ 226,803,182 $ 232,146,545 $ 232,146,545
States, municipalities, and
political subdivisions 327,486,502 336,720,302 336,720,302
Foreign governments 2,064,095 2,086,600 2,086,600
All other corporate bonds 218,812,683 221,314,427 221,314,427
-------------- -------------- --------------
Total fixed maturities 775,166,462 $ 792,267,874 792,267,874
-------------- ============== --------------
Equity securities
Common stock
Public utilities 476,499 465,446 465,446
Banks, trust and insurance companies 4,128,094 4,608,693 4,608,693
Industrial, miscellaneous and all other 10,678,499 12,715,884 12,715,884
Nonredeemable preferred stocks 2,597,280 2,594,309 2,594,309
-------------- -------------- --------------
Total equity securities 17,880,372 $ 20,384,332 20,384,332
-------------- ============== --------------
Other long-term investments --- ---
Short-term investments 6,992,430 6,992,430
-------------- --------------
Total investments $ 800,039,264 $ 819,644,636
============== ==============
</TABLE>
<PAGE>
66
ALLIED Group, Inc. and Subsidiaries
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
-------------- --------------
<S> <C> <C>
Indebtedness from affiliates $ 2,067,575 $ 4,768,770
Accrued investment income 6,078 72,518
Short-term investments 2,040,475 6,021,020
Fixed maturities at fair value
(amortized cost $74,788 in 1996 and $8,976,639 in 1995) 74,773 9,080,124
Equity securities at fair value (cost $2,567,741 in 1996 and
$1,790,896 in 1995) 3,356,145 2,071,834
Investment in subsidiaries at equity (note 1) 390,149,644 362,026,479
Current income taxes recoverable 972,757 79,129
Deferred income taxes 246,677 110,152
Other assets 1,224,474 551,593
-------------- --------------
Total assets $ 400,138,598 $ 384,781,619
============== ==============
Liabilities
Guarantee of ESOP obligations $ 24,370,000 $ 26,270,000
Other liabilities 5,177,116 6,926,145
-------------- --------------
Total liabilities 29,547,116 33,196,145
-------------- --------------
Stockholders' Equity
Preferred stock, no par value, issuable in series, authorized
7,500,000 shares; issued and outstanding 1,827,222 shares
in 1996 and 4,819,932 in 1995 37,812,387 83,647,674
Common stock, no par value, $1 stated value, authorized
40,000,000 shares; issued and outstanding 20,382,954 in
1996 and 9,444,646 in 1995 20,382,954 9,444,646
Additional paid-in capital 126,078,569 104,595,912
Retained earnings 195,276,063 159,469,625
Unrealized appreciation of investments (net
of deferred income tax expense of $6,906,819
and $9,906,744) 12,698,554 18,335,633
Unearned compensation related to ESOP (21,657,045) (23,908,016)
-------------- --------------
Total stockholders' equity 370,591,482 351,585,474
-------------- --------------
Total liabilities and stockholders' equity $ 400,138,598 $ 384,781,619
============== ==============
</TABLE>
See accompanying Notes to Condensed Financial Statements
<PAGE>
67
ALLIED Group, Inc. and Subsidiaries
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Equity in undistributed earnings of subsidiaries (note 1) $ 25,918,314 $ 38,478,651 $ 38,772,373
Dividends received from subsidiaries (note 1) 24,631,481 12,985,307 8,866,550
Employee leasing income 99,771,562 93,265,042 83,265,394
Realized investment gains (losses) (132,737) 405,654 (43,024)
Investment income 590,435 654,489 452,030
Other income 56,167 47,621 53,018
------------- ------------- -------------
150,835,222 145,836,764 131,366,341
------------- ------------- -------------
Expenses
Salaries, benefits, payroll taxes and other
employee leasing costs 98,322,653 91,929,248 82,177,291
Operating expenses 1,725,301 1,375,281 2,067,786
Interest expense 183,182 4,014 24,060
------------- ------------- -------------
100,231,136 93,308,543 84,269,137
------------- ------------- -------------
Income from operations before income taxes 50,604,086 52,528,221 47,097,204
Income tax expense (benefit) (480,127) 151,392 (527,792)
------------- ------------- -------------
Net income $ 51,084,213 $ 52,376,829 $ 47,624,996
============= ============= =============
</TABLE>
See accompanying Notes to Condensed Financial Statements.
<PAGE>
68
ALLIED Group, Inc. and Subsidiaries
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 51,084,213 $ 52,376,829 $ 47,624,996
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed earnings (25,918,314) (38,478,651) (38,772,373)
Realized investment (gains) losses 132,737 (405,654) 43,024
Indebtedness from affiliates 2,701,195 (1,339,475) (1,359,725)
Accrued investment income 66,440 (6,665) 19,629
Cost of ESOP shares allocated 2,250,971 2,213,911 1,751,994
Current (893,628) 190,468 2,110,615
Deferred (292,999) (656,689) 597,191
Other, net (4,336,578) 529,635 1,272,665
------------- -------------- ------------
Net cash provided by operating activities 24,794,037 14,423,709 13,288,016
------------- -------------- ------------
Cash flows from investing activities:
Investments in subsidiaries (8,081,482) 539 350
Purchase of fixed maturities --- (3,276,014) (16,030,000)
Purchase of equity securities (854,643) (1,630,622) (813,638)
Short-term investments, net 3,980,545 (3,500,734) 199,744
Sale of fixed maturities 8,602,567 --- 7,487,290
Maturities, calls, and principal reductions
of fixed maturities 167,853 235,608 11,809,815
Sale of equity securities 83,220 2,045,080 214,660
------------- -------------- -------------
Net cash provided by (used in) investing activities 3,898,060 (6,126,143) 2,868,221
------------- -------------- -------------
Cash flows from financing activities:
Issuance of preferred stock --- 699,559 794,133
Issuance of common stock 3,110,431 3,497,199 1,128,345
Repurchase of common stock (16,524,753) --- (6,360,128)
Dividends paid to stockholders, net of income tax benefit (15,277,775) (12,659,236) (11,795,038)
------------- -------------- -------------
Net cash used in financing activities (28,692,097) (8,462,478) (16,232,688)
------------- -------------- -------------
Net decrease in cash --- (164,912) (76,451)
Cash beginning of year --- 164,912 241,363
------------- -------------- -------------
Cash end of year $ --- $ --- $ 164,912
============= ============== =============
</TABLE>
See accompanying Notes to Condensed Financial Statements.
<PAGE>
69
ALLIED Group, Inc. and Subsidiaries
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of ALLIED Group,
Inc. and its subsidiaries.
(1) The Company's investment in subsidiaries, undistributed earnings of
subsidiaries, and dividends received from subsidiaries are shown by segment
below:
<TABLE>
<CAPTION>
Property- Excess &
casualty Surplus Other Total
--------------- -------------- -------------- --------------
Year ended
December 31, 1996
-----------------
<S> <C> <C> <C> <C>
Investment in subsidiaries $ 324,239,950 $ 42,083,857 $ 23,825,837 $ 390,149,644
Equity in undistributed
earnings of subsidiaries $ 19,074,658 $ 5,680,219 $ 1,163,437 $ 25,918,314
Dividends received from
subsidiaries $ 23,672,759 $ --- $ 958,722 $ 24,631,481
Year ended
December 31, 1995
-----------------
Investment in subsidiaries $ 293,167,247 $ 37,291,129 $ 31,568,103 $ 362,026,479
Equity in undistributed
earnings of subsidiaries $ 33,655,150 $ 3,516,974 $ 1,306,527 $ 38,478,651
Dividends received from
subsidiaries $ 12,011,307 $ --- $ 974,000 $ 12,985,307
Year ended
December 31, 1994
-----------------
Investment in subsidiaries $ 239,722,727 $ 31,341,143 $ 29,451,702 $ 300,515,572
Equity in undistributed
earnings of subsidiaries $ 31,614,854 $ 3,634,920 $ 3,522,599 $ 38,772,373
Dividends received from
subsidiaries $ 7,799,550 $ --- $ 1,067,000 $ 8,866,550
</TABLE>
<PAGE>
70
ALLIED Group, Inc. and Subsidiaries
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Reserves for Amortization
Deferred losses and Losses of deferred Other
policy loss Net and loss policy under-
acquisition adjusting Unearned Earned investment adjusting acquisition writing Written
Segments costs expenses premiums premiums income expenses costs expenses premiums
----------- ------------ --------- --------- ---------- ---------- ------------ -------- ----------
(in thousands)
1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Property-casualty $ 43,681 $ 303,014 $ 202,378 $ 466,211 $ 42,296 $ 335,511 $ 102,566 $ 18,193 $ 488,189
Excess & Surplus 2,990 59,177 18,218 27,314 6,241 17,484 5,749 2,272 28,417
Other operations --- --- --- --- 756 --- --- --- ---
Eliminations --- --- --- --- (71) --- --- (27) ---
----------- ------------ --------- --------- ---------- ---------- ------------ -------- ----------
Consolidated $ 46,671 $ 362,191 $ 220,596 $ 493,525 $ 49,222 $ 352,995 $ 108,315 $ 20,438 $ 516,606
=========== ============ ========= ========= ========== ========== ============ ======== ==========
1995
Property-casualty $ 38,846 $ 285,385 $ 180,217 $ 425,838 $ 39,110 $ 295,583 $ 93,684 $ 18,859 $ 440,838
Excess & Surplus 2,842 56,479 16,244 29,661 5,830 22,357 6,436 1,724 30,606
Other operations --- --- --- --- 2,302 --- --- --- ---
Eliminations --- --- --- --- --- --- --- --- ---
----------- ------------ --------- --------- ---------- ---------- ------------ -------- ----------
Consolidated $ 41,688 $ 341,864 $ 196,461 $ 455,499 $ 47,242 $ 317,940 $ 100,120 $ 20,583 $ 471,444
=========== ============ ========= ========= ========== ========== ============ ======== ==========
1994
Property-casualty $ 35,546 $ 260,420 $ 164,938 $ 386,732 $ 35,279 $ 268,376 $ 85,081 $ 23,466 $ 403,066
Excess & Surplus 2,723 50,576 15,175 25,786 5,242 18,568 5,777 1,659 27,026
Other operations --- --- --- --- 549 --- --- --- ---
Eliminations --- --- --- --- --- --- --- (35) ---
----------- ------------ --------- --------- ---------- ---------- ------------ -------- ----------
Consolidated $ 38,269 $ 310,996 $ 180,113 $ 412,518 $ 41,070 $ 286,944 $ 90,858 $ 25,090 $ 430,092
=========== ============ ========= ========= ========== ========== ============ ======== ==========
</TABLE>
<PAGE>
71
ALLIED Group, Inc. and Subsidiaries
SCHEDULE IV
REINSURANCE
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Percentage
Ceded Assumed of amount
Gross to other from other Net assumed to
amount companies companies (1) amount net
------------- -------------- ----------------- -------------- --------------
(in thousands)
1996
<S> <C> <C> <C> <C> <C>
Premiums:
Property-casualty $ 497,099 $ 293,986 $ 263,098 $ 466,211 56.4%
Excess & surplus lines 37,639 10,325 --- 27,314 ---
------------- -------------- ----------------- --------------
Total premiums $ 534,738 $ 304,311 $ 263,098 $ 493,525 53.3%
============= ============== ================= ==============
1995
Premiums:
Property-casualty $ 435,223 $ 265,571 $ 256,186 $ 425,838 60.2%
Excess & surplus lines 37,184 7,523 --- 29,661 ---
------------- -------------- ----------------- --------------
Total premiums $ 472,407 $ 273,094 $ 256,186 $ 455,499 56.2%
============= ============== ================= ==============
1994
Premiums:
Property-casualty $ 383,510 $ 242,490 $ 245,712 $ 386,732 63.5%
Excess & surplus lines 32,257 6,471 --- 25,786 ---
------------- -------------- ----------------- --------------
Total premiums $ 415,767 $ 248,961 $ 245,712 $ 412,518 59.6%
============= ============== ================= ==============
</TABLE>
(1) See note 6 of Notes to Consolidated Financial Statements for additional
information on amounts assumed from ALLIED Mutual Insurance Company
in accordance with the affiliated reinsurance pooling agreement.
<PAGE>
72
ALLIED Group, Inc. and Subsidiaries
SCHEDULE VI
SUPPLEMENTAL INFORMATION
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Losses and loss
Discount adjusting expenses
if any incurred related to Paid losses
deducted -------------------------------- and loss
from Current Prior adjusting
Segment reserves year years expenses
------- --------------- -------------- ------------- --------------
(in thousands)
1996
<S> <C> <C> <C> <C>
Property-casualty $ --- $ 334,245 $ 1,266 $ 315,987
Excess & surplus lines --- 19,430 (1,946) 15,284
--------------- -------------- ------------- --------------
Total $ --- $ 353,675 $ (680) $ 331,271
=============== ============== ============= ==============
1995
Property-casualty $ --- $ 294,176 $ 1,407 $ 270,373
Excess & surplus lines --- 21,780 577 15,302
--------------- -------------- ------------- --------------
Total $ --- $ 315,956 $ 1,984 $ 285,675
=============== ============== ============= ==============
1994
Property-casualty $ --- $ 271,723 $ (3,347) $ 245,416
Excess & surplus lines --- 16,851 1,717 16,904
--------------- -------------- ------------- --------------
Total $ --- $ 288,574 $ (1,630) $ 262,320
=============== ============== ============= ==============
</TABLE>
<PAGE>
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLIED Group, Inc.
(Registrant)
Date: March 4, 1997 By /s/ Jamie H. Shaffer
---------------------------------
Jamie H. Shaffer
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
By: /s/ Douglas L. Andersen By: /s/ Jamie H. Shaffer By: /s/ John E. Evans
- ------------------------------------ ----------------------------------- -----------------------------
Douglas L. Andersen Jamie H. Shaffer John E. Evans
President, CEO, and Director Senior Vice President, CFO Chairman of the Board
March 4, 1997 and Treasurer and Director
March 4, 1997 March 4, 1997
By: /s/ James W. Callison By: /s/ Harold S. Carpenter By:
- ------------------------------------ ----------------------------------- -----------------------------
James W. Callison Harold S. Carpenter Charles I. Colby
Director Director Director
March 4, 1997 March 4, 1997 March 4, 1997
By: /s/ Harold S. Evans By: By:
- ------------------------------------ ----------------------------------- -----------------------------
Harold S. Evans Richard O. Jacobson John P. Taylor
Director Director Director
March 4, 1997 March 4, 1997 March 4, 1997
By: /s/ William E. Timmons By:
- ------------------------------------ -----------------------------------
William E. Timmons Donald S. Willis
Director Director
March 4, 1997 March 4, 1997
</TABLE>
<PAGE>
74
ALLIED Group, Inc. and Subsidiaries
INDEX TO EXHIBITS
Exhibit
Number Item Page
3.2 Bylaws of the Company as of July 9, 1991, as amended March 3,
1992, October 14, 1993, December 14, 1994, and March 4, 1997 75
4.10 Stock Purchase Agreement between ALLIED Group, Inc. and State
Street Bank and Trust Company dated December 31, 1996 94
10.7 Amended and Restated Management Information Services Agreement
between ALLIED Group Information Systems, Inc. and certain of
its affiliated companies dated January 1, 1995 107
10.8 First Amendment to Amended and Restated Management Information
Services Agreement 122
10.54 Amendment to Consulting Agreement John E. Evans and ALLIED
Group, Inc., ALLIED Mutual Insurance Company, and ALLIED Life
Financial Corporation 125
10.55 ALLIED Group Short Term Management Incentive Plan for 1997 126
10.56 Amendment dated December 16, 1996, ALLIED Group, Inc. Long-Term
Management Incentive Plan 134
10.57 Amendment dated February 11, 1997, ALLIED Group, Inc. Outside
Director Stock Purchase Plan 135
10.58 Amendment dated February 11, 1997, ALLIED Group, Inc.
Nonqualified Stock Option Plan 136
10.59 Amendment dated February 11, 1997, ALLIED Group, Inc. Restated
and Amended Stock Option Plan 137
10.60 Amendment dated February 11, 1997, ALLIED Group, Inc. Long-Term
Management Incentive Plan 138
11 Statement re Computation of Per Share Earnings 139
21 Subsidiaries of the Registrant 140
23 Consent of Independent Auditors 141
27 Financial Data Schedule 142
<PAGE>
75
EXHIBIT 3.2
ALLIED GROUP, INC.
Amendment to the Bylaws
March 4, 1997
RESOLVED, that the Bylaws of the Corporation are hereby amended by
revising Section 5.1 to read as follows:
Section 5.1 GENERALLY. The officers of the corporation shall be a
President, one or more Vice Presidents (the number thereof to be determined by
the board of directors), a Secretary, a Treasurer, and such other officers as
may from time to time be appointed by the board of directors. None of the
officers need be a director. One person may hold the offices and perform the
duties of any two or more of said offices. In its discretion, the board of
directors may delegate the powers and duties of any officer to any other officer
or agent, notwithstanding any provisions of these bylaws, and the board of
directors may leave unfilled for any such period as it may fix, any office
except those of President, Treasurer, and Secretary. The officers of the
Corporation shall be appointed annually by the board of directors at the annual
meeting thereof. Each such officer shall hold office until the next succeeding
annual meeting of the board of directors until his successor shall be duly
chosen and shall qualify or until he or she shall resign or shall have been
removed.
