UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission File Number 0-14243
ALLIED Group, Inc.
(Exact name of registrant as specified in its charter)
Iowa
(State or other jurisdiction of incorporation or organization)
42-0958655
(I.R.S. Employer Identification No.)
701 Fifth Avenue, Des Moines, Iowa
(Address of principal executive offices)
50391-2000
(Zip Code)
515-280-4211
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 1997:
20,310,565 shares of Common Stock.
<PAGE>
2
PART I
Item 1. Financial Statements
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------- -------------
(in thousands)
<S> <C> <C>
Assets
Investments
Fixed maturities at fair value (amortized cost
$779,586 in 1997 and $775,166 in 1996) $ 795,074 $ 792,268
Equity securities at fair value
(cost $42,056 in 1997 and $17,880 in 1996) 48,548 20,384
Short-term investments at cost (note 2) 7,484 6,993
-------------- -------------
Total investments 851,106 819,645
Cash 1,577 1,067
Accrued investment income 11,378 11,563
Accounts receivable 98,511 84,706
Current income taxes recoverable 3,503 2,878
Reinsurance receivables for losses
and loss adjusting expenses 24,073 18,183
Mortgage loans held for sale (note 3) 21,071 12,054
Deferred policy acquisition costs 49,244 46,671
Prepaid reinsurance premiums 8,642 7,838
Mortgage servicing rights 33,949 33,094
Other assets 37,450 39,960
-------------- -------------
Total assets $ 1,140,504 $ 1,077,659
============== =============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
3
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------- -------------
(in thousands)
<S> <C> <C>
Liabilities
Losses and loss adjusting expenses $ 376,444 $ 362,191
Unearned premiums 233,312 220,596
Indebtedness to affiliates --- 2,130
Notes payable to nonaffiliates (note 3) 47,294 31,744
Notes payable to affiliates (note 2) 3,650 2,350
Guarantee of ESOP obligations 24,180 24,370
Deferred income taxes 1,125 2,244
Other liabilities 62,508 61,443
-------------- -------------
Total liabilities 748,513 707,068
-------------- -------------
Stockholders' equity
Preferred stock, no par value, issuable in series,
authorized 7,500 shares
6-3/4% Series, 1,827 shares issued and outstanding 37,812 37,812
Common stock, no par value, $1 stated value, authorized 80,000 shares, issued
and outstanding 20,299 shares in
1997 and 20,383 shares in 1996 (note 4) 20,299 20,383
Additional paid-in capital 121,364 126,078
Retained earnings 218,673 195,276
Unrealized appreciation of investments (net of deferred
income tax expense of $7,774 in 1997 and $6,907 in 1996) 14,206 12,699
Unearned compensation related to ESOP (20,363) (21,657)
-------------- -------------
Total stockholders' equity 391,991 370,591
-------------- -------------
Total liabilities and stockholders' equity $ 1,140,504 $ 1,077,659
============== =============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
4
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues
Earned premiums $ 135,876 $ 121,114 $ 267,743 $ 239,984
Investment income 12,874 12,044 25,526 24,163
Realized investment gains 7 31 0 39
Other income (note 2) 14,950 13,396 29,182 25,734
------------ ------------ ------------ ------------
163,707 146,585 322,451 289,920
------------ ------------ ------------ ------------
Losses and expenses
Losses and loss adjusting expenses 94,798 95,056 182,689 176,038
Amortization of deferred
policy acquisition costs 29,769 26,663 58,707 52,825
Other underwriting expenses 4,364 3,653 9,882 9,867
Other expenses 12,522 10,070 25,948 20,096
Interest expense 369 602 763 769
141,822 136,044 277,989 259,595
------------ ------------ ------------ ------------
Income before income taxes
and minority interest 21,885 10,541 44,462 30,325
------------ ------------ ------------ ------------
Income taxes
Current 6,994 2,917 14,609 7,906
Deferred (890) 76 (1,971) 923
------------ ------------ ------------ ------------
6,104 2,993 12,638 8,829
------------ ------------ ------------ ------------
Income before minority interest 15,781 7,548 31,824 21,496
Minority interest in net income
of consolidated subsidiary 125 --- 227 ---
------------ ------------ ------------ ------------
Net income $ 15,656 $ 7,548 $ 31,597 $ 21,496
============ ============ ============ ============
Net income applicable
to common stock $ 14,777 $ 6,669 $ 29,840 $ 19,143
============ ============ ============ ============
Earnings per share
Primary $ .73 $ .32 $ 1.47 $ 1.04
============ ============ ============ ============
Fully diluted $ .73 $ .32 $ 1.47 $ .94
============ ============ ============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
5
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 31,597 $ 21,496
Adjustments to reconcile net income to net cash
provided by operating activities
Realized investment gains 0 (39)
Depreciation and amortization 4,829 5,150
Indebtedness with affiliates (3,884) 1,095
Accounts receivable, net (19,695) (8,799)
Accrued investment income 185 (199)
Deferred policy acquisition costs (2,573) (2,477)
Mortgage loans held for sale, net (27) (1,924)
Other assets 2,542 (4,024)
Losses and loss adjusting expenses 14,253 8,290
Unearned premiums, net 11,912 10,951
Cost of ESOP shares allocated 1,294 1,131
Current income taxes (627) (5,229)
Deferred income taxes (1,971) 923
Other, net 1,510 2,877
------------ ------------
Net cash provided by operating activities 39,345 29,222
------------ ------------
Cash flows from investing activities
Purchase of fixed maturities (62,579) (97,278)
Purchase of equity securities (24,353) (5,304)
Purchase of equipment (4,241) (5,998)
Sale of fixed maturities 18,660 16,829
Maturities, calls, and principal reductions of fixed maturities 38,858 63,687
Sale of equity securities 185 520
Short-term investments, net (491) 2,419
Sale of equipment 278 78
------------ ------------
Net cash used in investing activities (33,683) (25,047)
------------ ------------
Cash flows from financing activities
Notes payable to nonaffiliates, net 6,560 7,400
Notes payable to affiliates, net 1,300 1,950
Issuance of common stock 3,648 1,156
Repurchase of common stock (7,354) (6,379)
Minority interest in additional paid-in capital (1,092) ---
Dividends paid to stockholders, net of income tax benefit (8,214) (7,918)
------------ ------------
Net cash used in financing activities (5,152) (3,791)
------------ ------------
Net increase in cash 510 384
Cash at beginning of year 1,067 1,465
------------ ------------
Cash at end of quarter $ 1,577 $ 1,849
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
6
ALLIED Group, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The accompanying interim consolidated financial statements include the accounts
of ALLIED Group, Inc. (the Company) and its subsidiaries. The interim
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP) and include all adjustments
which are, in the opinion of management, necessary for fair presentation of the
results for the interim periods. All such adjustments are of a normal and
recurring nature. All significant intercompany balances and transactions have
been eliminated. The accompanying interim consolidated financial statements
should be read in conjunction with the following notes and with the Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
At June 30, 1997, The ALLIED Group Employee Stock Ownership Trust (ESOP Trust)
owned 25.4% and ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated
property-casualty insurance company, controlled 18.4% of the outstanding voting
stock of the Company.