FURTHER RESOLVED, that the Bylaws of the Corporation are hereby amended
by revising Section 5.3 to read as follows:
Section 5.3 POWERS AND DUTIES OF THE OFFICE OF THE PRESIDENT. The
President shall be the chief executive officer of the Corporation. Subject to
the provisions of these Bylaws and to the direction of the board of directors,
he or she shall have the responsibility for the general management and control
of the business affairs of the Corporation and shall perform all duties and have
all powers which are commonly incident to the office of chief executive or which
are delegated to him or her by the board of directors. He or she will have the
power to sign all stock certificates, contracts, and other instruments of the
Corporation which are authorized and shall have general supervision and
direction of all of the other officers, employees, and agents of the
Corporation.
<PAGE>
76
ALLIED GROUP, INC.
Amendments to the Bylaws
December 14, 1994
RESOLVED, that the Bylaws of the Corporation are hereby amended by
revising Section 5.1 to delete Chairman as an officer position, and such amended
Section 5.1 shall read as follows:
Section 5.1 GENERALLY. The officers of the Corporation shall be one or
more Presidents (the number thereof to be determined by the board of directors),
one or more Vice Presidents (the number thereof to be determined by the board of
directors), a Secretary, a Treasurer, and such other officers as may from time
to time be appointed by the board of directors. None of the officers need be a
director. One person may hold the offices and perform the duties of any two or
more of said offices. In its discretion, the board of directors may delegate the
powers or duties of any officer to any other officer or agent, notwithstanding
any provisions of these bylaws, and the board of directors may leave unfilled
for any such period as it may fix, any office except those of President,
Treasurer, and Secretary. The officers of the Corporation shall be appointed
annually by the board of directors at the annual meeting thereof. Each such
officer shall hold office until the next succeeding annual meeting of the board
of directors until his successor shall be duly chosen and shall qualify or until
his or her death or until he or she shall resign or shall have been removed from
office.
FURTHER RESOLVED, that the Bylaws of the Corporation are hereby amended
by the deletion of Section 5.3 (Powers and Duties of the Chairman of the Board);
that Sections 5.4 through 5.8 shall be renumbered as Section 5.3 through 5.7;
and that the first sentence of Section 7.4 which references Section 5.5 shall be
amended to reference Section 5.4.
FURTHER RESOLVED, that the Bylaws of the Corporation are hereby amended
by deleting renumbered Section 5.3 and inserting in lieu thereof the following:
Section 5.3 POWERS AND DUTIES OF THE OFFICE OF THE PRESIDENT. The
Office of the President shall consist of one or more individuals who shall serve
in the capacity of President of the Corporation. Subject to the provisions of
these bylaws and to the direction of the board of directors, the member(s) of
the Office of President shall have the responsibility for the general management
and control of the business and affairs of the Corporation and shall perform all
duties and have all powers which are delegated to him or her by the board of
directors. The member(s) of the Office of the President shall have the power to
sign all stock certificates, certificates, contracts and other instruments of
the Corporation and shall have general supervision and direction of all of the
other officers, employees, and agents of the Corporation.
<PAGE>
77
AMENDMENT TO ALLIED GROUP, INC. BYLAWS
October 14, 1993
Article 4, Section 4.16(c)
The Board of Directors at each annual meeting shall appoint a
Coordinating Committee to consist of two members of the Board of Directors, who
do not serve on the Board of Directors of ALLIED Mutual Insurance Company or
ALLIED Life Financial Corporation. The Coordinating Committee shall be
responsible for matters involving actual or potential conflicts of interest, if
and when they arise, between ALLIED Mutual Insurance Company, ALLIED Life
Financial Corporation, and the Corporation.
<PAGE>
78
AMENDMENT TO ALLIED GROUP, INC BYLAWS AS OF MARCH 3, 1992
Section 3.8 Voting Shares
(a) Every stockholder entitled to vote may vote in person or by proxy.
Except as otherwise provided by law, each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote at a
meeting of stockholders. Unless otherwise provided by law, at each meeting for
election of directors, each stockholder entitled to vote shall be entitled to
vote the number of shares owned by the stockholder for as many persons as there
are directors to be elected and for whose election such stockholder has a right
to vote, and directors shall be elected by a majority of the votes cast.
<PAGE>
79
BYLAWS
OF
ALLIED GROUP, INC.
(an Iowa Corporation)
(hereinafter referred to as "Corporation")
ARTICLE 1
PRINCIPAL OFFICE
The principal office of the Corporation shall be located in Des Moines,
Polk County, Iowa or as identified in the most recent annual report filed by the
Corporation with the Iowa Secretary of State.
ARTICLE 2
NUMBER OF DIRECTORS
The number of directors shall be such number as the board of directors
shall at the time have designated, but not less than five (5) persons nor more
than thirteen (13) persons.
ARTICLE 3
MEETINGS OF STOCKHOLDERS
Section 3.1 ANNUAL MEETING. The annual meeting of the stockholders for
the election of directors and for the transaction of such other business as may
properly come before the meeting shall be held during the month of May each year
at the principal office of the Corporation (unless otherwise fixed by the board
of directors) at such time as the board of directors shall each year fix.
Section 3.2 SPECIAL MEETINGS. Special meetings of the stockholders for
any purpose of purposes, unless otherwise prescribed by the Iowa Business
Corporation Act or the Articles of Incorporation, may be called by the President
or the board of directors and shall be called by the board of directors upon the
written demand, signed, dated, and delivered to the Secretary, of the holders of
at least ten percent of all the votes entitled to be cast on any issue proposed
to be considered at the meeting. Such written demand shall state the purpose or
purposes for which such meeting is to be called. The time, date, and place of
any special meeting shall be determined by the board of directors or, at its
direction, by the President.
Section 3.3 NOTICE OF MEETINGS. Notice of (i) the place, date and time
of all meetings of stockholders; (ii) if applicable law so requires, the initial
authorization or issuance, subsequent to the next preceding stockholders
meeting, of shares for promissory notes or promises to render services in the
future; (iii) any indemnification of a director required by law to be reported
to stockholders; and (iv) in the case of a special meeting, the purpose or
<PAGE>
80
purposes for which the meeting is called shall be delivered not less than ten
(10) days nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such meeting and to such other stockholders as
are required by law to be given such notice. The board of directors may
establish a record date for the determination of stockholders entitled to
notice, as provided in Section 6.9 of these bylaws. Notice of adjourned meetings
need only be given if required by law or Section 3.6 of these bylaws.
Section 3.4 WAIVER OF NOTICE.
(a) A written waiver of notice of any meeting of the stockholders
signed by any stockholder entitled to such notice, whether before or after the
time stated in such notice for the holding of such meeting, shall be equivalent
to the giving of such notice to such stockholder in due time as required by law
and these bylaws.
(b) A stockholder's attendance at any stockholders meeting, in person
or by proxy, waives (i) giving of notice of such meeting and irregularities in
any notice given, unless the stockholder at the beginning of the meeting or
promptly upon the stockholder's arrival objects to holding the meeting or
transacting business at the meeting, and (ii) objection to consideration of a
particular matter at the meeting that is not within the purpose or purposes
described in the meeting notice, unless the stockholder objects to considering
the matter when it is presented.
Section 3.5 VOTING LIST. After fixing a record date for a meeting, the
Secretary shall prepare an alphabetical list of the names of all stockholders
who are entitled to notice of the stockholders meeting. The list must be
arranged by voting group and within each voting group by class or series of
shares, and show the address of and number of shares held by each stockholder.
The stockholders list must be available for inspection by any stockholder
beginning two business days after notice of the meeting is given for which the
list was prepared and continuing through the meeting at the Corporation's
principal office or at a place identified in the meeting notice in the city
where the meeting will be held. A stockholder, or a stockholder's agent or
attorney, is entitled on written demand to inspect and, subject to the
requirements of law, to copy the list during the period it is available for
inspection during regular business hours and at the person's expense. The
Corporation shall make the stockholders list available at the meeting, and any
stockholder, or a stockholder's agent or attorney, is entitled to inspect the
list at any time during the meeting or any adjournment.
Section 3.6 QUORUM.
(a) At any meeting of the stockholders, a majority of the votes
entitled to be cast on the matter by a voting group constitutes a quorum of that
voting group for action on that matter, unless the representation of a different
number is required by law, and in that case, the representation of the number so
required shall constitute a quorum. If a quorum shall fail to attend any
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meeting, the chairman of the meeting or a majority of the votes present may
adjourn the meeting to another place, date, or time.
(b) When a meeting is adjourned to anther place, date, or time, notice
need not be given of the adjourned meeting if the place, date, and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than one hundred
twenty (120) days after the date for which the meeting was originally noticed,
or if a new record date is fixed for the adjourned meeting, notice of the place,
date, and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 3.7 ORGANIZATION.
(a) The Chairman of the Board or such person as the board of directors
may have designated or, in the absence of such a person, the President or, in
his or her absence, such person as shall be designated by the holders of a
majority of the shares present at the meeting shall call meetings of the
stockholders to order and shall act as chairman of such meetings.
(b) The Secretary of the Corporation shall act as Secretary at all
meetings of the stockholders, but in the absence of the Secretary at any meeting
of the stockholders, the presiding officer may appoint any person to act as
Secretary of the meeting.
Section 3.8 VOTING OF SHARES.
(a) Every stockholder entitled to vote may vote in person or by proxy.
Except as otherwise provided by law, each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote at a
meeting of stockholders. Unless otherwise provided by law, at each meeting for
election of directors, each stockholder entitled to vote shall be entitled to
vote the number of shares owned by the stockholder for as many persons as there
are directors to be elected and for whose election such stockholder has a right
to vote, and directors shall be elected by a plurality of the votes cast.
(b) The stockholders having the right to vote shares at any meeting
shall only be those of record on the stock books of the Corporation on the
record date fixed pursuant to the provisions of Section 6.9 of these bylaws or
by law.
(c) Absent special circumstances, the shares of the Corporation held by
another corporation, if a majority of the shares entitled to vote for the
election of directors of such other corporation is held by the Corporation,
shall not be voted at any meeting.
(d) Voting by stockholders on any question or any election may be viva
voce unless the chairman of the meeting shall order or any stockholder shall
demand that voting be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting or in the stockholder's name by proxy, if there
be such proxy, and shall state the number of shares voted by such stockholder.
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(e) If a quorum exists, action on a matter, other than the election of
directors, by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast opposing the action, unless a
greater number is required by law.
Section 3.9 VOTING BY PROXY OR REPRESENTATIVE.
(a) At all meetings of the stockholders, a stockholder entitled to vote
may vote in person or by proxy appointed in writing and filed in accordance with
the procedure established for the meeting. No proxy shall be valid after eleven
months from the date of its execution, unless otherwise provided in the proxy.
(b) Shares held by an administrator, executor, guardian, conservator,
receiver, trustee, pledgee, or another corporation may be voted as provided by
law.
Section 3.10 INSPECTORS. The board of directors in advance of any
meeting of stockholders may, but shall not be obliged to, appoint inspectors to
act at such meeting or any adjournment thereof. If inspectors are not so
appointed, the officer of person acting as chairman of any such meeting may, and
on the request of any stockholder or his or her proxy shall, make such
appointment. In case any person appointed as inspector shall fail to appear or
act, the vacancy may be filled by appointment made by the board of directors in
advance of the meeting or at the meeting by the officer or person acting as
chairman. The inspectors shall register proxies; determine the number of shares
outstanding; the voting power of each; the shares represented at the meeting;
the existence of a quorum; the authenticity, validity, and effect of proxies;
receive votes, ballots, assents, or consents; hear and determine all challenges
and questions in any way arising in connection with the vote; count and tabulate
all votes assents, and consents; determine and announce the result; and do such
acts as may appear proper to conduct the election or vote with fairness to all
stockholders. The maximum number of such inspectors appointed shall be three,
and no inspector whether appointed by the board of directors or by the officer
or person acting as chairman need be a stockholder.
Section 3.11 CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Any action
required or permitted by law to be taken at a meeting of the stockholders may be
taken without a meeting if one or more consents in writing setting forth the
action so taken shall be signed by the holders of outstanding shares having not
less than ninety percent of the votes entitled to be cast at a meeting at which
all shares entitled to vote on the action were present and voted, and are
delivered to the Corporation for inclusion in the minutes.
Section 3.12 CONDUCT OF BUSINESS. The chairman of any meeting of
stockholders shall determine the order of business and procedure at the meeting,
including such regulation of the manner of voting and the conduct of business as
seem to him or her to be in order.
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ARTICLE 4
BOARD OF DIRECTORS
Section 4.1 QUALIFICATIONS AND GENERAL POWERS. No director is required
to be an officer, stockholder, or employee of the Corporation or a resident of
the State of Iowa. The business and affairs of the Corporation shall be managed
by the board of directors. The board of directors may authorize any officer or
officers, agent or agents, to enter into any contract or to execute and deliver
any instrument in the name and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
Section 4.2 INCREASE IN NUMBER OF DIRECTORS; TENURE; STAGGERED TERMS.
In case the number of directors is increased by thirty percent or less of the
number of directors last approved by the stockholders, by amendment to these
bylaws by the board of directors or by resolution of the board of directors, the
directorships to be filled by reason thereof may be filled by the affirmative
vote of a majority of the directors, though less than a quorum of the board of
directors. Any director so elected shall serve only until the next election of
directors by the stockholders. Each director shall hold office until the next
succeeding annual meeting and until his or her successor shall have been elected
and qualifies or until his or her death, resignation, or removal. The directors
are divided into three classes, each class to be nearly equal in number as
possible, and are elected for three-year terms.
Section 4.3 QUORUM AND MANNER OF ACTING. A majority of the number of
directors then holding office shall constitute a quorum for the transaction of
business, but if at any meeting of the board there be less than a quorum
present, a majority of the directors present may adjourn the meeting from time
to time until a quorum shall be present. Notice of any adjourned meeting need
not be given. At all meetings of directors at which a quorum is present, the act
of the majority of the directors present shall be the act of the board of
directors.
Section 4.4 RESIGNATION. Any director of the Corporation may resign at
any time by giving written notice to the board of directors, its chairman, or
the Corporation. The resignation of any director shall take effect upon delivery
of notice thereof or at such later date as shall be specified in such notice,
and unless otherwise specified therein, the acceptance of such resignation shall
not be necessary to make it effective.
Section 4.5 REMOVAL. A director shall be subject to removal, with or
without cause, at a meeting of the stockholders called for that purpose in the
manner prescribed by law.
Section 4.6 VACANCIES. Any vacancy occurring in the board of directors
through death, resignation, removal, or any other cause may be filled by the
affirmative vote of a majority of the remaining directors, though less than a
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quorum of the board of directors. A director elected to fill a vacancy shall be
elected only until the next election of directors by the stockholders.
Section 4.7 COMPENSATION OF DIRECTORS. The directors shall be entitled
to be reimbursed for any expenses paid by them on account of attendance at any
regular or special meeting of the board of directors, and the board may fix the
compensation of directors from time to time by resolution of the board.
Section 4.8 PLACE OF MEETINGS, ECT. The board of directors may hold its
meetings and keep the books and records of the Corporation at its principal
office (except that the record of its stockholders must also be kept as provided
in Section 3.5 of these bylaws) or at such other place or places within or
without the State of Iowa as the board may from time to time determine. A
director may participate in any meeting by any means of communication, including
but not limited to, a telephone conference call by which all directors
participating may simultaneously hear each other during the meeting.
Section 4.9 ANNUAL MEETING. Immediately after the final adjournment of
each annual meeting of the stockholders for the election of directors, the board
of directors shall meet, at the same place where said meeting of stockholders
finally adjourned, for the purpose of organization, the election of officers,
and the transaction of other business. Notice of such meeting need not be given.
Such meeting may be held at any other time or place as shall be specified in a
notice given as hereinafter provided for special meetings of the board of
directors or in a consent and waiver of notice thereof signed by all directors,
at which meeting the same matters shall be acted upon as is above provided.
Section 4.10 REGULAR MEETINGS. Regular meetings of the board of
directors shall be held at such place and at such times as the board of
directors shall by resolution fix and determine from time to time. No notice
shall be required for any such regular meeting of the board.
Section 4.11 SPECIAL MEETINGS; NOTICE.
(a) Special meetings of the board shall be held whenever called by
direction of the Chairman of the Board, the President, or one-third (1/3) of the
directors at the time being in office.
(b) Notice of each such meeting shall be delivered to each director at
least two (2) days before the date on which the meeting is to be held by mail,
telegraph, cable, radio, or wireless, or personally or by telephone. Each notice
shall state the time and place of the meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting. At
any meeting at which every director shall be present, even without any notice,
any business may be transacted.
Section 4.12 SUBSTITUTES FOR NOTICE. A written waiver of notice signed
by a director, whether before or after the time of the meeting stated therein,
shall be equivalent to the giving of such notice in due time as required by
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these bylaws. Attendance of a director at or participation in a meeting shall
constitute a waiver of notice of such meeting, unless the director at the
beginning of the meeting or promptly upon arrival objects to holding the meeting
or transacting business at the meeting and does not thereafter vote for or
assent to action taken at the meeting.
Section 4.13 DIRECTOR'S ASSENT PRESUMED. A director of the Corporation
who is present at a meeting of its board of directors at which action on any
corporate matter is taken shall be presumed to have assented to the action taken
unless the director's dissent shall be entered in the minutes of the meeting or
unless the director shall file a written dissent to such action with the person
acting as the Secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered or certified mail to the Secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
Section 4.14 ORDER OF BUSINESS.
(a) At meetings of the board of directors, business shall be transacted
in such order as, from time to time, the Chairman of the board of directors or
the board of directors may determine.
(b) At all meetings of the board, the Chairman of the Board or, in his
or her absence, the person designated by the vote of a majority of the directors
present shall preside.
Section 4.15 ACTION WITHOUT MEETING. Any action required or permitted
by law to be taken at any meeting of the board of directors may be taken without
a meeting if the action is taken by all members of the board and if one or more
consents in writing setting forth the action so taken shall be signed by all of
the directors then in office and included in the minutes.
Section 4.16 COMMITTEES.
(a) The board of directors, by resolution adopted by the affirmative
vote of a majority of the number of directors then in office, may establish one
or more committees, including an executive committee, each committee to consist
of two (2) or more directors appointed by the board of directors. Any such
committee shall serve at the will of the board of directors. Each such committee
shall have the powers and duties delegated to it by the board of directors. The
board of directors may elect one or more of its members as alternate members of
any such committee who may take the place of any absent member or members at any
meeting of such committee, upon request by the President or the chairman of such
committee. Each such committee shall fix its own rules governing the conduct of
its activities as the board of directors may request.
(b) The Corporation shall have a committee of the board of directors
known as the Executive Committee made up of at least two persons, with the
number to be established by the board of directors at each annual meeting. The
Executive Committee shall have and exercise all authority of the board of
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directors in the management of the business and affairs of the Corporation
except that the Executive Committee shall not:
(1) authorize distributions;
(2) approve or propose to stockholders action that is required by
law to be approved by stockholders;
(3) fill vacancies on the board of directors or on any of its
committees;
(4) amend articles of incorporation;
(5) adopt, amend, or repeal bylaws;
(6) approve a plan of merger not requiring stockholder approval;
(7) authorize or approve reacquisition of shares, except according
to a formula or method prescribed by the board of directors; and
(8) authorize or approve the issuance or sale or contract for sale
of shares, or determine the designation and relative rights,
preferences, and limitations of a class or series of shares, except
according to limitations prescribed by the board of directors.
(c) The Board of Directors at each annual meeting shall appoint a
Coordinating Committee to consist of two members of the Board of Directors, who
do not serve on the Board of Directors of ALLIED Mutual Insurance Company. The
Coordinating Committee shall meet on an as-needed basis upon the call of the
Chairman of the Board of Directors. The Coordinating Committee shall be
responsible for matters involving actual or potential conflicts of interest, if
and when they arise, between the Corporation and ALLIED Mutual Insurance Company
and shall report thereon to the Board of Directors.
(d) The Corporation shall have a committee of the board of directors
known as the Audit Committee made up of at least two persons, with the number to
be established by the board of directors at each annual meeting. The majority of
the members of the Audit Committee shall be independent directors. The Audit
Committee shall evaluate the Corporation's systems of internal control and test
for compliance therewith on a continuing basis and shall report its findings to
the board of directors at least annually.
(e) A committee of the board shall not: (i) authorize distributions by
the Corporation; (ii) approve or propose to stockholders of the Corporation
action that the law requires be approved by stockholders; (iii) fill vacancies
on the board of directors of the Corporation or on any of its committees; (iv)
amend the articles of incorporation of the Corporation; (v) adopt, amend, or
repeal bylaws of the Corporation; (vi) approve a plan of merger not requiring
stockholder approval; (vii) authorize or approve reacquisition of shares by the
Corporation, except according to a formula or method prescribed by the board of
directors; or (viii) authorize or approve the issuance or sale or contract for
sale of shares or determine the designation and relative rights, preferences,
and limitations of a class or series of shares, except that the board of
directors may authorize a committee or a senior executive officer of the
Corporation to do so within limits specifically prescribed by the board of
directors.
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(f) The board of directors at each annual meeting shall appoint a
member or members of the board of directors to the Compensation Committee
provided for in the ALLIED Group Intercompany Operating Agreement dated January
1, 1990, as amended from time to time ("IOA"). The Compensation Committee as set
forth in the IOA shall be a joint committee of the boards of directors of the
Corporation and ALLIED Mutual Insurance Company. The board of directors also may
appoint a separate Compensation Committee for any other purpose, and the members
thereof may include but need not be limited to those members appointed to the
IOA Compensation Committee.
ARTICLE 5
OFFICERS
Section 5.1 GENERALLY. The officers of the Corporation shall be a
Chairman of the Board, a President, one or more Vice Presidents (the number
thereof to be determined by the board of directors), a Secretary, a Treasurer
and such other officers as may from time to time be appointed by the board of
directors. None of the officers, except the Chairman of the Board, need be a
director. One person may hold the offices and perform the duties of any two or
more of said offices. In its discretion, the board of directors may delegate the
powers or duties of any officer to any other officer or agent, notwithstanding
any provision of these bylaws, and the board of directors may leave unfilled for
any such period as it may fix any office except those of President, Treasurer,
and Secretary. The officers of the Corporation shall be appointed annually by
the board of directors at the annual meeting thereof. Each such officer shall
hold office until the next succeeding annual meeting of the board of directors
and until his or her successor shall have been duly chosen and shall qualify or
until his or her death or until he or she shall resign or shall have been
removed.
Section 5.2 REMOVAL. Any officer may be removed by the board of
directors, with or without cause, but such removal shall be without prejudice to
the contract rights, if any, of the person so removed.
Section 5.3 POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD. The
Chairman of the Board shall preside at all meetings of the board at which he or
she may be present and shall have such other powers and duties as he or she may
be called upon by the board of directors to perform.
Section 5.4 POWERS AND DUTIES OF THE PRESIDENT. The President shall be
the chief executive officer of the Corporation. Subject to the provisions of
these bylaws and to the direction of the board of directors, he or she shall
have the responsibility for the general management and control of the business
and affairs of the Corporation and shall perform all duties and have all powers
which are commonly incident to the office of chief executive or which are
delegated to him or her by the board of directors. He or she shall have power to
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sign all stock certificates, contracts, and other instruments of the Corporation
and shall have general supervision and direction of all of the other officers,
employees, and agents of the Corporation.
Section 5.5 POWERS AND DUTIES OF THE VICE PRESIDENTS. In the absence of
the President or in the event of his or her death or inability or refusal to
act, the Vice President (or in the event there is more than one Vice President,
the Vice Presidents in the order designated by the President, the Executive
Committee, or the board of directors) shall perform the duties of the President
and when so acting shall have all the powers of and be subject to all the
restrictions upon the President. Any Vice President may sign, with the Secretary
or Assistant Secretary, certificates for shares of the Corporation and shall
perform such other duties and have such authority as from time to time may be
assigned to such Vice President by the President or by the board of directors.
Section 5.6 POWERS AND DUTIES OF THE SECRETARY. The Secretary shall
keep minutes of all meetings of the stockholders and of the board of directors;
authenticate records of the Corporation and attend to giving and serving all
notices of the Corporation as provided by these bylaws or as required by law; be
custodian of the corporate seal, the stock certificate books, and such other
books, records, and papers as the board of directors may direct and see that the
corporate seal is affixed to all stock certificates and to all documents, the
execution of which on behalf of the Corporation under its seal is duly
authorized; keep a stock record showing the names of all persons who are
stockholders of the Corporation, their post office addresses as furnished by
each such stockholder, and the number of shares of each class of stock held by
them respectively and, at least ten (10) days before each stockholders meeting,
prepare a complete list of stockholders entitled to vote at such meeting
arranged in alphabetical order; sign with the President or a Vice President
certificates for shares of the Corporation, the issuance of which shall have
been duly authorized; and in general, perform all duties incident to the office
of Secretary and such other duties as from time to time may be assigned to the
Secretary by the President or the board of directors.
Section 5.7 POWERS AND DUTIES OF THE TREASURER. The Treasurer shall
have custody of and be responsible for all monies and securities of the
Corporation and shall keep full and accurate records and accounts in books
belonging to the Corporation showing the transactions of the Corporation, its
accounts, liabilities, and financial condition and shall see that all
expenditures are duly authorized and are evidenced by proper receipts and
vouchers; deposit in the name of the Corporation in such depository or
depositories as are approved by the directors all monies that may come into the
Treasurer's hands for the Corporation's account; render an account of the
financial condition of the Corporation at least annually; and in general,
perform such duties as may from time to time be assigned to the Treasurer by the
President or by the board of directors.
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Section 5.8 ASSISTANTS. There shall be such number of Assistant
Secretaries and Assistant Treasurers as the board of directors may from time to
time authorize and appoint. The Assistant Secretaries and Assistant Treasurers,
in general, shall perform such duties as shall be assigned to them by the
Secretary or the Treasurer, respectively, or by the President or the board of
directors. The board of directors shall have the power to appoint any person to
act as assistant to any other officer, or to perform the duties of any other
officer whenever for any reason it is impracticable for such officer to act
personally, and such assistant or acting officer so appointed shall have the
power to perform all the duties of the office to which he or she is so appointed
to be assistant or as to which he or she is so appointed to act, except as such
power may be otherwise defined or restricted by the board of directors.
ARTICLE 6
SHARES, THEIR ISSUANCE AND TRANSFER
Section 6.1 CONSIDERATION FOR SHARES. The board of directors may
authorize shares to be issued for consideration consisting of any tangible or
intangible property or benefit to the Corporation, including cash, promissory
notes, services performed, contracts for services to be performed, or other
securities of the Corporation. Before the Corporation issues shares, the board
of directors must determine that the consideration received or to be received
for shares to be issued is adequate. If the Corporation issues or authorizes the
issuance of shares for promissory notes or for promises to render services in
the future, the Corporation shall report in writing to the stockholders the
number of shares authorized or issued and the consideration received by the
Corporation with or before the notice of the next stockholders meeting.
Section 6.2 CERTIFICATES FOR SHARES. Every stockholder of the
Corporation shall be entitled to a certificate or certificates, to be in such
form as the board of directors shall prescribe, certifying the number and class
of shares of the Corporation owned by such stockholder.
Section 6.3 EXECUTION OF CERTIFICATES. The certificates for shares of
stock shall be numbered in the order in which they shall be issued and shall be
signed by the President or a Vice President and the Secretary or an Assistant
Secretary of the Corporation and shall be sealed with the seal of the
Corporation or a facsimile thereof. The signatures of the President or Vice
President and the Secretary or Assistant Secretary or other persons signing for
the Corporation upon a certificate may be facsimiles if the certificate is
countersigned by a transfer agent, or registered by a registrar, other than the
Corporation itself or an employee of the Corporation. In case any officer or
other authorized person who has signed or whose facsimile signature has been
placed upon such certificate for the Corporation shall have ceased to be such
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officer or employee or agent before such certificate is issued, it may be issued
by the Corporation with the same effect as if he or she were such officer or
employee or agent at the date of its issue.
Section 6.4 SHARE RECORD. A record shall be kept by the Secretary, or
by any other officer, employee or agent designated by the board of directors, of
the names and addresses of all stockholders and the number and class of shares
held by each represented by such certificates and the respective dates thereof
and in case of cancellation, the respective dates of cancellation.
Section 6.5 CANCELLATION. Every certificate surrendered to the
Corporation for exchange or transfer shall be cancelled, and no new certificate
or certificates shall be issued in exchange for any existing certificate until
such existing certificate shall have been so cancelled, except in cases provided
in Section 6.8 of these bylaws.
Section 6.6 TRANSFERS OF STOCK. Transfers of shares of the capital
stock of the Corporation shall be made only on the books of the Corporation by
the record holder thereof, or by his or her attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary of the Corporation,
and on surrender of the certificate or certificates for such shares properly
endorsed and the payment of all taxes thereon. The person in whose name shares
of stock stand on the books of the Corporation shall be deemed the owner thereof
for all purposes as regards the Corporation; provided, however, that whenever
any transfer of shares shall be made for collateral security, and not
absolutely, such fact, if known to the Secretary of the Corporation, shall be so
expressed in the entry of transfer.
Section 6.7 REGULATIONS. The board of directors may make such other
rules and regulations as it may deem expedient, not inconsistent with law,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation.
Section 6.8 LOST, DESTROYED, OR MUTILATED CERTIFICATES. In the event of
the loss, theft, or destruction of any certificate of stock, another may be
issued in its place pursuant to such regulations or delegations as the board of
directors may establish concerning proof of such loss, theft, or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 6.9 RECORD DATE. The board may fix, in advance, a date as the
record date for any determination of stockholders for any purpose, such date in
every case to be not more than seventy (70) days prior to the date on which the
particular action or meeting, requiring such determination of stockholders, is
to be taken or held. If no record date is so fixed for the determination of
stockholders, the close of business on the day before the date on which the
first notice of a stockholder meeting is delivered or the date on which the
resolution of the board of directors declaring a share dividend or distribution
(other than in connection with a repurchase or reacquisition of shares) is
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adopted, as the case may be, shall be the record date for such determination of
stockholders. When a determination of stockholders entitled to vote at any
meeting of stockholders has been made as provided in this section, such
determination shall apply to any adjournment thereof, unless the board of
directors selects a new record date or unless a new record date is required by
law.
Section 6.10 DIVIDENDS. The directors may from time to time declare,
and the Corporation may pay, dividends on its outstanding shares in the manner
and upon the terms and conditions provided by law.
ARTICLE 7
MISCELLANEOUS PROVISIONS
Section 7.1 FACSIMILE SIGNATURES. In addition to the provisions for use
of facsimile signatures elsewhere specifically authorized in these bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the board of directors or a committee thereof.
Section 7.2 CORPORATE SEAL. The board of directors shall provide for a
corporate seal which shall be circular in form and shall bear the name of the
Corporation and the words "Corporate Seal" and "Iowa". The Secretary shall be
custodian of any such seal. The board of directors may also authorize a
duplicate seal to be kept and used by any other officer.
Section 7.3 FISCAL YEAR. The fiscal year of the Corporation shall be at
the close of business on the last day of December of each year.
Section 7.4 VOTING OF STOCKS OWNED BY THE CORPORATION. In the absence
of a resolution of the board of directors to the contrary, the President of the
Corporation or any Vice President acting within the scope of his or her
authority as provided in Section 5.5 of these bylaws is authorized and empowered
on behalf of the Corporation to attend, vote at, and grant discretionary proxies
to be used at any meeting of stockholders of any corporation in which this
Corporation holds or owns shares of stock and, in that connection, on behalf of
this Corporation, to execute a waiver of notice of any such meeting. The board
of directors shall have authority to designate any officer or person as a proxy
or attorney-in-fact to vote shares of stock in any other corporation in which
this Corporation may own or hold shares of stock.
Section 7.5 STOCKHOLDERS'RIGHT TO INFORMATION.
(a) A stockholder of the Corporation is entitled to inspect and copy,
during regular business hours at the Corporation's principal office, any of the
following records of the Corporation, if the stockholder gives the Corporation
written notice of the stockholder's demand at least five business days before
the date on which the stockholder wishes to inspect and copy:
(1) Articles or Restated Articles of Incorporation and all
amendments currently in effect;
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92
(2) Bylaws or Restated Bylaws and all amendments currently in
effect;
(3) Resolutions adopted by the board of directors creating one or
more classes or series of shares and fixing their relative rights,
preferences, and limitations, if shares issued pursuant to those
resolutions are outstanding;
(4) Minutes of all stockholders meetings and records of all action
taken by stockholders without a meeting for the past three years;
(5) All written communications to stockholders generally within the
past three years, including the financial statements furnished for the
past three years;
(6) A list of the names and business addresses of the Corporation's
current directors and officers; and
(7) The Corporation's most recent annual report delivered to the
Iowa Secretary of State.
(b) If (i) a stockholder makes a demand in good faith and for a proper
purpose, (ii) the stockholder describes with reasonable particularity the
stockholder's purpose and the records the stockholder desires to inspect, and
(iii) the record requested is directly connected with the stockholder's stated
purpose, the stockholder shall also be entitled to inspect and copy, during
regular business hours at a reasonable location specified by the Corporation,
any of the following records of the Corporation provided the stockholder gives
the Corporation written notice of the stockholder's demand at least five
business days before the date on which the stockholder wishes to inspect and
copy any of the following:
(1) Excerpts from minutes of any meeting of the board of directors,
records of any actions of a committee of the board of directors while
acting as authorized by the board of directors on behalf of the
Corporation, minutes of any meeting of the stockholders, and records of
action taken by the stockholders or the board of directors without a
meeting to the extent not subject to inspection under the preceding
subparagraph;
(2) Accounting records of the Corporation; and
(3) The record of stockholders of the Corporation.
ARTICLE 8
INDEMNIFICATION OF DIRECTORS
Section 8.1 MANDATORY INDEMNITY. The Corporation shall indemnify a
director, officer, employee, agent, and others of this Corporation, and each
director, officer, employee, agent, and others 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, penalties, fines, settlements, and reasonable expenses actually
incurred by such director, officer, employee, agent, and others of this
Corporation or as a director, officer, partner, trustee, employee, or agent of
another corporation, partnership, joint venture, trust, other enterprise, or
<PAGE>
93
employee benefit plan, except that the mandatory indemnification required by
this sentence shall not apply (i) to a breach of a director's, officer's,
employee's, agent's, or other's duty of loyalty to the Corporation or its
stockholders, (ii) to acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of the law, (iii) to a transaction
from which a director, officer, employee, agent, or others derived an improper
personal benefit, or (iv) 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, officer, employee, or others
shall be adjudged liable to the Corporation.
Section 8.2 NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification
conferred in this Article shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, the Corporation's
Articles of Incorporation, or any agreement, vote of stockholders or
disinterested directors, or otherwise.