Minority interest
The minority interest in net income of consolidated subsidiary represents the
minority common stockholders' proportionate share of the net assets and results
of operations of the majority-owned mortgage banking subsidiary. Options
exercised by key employees of the mortgage banking subsidiary resulted in a 20%
ownership in the outstanding common stock of the subsidiary on January 2, 1997.
No additional options are outstanding. The minority interest in the subsidiary
was $2 million at June 30, 1997 and is included in other liabilities. This
transaction did not have a material impact on the Company's financial position,
results of operations, or liquidity.
Earnings per share
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) 128, "Earnings per Share" in February of 1997. SFAS
128 specifies the computation, presentation, and disclosure requirements for
earnings per share (EPS) for entities with publicly-held common stock effective
for annual periods ending after December 15, 1997. Early application is not
permitted, but pro forma disclosure is allowed under SFAS 128. Presented below
are the pro forma EPS that the Company would have reported for the period ended
June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic EPS $ .73 $ .32 $ 1.47 $ 1.04
Diluted EPS $ .72 $ .31 $ 1.45 $ .93
</TABLE>
(2) Transactions with Affiliates
Pursuant to the terms of the Intercompany Operating Agreement, the Company
leases employees to ALLIED Mutual and certain of its subsidiaries. Each company
that leases employees is charged a fee based upon costs incurred for salaries,
related benefits, taxes, and expenses associated with the employees it leases.
For the six months ended June 30, 1997 and 1996, the Company received revenues
of $1.3 million and $1.4 million for employees leased to affiliates,
respectively, which are included in other income.
<PAGE>
7
Subsidiaries of the Company provide data processing and other services for
ALLIED Mutual and its subsidiaries. Included in other income are revenues of
$741,000 and $645,000 relating to services performed for ALLIED Mutual and its
subsidiaries for the first half of 1997 and 1996, respectively.
Effective January 1, 1997, the Company's property-casualty subsidiaries entered
into a property catastrophe reinsurance agreement with ALLIED Mutual and a
nonaffiliated reinsurer. ALLIED Mutual's participation in the agreement is 90%.
The reinsurance agreement is an aggregate catastrophe program that covers the
property-casualty segment's share of pooled losses up to $30 million in excess
of $20 million in the aggregate for any one quarter or in excess of $50 million
in the aggregate for any one year. Premiums paid by the property-casualty
segment to ALLIED Mutual were $1.4 million in the first half of 1997. The
property-casualty segment had recoveries of $2 million from ALLIED Mutual under
the agreement in the first half of 1997.
Prior to 1997, ALLIED Mutual participated with a nonaffiliated reinsurance
company in a property catastrophe reinsurance agreement that covered the
property-casualty segment's share of pooled losses up to $5 million in excess of
$5 million. ALLIED Mutual's and the reinsurance company's participation in such
agreement was 90% and 10%, respectively. Effective December 31, 1996, this
agreement was canceled. Premiums paid by the property-casualty segment to ALLIED
Mutual were $1.8 million in the first half of 1996. There were recoveries from
ALLIED Mutual under this agreement of $3 million in the first half of 1996.
The Company invests excess cash in a short-term investment fund with other
affiliated companies. The fund was established to concentrate short-term cash in
a single account to maximize yield. AID Finance Services, Inc., a wholly-owned
subsidiary of ALLIED Mutual, is the fund administrator. At June 30, 1997, the
Company had $5.9 million invested in the fund and had several short-term
unsecured notes payable to the fund totaling $3.7 million. The interest rate on
the borrowings was 8.8%.
The Company had interest income from affiliates of $246,000 and $219,000 in the
first six months of 1997 and 1996, respectively. Interest paid to affiliates was
$172,000 and $111,000 in the first half of 1997 and 1996, respectively.
(3) Notes Payable to Nonaffiliates
At June 30, 1997, the mortgage banking subsidiary had borrowed $25.7 million
under the terms of three separate mortgage loan warehousing agreements with
different commercial banks. These notes payable are not guaranteed by the
Company. Under the terms of the agreements, the subsidiary can borrow up to the
lesser of $67 million or 98% of the mortgage credit borrowing base. The
outstanding borrowings were secured by $21.1 million of pledged mortgage loans
held for sale, mortgage servicing rights on loans with a principal balance of
$2.8 billion, and foreclosure loans. Interest rates applicable to the mortgage
loan warehousing agreements vary with the level of investable deposits
maintained at the respective commercial banks.
The mortgage banking subsidiary also had $12 million of 8.4% senior secured
notes outstanding as of June 30, 1997. The notes are payable to a nonaffiliated
life insurance company and are secured by pledged mortgage servicing rights. The
notes are payable in equal annual installments of $1.5 million each September 1,
with interest payable semi-annually. The final installment and interest is due
September 1, 2004.
The Federal Home Loan Bank of Des Moines provides a $3 million committed credit
facility through a line of credit agreement with AMCO Insurance Company (AMCO)
that expires February 27, 1998. Interest on any outstanding borrowings is
payable at an annual rate equal to the federal funds unsecured rate for Federal
Reserve member banks, which was 5.8% at June 30, 1997. AMCO had an outstanding
balance under this line of credit of $3 million at June 30, 1997. AMCO also had
$6.6 million outstanding at the end of the second quarter on an uncommitted
basis. The borrowings were secured by United States Government securities with a
carrying value of $16.1 million.
<PAGE>
8
(4) Common Stock
During the first half of 1997, the Company canceled 206,700 shares of its common
stock purchased on the open market at an average price per share of $35.58. The
first 57,000 shares were repurchased under a program approved by the Board of
Directors (Board) on July 15, 1996 and completed on March 13, 1997. The
remaining 149,700 shares were repurchased under a program approved by the Board
on March 4, 1997, whereby an additional 250,000 shares of common stock were
authorized to be repurchased pursuant to SEC Rule 10b-18. The actual number of
shares to be repurchased is dependent upon market conditions, and the program
may be terminated at the Company's discretion.
(5) Segment Information
The Company's principal products, services, and effect on revenues, income
before income taxes and minority interest, and assets are identified by segment.