ARTICLE 9
AMENDMENTS TO BYLAWS
These bylaws may be amended or repealed by the board of directors or by
the stockholders; provided, however, that the stockholders may from time to time
specify particular provisions of the bylaws which shall not be amended or
repealed by the board of directors.
/s/ George T. Oleson
------------------------------
George T. Oleson
Assistant Secretary
<PAGE>
94
EXHIBIT 4.10
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of December 31, 1996, between ALLIED
GROUP, INC., an Iowa corporation (the "Company"), and STATE STREET BANK AND
TRUST COMPANY, a Massachusetts trust company, solely in its capacity as trustee
under the Plan defined below and not individually (the "Trustee").
WITNESSETH;
WHEREAS, the Company has established and maintains The ALLIED Group Employee
Stock Ownership Plan (the "Plan"), for the benefit of all employees eligible to
participate therein;
WHEREAS, the Plan qualifies as an "employee stock ownership plan" within the
meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended
(the "Code");
WHEREAS, the Company has established and maintains The ALLIED Group Employee
Stock Ownership Trust (the "Trust") and the Company has appointed the Trustee to
act as the trustee thereof pursuant to a trust agreement between the Company and
the Trustee, amended and restated as of April 16, 1991 (the "Trust Agreement");
WHEREAS, the Trust Agreement provides that the assets of the trust created
thereunder shall be invested in, among other things, shares of common stock of
the Company ("Common Stock");
WHEREAS, as directed by the ESOP Committee (the "Committee") under the terms
of the Trust Agreement, the Trustee is authorized to purchase shares of Common
Stock and the Company wishes to issue and sell such shares of Common Stock to
the Trustee, and no commission will be paid by the Trustee in connection with
the purchase of such shares of Common Stock; and
WHEREAS, the Trustee is required under the Trust Agreement to independently
determine (i.e., without direction from the Company) the purchase price that
shall be paid for any stock of the Company, and the Trustee has determined that
the average of the high and low sale prices of the shares of Common Stock as
reported on the Nasdaq National Market tier of The Nasdaq Stock Market on
December 31, 1996 is fair and equitable to the participants in the Plan and the
price to be paid for the Common Stock is not in excess of adequate
consideration.
NOW THEREFORE, in consideration of these premises and the mutual promises
contained herein, the parties hereto, intending to be legally bound, hereby
agree as follows:
<PAGE>
95
1. The Trustee hereby agrees to purchase (the "Purchase") with the funds
directed by the Committee, and the Company hereby agrees to issue and sell for
cash to the Trust 24,381 shares of Common Stock (the "Shares") for an aggregate
purchase price (the "Purchase Price") of $800,000.00 (or approximately $32.8125
per share). The Company will pay all stamp and other transfer taxes, if any,
which may be payable in respect of the issuance, sale and delivery of the Shares
and shall be entitled to any refund thereof.
2. The Purchase shall be consummated at or about 5:30 P.M. Central Standard
Time on December 31, 1996 (such date of delivery being hereinafter called the
"Delivery Date") at the offices of the Company, Des Moines, Iowa or as otherwise
agreed by the parties hereto. On the Delivery Date, the Trustee shall deliver to
the Company the Purchase Price in immediately available funds together with an
opinion of Goodwin, Procter & Hoar, LLP, counsel to the Trustee, in the form
attached as Annex A hereto, and the Company will deliver to the Trustee a
certificate or certificates representing the Shares which shall be registered in
the name of the Trustee, as trustee under the Plan, or in the name of its
nominee, together with an opinion of Katherine E. Schmidt, Associate Corporate
Counsel of the Company, in the form attached as Annex B hereto.
3. The Company hereby represents, warrants and covenants to the Trustee as
follows:
a. the Company (i) is a corporation duly organized, validly existing
and in good standing under the laws of the State of Iowa and (ii)
has full corporate power and authority to execute and deliver this
Agreement, to carry out the transactions contemplated hereby, to
own, lease and operate its assets and properties, and to carry on
its business as now being conducted;
b. this Agreement has been duly authorized, executed and delivered by
the Company and constitutes a valid and binding obligation of the
Company, enforceable against the Company in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting
creditors' rights generally and to general principles of equity
(regardless of whether considered in a proceeding at law or in
equity);
c. the execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby
will not violate (i) the Company's Articles of Incorporation or
By-laws, each as amended or restated to date or, (ii) any provision
of any agreement, instrument, order, award, judgment or decree to
<PAGE>
96
which the Company is a party or by which it or any of its businesses
or properties are bound, or (iii) any statute, rule or regulation of
any federal, state or local government or governmental agency
applicable to the Company except in the case of subparagraphs (ii)
or (iii) of this Section 3(c) for any such violations which either
individually or in the aggregate do not have a material adverse
effect on the business or properties of the Company and its
subsidiaries taken as a whole;
d. except for any necessary applications with The Nasdaq Stock Market
with respect to any newly issued shares of Common Stock which may be
issued upon conversion of the Shares, no approval, authorization or
other action by, or filing (other than such filings of the Company
as may be necessary in connection with any registration for sale of
the common stock that may be issuable upon conversion of the Shares)
with, any government authority is required to be obtained or made by
the Company in connection with the execution, delivery and
performance by the Company of this Agreement and the consummation of
the transactions contemplated hereby;
e. the Shares have been duly and validly authorized and, when issued
and delivered to and paid for by the Trustee pursuant to this
Agreement, (i) will be validly issued, fully paid and nonassessable
and not liable to any further call or assessment, (ii) the
certificates representing the Shares comply with the applicable
requirements of Iowa law and (iii) the Trustee will acquire full
right, title and interest in and to the Shares free and clear of any
and all liens, claims, charges and encumbrances (other than rights
of participants in the Plan);
f. the Plan has been duly authorized and established, and the Trust
Agreement has been duly authorized, by all necessary corporate
action on the part of the Company; the Plan constitutes in all
material respects in form an employee stock ownership plan within
the meaning of Section 4975(e)(7) of the Code, Code Regulation
Section 54.4975-11 and Section 407(d)(6) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"); and each of the
Shares constitutes a qualifying employer security within the meaning
of Section 4975(e)(8) of the Code; provided, however, that in making
the representations contained in this Section 3(f) the Company has
relied upon the correctness of the Trustee's representations
contained in Section 4(f) of this Agreement;
g. the Company's Annual Report on Form 10-K for the year ended December
31, 1995 and quarterly reports on Form 10-Q for the quarterly
<PAGE>
97
periods ended March 31, June 30, and September 30, 1996, on the
respective dates filed with the Securities and Exchange Commission
("SEC"), conformed in all material respects to the requirements of
the Securities Exchange Act of 1934, as amended;
h. no person or other entity is entitled to any fees or commissions due
to the Company's actions in connection with the purchase and sale of
the Shares;
i. the Company shall use its best efforts during the term of the Trust
to cause the Plan to maintain its qualification as an employee stock
ownership plan within the meaning of Section 4975 of the Code; and
j. the Company has furnished and will continue to furnish to the
Trustee from time to time copies of all reports and financial
statements which the Company shall send or make available to its
public stockholders generally, all other written communications from
the Company to public shareholders generally and each regular or
periodic report, proxy statement, registration statement or
prospectus, if any, filed by the Company with the SEC; and
4. The Trustee represents and warrants to the Company as follows:
a. the Trustee (i) is a duly organized and validly existing
Massachusetts trust company in good standing and with full power and
authority to act as Trustee and exercise trust powers, including
without limitation, the trust powers provided in and contemplated by
the Trust Agreement, and (ii) has full corporate power and authority
to execute and deliver this Agreement and to carry out the
transactions contemplated hereby;
b. this Agreement has been duly authorized, executed and delivered by
the Trustee and constitutes a valid and binding obligation of the
Trustee, enforceable against the Trustee in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting
creditors' rights generally and to general principles of equity
(regardless of whether considered in a proceeding at law or in
equity);
c. the execution, delivery and performance of this Agreement by the
Trustee and the consummation of the transactions contemplated hereby
will not violate (i) the Trustee's Corporate Charter or By-laws,
each as amended to date, or (ii) any provision of any agreement,
<PAGE>
98
instrument, order, award, judgment or decree to which the Trustee is
a party or by which it or any of its businesses or properties are
bound or (iii) any statute, rule or regulation of any federal, state
or local government or governmental agency applicable to the Trustee
except in the case of subparagraphs (ii) or (iii) of this Section
4(c) for any such violations which either individually or in the
aggregate do not have a material adverse effect on the business or
properties of the Trustee; provided, however, that in making the
representations contained in clause (iii) of this Section 4(c), the
Trustee has relied upon the correctness of the Company's
representations in Sections 3(g), as limited by the proviso therein,
and 3(i) of this Agreement and (2) the Committee's direction letter
dated December 30, 1996;
d. no approval, authorization or other action by, or filing with, any
governmental authority is required to be obtained or made by the
Trustee in connection with the execution, delivery and performance
by the Trustee of this Agreement and the consummation of the
transactions contemplated hereby;
e. the Trustee is acquiring the Shares on behalf of the Plan solely for
investment purposes and not with a view to, or for sale in
connection with, any distribution thereof; provided, however, that
the Shares will be allocated to the accounts of the participants in
the Plan pursuant to the terms of the Plan and distributions may be
made to participants and beneficiaries of the Plan in shares of
Common Stock, it being understood that the Shares are being sold to
the Trustee pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon this representation and
warranty;
f. the purchase of the Shares on the Delivery Date by the Trust for the
Purchase Price is for not greater than "adequate consideration" as
that phrase is defined in Section 3(18) of ERISA, and any proposed
regulations thereunder, and will not constitute a prohibited
transaction under Section 406 of ERISA or Section 4975(c) of the
Code by reason of the exemptions set forth in Section 408(e) of
ERISA and Section 4975(d) (13) of the Code; provided that in making
the representations contained in this Section 4(f), the Trustee has
relied upon the correctness of the Company's representations
contained in Sections 3(g), as limited by the proviso therein, and
3(i) of this Agreement;
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99
g. no person or other entity is entitled to any commissions due to the
Trustee's actions in connection with the purchase and sale of the
Shares.
5. The Trustee and Company agree that the per share purchase price for the
Common Stock will be the average of the high and low sale prices of the shares
of Common Stock on the Nasdaq National Market tier of The Nasdaq Stock Market on
December 31, 1996, the day prior to the stock purchase.
6. The Company has at its expense, prepared, filed, and obtained the
effectiveness of, and will use its best efforts to cause to remain effective, a
registration statement on an appropriate form, including a final prospectus (the
"Registration Statement"), under and complying with the Securities Act and the
rules and regulations thereunder, relating to the shares of the Company's Common
Stock held by the Trust. The Company shall also use its best efforts to register
or qualify such shares covered by the Registration Statement under the "blue
sky" or securities laws of such jurisdictions within the United States as the
Trustee may reasonably request; PROVIDED, HOWEVER, that the Company shall not be
required to consent to the general service of process for all purposes in any
jurisdiction where it is not then qualified to do business.
7. The Company agrees that it will use its best efforts to maintain the
qualification of the Plan as an employee stock ownership plan within the meaning
of Section 4975(e)(7) of the Code.
8. The representations, warranties and agreements in this Agreement shall
survive the date hereof and the Delivery Date.
9. This Agreement shall be governed by and construed in accordance with the
laws of the State of Iowa applicable to contracts to be executed, delivered and
performed in such state, to the extent not preempted by the laws of the United
States of America. The parties hereby irrevocably and unconditionally consent to
submit to the exclusive jurisdiction of the courts of the State of Iowa and the
United States of America located in Polk County, Iowa for any actions, suits or
proceedings arising out of or relating to this Agreement. This Agreement, the
Plan and Trust Agreement (including documents referred to therein or delivered
pursuant thereto) set forth the entire Agreement of the parties with respect to
the subject matter contained herein and supersede all prior oral and written
agreements, if any, between the parties with respect to such subject matter.
This Agreement shall bind and inure to the benefit of all successors to, and
assigns of, the parties hereto; provided, however, that the Trustee shall not
assign or otherwise transfer its interest in, or obligations under, this
Agreement without the written consent of the Company, except that the Trustee
may assign, without the Company's written consent, all its rights hereunder to
any institution exercising trust powers in connection with any such institution
assuming the duties of a trustee under the Trust Agreement. In the event that
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100
any provision of this Agreement shall be declared unenforceable by a court of
competent jurisdiction, such provision shall be stricken herefrom and the
remainder of this Agreement shall remain binding on the parties hereto. In the
event any such provision shall be so declared unenforceable due to its scope or
breadth, then it shall be narrowed to the scope or breadth permitted by law.
10. This Agreement may be executed in two counterparts, each of which shall
be deemed an original, but each of which taken together shall constitute one and
the same instrument.
11. This Agreement may not be modified with respect to the obligations of a
party hereto except by an instrument in writing signed by such party.
12. The terms and provisions of the Trust Agreement relating to the nature
of the responsibilities of the Trustee and the indemnification by the Company of
the Trustee are incorporated herein by reference and made applicable to this
Agreement.
13. All notices, requests, or other communications required or permitted to
be delivered hereunder shall be in writing, delivered to each party hereto at
its address specified in the Trust Agreement and shall become effective as
therein provided. Any party hereto may from time to time, by written notice
given as aforesaid, designate any other address to which notices, requests or
other communications addressed to it shall be sent.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Agreement as of the date first above written.
ALLIED GROUP, INC.
By /s/ Jamie H. Shaffer
-----------------------------
Name Jamie H. Shaffer
---------------------------
Title President (Financial)
--------------------------
STATE STREET BANK AND TRUST
COMPANY solely in its capacity
as Trustee under the Plan and
Trust Agreement referred to
herein and not individually
By /s/ Marianne E. Sullivan
-----------------------------
Name Marianne E. Sullivan
---------------------------
Title Vice President
--------------------------
<PAGE>
101
Annex A
December 31, 1996
ALLIED Group, Inc.
701 Fifth Avenue
Des Moines, Iowa 50391-2003
Re: The ALLIED Group Employee Stock Ownership Trust
Ladies and Gentlemen:
We have acted as special counsel for State Street Bank and Trust
Company ("State Street"), as trustee (the "Trustee") of The ALLIED Group
Employee Stock Ownership Trust (the "Trust"), which forms a part of the ALLIED
Group Employee Stock Ownership Plan ("Plan"), and which is evidenced by the
Trust Agreement dated April 16, 1991 (the "ESOP Trust Agreement") between
Trustee and ALLIED Group, Inc. (the "Company") in connection with the purchase
by the Trustee of 24,381 shares of Common Stock of the Company, no par value
(the "Common Stock") pursuant to the Stock Purchase Agreement between the
Company and the Trustee dated as of December 31, 1996 (the "Stock Purchase
Agreement"). Capitalized terms used herein that are not defined herein have the
meanings set forth in the Stock Purchase Agreement.
In connection therewith, we have reviewed executed copies of: (i) the
Stock Purchase Agreement; (ii) the ESOP Trust Agreement; (iii) the corporate
charter and by-laws of State Street, both as amended to date; (iv) other
records, documents, and instruments relating to the powers and organization of
State Street and to State Street's acceptance of fiduciary duties, obligations
and trusts; and (v) such other certificates and documents as we have deemed
relevant or necessary as a basis for the opinion expressed below.
In our examination, we have assumed without any investigation (i) the
legal capacity of each natural person, (ii) the full power and authority of each
person other than State Street to execute, deliver and perform its obligations
under each document heretofore executed and delivered or hereafter to be
executed and delivered and to do each other act heretofore done or hereafter to
be done by such person, (iii) the due authorization, execution and delivery by
each person other than State Street of each document heretofore executed and
delivered by such person, (iv) the legality, validity, binding effect and
enforceability as to each person other than State Street of each document
heretofore executed and delivered or hereafter to be executed and delivered and
of each other act heretofore done or hereafter to be done by such person, (v)
the genuineness of each signature other than those of officers of State Street
and the completeness and authenticity of each document submitted to us as an
original, (vi) the conformity to the original of each document submitted to us
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102
as a copy, (vii) the authenticity of the original of each document submitted to
us as a copy and (viii) no amendment or modification hereafter of any provision
of any document. Insofar as our opinion relates to, or depends on, any matter of
fact, we have relied on representations as set forth in the Stock Purchase
Agreement, and upon written statements and certificates of officers of State
Street and of public officials.
We are members of the Bar of the Commonwealth of Massachusetts and,
accordingly, we express no opinion herein concerning any law other than the laws
of the Commonwealth of Massachusetts and the Federal laws of the United States
of America, to the extent specifically referred to herein.
As used in this opinion with respect to any matter, the qualifying
phrase "to the best of our knowledge" means that, without independent review or
verification, nothing has come to our attention in the course of our performing
legal services for the Trustee with respect to said matter.
We express no opinion as to matters governed by the Internal Revenue
Code of 1986 (the "Code") or the Employee Retirement Income Security Act of 1974
("ERISA"), both as amended, or federal or state securities laws.
Based on and subject to the foregoing, we are of the opinion that:
1. State Street, acting solely in its capacity as Trustee, has all
requisite power and authority to execute, deliver and perform its obligations
under the Stock Purchase Agreement.
2. The execution, delivery and performance of the Stock Purchase
Agreement by State Street, as Trustee, will not violate the charter or the
by-laws of State Street or, to the best of our knowledge, any order, judgment or
decree binding on State Street (individually or as trustee).