Property-casualty -- Predominantly private passenger automobile,
homeowners, and small commercial lines of insurance.
Excess & surplus lines -- Primarily commercial casualty and commercial
property lines of insurance coverage that standard insurers are unable or
unwilling to provide.
Eliminations and other -- Eliminations between segments plus other
noninsurance operations not reported as segments (including mortgage
banking, data processing, and employee leasing to affiliates).
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1997 1996
---------------- ---------------
(in thousands)
<S> <C> <C>
Revenues *
Property-casualty $ 275,836 $ 249,960
Excess & surplus lines 19,724 17,443
Eliminations and other 26,891 22,517
---------------- ---------------
Total $ 322,451 $ 289,920
================ ===============
Income before income taxes and minority interest *
Property-casualty $ 39,542 $ 25,094
Excess & surplus lines 4,740 3,578
Eliminations and other 180 1,653
---------------- ---------------
Total $ 44,462 $ 30,325
================ ===============
June 30, December 31,
1997 1996
---------------- ---------------
(in thousands)
Assets
Property-casualty $ 973,518 $ 917,537
Excess & surplus lines 138,357 131,405
Eliminations and other 28,629 28,717
---------------- ---------------
Total $ 1,140,504 $ 1,077,659
================ ===============
* Including realized investment gains or losses.
</TABLE>
<PAGE>
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Overview
The following analysis of the consolidated results of operations and financial
condition of ALLIED Group, Inc. (the Company) should be read in conjunction with
the interim consolidated financial statements and related footnotes included
elsewhere herein, and with the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
The Company, a regional insurance holding company, and its subsidiaries operate
exclusively in the United States and primarily in the central and western
states. The largest segment includes three property-casualty insurance companies
that write personal lines (primarily automobile and homeowners) and small
commercial lines of insurance. The other reportable segment is excess & surplus
lines insurance. The property-casualty insurance segment, accounted for 85.5%
and 86.2% of consolidated revenues for the six months ended June 30, 1997 and
1996, respectively.
The property-casualty segment participates in a reinsurance pooling agreement
with ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated
property-casualty insurance company. The agreement generally provides that the
property-casualty insurance business is combined and then prorated among the
participants according to predetermined percentages. Participation percentages
are based on certain factors such as capitalization and business produced by the
respective companies. The segment's participation in the reinsurance pool has
been 64% since January 1, 1993.
The operating results of the property-casualty insurance industry are subject to
significant fluctuations from quarter to quarter and from year to year due to,
but not limited to, the effect of competition on pricing, the frequency and
severity of losses incurred in connection with weather-related and other
catastrophic events, adequacy of reserves, general economic and business
conditions, and other factors such as changes in tax laws and the regulatory
environment.
Results of Operations
Consolidated revenues for the first half of 1997 were $322.5 million, up 11.2%
over the $289.9 million reported for the first six months of 1996. For the
second quarter only, consolidated revenues increased 11.7% over the same period
in 1996. The increase occurred primarily because of the growth in earned
premiums for the six and three months ended June 30, 1997.
Income before income taxes and minority interest for the first six months of
1997 was up to $44.5 million from $30.3 million for the same period in 1996. For
the three months ended June 30, 1997, income before income taxes and minority
interest was up 107.6% to $21.9 million. The increase was primarily due to
higher revenues and improved loss experience for the six and three months ending
June 30, 1997. Wind and hail losses for the first six months of 1997 were down
34% to $15.6 million compared to $23.7 million for the same period in 1996. For
the quarter only wind and hail losses were down 35.7% to $12.9 million.
Net income was up 47% to $31.6 million, bringing fully diluted earnings per
share to $1.47 for the six months ended June 30, 1997, from $21.5 million ($0.94
per share) for the corresponding period in 1996. Fully diluted earnings per
share before realized investments gains and losses were $1.47 for the first half
of 1997 compared with $0.94 for the same period of 1996. For the three months
ended June 30, 1997 and 1996, fully diluted earnings per share before realized
gains were $0.73 and $0.32, respectively.
Book value per share at June 30, 1997 increased to $18.45 compared to $17.39 at
December 31, 1996. Growth in the book value per share was primarily the result
of higher net income for the first six months of 1997. The fair value of
investments in fixed maturities was $15.5 million above cost at June 30, 1997
compared to $17.1 million above cost at December 31, 1996. If the investments in
fixed maturities were reported at amortized cost, the book value would have been
$17.96 at June 30, 1997 compared to $16.85 at December 31, 1996.
<PAGE>
10
Property-casualty
Net written premiums for the pool (including ALLIED Mutual) totaled $412.1
million, a 10.7% increase over production in the first half of 1996. The average
premium per policy for personal lines was up 3.7% from the first six months of
1996 to $610 while the policy count grew 7.7%. The average premium per policy
for commercial lines excluding crop-hail increased 6.5% from the first half of
1996 to $1,154 and the policy count was up 3.3%. Earned premiums for the
property-casualty segment were 67.8% personal lines and 32.2% commercial lines
in the first six months of 1997. The business mix for the first half of 1996 was
66.5% personal lines and 33.5% commercial lines.
Revenues for the property-casualty segment increased to $275.8 million from $250
million for the six months ended June 30, 1997 and 1996, respectively. Revenues
for the three months ended June 30, 1997, increased 11% to $140 million. Direct
earned premiums for the segment were $275.6 million for the first half of 1997
compared with $237.9 million one year earlier. Earned premiums increased 11.5%
for the first half of 1997 to $251.4 million from $225.6 million; earned
premiums for the second quarter increased 11.9 % to $127.5 million from $113.9
million for the same period in 1996. The increase resulted primarily from growth
in insurance exposure.
Investment income for the first half of 1997 was $22.1 million compared to $20.6
million for the same period in 1996. For the three months ended June 30, 1997,
investment income increased 8.8% to $11.2 million compared to $10.3 million for
the same period in 1996. The increase was the result of a larger average balance
in invested assets. The pretax yield on invested assets was 6.1% and 6.3% for
the six months ended June 30, 1997 and 1996, respectively. Realized investment
losses were $2,000 in the first half of 1997 compared with realized gain of
$36,000 in the first half of 1996. Other income for the first six months of 1997
and 1996 was $2.3 million and $3.8 million, respectively.
Income before income taxes increased 57.6% to $39.5 million from $25.1 million
in the first half of 1996. A 10.4% growth in revenues, combined with an improved
loss experience and lower underwriting expense in the first half of 1997
contributed to the increase.