3. The Stock Purchase Agreement has been duly executed and delivered by
State Street, as Trustee.
4. No authorization, approval or consent of, and no filings or
registrations with, any governmental or regulatory authority or agency are
necessary for the execution, delivery or performance by State Street of the
Stock Purchase Agreement or for the validity or enforceability thereof, except
for filings with the Internal Revenue Service or the Department of Labor which
may from time to time be required by ERISA or the Code.
We express no opinion as to any matter other than as expressly set
forth above, and no other opinion is intended to be implied nor may be inferred
<PAGE>
103
herefrom. The opinions expressed herein are given as of the date hereof and we
undertake no obligation hereby and disclaim any obligation to advise you of any
change after the date hereof pertaining to any matter referred to herein.
Neither this opinion nor any part hereof may be delivered to, used or relied
upon by any person or entity other than you without our prior written consent.
Very truly yours,
/s/ GOODWIN, PROCTER & HOAR, LLP
---------------------------------
GOODWIN, PROCTER & HOAR, LLP
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104
Annex B
December 31, 1996
State Street Bank and Trust Company
Legal Division, Q6N
200 Newport Avenue
North Quincy, MA 02171
Ladies and Gentlemen:
I have acted as legal counsel of ALLIED Group, Inc., an Iowa corporation (the
"Company"), and in such capacity I have advised the Company in connection with
The ALLIED Group Employee Stock Ownership Trust (the "ESOP Trust"), a trust
established under that certain Trust Agreement amended and restated as of April
16, 1991 (the "Trust Agreement"), between the Company and State Street Bank and
Trust Company, as trustee (the "Trustee" or "State Street"), which implements
and forms a part of the ALLIED Group Employee Stock Ownership Plan (the "Plan"),
and in connection with the purchase by the Trustee of 24,381 shares of Common
Stock of the Company, no par value (the "Common Stock"), pursuant to the Stock
Purchase Agreement between the Company and the Trustee dated December 31, 1996
(the "Stock Purchase Agreement"). Capitalized terms used herein without
definition shall have the meanings ascribed to them in the Stock Purchase
Agreement.
In connection therewith, I have reviewed executed copies of (i) the Stock
Purchase Agreement, (ii) such other certificates and documents as I have deemed
relevant or necessary as a basis for the opinion expressed below.
In such connection, I have assumed the genuineness of all signatures, the
authenticity of all documents submitted to me as originals, the conformity to
original documents of all documents submitted to me as photostatic or certified
copies, and the authenticity of the originals of such copies. I have relied, to
the extent I deem such reliance proper, upon representations made in the
documents and certificates or representations made in writing by duly authorized
representatives of the Company.
In rendering the opinions contained herein, I have assumed that (a) State
Street, as Trustee, has all requisite power and authority to execute, deliver,
and perform its obligations under the Stock Purchase Agreement; (b) that the
execution, delivery, and performance of the Stock Purchase Agreement by State
Street, as Trustee, will not violate the charter or bylaws of State Street; and
(c) that the Stock Purchase Agreement has been executed and delivered by State
Street as Trustee and constitutes the legal, valid, and binding obligation of
the ESOP Trust, enforceable in accordance with its terms, except as enforcement
may be limited by (i) bankruptcy, insolvency, reorganization, or similar laws
affecting the enforcement of creditors' rights generally, or (ii) equitable
principles of general applicability (regardless of whether such enforceability
is considered in a proceeding in equity or law).
<PAGE>
105
I express no opinion with respect to the laws of any jurisdiction other than the
State of Iowa and the United States of America. These opinions are expressed as
of the date hereof and are therefore subject to subsequent interpretive,
regulatory, legislative, and judicial developments.
Based on and subject to the foregoing, I am of the opinion that:
1. The Company is validly existing and in good standing under the laws of
the State of Iowa and has all requisite corporate power to execute,
deliver, and perform the Stock Purchase Agreement. The Company has taken
all necessary corporate action to authorize the execution, delivery, and
performance of the Stock Purchase Agreement.
2. The Stock Purchase Agreement has been duly executed and delivered by the
Company and is the legal, valid, and binding agreement of the Company,
enforceable against the Company in accordance with its respective terms,
except as the enforceability thereof may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, or
similar laws affecting the enforcement of creditors' rights generally or
(ii) equitable principles of general applicability (regardless of
whether such enforceability is considered in a proceeding in equity or
at law).
3. The Shares have been validly authorized, and upon payment therefor as
provided in the Stock Purchase Agreement, will be validly issued and
outstanding and will constitute fully-paid and nonassessable shares of
Common Stock of the Company.
4. Upon payment by the Trust as provided in the Stock Purchase Agreement,
the Company will convey to the Trust good and valid title to the Shares
free and clear of any liens, claims, security interests, and
encumbrances, except for beneficial interests accruing to Plan
participants and their beneficiaries.
5. As of the date hereof, the Plan and the ESOP Trust in form meet in all
material respects (a) the applicable requirements of Section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), (b) the
requirements applicable to an employee stock ownership plan for purposes
of Section 4975(e)(7) of the Code and the regulations promulgated
thereunder, and (c) the requirements for exemption from tax under
Section 501(a) of the Code.
6. The shares of Common Stock to be purchased by the ESOP Trust constitute
"employer securities" within the meaning of Section 409(1) of the Code
and "qualifying employer securities" within the meaning of Section
407(d)(5) of ERISA.
7. The shares of Common Stock to be purchased by the ESOP Trust have voting
rights, and the Plan meets the voting rights requirements of Section
409(e)(2) of the Code with respect to such shares.
<PAGE>
106
In rendering the foregoing opinions and any other opinions expressed in this
letter, I have relied on the following assumptions:
a. Except as to matters expressly opined on herein, the Plan and ESOP
Trust have been, and will continue to be, administered and
operated at all times strictly in accordance with their terms and
with all requirements of applicable law including, but not limited
to, all of the requirements applicable to a qualified plan under
Section 401(a); the requirements applicable to an "employee stock
ownership plan" (within the meaning of Section 4975(e)(7)) under
Section 4975 and 409 of the Code; and the requirements applicable
to a tax-exempt trust under Section 501(a); and with the
provisions of ERISA and all regulations thereunder.
b. No fiduciary of the Plan has received any consideration of the
type described in Section 4975(c)(1)(F) of the Code and Section
406(b)(3) of ERISA in connection with the transactions described
herein.
c. The fiduciaries of the Plan and the ESOP Trust have acted
prudently and in good faith, and have given appropriate
consideration to those facts and circumstances that are relevant
to the transactions in accordance with the fiduciary requirements
of part 4 of Title I of ERISA.
These opinions are rendered solely to the Trustee in connection with the
transactions of the Trustee contemplated by the Stock Purchase Agreement. No
other person, firm, or corporation may rely upon these opinions for any purpose
without my prior written consent.
Yours very truly,
/s/ George T. Oleson
- --------------------------
George T. Oleson
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EXHIBIT 10.7
AMENDED AND RESTATED
MANAGEMENT INFORMATION SERVICES AGREEMENT
Effective March 1, 1996
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108
AMENDED AND RESTATED
MANAGEMENT INFORMATION SERVICES AGREEMENT
This Agreement ("Agreement") is made as of this 24th day of January,
1997, to be effective March 1, 1996, (unless a different effective date is
indicated) by and among AMCO Insurance Company ("AMCO"), ALLIED Group
Information Systems, Inc. ("AGIS"), ALLIED Mutual Insurance Company ("Mutual"),
ALLIED Group, Inc. ("AGI"), ALLIED General Agency Company ("AGA"), ALLIED Group
Mortgage Company ("AGMC"), ALLIED Group Leasing Corporation ("AGLC"), ALLIED
Life Financial Corporation ("ALFC"), ALLIED Life Insurance Company ("ALLIED
Life"), ALLIED Life Brokerage Agency ("ALBA"), ALLIED Group Merchant Banking
Corporation ("AGMBC"), ALLIED Group Insurance Marketing Company ("AGIMC"), The
Freedom Group, Inc. ("TFG"), and Midwest Printing Services, Ltd. ("Midwest
Printing"). AGIS, AGI, AGA, AGMC, AGLC, ALFC, ALLIED Life, ALBA, AGMBC, AGIMC,
TFG, and Midwest Printing shall be hereinafter referred to collectively as the
"Companies".
WITNESSETH:
WHEREAS, AGIS and Mutual, AGI, AMCO, AGA, AGMC, AGLC, ALFC, ALLIED
Life, ALBA, AGMBC, and AGIMC entered into an Amended and Restated Management
Information Services Agreement effective January 1, 1995 (the "January 1995
Agreement") on December 14, 1995; and
WHEREAS, effective March 1, 1996, AGIS was restructured, with AGIS
declaring and paying a dividend to AMCO consisting of all assets and related
liabilities of TFG-ALLIED Operations; and
WHEREAS, effective March 1, 1996, AMCO began providing the services
previously provided by AGIS under the January 1995 Agreement;
WHEREAS, effective May 13, 1996, the AMCO programmers working on ALIC
data were transferred to ALIC as employees;
NOW, THEREFORE, in consideration of the foregoing premises, and for and
in consideration of the mutual covenants and agreements contained herein, the
parties agree as follows:
I. DEFINITIONS
1.1 "AGI and Its Subsidiaries" shall mean the following companies
which are parties to this Agreement: AGI, AMCO, AGA, AGMC, AGLC, TFG, AGIS,
and Midwest Printing.
1.2 "ALFC and Its Subsidiaries" shall mean the following companies
which are parties to this Agreement: ALFC, ALLIED Life, ALBA, and AGMBC.
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1.3 "Coordinating Committee" shall mean the joint meeting of the
coordinating committees established by Mutual, AGI, and ALFC in accordance with
their respective bylaws or pursuant to resolution for the purpose, among others,
of resolving issues under this Agreement.
1.4 "Management Information Services" or "MIS" shall mean the
Methods/Procedures, the processing, and support of information and data
functions. MIS does not include: (a) third-party data processing services
provided to any of the Companies by contract; (b) processing flexible premium
payment plans; or (c) printing services, unless otherwise provided herein.
1.5 "Methods/Procedures" shall mean studies or work flow analysis,
training on software systems, and other computer support.
1.6 "Mutual and Its Subsidiaries" shall mean the following companies
which are parties to this Agreement: Mutual and AGIMC.
1.7 "PC" shall mean personal computer.
1.8 "PC Support" shall mean PC installation, training, and assistance,
but shall not include PC maintenance.
1.9 "Programming/Development" shall mean the analysis, design,
programming, and development of PC and mainframe Software and shall include
mainframe Software consulting and maintenance services. The maintenance services
shall include, but not be limited to, error corrections, enhancements, and
updates. Unless specifically provided for herein, Programming/Development shall
not include those programming functions performed by any of the Companies on
personal computers.
1.10 "Software" shall mean any and all computer programs, models,
plans, outlines, packages, or systems thereof and related documentation or
manuals as developed, or which may be developed in the future by AMCO and used
by the Companies for MIS, but does not include those computer programs which are
used by any of the Companies pursuant to license agreements with third parties.
II. POOLING AGREEMENT
2.1 AMCO, Mutual, ALLIED Property and Casualty Insurance Company, and
Depositors Insurance Company are parties to the Second Amended and Restated
Reinsurance Pooling Agreement dated December 14, 1992, as amended February 18,
1993 and February 10, 1995 ("Pooling Agreement"), pursuant to which AMCO, as the
pool administrator, conducts insurance operations and provides certain
administrative services to the other parties. Included in these administrative
services are the provision of data processing services for the jointly conducted
insurance operations. The Pooling Agreement shall control as to matters
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regarding data processing services provided by AMCO to Mutual, ALLIED Property
and Casualty Insurance Company, and Depositors Insurance Company and the payment
for any services provided thereto.
III. SERVICES
3.1 GENERAL MIS. AMCO shall provide all MIS required by ALLIED Life,
AGI's human resources department, and AGIMC. The MIS to be provided during the
term of this Agreement shall be substantially the same as those services
presently provided to or utilized by ALLIED Life, AGI's human resources
department, and AGIMC as of the effective date of this Agreement. In addition,
AMCO shall provide MIS to any of the Companies if requested. The scope and
extent of MIS provided under this Agreement may be amended or modified from time
to time by written agreement between AMCO and the party receiving the MIS.
3.2 PC SUPPORT. AMCO shall provide PC Support to ALLIED Life, ALBA,
AGI's human resources department, AGA, AGMC, AGLC, AGMBC, AGIMC, and AGIS. AMCO
shall also provide AGIMC with PC Support for its phone system.
3.3 PC MAINTENANCE. AMCO will assist in coordinating with each of the
Companies for third-party vendor maintenance on the personal computers, and each
of the Companies shall be responsible for payment to such third-party vendors.
3.4 AGMC SCANLINE PROCESSING. AMCO shall use its scanline equipment to
process AGMC payment forms on a daily basis, Monday through Friday, during the
term of this Agreement. AMCO shall provide its own personnel, program disk, and
tapes to process such forms.
3.5 FLEXIBLE PREMIUM PAYMENT PLANS. AMCO shall perform the processing,
billing, scanline, and remittance services with regard to the flexible premium
payment plan offered by ALLIED Life to its insureds on ALLIED Life policies. All
service charges and reinstatement fees assessed to insureds pursuant to the
flexible premium payment plan shall be retained by ALLIED Life.
3.6 AGIS CUSTOMERS. AGIS sells to its insurance customers data
processing services which are presently provided using AMCO's mainframe and
other equipment. AMCO agrees to continue to provide insurance processing
services subject to AGIS obtaining AMCO's written consent prior to entering into
future data processing agreements and limiting annual growth so it does not
exceed 10%.
3.7 PRINTING.
(a) FORMS AND REPORTS. AMCO shall generate the following data and
record output for ALLIED Life and AGIS customers: (i) policy forms, (ii) claim
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forms, (iii) billing forms, and (iv) internal reports not generated by personal
computers. AMCO shall generate internal reports for AGI's human resources
department which cannot be generated by personal computers.
(b) TYPESETTING AND OTHER PRINTING. AMCO shall provide typesetting
services to Companies requesting typesetting services. Any other printing
services including, but not limited to, specialty printing or brochures, shall
be provided by AMCO to the Companies, or any of them, if requested.
3.8 POLICY ASSEMBLY. AMCO shall provide policy assembly for AGIS
customers. The policy assembly shall include the preparing, handling, and
mailing of insurance policies.
3.9 POSTAGE AND MAIL PROCESSING. AMCO shall provide mail processing
for the Companies which are located in Polk County, Iowa. This mail processing
shall include internal and external distribution of mail among such Companies,
to and from the proper post office facilities and may include inserting and
sorting mail services.
3.10 SUPPLY SERVICES. For those Companies which desire to use the
supply service, AMCO shall administer and manage the storage, warehousing, and
distribution of the inventory of office supplies owned by such Companies. The
supply service provided by AMCO shall include, but not be limited to, the
ordering of paper used in processing forms for ALLIED Life and AGIS customers.
3.11 TELEPHONE AND COMMUNICATIONS. AMCO shall provide telephone
equipment, long-distance communication services, or both, for such Companies
requesting equipment and/or service upon mutually agreeable terms and
conditions. AMCO shall also provide computer and telephone port access to those
Companies which office at 701 Fifth Avenue, Des Moines, Iowa.
3.12 OTHER SERVICES. Any other services provided by AMCO to the
Companies, or any of them, shall be negotiated between AMCO and such company on
such terms and conditions as are mutually agreeable.
IV. WARRANTIES
4.1 LICENSE OF SOFTWARE. AMCO shall own or license any Software
necessary to provide the services described in this Agreement. AMCO shall be
responsible for resolving any licensing conflicts that may result from its use
of such Software.
4.2 NO WARRANTIES. AMCO makes no warranties, express or implied as to
performance of the machines, equipment, or Software provided under the terms of
this Agreement. AMCO will not be liable for any damages, of any kind, as a
result of the unavailability or malfunction of the machines, equipment or
Software.
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112
V. PAYMENT FOR SERVICES
5.1 GENERAL. The fees described in this Article III may be
renegotiated in the future at the agreement of the affected parties. The
amount of the renegotiated fee to be paid by any of the Companies shall be
renegotiated on an arm's length basis.
5.2 FEES. The Companies shall pay the fees set forth in Addendum A to
this Agreement.
VI. TERM, TERMINATION, AND CHANGE OF CONTROL
6.1 TERM AND TERMINATION. This Agreement shall be effective on
March 1, 1996 and shall continue in effect until December 31, 2004, and shall
continue thereafter unless prior to December 31, 2002, a party to this Agreement
delivers to the other parties a written notice that such party intends
to cease participation and terminate the Agreement as to it on December 31, 2004
or as of a specified date thereafter. This Agreement may be terminated by a
party to this Agreement, as to such party's participation in the Agreement,
effective after December 31, 2004, provided that such party has given
written notice of termination to the others at least two (2) years prior
to the proposed termination date.
6.2 CHANGE OF CONTROL OF ALFC. In the event of a Change of Control (as
hereinafter defined in this section) of ALFC, either Mutual or AGI may, in its
sole discretion, at any time after such Change of Control: (i) terminate the
Intercompany Operating Agreement ("IOA Agreement") and this Agreement upon six
(6) months notice to ALFC; (ii) extend the term of the IOA Agreement and this
Agreement for up to ten (10) additional years beyond December 31, 2004 upon six
(6) months notice to ALFC; or (iii) allow such agreements to continue in effect.