The statutory combined ratio (after policyholder dividends) for the first six
months of 1997 was 93.8 compared to 99.4 reported in the first half of 1996. The
improvement in the combined ratio was primarily attributed to a 5.2-point
decrease in the six month loss and loss adjusting expense ratio. The impact of
wind and hail losses on the combined ratio was 6.2 points and 10.5 points for
the six months ended June 30, 1997 and 1996, respectively. The generally
accepted accounting principles (GAAP) underwriting gain was $15.1 million
compared with a gain of $706,000 for the first half of 1996. On a fully diluted
basis, the impact of wind and hail losses on the results of operations was $0.50
per share versus $0.74 per share in the first six months of 1996.
The following table presents the property-casualty's statutory combined ratio by
line of business for the three and six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Personal automobile 90.9 98.5 93.1 98.4
Homeowners 110.8 126.3 100.5 111.6
Personal lines 96.3 105.7 95.1 101.8
Commercial automobile 79.2 102.5 92.1 101.5
Workers' compensation 90.2 76.0 88.1 72.5
Other property/liability 96.8 106.6 92.0 99.9
Other lines 59.7 43.7 60.5 50.3
Commercial lines 92.5 99.8 91.0 94.8
Total 95.1 103.7 93.8 99.4
</TABLE>
<PAGE>
11
The personal auto statutory combined ratio improved to 93.1 for the first six
months of 1997 from 98.4 for the same period in 1996. The improvement was
largely due to a 4.5-point decrease in the loss and loss adjusting expense
ratio; the underwriting expense ratio also improved 0.7-points. The statutory
combined ratio for the homeowners line was 100.5 for the first half of 1997
compared with 111.6 for the same period of 1996. The improvement was primarily
due to a 11.1-point decrease in the loss and loss adjusting expense ratio. The
impact of lower wind and hail losses on the combined ratio for the homeowners
line decreased to 17.6-points from 29.9 points for the first half of 1996.
Overall, the personal lines statutory combined ratio decreased to 95.1 in the
first six months of 1997 from 101.8 in the same period of 1996. The statutory
combined ratio for commercial lines decreased to 91.0 in the first six months of
1997 from 94.8 for the first half of 1996. The improvement of personal and
commercial lines combined ratio was primarily attributable to lower losses and
loss adjusting expenses due to a favorable loss experience in the first six
months of 1997.
Excess & Surplus Lines
Earned premiums increased 13.4% to $16.3 million for the first half of 1997 from
$14.4 million for the same period in 1996. For the three months ended June 30,
1997 and 1996, earned premiums were $8.4 million and $7.2 million, respectively.
Net written premiums increased 19.2% to $17.4 million for the six months ended
June 30, 1997 from $14.6 million in the same period of 1996. The increase is
primarily due to the segment's intensified marketing efforts and the addition of
16 new agents (a 22.5% increase) over the last 18 months. The segment's major
product lines all experienced increases in net written premiums. Direct earned
premiums increased to $21 million for the six months ended June 30, 1997 from
$18.1 million for the same period in 1996. For the six month period ended June
30, 1997, the segment's book of business was comprised of 2.9% personal lines
and 97.1% commercial lines. The business mix for the first half of 1996 was 2.4%
personal lines and 97.6% commercial lines.
Investment income for the first six months of 1997 increased 11.8% to $3.4
million from $3 million for the same period in 1996. For the second quarter
only, investment income increased 12.3% to 1.7 million. Investment income
increased due to a larger average balance in the investment portfolio. The
pretax yield on those assets was 6.3% in the first six months of 1997 compared
to 6.3% for the same period in 1996. Invested assets increased to $108.9 million
at June 30, 1997 from $104.4 million at year-end 1996.
The statutory combined ratio (after policyholder dividends) was 90.9, which
produced a GAAP underwriting gain of $1.4 million for the first six months of
1997. The combined ratio for the first half of 1996 was 96.3 which resulted in a
GAAP underwriting gain of $547,000. The combined ratio improved primarily
because of a 3.4-point improvement in the loss and loss adjusting expense ratio
in the first six months of 1997, due to improved loss experience. The
underwriting expense ratio also improved 2-points in the first half of 1997 over
the same period in 1996, due to the growth in net written premiums.
Income before income taxes for the six months ended June 30, 1997 increased to
$4.7 million from $3.6 million; for the quarter ended June 30, 1997, income
before income taxes increased to $2.7 million from $1.8 million for the same
quarter in 1996. The segment had realized losses of $2,000 for the first six
months of 1997 and no realized gains or losses in the same period of 1996.
Noninsurance Operations
Revenues for the noninsurance operations (including mortgage banking, data
processing, and employee leasing to affiliates) for the first half of 1997
increased to $26.9 million from $22.5 million for the same period last year. The
increase was primarily due to a 21.4% increase in data processing revenues.
Income before income taxes was $180,000 for the first half of 1997 compared to
income before taxes of $1.7 million for the six months ended June 30, 1996. The
decrease was due to higher operating expenses. The mortgage banking servicing
portfolio at June 30, 1997 remained unchanged from year-end 1996 at $2.8
billion.
Investments and Investment Income
The investment policy for the Company's insurance segments require that the
fixed maturity portfolio be invested primarily in debt obligations rated "BBB"
or higher by Standard & Poor's Corporation or a recognized equivalent at the
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
<PAGE>
12
comprised primarily of issues rated at least A3/A- by Standard and Poor's
Corporation or Moody's. The Company's investment portfolio consisted primarily
of fixed income securities and equity securities; 93.4% and 5.7%, respectively.
The ratings on 99.6% of the fixed income securities at June 30, 1997 were
investment grade or higher. The investment portfolio contained no real estate or
mortgage loans at June 30, 1997.
Invested assets were up 3.8% to $851.1 million from $819.6 million at year-end
1996. Six-month consolidated investment income increased 5.6% to $25.5 million
from $24.2 million through June 30, 1996. For the quarter ended June 30, 1997,
investment income was up 6.9% to $12.9 million over the second quarter in 1996.
The increase was due to a larger average balance of invested assets. The
Company's pretax rate of return on invested assets was down to 6.1% from last
year's 6.3%.
Income Taxes
The Company's year-to-date effective income tax rate was 28.4% at June 30, 1997
and for year-end 1996. The income tax expense for the first half of 1997 rose on
higher operating income up to $12.6 million from $8.8 million for the same
period in 1996.
Regulations
California was the source of approximately 25% of the pool's direct written
premiums for the past ten years. Proposition 103, approved by California voters
in 1988, provides for a rollback of rates on premiums collected in calendar year
1989 to the extent that the insurer's return on equity for each Proposition 103
line of business exceeded 10%. The rollback liability, if any, has not been
finalized. Management of the Company continues to believe that the insurance
subsidiaries will not be liable for any material rollback of premiums.