"Change of Control" for purposes of this section shall mean an event whereby a
person, group, or entity that is not affiliated with ALFC or Mutual acquires the
ownership of 50% or more of the voting stock of ALFC. A person, group, or entity
"affiliated" with ALFC or Mutual shall mean a person, group, or entity that
directly or indirectly through one or more intermediaries controls, is
controlled by, or is under common control with ALFC or Mutual.
6.3 CHANGE OF CONTROL OF AGI.
(a) In the event of a Change of Control (as hereinafter defined in
this section) of AGI, Mutual may, in its sole discretion, at any time after such
Change of Control: (i) terminate all three of the Pooling Agreement, IOA
Agreement, and this Agreement upon six (6) months notice to AGI; (ii) extend the
term of the Pooling Agreement, IOA Agreement, and this Agreement for up to ten
(10) additional years beyond December 31, 2004 upon six (6) months notice to
AGI; or (iii) allow such agreements to continue in effect. "Change of Control"
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for purposes of this section shall mean an event whereby a person, group, or
entity that is not affiliated with AGI or Mutual acquires the ownership of 50%
or more of the voting stock of AGI. A person, group, or entity "affiliated" with
AGI or Mutual shall mean a person, group, or entity that directly or indirectly
through one or more intermediaries controls, is controlled by, or is under
common control with AGI or Mutual.
(b) In the event of a Change of Control (as hereinafter defined in
this section) of AGI, ALFC may, in its sole discretion, at any time after such
Change of Control: (i) terminate both the IOA Agreement and this Agreement upon
six (6) months notice to AGI; (ii) extend the term of the IOA Agreement and this
Agreement for up to ten (10) additional years beyond December 31, 2004 upon six
(6) months notice to AGI; or (iii) allow such agreements to continue in effect.
"Change of Control" for purposes of this section shall mean an event whereby a
person, group, or entity that is not affiliated with AGI or Mutual acquires the
ownership of 50% or more of the voting stock of AGI. A person, group, or entity
"affiliated" with AGI or Mutual shall mean a person, group, or entity that
directly or indirectly through one or more intermediaries controls, is
controlled by, or is under common control with AGI or Mutual.
VII. DISPUTE RESOLUTION
7.1 AGI AND ITS SUBSIDIARIES. Any controversy, claim, or dispute
arising out of or relating to this Agreement, or breach thereof, among or
between AGI and Its Subsidiaries shall be resolved by AGI's Board of Directors,
the decision of which shall be binding.
7.2 MUTUAL AND ITS SUBSIDIARIES. Any controversy, claim, or dispute
arising out of or relating to this Agreement, or breach thereof, among or
between Mutual and Its Subsidiaries shall be resolved by Mutual's Board of
Directors, the decision of which shall be binding.
7.3 ALFC AND ITS SUBSIDIARIES. Any controversy, claim, or dispute
arising out of or relating to this Agreement, or breach thereof, among or
between ALFC and Its Subsidiaries shall be resolved by ALFC's Board of
Directors, the decision of which shall be binding.
7.4 ALL OTHER DISPUTES. All other disputes under this Agreement shall
be referred for resolution to the Coordinating Committee. Each of the
coordinating committees of Mutual, AGI, and ALFC (a) has the right to
participate in each and every Coordinating Committee deliberation unless it
elects to abstain therefrom and (b) has one vote which shall be cast for or
against any such decision unless it elects to abstain. Each such coordinating
committee shall be comprised of two persons, one of whom shall constitute a
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quorum for the transaction of any business. All decisions of the Coordinating
Committee must be unanimous, except for abstentions. All decisions of the
Coordinating Committee are binding on the parties hereto.
7.5 ARBITRATION. If a controversy, claim, or dispute cannot be
resolved by the Coordinating Committee pursuant to Section 7.4, then it will be
submitted to arbitration as set forth hereafter.
(a) Consent to Arbitration. Each party to this Agreement hereby
consents and agrees that any dispute between the parties hereto with respect to
the interpretation, performance, or breach of any of the terms of this Agreement
or the transactions contemplated hereby which cannot be resolved by the
Coordinating Committee shall be referred to arbitration conducted in accordance
with the rules and procedures of the American Arbitration Association ("AAA"),
upon written request of the disputing party hereto delivered to the party with
which it has a dispute. Within thirty (30) days of the delivery of such written
notice, each party involved shall nominate an AAA-licensed arbitrator (the
"Party Arbitrators"). Within thirty (30) days of their nomination, if there are
two Party Arbitrators, the Party Arbitrators shall select a third AAA-licensed
arbitrator (the "Third-Arbitrator") and shall give the parties hereto written
notice of such choice. If there are three parties to the dispute and each party
selects a Party Arbitrator, the three Party Arbitrators selected shall
constitute the Arbitrators without further selection. If there are more than
three parties to the dispute, the parties to this Agreement agree that Mutual
shall represent Mutual and Its Subsidiaries, ALFC shall represent ALFC and Its
Subsidiaries, and AGI shall represent AGI and Its Subsidiaries.
(b) Authority of Arbitrators. The arbitrators shall be empowered
to decide all issues submitted to arbitration using principles of law and equity
and, if required, by application of any customary practices in the insurance and
reinsurance industries. The arbitrators shall be relieved of all judicial
formalities and shall not be required to follow any rules of evidence except as
such rules may be imposed on arbitration proceedings conducted in accordance
with the laws of the State of Iowa, but the arbitrators shall attempt to enforce
the intents and purposes of this Agreement to the extent practicable and in
accordance with Iowa law. The decision of a majority of the arbitrators shall be
final and binding on each of the parties to the arbitration proceeding.
(c) Expenses; Location. Each party to the dispute shall bear the
expenses of its respective Party Arbitrator. If only two parties are involved in
the arbitration, the involved parties shall jointly share all other expenses of
the arbitration proceeding and the expenses of the Third Arbitrator. The
arbitration proceeding shall take place at Des Moines, Iowa unless another
location is mutually agreed upon by the parties. The arbitration proceeding
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115
shall be governed by the laws of the State of Iowa. The parties hereto hereby
agree that any information respecting any matters submitted to arbitration in
accordance with the foregoing or any aspect of the arbitration proceeding itself
shall be treated as confidential and will not be disclosed to anyone not
employed or acting on behalf of a party hereto in connection with such
arbitration or used at any time in any manner that is adverse to the interests
of either party hereto but, in any such case, such information may be disclosed
if such disclosure is made in connection with either party's prosecution or
defense of any legal proceedings or if such disclosure is required pursuant to a
subpoena or other legal order issued by any judicial or regulatory body or is
otherwise required by law.
(d) Restriction. Anything set forth herein to the contrary
notwithstanding, with respect to any issue to be determined by arbitration, each
of the parties to the arbitration proceeding shall submit in writing to the
arbitrators the party's proposed resolution of such issue. The arbitrators shall
be constrained in their decision relating to such issue to select only between
the proposed resolutions of the parties, and the arbitrators shall have no
discretion to fashion any compromise or other resolution of the issue submitted
for arbitration.
VIII. CONFIDENTIAL INFORMATION AND TRADE SECRETS
8.1 OBLIGATION TO KEEP CONFIDENTIAL.
(a) Each party to this Agreement shall keep confidential, except
as the other party or parties may otherwise consent in writing, and, except for
the other parties' benefit, not disclose or make any use of at any time and for
any purpose whatsoever, any trade secrets, confidential information, knowledge,
data, trademarks or trade names, or other information of any of the Companies to
their products, know-how, designs, customer lists, business plans, marketing
plans and strategies, pricing strategies, or other subject matter pertaining to
any business of the Companies or any of their clients, customers, consultants,
licensees, or affiliates, which the party has obtained or may obtain, or
otherwise acquire during the course of contacts, discussions, negotiation, or
agreement with any of the other parties, except as herein provided (hereafter,
collectively, "Confidential Information"). No party shall deliver, reproduce, or
in any way allow any Confidential Information of the other parties or any
documentation relating thereto, to be delivered to or used by any third parties
without specific written direction or consent of a duly authorized officer of
the other party.
(b) Upon termination of this Agreement for any reason whatsoever
each party shall promptly surrender and deliver to each other party all records,
materials, equipment, drawings, documents, data, and all Confidential
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116
Information of the other parties and shall not retain any description containing
or pertaining to any Confidential Information of the other parties, unless
otherwise consented to in writing by a duly authorized officer of the other
party.
8.2 PERMISSIVE RELEASE OF CONFIDENTIAL INFORMATION. Notwithstanding
the provisions of this section, any Confidential Information may be used in
connection with any arbitration relating to the transactions contemplated by
this Agreement and such information may be disclosed if such disclosure is made
in connection with the parties' prosecution or defense of any legal proceedings
or if such disclosure is required pursuant to a subpoena or other legal order
issued by any judicial or regulatory body or is otherwise required by law.
IX. MISCELLANEOUS
9.1 ASSIGNMENT. This Agreement, including any or all rights and
obligations hereunder, shall not be assigned by any of the parties to any third
party without the prior written consent of all of the other parties. Except as
otherwise provided in this Agreement, the obligations and rights of the parties
shall be binding upon and inure to the benefit of any assignee, transferee,
successor, or receiver of each of the parties.
9.2 WAIVER; REMEDIES. No delay or omission of any party to this
Agreement to exercise any right or power hereunder shall impair such right or
power or be a waiver of any default or an acquiescence therein; and any single
or partial exercise of any such right or power shall not preclude other or
further exercise thereof or the exercise of any other right. In addition to any
rights granted herein, the parties hereto shall have and may exercise any and
all rights and remedies now or hereafter provided by law except as may be
limited by Section 7 of this Agreement.
9.3 NOTICES. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally or if mailed by certified or registered mail (return
receipt requested) to the party at its address as set forth on the signature
page of this Agreement. Any notice given as provided in this section, if given
personally, shall be effective upon delivery, or if given by certified or
registered mail, shall be effective three days after deposit in the mail. Any
party hereto may change the address at which it is to be given notice by giving
notice to the other party as provided in this section.
9.4 GOVERNING LAW. This Agreement shall be deemed to be a contract
made under the laws of the State of Iowa and shall be construed and interpreted
under the laws of such state applicable to contracts made and to be performed
entirely within such state.
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9.5 ENFORCEABILITY. If any one or more of the covenants, agreements,
provisions, or other terms of this Agreement shall be for any reason whatsoever
determined to be invalid, then such terms shall be deemed severable from the
remaining terms of this Agreement and shall in no way affect the validity or
enforceability of the other terms of this Agreement and such invalid terms shall
be replaced by valid terms bearing the closest possible similarity in substance
so that the intentions and purposes being the basis of this Agreement could be
enforced to the greatest extent permitted by law.
9.6 SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND COVENANTS. All
covenants, agreements, representations, and warranties made in this Agreement by
any of the parties hereto, including but not limited to, the indemnification
provisions set forth herein, shall be effective on the effective date hereof and
thereafter.
9.7 COUNTERPARTS. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
9.8 HEADINGS. The headings in the sections and subsections of this
Agreement are inserted for convenience only and shall not constitute a part
hereof.
9.9 ENTIRE AGREEMENT. This Agreement, including the schedules and
addenda referred to herein and any documents executed by the parties
simultaneously herewith constitute the entire understanding and agreement of the
parties hereto and supersede all other prior agreements and understandings,
written or oral, between the parties with respect to the transactions
contemplated herein. Provided, however, the foregoing shall not operate or be
construed to prohibit proof of prior understandings and agreements between or
among the parties to the extent necessary to properly construe or interpret this
Agreement.
9.10 AMENDMENTS. Any changes to this Agreement and any further
obligations of the parties to each other must be in writing and executed by
their respective duly authorized officers.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Management Information Services Agreement to be signed by their
duly-authorized officers all as of the date and year first written above.
ALLIED Mutual Insurance Company ALLIED Group, Inc.
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2000 Des Moines, IA 50391-2000
By: /s/ Douglas L. Andersen By: /s/ Jamie H. Shaffer
---------------------------- ----------------------------
Title: President Title: President (Financial)
------------------------- -------------------------
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118
AMCO Insurance Company ALLIED General Agency Company
701 5th Avenue 701 5th Ave.
Des Moines, IA 50391-2013 Des Moines, IA 50391-2002
By: /s/ Douglas L. Andersen By: /s/ Douglas L. Andersen
---------------------------- ----------------------------
Title: President Title: President
------------------------- -------------------------
ALLIED Life Financial ALLIED Group Leasing
Corporation Corporation
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2003 Des Moines, IA 50391-2015
By: /s/ Samuel J. Wells By: /s/ Jamie H. Shaffer
---------------------------- ----------------------------
Title: President Title: President
------------------------- -------------------------
ALLIED Group Mortgage Company ALLIED Life Insurance Company
1701 48th St. 701 5th Ave.
West Des Moines, IA 50391-2009 Des Moines, IA 50391-2003
By: /s/ Jamie H. Shaffer By: /s/ Samuel J. Wells
---------------------------- ----------------------------
Title: Secretary Title: President
------------------------- -------------------------
ALLIED Group Merchant Banking ALLIED Group Insurance
Corporation Marketing Company
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2003 Des Moines, IA 50391-2010
By: /s/ Paul McGillivray By: /s/ Jamie H. Shaffer
---------------------------- ----------------------------
Title: President Title: Treasurer
------------------------- -------------------------
ALLIED Group Information ALLIED Life Brokerage Agency
Systems, Inc. 701 5th Ave.
701 5th Ave. Des Moines, IA 50391-2003
Des Moines, IA 50391-1002
By: /s/ Jamie H. Shaffer By: /s/ Samuel J. Wells
---------------------------- ----------------------------
Title: Secretary Treasurer Title: President
------------------------- -------------------------
The Freedom Group, Inc. Midwest Printing Services, Ltd.
701 5th Ave. 3820 109th St.
Des Moines, IA 50391-1002 Des Moines, IA 50391-1003
By: /s/ Jamie H. Shaffer By: /s/ Leslie D. Peltz
---------------------------- ----------------------------
Title: Secretary Treasurer Title: Treasurer
------------------------- -------------------------
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ADDENDUM A
I. ALLIED LIFE. ALLIED Life shall pay AMCO on a monthly basis fees for
services under this Agreement in accordance with the following:
(a) $37.50 per hour for Programming/Development time and
Methods/Procedures time.
(c) ALLIED Life shall also pay fees in accordance with Sections VII
through XI of this Addendum.
(d) ALLIED Life shall reimburse AMCO for the actual costs AMCO incurs
on a monthly basis for providing ALLIED Life the services provided
under Sections 3.1 ("General MIS"), 3.2 ("PC Support"), 3.7 (a)
("Printing--Forms and Reports"), and 3.8 ("Policy Assembly"). In
order to reimburse AMCO for the cost of these services, ALLIED
Life will forward $56,250 at the end of each month as an
estimation of the costs of providing the services for that month.
(e) At the end of the calendar year, AMCO will calculate its actual
cost of providing these services and compare it to the monthly
payments forwarded to AMCO for the services by ALLIED Life. If the
total actual costs exceed the total monthly payments made, ALLIED
Life will promptly pay the difference to AMCO. If the total actual
costs are less than the total monthly payments made, AMCO will
promptly refund the difference to ALLIED Life.
The aforementioned fees shall be renegotiated by ALLIED Life and AMCO
each calendar year. If ALLIED Life and AMCO are unable to agree on an
annual fee for the next calendar year by December 15th of each year,
the calculation of a reasonable annual fee for the next calendar year
shall be submitted to the Coordinating Committee for resolution.
II. AGI HUMAN RESOURCES. For the services provided by AMCO to AGI's human
resources department under Sections 3.1 ("General MIS"), 3.2 ("PC
Support"), and 3.7(a) ("Printing--Forms and Reports"), AGI shall pay to
AMCO $42.00 per hour for Programming/Development time and $40.00 per
hour for Methods/Procedures time. Each year, beginning January 1, 1997,
this hourly rate shall be recalculated based upon estimated costs for
the year in question. Such fees shall be billed and paid monthly. If
applicable, AGI shall also pay fees in accordance with Sections VI
through X of this Addendum.
III. AGIMC. AGIMC shall pay AMCO for services under this Agreement in
accordance with the following:
(a) For the services provided under Sections 3.1 ("General MIS") and
3.2 ("PC Support"), AGIMC shall pay to AMCO $42.00 per hour for
Programming/Development time and $40.00 per hour for
Methods/Procedures. Such fees shall be billed and paid monthly.
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Each year, beginning January 1, 1996, this hourly rate shall be
recalculated based upon estimated costs for the year in question.
(b) If applicable, AGIMC shall also pay fees in accordance with
Sections VII through XI of this Addendum.
IV. AGMC. AGMC shall pay to AMCO for services under this Agreement in
accordance with the following:
(a) For the services provided under Section 3.4 ("AGMC Scanline
Processing") the fee of .089 dollars ($.089) for each payment form
processed daily. In the event of any dispute as to the amount due
under the per item charge, AMCO's records shall control. AMCO will
bill AGMC monthly for the per item processing charges. Such amount
shall be immediately due and payable upon receipt by AGMC.
(b) If applicable, AGMC shall also pay fees in accordance with
Sections VI through X of this Addendum.
V. PROGRAMMING. Each of the Companies (except as may be provided elsewhere
for ALLIED Life, AGI, and AGIMC) which request that AMCO provide
Programming/Development services shall pay a rate of $42.00 per hour.
Each of the Companies (except for ALLIED Life, AGI, and AGIMC) which
request that AMCO provide Methods/Procedures services shall pay $40.00
per hour. Such fees shall be billed and paid monthly. Each year,
beginning January 1, 1997, this hourly rate shall be recalculated based
upon estimated costs for the year in question.
VI. TYPESETTING/OTHER PRINTING. The Companies which request that AMCO
provide typesetting services in accordance with Section 3.7(b)
("Printing--Typesetting/Other Printing") shall pay a rate of $22.00 per
hour. Such fees shall be billed and paid monthly. Any other printing
services shall be provided by AMCO to any of the Companies for a fee to
be negotiated between AMCO and such company in addition to the fees
specified in this Addendum A.
VII. PC MAINTENANCE. If AMCO assists in coordinating third-party vendor
maintenance for the personal computers of any of the Companies, such
Companies agree to pay upon receipt of an invoice from AMCO the
third-party vendor's actual charges as billed to AMCO.
VIII. POSTAGE/MAIL PROCESSING. For the services provided under Section 3.9,
the Companies which have offices located in Polk County, State of Iowa,
shall pay AMCO for mail processing as follows:
(a) the Companies shall reimburse AMCO for the actual cost of postage
utilized,
<PAGE>
121
(b) if AMCO performs any mail inserting services for any of the
Companies, such Companies shall pay AMCO $0.032 per item,
(c) if AMCO performs any proof of mail services for any of the
Companies, such Companies shall pay AMCO $0.057 per item,
(d) if AMCO performs any outgoing mail sorting services for any of the
Companies, such Companies shall pay AMCO $0.0225 per item,
(e) if AMCO performs incoming mail sorting services for any of the
Companies, such Companies shall pay AMCO $0.0225 per item,
(f) if AMCO performs special handling services in mail processing, it
will be billed at $0.051 per item,
(g) if AMCO performs remittance processing, it will be billed at
$0.089 per item, and,
(h) if AMCO performs a manual look up requested by one of the
Companies the fee is $0.54 per item.
The number of items and the fees shall be billed to each of the
Companies utilizing the services and paid by each of them monthly.
IX. TELEPHONE/COMMUNICATIONS. The Companies which request that AMCO provide
telephone/communications equipment under Section 3.11 ("Telephone and
Communications") shall pay to AMCO a mutually agreed upon monthly fee
for the equipment. Each of the Companies requesting long-distance
communication services (the "Long-Distance Companies") will pay a
monthly charge based upon the proportion of their actual long distance
minutes to the total actual long distance minutes used by the
Long-Distance Companies overall.
X. TAXES. AMCO shall pay any sales, use, and personal property taxes which
may be due and owing with respect to the services provided under this
Agreement. AMCO shall receive reimbursement from the appropriate
Companies for any sales or use tax paid.
<PAGE>
122
EXHIBIT 10.8
FIRST AMENDMENT TO
AMENDED AND RESTATED
MANAGEMENT INFORMATION SERVICES AGREEMENT
Effective March 1, 1996
This First Amendment ("amendment") to the Amended and Restated Management
Information Services Agreement ("Agreement") is made as of this 24th day of
February, 1997, to be effective March 1, 1996, (unless a different effective
date is indicated) by and among AMCO Insurance Company ("AMCO"), ALLIED Group
Information Systems, Inc. ("AGIS"), ALLIED Mutual Insurance Company ("Mutual"),
ALLIED Group, Inc. ("AGI"), ALLIED General Agency Company ("AGA"), ALLIED Group
Mortgage Company ("AGMC"), ALLIED Group Leasing Corporation ("AGLC"), ALLIED
Life Financial Corporation ("ALFC"), ALLIED Life Insurance Company ("ALLIED
Life"), ALLIED Life Brokerage Agency ("ALBA"), ALLIED Group Merchant Banking
Corporation ("AGMBC"), ALLIED Group Insurance Marketing Company ("AGIMC"), The
Freedom Group, Inc. ("TFG"), and Midwest Printing Services, Ltd. ("Midwest
Printing"). AGIS, AGI, AGA, AGMC, AGLC, ALFC, ALLIED Life, ALBA, AGMBC, AGIMC,
TFG, and Midwest Printing shall be hereinafter referred to collectively as the
"Companies".
WITNESSETH:
WHEREAS, AGIS, Mutual, AGI, AMCO, AGA, AGMC, AGLC, ALFC, ALLIED Life, ALBA,
AGMBC, TFG, Midwest Printing, and AGIMC entered into an Amended and Restated
Management Information Services Agreement effective March 1, 1996 on January 24,
1997; and
WHEREAS, Section I of Addendum A to the Agreement was not accurate in
stating certain fees for ALLIED Life;
WHEREAS, Section IX of the Agreement allows amendment of the Agreement in
writing and executed by the parties;
NOW, THEREFORE, in consideration of the foregoing premises, and for and in
consideration of the mutual covenants and agreements contained herein, the
parties agree as follows:
1. The Agreement is hereby amended by deleting Section I(a) of the Addendum and
inserting in place thereof the following:
(a) $37.50 per hour for Programming/Development time and Methods/Procedures
time from March 1, 1996 through May 13, 1996 when the programmers
became ALLIED Life employees and no charge thereafter.
<PAGE>
123
2. The Agreement is hereby amended by deleting Section I(d) of the Addendum and
inserting in place thereof the following:
(d) ALLIED Life shall reimburse AMCO for the actual costs AMCO incurs on a
monthly basis for providing ALLIED Life the services provided under
Sections 3.1 ("General MIS"), 3.2 ("PC Support"), 3.7 (a)
("Printing--Forms and Reports"), and 3.8 ("Policy Assembly"). In order
to reimburse AMCO for the cost of these services, ALLIED Life will
forward $50,000.00 at the end of each month as an estimation of the
costs of providing the services for that month.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to the Amended and Restated Management Information Services Agreement to be
signed by their duly-authorized officers all as of the date and year first
written above.
ALLIED Mutual Insurance Company ALLIED Group, Inc.
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2000 Des Moines, IA 50391-2000
By: /s/ Douglas L. Andersen By: /s/ Jamie H. Shaffer
----------------------------- ----------------------------
Title: President Title: President (Financial)
-------------------------- -------------------------
AMCO Insurance Company ALLIED General Agency Company
701 5th Avenue 701 5th Ave.
Des Moines, IA 50391-2013 Des Moines, IA 50391-2002
By: /s/ Douglas L. Andersen By: /s/ Jamie H. Shaffer
----------------------------- ----------------------------
Title: President Title: Treasurer
-------------------------- -------------------------
ALLIED Life Financial ALLIED Group Leasing
Corporation Corporation
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2003 Des Moines, IA 50391-2015
By: /s/ Samuel J. Wells By: /s/ Jamie H. Shaffer
----------------------------- ----------------------------
Title: President Title: President
-------------------------- -------------------------
<PAGE>
124
ALLIED Group Mortgage Company ALLIED Life Insurance Company
1701 48th St. 701 5th Ave.
West Des Moines, IA 50391-2009 Des Moines, IA 50391-2003
By: /s/ Jamie H. Shaffer By: /s/ Samuel J. Wells
----------------------------- ----------------------------
Title: Secretary Title: President
-------------------------- -------------------------
ALLIED Group Merchant Banking ALLIED Group Insurance
Corporation Marketing Company
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2003 Des Moines, IA 50391-2010
By: /s/ Paul McGillivray By: /s/ Jamie H. Shaffer
----------------------------- ----------------------------
Title: President Title: Treasurer
-------------------------- -------------------------
ALLIED Group Information ALLIED Life Brokerage Agency
Systems, Inc. 701 5th Ave.
701 5th Ave. Des Moines, IA 50391-2003
Des Moines, IA 50391-1002
By: /s/ Jamie H. Shaffer By: /s/ Samuel J. Wells
----------------------------- ----------------------------
Title: Secretary Treasurer Title: President
-------------------------- -------------------------
The Freedom Group, Inc. Midwest Printing Services, Ltd.
701 5th Ave. 3820 109th St.
Des Moines, IA 50391-1002 Des Moines, IA 50391-1003
By: /s/ Jamie H. Shaffer By: /s/ Leslie D. Peltz
----------------------------- ----------------------------
Title: Secretary Treasurer Title: Treasurer
-------------------------- -------------------------
<PAGE>
125
EXHIBIT 10.54
AMENDMENT TO
CONSULTING AGREEMENT
THIS AMENDMENT is made this 18th day of December, 1996, by and between John
E. Evans ("Evans") and ALLIED Group, Inc. ("AGI"), ALLIED Mutual Insurance
Company ("Mutual"), and ALLIED Life Financial Corporation ("ALFC"). AGI, Mutual,
and ALFC shall be known collectively as "ALLIED".
WHEREAS, on December 14, 1994, ALLIED and Evans entered into a Consulting
Agreement setting forth the services which Evans was to render to ALLIED
following his retirement;
WHEREAS, the parties desire to amend the Consulting Agreement as set forth
herein;
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants set forth below and other valuable consideration, the receipt of which
is hereby acknowledged, the parties agree as follows:
1. Section IV of the Consulting Agreement is amended to add new subsection
(c) as follows:
(c) Payment of expenses associated with income tax preparation and other tax
services, provided that ALLIED may review Evans' tax returns at any time.
2. Subsection (a) of Section V of the Consulting Agreement is amended to
read as follows:
(a) the mutual agreement of the parties;
3. The last sentence of Section V of the Consulting Agreement which begins
"If this Agreement has..." is deleted in its entirety.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year above first written.
ALLIED Mutual Insurance Company
/s/ John E. Evans By:/s/ Douglas L. Andersen
- -------------------------------- ------------------------------
John E. Evans Its: President
-----------------------------
ALLIED Group, Inc. ALLIED Life Financial Corporation
By:/s/ Jamie H. Shaffer By:/s/ Samuel J. Wells
----------------------------- ------------------------------
Its: President (Financial) Its: President
---------------------------- -----------------------------
<PAGE>
126
EXHIBIT 10.55
ALLIED GROUP
SHORT TERM MANAGEMENT
INCENTIVE PLAN
1. PURPOSE
-------
This ALLIED Group Short Term Management Incentive Plan (the "Plan") is
effective January 1, 1997.
The purpose of this Plan is to encourage outstanding performance by certain
key employees of ALLIED Group, Inc. ("AGI") in the attainment of annual
financial and operating goals of AGI, ALLIED Mutual Insurance Company, and all
of their subsidiaries except for ALLIED Life Financial Corporation and its
subsidiaries (collectively, the "ALLIED Group").
2. DEFINITIONS
-----------
The capitalized terms used throughout the Plan have the following meaning:
(a) "AGIMC" means ALLIED Group Insurance Marketing Company.
(b) "AGIS" means ALLIED Group Information Systems, Inc.
(c) "AGMC" means ALLIED Group Mortgage Company.
(d) "ALLIED Group Net Income" means net income after income taxes
(including net realized investment gains/losses) for the consolidated group of
companies comprising the ALLIED Group (excluding crop-hail business) computed in
conformity with generally accepted accounting principles ("GAAP").
(e) "Base Salary" is the annualized weekly base pay of the Participant in
effect as of December 31 of the Plan year.
(f) "Committee" shall mean the Compensation Committee of the Board of
Directors of AGI in consultation with the Joint Compensation Committee of the
Board of AGI and ALLIED Mutual Insurance Company.
(g) "Consolidated TFG" shall mean The Freedom Group, Inc. and ALLIED Group
Information Systems, Inc.
(h) "Discretionary Award" is the increment above the Guaranteed Award which
is awarded to a Participant based on the discretion of the Committee.
(i) "DPW" is direct premiums written, net of return premiums, as reported
in the 1997 Planning Package for a particular regional office or company. For
ALLIED Group, it includes all property-casualty companies but excludes (i)
Western Heritage, (ii) crop-hail business, and (iii) flood program. For AGIMC,
<PAGE>
127
DPW shall exclude any premiums generated from business that is purchased by
AGIMC from another entity, unless the Committee determines otherwise.
(j) "Eligible Award Percentage" is that percentage amount set forth on
Exhibit B which shows the direct numeric relationship associated with the
attainment of Threshold, Goal, or Maximum performance, and it is used in
determining potential Eligible Tier Awards. The Eligible Award Percentage is
calculated as follows:
Example Calculation for Eligible Award Percentage for
-----------------------------------------------------
Profit for a Participant from Des Moines Regional Office
--------------------------------------------------------
(DMRO) in Tier IV
-----------------
Step 1: Compare actual profit results for the fiscal year (if the actual
Profit results for the fiscal year do not meet the Threshold, then the
Eligible Award Percentage is 0, and no further calculations are necessary)
to the highest goal specified in Exhibit A that it exceeds (in this
example, assume the actual profit results are $26,750,000).
$1,750,000 = $26,750,000 - $25,000,000
(Threshold)
Step 2: Interpolate between the Threshold and Goal (or between the Goal and
Maximum as the case may be) to determine what percentage the Participant is
above the Threshold or Goal. There is no need to interpolate if the Maximum
has been exceeded. In this example, $1,750,000 is 50% between Threshold
($25,000,000) and Goal ($28,500,000).
50% = $1,750,000 / ($28,500,000 - $25,000,000)
Step 3: Take the eligible award percentage for Profit from Exhibit B for
the Participant's particular tier category and for the goal level that has
been attained (e.g., Threshold or Goal) and interpolate based on 50%
attainment. The eligible award percentages for Profit in Tier IV on Exhibit
B are 12% for Threshold and 24% for Goal.
18% = ((24% - 12%) x 50%) + 12%
In this example, 18% is the Eligible Award Percentage for Profit for a
Participant from DMRO in Tier IV.
The same process is used to compute the Eligible Award Percentage for
Growth.
(k) "Eligible Individual Award" is the award potential for a Participant
based on Profit and Growth results. Eligible Individual Award is the sum of (i)
the Eligible Award Percentage for Profit multiplied by the Base Salary for the
Participant and (ii) the Eligible Award Percentage for Growth multiplied by the
Base Salary for the Participant. The Eligible Individual Award is the base used
to determine the Guaranteed Award and the Discretionary Award.
<PAGE>
128
(l) "Eligible Tier Award" is the award potential for a tier based on Profit
and Growth results. Eligible Tier Award is the sum of all Eligible Individual
Awards for all of the Participants in a particular tier.
(m) "Goal" is the expected level of performance used to establish targeted
awards as approved by the Committee.
(n) "Growth" is a performance indicator and is the increase in revenue from
the prior year stated in terms of a percentage increase or dollar target.
Generally, revenue is expressed in DPW, except as follows:
Consolidated TFG - total revenues for TFG and AGIS
TFG - total revenues for TFG
AGIS - total revenues for AGIS
Midwest Printing Services - percentage increase in total revenues
(o) "Guaranteed Award" is guaranteed to Participants and is 75% of their
Eligible Individual Award.
(p) "Maximum" is the level of performance at which the maximum eligible
award could be made.
(q) "Midwest Printing Services" is Midwest Printing Services, Ltd. but
shall not include the revenues or expenses from the operations acquired in May
1995 from Monaco Computer Services, Inc.
(r) "Operating Profit" is calculated on a GAAP basis, includes net realized
investment gains/losses, and is after income taxes.
(s) "Participant" is a key employee of AGI recommended by the President(s)
of AGI and approved by the Committee to participate in this Plan.
(t) "Persistency" for AGIMC is the year-end persistency percentage as shown
on the ALLIED Group AGIMC Production Report B, which shall include any business
that is purchased by AGIMC from another entity.
(u) "Profit" is a performance indicator and shall be defined based on the
particular area for which a Participant provides services:
Regional Offices and Bonds - "Regional Office Operating Profit"
AGIMC - "Persistency"
AGI subsidiaries - "Operating Profit"
Staff areas/all other areas - "ALLIED Group Net Income"
Consolidated TFG - net income after tax including subsidiaries
TFG - net income after tax excluding subsidiaries
AGIS - net income after tax
<PAGE>
129
(v) "Regional Office Operating Profit" is the Regional Office Operating
Statement GAAP net income.
(w) "TFG" means The Freedom Group, Inc.
(x) "Threshold" is the minimum level of performance that will warrant an
award.
(y) "WHIC" means Western Heritage Insurance Company.
3. PARTICIPATION AND TIERS
-----------------------
Participation in the Plan is tiered by responsibility level and the
short-term impact of the management position.
Responsibility Levels
---------------------
Tier I President(s)
Regional Vice Presidents
Subsidiary Presidents
Profit Center Officers
Tier II Regional Office Managers and Subsidiary Officers
Tier III Primary Corporate Staff Vice Presidents
Tier IV Subsidiary Managers
Corporate Staff Vice Presidents and Officers
Tier V Subsidiary Managers
Tier VI Subsidiary Managers
Regional Office Managers
A participation list specifying the Participants in each tier shall be
approved by the Committee prior to each fiscal year. The Committee may amend
such list from time to time to add or delete Participants.
Each tier level of participation will have varying award opportunity at the
Threshold, Goal, and Maximum performance levels for each of the performance
indicators.
4. PERFORMANCE INDICATORS
----------------------
Two performance indicators, Profit and Growth, will be used to measure the
success of ALLIED Group and the level of bonus to be paid under this Plan. The
Threshold for Profit must be attained before any award will be made based on
Growth. Notwithstanding the foregoing, for AGIMC, the Threshold for Profit need
not be attained for there to be an award based on Growth.
Profit is the only indicator used to measure performance for AGMC, WHIC,
and ALLIED General Agency, and the total bonus amount is paid based upon results
of Profit.
5. AWARDS
------
(a) A Participant may receive an Eligible Individual Award under the Plan.