New Accounting Pronouncements
During June of 1997, the Financial Accounting Standards Board issued two new
accounting standards; Statement of Financial Accounting Standards (SFAS) 130,
"Reporting Comprehensive Income" and SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS 131 specifies the presentation and
disclosure of operating segment information reported in the annual report and
interim reports issued to stockholders. The provisions of both statements will
be effective for years beginning after December 15, 1997, but early adoption is
permitted. Management of the Company believes that the adoption of these
statements will not have a material impact on the Company's financial position,
results of operations, or liquidity.
Liquidity and Capital Resources
Substantial cash inflows are generated from premiums, pool administration fees,
investment income, and proceeds from maturities of portfolio investments. The
principal outflows of cash are payment of claims, commissions, premium taxes,
operating expenses, and income taxes and the purchase of fixed income and equity
securities. In developing its investment strategy, the Company establishes a
level of cash and highly liquid short and intermediate-term securities which,
combined with expected cash flow, is believed adequate to meet anticipated
short-term and long-term payment obligations.
In the first half of 1997, operating activities generated cash flows of $39.3
million; in the first six months of 1996, the total was $29.2 million. For both
years, the primary source of funds was premium growth in the Company's
property-casualty insurance operations. The funds were used primarily to
purchase equity securities and to repurchase the Company's common stock which
accounted for the majority of the investing activities.
Operating cash flows were also used to pay $8.7 million of dividends to
stockholders in the first six months of 1997. For the same period in 1996, the
funds generated from the operating activities were used to pay dividends to
stockholders of $8.5 million. Dividend payments to common stockholders totaled
$6.9 million for the six months ended June 30, 1997, up from $6.1 million for
the same period in 1996. The increase in dividends to common stock shareholders
is due to a higher dividend per share, 15.9% increase from June 30, 1996. In the
first half of 1997 and 1996, the Company paid dividends of $1.8 million on the
<PAGE>
13
6-3/4% Series preferred stock. The Company also paid dividends of $595,000 on
the ESOP Series preferred stock (ESOP Series) in the six months ended June 30,
1996.
The Company relies primarily on dividend payments from its property-casualty
subsidiaries to pay preferred and common stock dividends to stockholders. During
the first six months of 1997, the Company received dividend payments of $8.1
million from the property-casualty subsidiaries and $38,000 from noninsurance
subsidiaries. During the same period of 1996, the Company received dividend
payments of $7.5 million from the property-casualty subsidiaries and $38,000
from noninsurance subsidiaries.
During the first half of 1997, the Company canceled 206,700 shares of its common
stock purchased on the open market at an average price per share of $35.58. The
first 57,000 shares were repurchased under a program approved by the Board of
Directors (Board) on July 16, 1996 and completed on March 13, 1997. An
additional 149,700 shares were repurchased under a program approved by the Board
on March 4, 1997, whereby an additional 250,000 shares of common stock were
authorized to be repurchased pursuant to SEC Rule 10b-18. The Company can
repurchase up to 100,300 shares. During the six months ended June 30, 1996, the
Company had repurchased and canceled 164,500 of its common stock under the
repurchase program approved by the Board on December 31, 1994. The shares were
purchased at an average price per share of $38.78.
The mortgage banking subsidiary has separate credit arrangements to support its
operations. Short-term and long-term notes payable to nonaffiliated companies
are used to finance its mortgage loans held for sale and to purchase mortgage
servicing rights. The level of short-term borrowings fluctuates daily depending
on the level of inventory being financed. At June 30, 1997, short-term
borrowings amounted to $25.7 million to be repaid through the subsequent sale of
mortgage loans held for sale and long-term borrowings amounted to $12 million to
be repaid over the next eight years. These notes payable are not guaranteed by
the Company. In the normal course of its business, the subsidiary also makes
commitments to buy and sell securities that may result in credit and market risk
in the event the counterparty is unable to fulfill its obligation.
Management anticipates that short-term and long-term capital expenditures, cash
dividends, and operating cash needs will be met from existing capital and
internally generated funds. As of June 30, 1997, the Company and its
subsidiaries had no material commitments for capital expenditures. Future debt
and stock issuance will be considered as additional capital needs arise. The
method of funding will depend upon financial market conditions.
<PAGE>
14
PART II
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on May 13, 1997.
(b) Douglas L. Andersen, Harold S. Carpenter, Charles I. Colby, and
Harold S. Evans were elected to serve as directors of the Company
for a term of three years which expires in the year 2000. Current
directors whose terms expire in 1998 are James W. Callison,
Richard O. Jacobson, and John P. Taylor. Current directors whose
terms expire in 1999 are John E. Evans, William E. Timmons, and
Donald S. Willis.
(c) With respect to the voting on the election of the directors:
<TABLE>
<CAPTION>
Broker
For Withheld Nonvotes
----------- ---------- --------
<S> <C> <C> <C>
Douglas L. Andersen 21,940,941 265,328 ---
Harold S. Carpenter 21,879,347 326,922 ---
Charles I. Colby 21,881,424 324,844 ---
Harold S. Evans 21,842,406 363,863 ---
</TABLE>
With respect to the amendment to the Restated Articles of
Incorporation to increase the number of authorized shares of
common stock from 40 million to 80 million shares:
<TABLE>
<CAPTION>
Broker
For Against Abstain Nonvotes
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Common stock 16,783,600 1,064,675 246,745 ---
Preferred stock 4,111,249 --- --- ---
----------- ---------- --------- ---------
Total 20,894,849 1,064,675 246,745 ---
</TABLE>
(d) None
Item 6. Exhibits and Reports on Form 8-K
(a) 3.3 Articles of Amendment dated May 13, 1997 to the Amended and
Restated Articles of Incorporation
10.61 ALLIED Mutual and General Re-insurance Corporation Property
Catastrophe Agreement
10.62 Second Amendment to Consulting Agreement between John E.
Evans, ALLIED Group, Inc., ALLIED Mutual Insurance Company,
and ALLIED Life Financial Corporation.
11 Statement re Computation of Per Share Earnings.
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the second quarter
ended June 30, 1997.
<PAGE>
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIED Group, Inc.
(Registrant)
Date: August 6, 1997 /s/ Jamie H. Shaffer
----------------------------------------
Jamie H. Shaffer, Senior Vice President,
Chief Financial Officer, and Treasurer
<PAGE>
16
ALLIED Group, Inc. and Subsidiaries
INDEX TO EXHIBITS
EXHIBIT
NUMBER ITEM PAGE
3.3 Articles of Amendment dated May 13, 1997 to the Amended
and Restated Articles of Incorporation 17
10.61 ALLIED Mutual and General Re-insurance Corporation
Property Catastrophe Agreement 19
10.62 Second Amendment to Consulting Agreement between
John E. Evans, ALLIED Group, Inc., ALLIED Mutual Insurance
Company, and ALLIED Life Financial Corporation. 37
11 Statement re Computation of Per Share Earnings 38
27 Financial Data Schedule 39
<PAGE>
17
EXHIBIT 3.3
ARTICLES OF AMENDMENT
of
ALLIED Group, Inc.
TO THE SECRETARY OF STATE OF THE STATE OF IOWA:
Pursuant to Sections 1003 and 1006 of the Iowa Business Corporation
Act, the undersigned corporation adopts the following amendment to the
corporation's articles of incorporation.
1. The name of the corporation is ALLIED Group, Inc.
2. Article IV(a) of the Articles of Restatement is amended to read in full
as follows:
(a) The total number of shares of stock which the Corporation
shall have authority to issue is eighty-seven million five hundred
thousand (87,500,000) shares consisting of eighty million
(80,000,000) shares of common stock without par value and seven
million five hundred thousand (7,500,000) shares of preferred
stock without par value.
3. The date of adoption of the amendment was May 13, 1997.
4. The amendment was approved by the shareholders. The designation, number
of outstanding shares, number of votes entitled to be cast by each
voting group entitled to vote separately on the amendment, and the
number of votes of each voting group indisputably represented at the
meeting is as follows:
<TABLE>
<CAPTION>
SHARES
OUTSTANDING AS VOTES ENTITLED VOTES
DESIGNATION OF RECORD DATE TO BE CAST ON REPRESENTED
OF GROUP (MARCH 6, 1997) AMENDMENT AT MEETING
----------- --------------- -------------- ----------
<S> <C> <C> <C>
Common Stock 20,347,585 20,347,585 18,095,020
Common Stock 22,174,807 24,458,835 22,206,269
and Preferred
Stock
</TABLE>
<PAGE>
18
The total number of votes cast for and against the amendment by each
voting group entitled to vote separately on the amendment is as
follows:
<TABLE>
<CAPTION>
VOTING VOTES VOTES
GROUP FOR AGAINST
------ ----- -------
<S> <C> <C>
Common Stock 16,783,600 1,064,675
Common Stock and 20,894,849 1,064,675
Preferred Stock
</TABLE>
The number of votes cast for the amendment by each voting group was
sufficient for approval by that voting group.
The effective date of this document is May 13, 1997.
ALLIED Group, Inc.
/s/ Douglas L. Andersen
------------------------------
Douglas L. Andersen, President
<PAGE>
19
EXHIBIT 10.61
Agreement No. 8375
INTERESTS AND LIABILITIES AGREEMENT
NO. 8375
to
AGGREGATE CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT
between
AMCO INSURANCE COMPANY
ALLIED PROPERTY AND CASUALTY INSURANCE COMPANY
DEPOSITORS INSURANCE COMPANY
MOTOR CLUB OF IOWA INSURANCE COMPANY
701 Fifth Avenue
Des Moines, Iowa 50391-2000
(herein collectively referred to as the "Company")
and
GENERAL REINSURANCE CORPORATION
a Delaware corporation
having its principal offices at
Financial Centre
695 East Main Street P.O. Box 10350
Stamford, Connecticut 06904-2350
(herein referred to as the "Subscribing Reinsurer")
The Subscribing Reinsurer agrees to assume 10% of the liability under
the Aggregate Catastrophe Excess of Loss Reinsurance Agreement effective January
1, 1997, attached hereto.
As consideration the Subscribing Reinsurer shall receive identical
shares of the premiums named therein.
The share of the Subscribing Reinsurer shall be separate and apart from
the shares of the other Reinsurers, and the Subscribing Reinsurer shall in no
event participate in the Interests and Liabilities of the other Reinsurers.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
<PAGE>
20
executed in duplicate,
this 15th day of May , 1997 ,
AMCO INSURANCE COMPANY
ALLIED PROPERTY AND CASUALTY
INSURANCE COMPANY
DEPOSITORS INSURANCE COMPANY
MOTOR CLUB OF IOWA INSURANCE
COMPANY
/s/ Douglas L. Andersen
---------------------------------
Douglas L. Andersen
President
Attest: /s/ Stephen Rasmussen
----------------------------
Stephen Rasmussen
Sr. Vice President
and this 13th day of May , 1997 .
GENERAL REINSURANCE CORPORATION
/s/ Jim Conroy
---------------------------------
Jim Conroy
Vice President
Attest: /s/ Thomas M. Reindall
----------------------------
Thomas M. Reindall
<PAGE>
21
INTERESTS AND LIABILITIES AGREEMENT
to
AGGREGATE CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT
between
AMCO INSURANCE COMPANY
ALLIED PROPERTY AND CASUALTY INSURANCE COMPANY
DEPOSITORS INSURANCE COMPANY
MOTOR CLUB OF IOWA INSURANCE COMPANY
701 Fifth Avenue
Des Moines, Iowa 50391-2000
(herein collectively referred to as the "Company")
and
ALLIED MUTUAL INSURANCE COMPANY
701 Fifth Avenue
Des Moines, Iowa 50391-2000
(herein referred to as the "Subscribing Reinsurer")
The Subscribing Reinsurer agrees to assume 90% of the liability under
the Aggregate Catastrophe Excess of Loss Reinsurance Agreement effective January
1, 1997, attached hereto.
As consideration the Subscribing Reinsurer shall receive identical
shares of the premiums named therein.
The share of the Subscribing Reinsurer shall be separate and apart from
the shares of the other Reinsurers, and the Subscribing Reinsurer shall in no
event participate in the Interests and Liabilities of the other Reinsurers.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
<PAGE>
22
executed in duplicate,
this 15th day of May , 1997 ,
AMCO INSURANCE COMPANY
ALLIED PROPERTY AND CASUALTY
INSURANCE COMPANY
DEPOSITORS INSURANCE COMPANY
MOTOR CLUB OF IOWA INSURANCE
COMPANY
Attest: /s/ Stephen S. Rasmussen /s/ Douglas L. Andersen
------------------------------ ----------------------------------
Stephen S. Rasmussen Douglas L. Andersen
Sr. Vice President President
and this 15th day of May , 1997 .