No award will be made for performance that does not meet the Threshold goal for
Profit. Upon meeting the Threshold goal for Profit, a Participant will receive a
<PAGE>
130
Guaranteed Award. Depending on the determination of the Committee, a Participant
may or may not receive a Discretionary Award. A Participant's total award is the
sum of the Guaranteed Award and the Discretionary Award. The Discretionary Award
combined with the Guaranteed Award cannot exceed 150% of the Participant's
Eligible Individual Award.
(b) In addition to the requirements in the foregoing paragraph, a
pre-Threshold requirement will be applicable to Staff employees. "Staff
employees" are defined to include those employees with overall corporate
responsibilities, each of whom shall be identified as "Staff" on the
participation list approved by the Committee. Staff employees must attain a 14%
return on average equity based on AGI financial statements before they are
eligible to meet the Threshold goal. "Return on equity" is defined as the
"Return on Average Book Value per Fully-diluted Share" as calculated for and as
disclosed in the ALLIED Group, Inc. Annual Report to Stockholders.
(c) Total awards made to all of the Participants in a particular tier
shall not exceed 100% of the Eligible Tier Award, but the total awards for a
particular tier may be less than the Eligible Tier Award. Notwithstanding the
foregoing, if the Committee determines that a Participant has shown
extraordinary performance in a calendar year, the Committee may exceed the
Eligible Tier Award in order to increase the Discretionary Award for the
Participant showing such extraordinary performance.
(d) In the event a Participant does not meet the Threshold goal for
Profit, the Committee may, in unusual or extraordinary circumstances, award the
Participant a special award under the Plan. This paragraph may only be invoked
by the Committee in rare and extreme situations.
6. PRORATED AWARDS
---------------
Employees who become eligible for participation in this Plan after the
beginning of the Plan year may receive a prorated award based on the time the
employee was a Participant and based on active time employed during the Plan
year. Prorated awards will be calculated by determining the number of calendar
weeks that a Participant has been eligible for a tier and dividing that number
by the calendar weeks in that Plan year.
7. DEATH, DISABILITY, OR RETIREMENT
--------------------------------
In the event that a Participant dies, becomes disabled, or retires due to
age in accordance with AGI policy, a prorated award will be made based on active
time employed as a Participant during the Plan year.
8. PLAN YEAR
---------
The Plan year will be AGI's fiscal year.
<PAGE>
131
9. TRANSFERABILITY
---------------
A Participant may not sell, pledge, donate, or otherwise assign any
interest in this Plan.
10. EMPLOYMENT
----------
Nothing in this Plan confers upon a Participant any right to continued
employment or interferes with or limits in any way ALLIED Group's right to
terminate the employment of a Participant at any time.
11. TERMINATION OF EMPLOYMENT
-------------------------
If a Participant terminates employment or is terminated by ALLIED Group for
any reason other than death, disability, or retirement due to age in accordance
with AGI policy, and if such termination date is prior to the payment date of an
award under this Plan, any right to an award under this Plan is forfeited.
12. PLAN AMENDMENT OR TERMINATION
-----------------------------
The Committee may amend or terminate the Plan at any time. Participants
will be notified of such action as soon as it is practical to do so.
In the event of any change in the corporate structure of AGI affecting the
goals set forth in Exhibit A or the eligible award percentages set forth in
Exhibit B, and where such change in corporate structure would adversely affect a
Participant, the Committee may adjust or amend the Plan so as not to
disadvantage a Participant. In the event that a change in accounting rules or
procedures would affect the goals set forth in Exhibit A or the eligible award
percentages set forth in Exhibit B, and where such change in accounting rules or
procedures would adversely affect or create a windfall for a Participant, the
Committee may adjust or amend the Plan.
13. ADMINISTRATION
--------------
All matters pertaining to the administration of this Plan will be the
responsibility of the Committee, and any decisions of the Committee shall be
conclusive and binding. This includes all matters of interpretation, areas not
specified in the Plan, and any other issues that may affect the Plan.
14. GOVERNING LAW
-------------
The Plan will be administered, enforced, construed, and interpreted in
accordance with the laws of the State of Iowa.
<PAGE>
132
EXHIBIT A GOALS
<TABLE>
<CAPTION>
Threshold Goal Maximum
--------- ---- -------
PROFIT
- ------
<S> <C> <C> <C>
Regional Offices:
DMRO $25,000,000 $28,500,000 $32,000,000
LRO $11,000,000 $12,500,000 $14,000,000
RMRO $6,000,000 $7,000,000 $8,000,000
PCRO $16,500,000 $19,000,000 $21,500,000
Bonds $675,000 $700,000 $725,000
Staff (1) $61,000,000 $70,500,000 $80,000,000
AGMC $2,400,000 $2,700,000 $3,000,000
WHIC $6,000,000 $7,000,000 $8,000,000
ALLIED General Agency $25,000 $30,000 $35,000
TFG (2) $800,000 $920,000 $1,040,000
AGIS (2) $400,000 $475,000 $550,000
Consolidated TFG (2) $1,200,000 $1,395,000 $1,590,000
Midwest Printing Services $275,000 $350,000 $425,000
AGIMC 87.5% 89% 90.5%
GROWTH
- ------
Regional Offices, Bonds, AGIS,
and Staff in DPW 10% 12.5% 15%
AGIMC DPW 18% 22% 26%
Midwest Printing Services 10% 14% 18%
TFG (2) $10,000,000 $11,000,000 12,000,000
AGIS (2) $11,000,000 $12,500,000 $14,000,000
Consolidated TFG (2) $21,000,000 $23,500,000 $26,000,000
- --------------------
(1) A pre-Threshold requirement will be applicable to Staff employees. Staff
employees must attain a 14% return on equity based on ALLIED Group, Inc.
financial statements before they are eligible to meet the Threshold goal.
(2) In the event that either TFG or AGIS receives a capital contribution in
the Plan year, the Threshold, Goal, and Maximum shall each be adjusted
upwards by the addition of the dollar amount derived from the following
formula:
Dollar Amount of x 14% x Remaining / Total
Number
Capital Contribution Days in of Days
in
Plan Year Plan
Year
</TABLE>
<PAGE>
133
EXHIBIT B
ELIGIBLE AWARD PERCENTAGES
<TABLE>
<CAPTION>
Threshold Goal Maximum Weight
--------- ---- ------- ------
<S> <C> <C> <C> <C>
Tier I:
Profit 19% 38% 56% 75%
Growth 6% 12% 19% 25%
Total 25% 50% 75%
Tier II: (1)
Profit 15% 30% 45% 75%
Growth 5% 10% 15% 25%
Total 20% 40% 60%
Tier III:
Profit 13% 27% 40% 75%
Growth 5% 9% 14% 25%
Total 18% 36% 54%
Tier IV: (1,2)
Profit 12% 24% 36% 75%
Growth 4% 8% 12% 25%
Total 16% 32% 48%
Tier V: (2)
Profit 9% 18% 27% 75%
Growth 3% 6% 9% 25%
Total 12% 24% 36%
Tier VI:
Profit 6% 12% 18% 75%
Growth 2% 4% 6% 25%
Total 8% 16% 24%
- -------------------
(1) AGIMC award percentage weighting = 25% Persistency, 75% Growth.
(2) TFG Financial and Insurance Divisions weighted 50% Profit and 50% Growth
(Revenue)
</TABLE>
<PAGE>
134
EXHIBIT 10.56
AMENDMENT DATED DECEMBER 16, 1996
ALLIED GROUP, INC. LONG-TERM MANAGEMENT INCENTIVE PLAN
The ALLIED Group, Inc. Long-Term Management Incentive Plan (the "Plan") was
amended by the Executive Committee of the Board of Directors of ALLIED Group,
Inc. (the "Company") on December 16, 1996, to reflect the changes set forth
below. Capitalized terms used herein shall have the meaning as assigned thereto
in the Plan.
1. Definition of Window Period. The definition of "Window Period" as set
forth in Article 2, subsection "ad", is deleted in its entirety.
2. Committee. The references to Rule 16b-3(c)(2) in the second paragraph of
Section 3.1 are amended to read "Rule 16b-3".
3. Six-Month Holding Period. The second paragraph of Section 6.7 of the
Plan is amended by the deletion of the parenthetical "(provided that the Shares
which are tendered must have been held by the Participant for at least six (6)
months prior to their tender to satisfy the Option Price)".
4. Rule 16b-3 Requirements. Section 7.9 of the Plan is deleted in its
entirety and shall remain reserved for future use.
5. Amendment and Shareholder Approval. Section 11.1 of the Plan is amended
to read in its entirety as follows:
The Board may at any time and from time to time, alter, amend, suspend
or terminate the Plan in whole or in part; provided, that no amendment
which requires shareholder approval in order for the Plan to continue to
satisfy the requirements of Section 422 of the Code, shall be effective
unless such amendment shall be approved by the requisite vote of
shareholders of the Company entitled to vote thereon.
6. Share Withholding. Section 12.2 of the Plan is amended to read in its
entirety as follows:
With respect to withholding required upon the exercise of Options or
SARs, upon the lapse of restrictions on Restricted Stock, or upon any
other taxable event hereunder, Participants may elect to satisfy the
withholding requirement, in whole or in part, by having the Company
withhold Shares having a Fair Market Value on the date of the tax is to
be determined equal to the minimum statutory total tax which could be
imposed on the transaction. All elections shall be irrevocable, made in
writing, and signed by the Participant.
7. Requirements of Law. The second paragraph of Section 15.3 of the Plan is
deleted in its entirety.
8. Securities Law Compliance. The first sentence of Section 15.4 of the
Plan is amended to read in its entirety as follows:
With respect to Insiders, transactions under this Plan are intended to
comply with the applicable conditions of Rule 16b-3 or its successors
under the 1934 Act.
<PAGE>
135
EXHIBIT 10.57
AMENDMENT DATED FEBRUARY 11, 1997
ALLIED GROUP, INC. OUTSIDE DIRECTOR STOCK PURCHASE PLAN
The ALLIED Group, Inc. Outside Director Stock Purchase Plan (the
"Plan") was amended by the Executive Committee of the Board of Directors of
ALLIED Group, Inc. on January 30, 1997, to reflect the change set forth below.
Capitalized terms used herein shall have the meaning as assigned thereto in the
Plan.
CHANGE FROM NASDAQ TO NEW YORK STOCK EXCHANGE. Section 2 of the Plan is
amended by the replacement of the definition of "Fair Market Value" with the
following:
"Fair Market Value" shall be the average of the high and low prices for
a share of Common Stock as reported on the New York Stock Exchange
Composite Tape, or if no Common Stock was traded on such date, then the
last day traded immediately prior to the relevant date.
<PAGE>
136
EXHIBIT 10.58
AMENDMENT DATED FEBRUARY 11, 1997
ALLIED GROUP, INC. NONQUALIFIED STOCK OPTION PLAN
ALLIED Group, Inc. Nonqualified Stock Option Plan (the "Plan") was
amended by the Executive Committee of the Board of Directors of ALLIED Group,
Inc. on January 30, 1997, to reflect the change set forth below. Capitalized
terms used herein shall have the meaning as assigned thereto in the Plan.
CHANGE FROM NASDAQ TO NEW YORK STOCK EXCHANGE. Section 2 of the Plan is
amended by the replacement of the definition of "Fair Market Value" with the
following:
"Fair Market Value" shall be the average of the high and low prices for
a share of Common Stock as reported on the New York Stock Exchange
Composite Tape, or if no Common Stock was traded on such date, then the
last day traded immediately prior to the relevant date.
<PAGE>
137
EXHIBIT 10.59
AMENDMENT DATED FEBRUARY 11, 1997
ALLIED GROUP, INC. RESTATED AND AMENDED STOCK OPTION PLAN
The ALLIED Group, Inc. Restated and Amended Stock Option Plan (the
"Plan") was amended by the Executive Committee of the Board of Directors of
ALLIED Group, Inc. on January 30, 1997, to reflect the change set forth below.
Capitalized terms used herein shall have the meaning as assigned thereto in the
Plan.
CHANGE FROM NASDAQ TO NEW YORK STOCK EXCHANGE. Section 2 of the Plan is
amended by the replacement of the definition of "Fair Market Value" with the
following:
"Fair Market Value" shall be the average of the high and low prices for
a share of Common Stock as reported on the New York Stock Exchange
Composite Tape, or if no Common Stock was traded on such date, then the
last day traded immediately prior to the relevant date.
<PAGE>
138
EXHIBIT 10.60
AMENDMENT DATED FEBRUARY 11, 1997
ALLIED GROUP, INC. LONG-TERM MANAGEMENT INCENTIVE PLAN
The ALLIED Group, Inc. Long-Term Management Incentive Plan (the "Plan")
was amended by the Executive Committee of the Board of Directors of ALLIED
Group, Inc. on January 30, 1997, to reflect the change set forth below.
Capitalized terms used herein shall have the meaning as assigned thereto in the
Plan.
CHANGE FROM NASDAQ TO NEW YORK STOCK EXCHANGE. Article 2, paragraph (n)
of the Plan is amended by the replacement of the definition of "Fair Market
Value" with the following:
(n) "Fair Market Value" shall be the average of the high and low
prices for a share of Common Stock as reported on the New York
Stock Exchange Composite Tape, or if no Common Stock was traded
on such date, then the last day traded immediately prior to the
relevant date.
<PAGE>
139
Exhibit 11
ALLIED Group, Inc. and Subsidiaries
Computation of Per Share Earnings
For the years ended December 31, 1996, 1995, 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
PRIMARY
Net income $ 51,084,213 $ 52,376,829 $ 47,624,996
Preferred stock dividends (4,110,602) (7,217,294) (7,305,585)
----------------- ----------------- -----------------
Adjusted net income $ 46,973,611 $ 45,159,535 $ 40,319,411
================= ================= =================
Earnings per share $ 2.42 $ 3.27 $ 2.98
================= ================= =================
Weighted average shares outstanding 19,408,096 13,806,482 13,512,746
================= ================= =================
FULLY DILUTED
Net income $ 51,084,213 $ 52,376,829 $ 47,624,996
Preferred stock dividends (3,515,118) (3,515,118) (3,515,118)
Additional net ESOP expenses-
assuming conversion of ESOP
Series preferred stock --- (168,545) (303,129)
----------------- ----------------- -----------------
Adjusted net income $ 47,569,095 $ 48,693,166 $ 43,806,749
================= ================= =================
Earnings per share $ 2.31 $ 2.35 $ 2.12
================= ================= =================
Weighted average shares outstanding 20,633,175 20,751,736 20,621,597
================= ================= =================
The dilutive effect of ALLIED's common stock equivalents is less than 3% and have not entered into the earnings
per share computations.
</TABLE>
<PAGE>
140
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
State of
Name of subsidiary incorporation
- --------------------------------------------------------- --------------
I. AMCO Insurance Company Iowa
A. Western Heritage Insurance Company Arizona
B. ALLIED General Agency Company Iowa
II. ALLIED Property and Casualty Insurance Company Iowa
III. Depositors Insurance Company Iowa
IV. ALLIED Group Mortgage Company Iowa
V. The Freedom Group, Inc. Iowa
A. ALLIED Group Information Systems, Inc. Iowa
VII. Midwest Printing Services, Ltd. Iowa
<PAGE>
141
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
ALLIED Group, Inc.
We consent to incorporation by reference in Registration Statement Nos.
33-48235, 33-6643, 33-6644, 33-48206, 33-24543, 33-28907, 33-48234, 33-76876,
and 33-65037 on Form S-8 and Registration Statement Nos. 33-48233, 33-61090, and
333-19163 on Form S-3 of ALLIED Group, Inc. of our reports dated February 3,
1997, relating to the accompanying consolidated balance sheets of ALLIED Group,
Inc. and subsidiaries as of December 31, 1996 and 1995, and related consolidated
statements of earnings, stockholders' equity, and cash flows and related
schedules for each of the years in the three-year period ended December 31,
1996, which appears in the December 31, 1996 annual report on Form 10-K of
ALLIED Group, Inc.
KPMG Peat Marwick LLP
Des Moines, Iowa
March 14, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
GROUP, INC.'S DECEMBER 31, 1996 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY
BY SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000774624
<NAME> ALLIED GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-31-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 792,268
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 20,384
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 819,645
<CASH> 1,067
<RECOVER-REINSURE> 18,183
<DEFERRED-ACQUISITION> 46,671
<TOTAL-ASSETS> 1,077,659
<POLICY-LOSSES> 362,191
<UNEARNED-PREMIUMS> 220,596
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 34,094
0
37,812
<COMMON> 20,383
<OTHER-SE> 312,396
<TOTAL-LIABILITY-AND-EQUITY> 1,077,659
493,525
<INVESTMENT-INCOME> 49,222
<INVESTMENT-GAINS> 49
<OTHER-INCOME> 53,558
<BENEFITS> 352,995
<UNDERWRITING-AMORTIZATION> 108,315
<UNDERWRITING-OTHER> 20,438
<INCOME-PRETAX> 71,311
<INCOME-TAX> 20,227
<INCOME-CONTINUING> 51,084
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,084
<EPS-PRIMARY> 2.420
<EPS-DILUTED> 2.310
<RESERVE-OPEN> 324,939
<PROVISION-CURRENT> 353,675
<PROVISION-PRIOR> (680)
<PAYMENTS-CURRENT> 194,735
<PAYMENTS-PRIOR> 136,536
<RESERVE-CLOSE> 346,663
<CUMULATIVE-DEFICIENCY> 5,070
</TABLE>