ALLIED MUTUAL INSURANCE COMPANY
/s/ Jamie H. Shaffer
----------------------------------
Jamie H. Shaffer
Treasurer
Attest: /s/ G. T. Oleson
------------------------------
G. T. Oleson
Secretary
<PAGE>
23
AGGREGATE CATASTROPHE
EXCESS OF LOSS REINSURANCE AGREEMENT
between
AMCO INSURANCE COMPANY
ALLIED PROPERTY AND CASUALTY INSURANCE COMPANY
DEPOSITORS INSURANCE COMPANY
MOTOR CLUB OF IOWA INSURANCE COMPANY
701 Fifth Avenue
Des Moines, Iowa 50391-2000
(herein collectively referred to as the "Company")
and
The Subscribing Reinsurers executing
the Interests and Liabilities Agreements attached to this Agreement
(herein collectively referred to as the "Reinsurers")
- ---------------------------------------------------------------------------
PREAMBLE
In consideration of the mutual covenants herein contained and upon the
terms and conditions herein set forth, the Reinsurers shall indemnify the
Company as herein provided and specified.
Article I - BUSINESS REINSURED
The Reinsurers hereby agree to reinsure, subject to the terms and
conditions contained herein, the net excess liability of the Company resulting
from loss occurrences commencing during the term of this Agreement under
policies, contracts or binders of insurance or reinsurance, whether oral or
written, (hereinafter called "policies") heretofore issued or which hereafter
may be issued or renewed by the Company and classified by the Company as
Property including Inland Marine, Earthquake and Automobile Physical Damage, but
only as respects the perils of windstorm, hail, tornado, hurricane, cyclone,
including ensuing collapse and water damage, and earthquake.
<PAGE>
24
Article II - TERM
The term of this Agreement shall be from 12:01 a.m., Central Standard
Time, January 1, 1997 to 12:01 a.m., Central Standard Time, January 1, 1998 and
shall apply to all loss occurrences commencing during the term of this
Agreement.
If this Agreement shall terminate while a loss occurrence covered
hereby is in progress, it is agreed that, subject to the other conditions of
this Agreement, the Reinsurers shall be liable for their proportion of the
entire loss or damage.
Article III - TERRITORY
This Agreement shall apply to losses occurring within the territorial
limits of the Company's original policies.
Article IV - EXCLUSIONS
This Agreement shall not apply to:
(a) Pro rata and excess of loss reinsurance assumed, except
reinsurance assumed between member companies of the ALLIED
Group, agency reinsurance and business reinsured 100% by the
Company.
(b) All Casualty business except mandatory coverages under the
Property portion of package policies.
(c) Ocean Marine.
(d) Fidelity and Surety.
(e) Financial Guarantee and Insolvency.
(f) Boiler and Machinery.
(g) Hail on growing and standing crops.
(h) Mortgage impairment insurance and similar kinds of insurance
however styled.
(i) Difference in Conditions insurance when written as such.
<PAGE>
25
(j) Any peril not specifically included in the article entitled
BUSINESS REINSURED. Fire following directly occasioned by the
earthquake is excluded.
(k) Loss or liability in respect of overhead transmission and
distribution lines and their supporting structures other than
those on or within 1000 feet of the insured premises. It is
understood and agreed that public utilities extension and/or
suppliers extension and/or contingent business interruption
coverages are not subject to this exclusion, provided that these
are not part of a transmitters' or distributors' policy.
(l) Loss or Damage or Costs or Expenses arising from Seepage and/or
Pollution and/or Contamination, other than contamination from
smoke damage. Nevertheless, this exclusion does not preclude any
payment of the cost of the removal of debris of property damaged
by a loss otherwise covered hereunder, but subject always to a
limit of not more than 25% of the Company's property loss under
the original policy.
(m) Loss or liability as excluded by the attached Insolvency Funds
Exclusion Clause.
(n) Loss or liability as excluded by the attached Pools and
Associations Exclusion Clause.
(o) Loss or liability as excluded by the attached North American War
Exclusion Clause (Reinsurance).
(p) Loss or liability as excluded by the attached Nuclear Incident
Exclusion Clauses - Physical Damage Reinsurance.
Article V - LIMIT AND RETENTION
No claim shall be made upon the Reinsurers hereunder unless and until
the Company shall have first sustained:
(a) With respect to aggregate excess losses resulting from loss
occurrences commencing during any calendar quarter during the
term of this Agreement an ultimate net loss in excess of the
Company's percentage share of the Reinsurance Pool multiplied by
$20,000,000; or
(b) With respect to aggregate excess losses resulting from loss
occurrences commencing during the entire term of this Agreement
an ultimate net loss in excess of the Company's percentage share
of the Reinsurance Pool multiplied by $50,000,000,
<PAGE>
26
and then the Reinsurers shall be liable for the amount of the ultimate net loss
sustained by the Company in excess thereof but the sum recoverable with respect
to aggregate excess losses resulting from loss occurrences commencing during the
entire term of this Agreement shall not exceed the Company's percentage share of
the Reinsurance Pool multiplied by $30,000,000.
For purposes of this Article, the term "excess loss" shall mean
ultimate net loss sustained by the Company in each loss occurrence for which the
ultimate net loss sustained by the Company exceeds a franchise deductible of the
Company's percentage share of the Reinsurance Pool multiplied by $250,000.
Article VI - NET RETAINED LIABILITY
This Agreement applies only to that portion of any insurance or
reinsurance covered by this Agreement which the Company retains net for its own
account, and in calculating the amount of any loss hereunder and also in
computing the amount in excess of which this Agreement attaches, only loss or
losses in respect of that portion of any insurances or reinsurances which the
Company retains net for its own account shall be included.
It is understood and agreed that the amount of the Reinsurers'
liability hereunder in respect of any loss or losses shall not be increased by
reason of the inability of the Company to collect from any other reinsurer,
whether specific or general, any amount which may have become due from them,
whether such inability arises from the insolvency of such other reinsurer or
otherwise.
Article VII - ULTIMATE NET LOSS
The term "ultimate net loss" shall mean such amounts that the Company
is liable to pay in the settlement of claims or satisfaction of judgments,
including court costs, interest on judgments, and allocated investigation,
adjustment, and legal expenses of the Company. It is understood that allocated
expenses applicable to salaried adjusters of the Company shall be an amount
<PAGE>
27
equal to 10% of the amount paid by the Company in settlement of claims or
satisfaction of judgments. Nothing in this clause, however, shall be construed
to mean that losses under this Agreement are not recoverable until the Company's
ultimate net loss has been ascertained.
All salvages, recoveries or payments and reversals or reductions of
verdicts or judgments recovered or received subsequent to a loss settlement
under this Agreement, including amounts recoverable under inuring reinsurance
whether collected or not, shall be applied as if recovered or received prior to
loss settlement, and shall be deducted from the actual loss sustained to arrive
at the amount of ultimate net loss hereunder.
Article VIII - DEFINITION OF LOSS OCCURRENCE
The term "loss occurrence" shall mean the sum of all individual losses
directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which occurs within the
area of one state of the United States or province of Canada and states or
provinces contiguous thereto and to one another. However, the duration and
extent of any one "loss occurrence" shall be limited to all individual losses
sustained by the Company occurring during any period of 72 consecutive hours
arising out of and directly occasioned by the same event except that the term
"loss occurrence" shall be further defined as follows:
(a) As regards windstorm, hail, tornado, hurricane, cyclone,
including ensuing collapse and water damage, the event need not
be limited to one state or province or states or provinces
contiguous thereto.
(c) As regards earthquake, the epicentre of which need not
necessarily to be within the territorial confines referred to in
the opening paragraph of this Article.
For all "loss occurrences", the Company may choose the date and time
when any such period of consecutive hours commences, provided that it is not
earlier than the date and time of the occurrence of the first recorded
individual loss sustained by the Company arising out of that disaster, accident
<PAGE>
28
or loss and provided that only one such period of 72 consecutive hours shall
apply with respect to one event.
Article IX - DEFINITION OF REINSURANCE POOL
The term "Reinsurance Pool" shall mean the pooling arrangement among
the companies listed in this Agreement as the reinsured Company and Allied
Mutual Insurance Company.
Article X - PREMIUM AND REPORTS
For the term of this Agreement, January 1, 1997 to January 1, 1998, the
Company shall pay to the Reinsurers an annual premium equal to the Company's
percentage share of the Reinsurance Pool multiplied by $5,000,000 payable in
quarterly installments on January 1, April 1, July 1 and October 1, 1997.
The Company shall also provide the Reinsurers as soon as possible after
December 31 any reports which may be necessary for annual statement purposes.
Article XI - NOTICE OF LOSS AND LOSS SETTLEMENT
As soon as practicable after the close of each calendar quarter, the
Company will advise the Reinsurers of all loss occurrences which commenced
during the quarter which in the opinion of the Company may involve the
Reinsurers under this Agreement and of all subsequent developments pertaining
thereto which in the opinion of the Company may materially affect the position
of the Reinsurers.
All loss settlements made by the Company provided same are within the
terms of this Agreement, shall be unconditionally binding upon the Reinsurers.
The Reinsurers agree to pay all amounts for which they may be liable immediately
upon receiving reasonable evidence from the Company of the amount due, or to be
due.
<PAGE>
29
Article XII - CURRENCY
All payments made under this Agreement shall be made in United States
currency.
Article XIII - ACCESS TO RECORDS
The Reinsurers or their duly accredited representative shall have free
access to the books and records of the Company at all reasonable times for the
purpose of obtaining information concerning this Agreement or the subject matter
thereof.
Article XIV - ERRORS AND OMISSIONS
Any delays, omissions or errors inadvertently made in conjunction with
this Agreement shall not be held to relieve either party hereto from any
liability which would attach to it hereunder if such delay, omission, or error
had not been made, provided such error or omission is rectified as soon as
possible after discovery.
Article XV - INSOLVENCY
In the event of the insolvency of the Company, the reinsurance proceeds
will be paid to the Company or the liquidator on the basis of the amount of the
claim allowed in the insolvency proceeding without diminution by reason of the
inability of the Company to pay all or part of the claim.
The Reinsurers shall be given written notice of the pendency of each
claim against the Company on the policy(ies) reinsured hereunder within a
reasonable time after such claim is filed in the insolvency proceedings. The
Reinsurers shall have the right to investigate each such claim and to interpose,
at their own expense, in the proceeding where such claim is to be adjudicated,
any defenses which they may deem available to the Company or its liquidator. The
expense thus incurred by the Reinsurers shall be chargeable, subject to court
approval, against the insolvent Company as part of the expense of liquidation to
<PAGE>
30
the extent of a proportionate share of the benefit which may accrue to the
Company solely as a result of the defense undertaken by the Reinsurers.
Article XVI - ARBITRATION
Any unresolved difference of opinion between the Reinsurers and the
Company shall be submitted to arbitration by three arbitrators. If more than one
Reinsurer is involved in the same dispute, all such Reinsurers shall constitute
and act as one party for purposes of this Article and communications shall be
made by the Company to each of the Reinsurers constituting the one party;
provided, however, that nothing herein shall impair the rights of such
Reinsurers to assert several, rather than joint, defenses of claims, nor be
construed as changing the liability of the Reinsurers under the terms of this
Agreement from several to joint.
One arbitrator shall be chosen by the Reinsurer(s), and one shall be
chosen by the Company. The third arbitrator shall be chosen by the other two
arbitrators within ten (10) days after they have been appointed. If the two
arbitrators cannot agree upon a third arbitrator, each arbitrator shall nominate
three persons of whom the other shall reject two. The third arbitrator shall
then be chosen by drawing lots. If either party fails to choose an arbitrator
within thirty (30) days after receiving the written request of the other party
to do so, the latter shall choose both arbitrators, who shall choose the third
arbitrator. The arbitrators shall be impartial and shall be active or retired
persons whose principal occupation is or was as an officer of property and
casualty insurance or reinsurance companies.
The party requesting arbitration (the "Petitioner") shall submit its
brief to the arbitrators within thirty (30) days after notice of the selection
of the third arbitrator. Upon receipt of the Petitioner's brief, the other party
(the "Respondent") shall have thirty (30) days to file a reply brief. On receipt
of the Respondent's brief, the Petitioner shall have twenty (20) days to file a
rebuttal brief. Respondent shall have twenty (20) days from the receipt of
Petitioner's rebuttal brief to file its rebuttal brief. The arbitrators may
extend the time for filing of briefs at the request of either party.
<PAGE>
31
The arbitrators are relieved from judicial formalities and, in addition
to considering the rules of law and the customs and practices of the insurance
and reinsurance business, shall make their award with a view to effecting the
intent of this Agreement. The decision of the majority shall be final and
binding upon the parties. The costs of arbitration, including the fees of the
arbitrators, shall be shared equally unless the arbitrators decide otherwise.
The arbitration shall be held at the times and places agreed upon by the
arbitrators.
Article XVII - TAX CLAUSE
In consideration of the terms under which this Agreement is issued, the
Company undertakes not to claim any deduction of the premium hereon when making
Canadian tax returns or when making tax returns other than Income or Profits Tax
returns, to any State or Territory of the United States of America or to the
District of Columbia.
Article XIII - OFFSET
The Company or the Reinsurers may offset any balance, whether on
account of premium, commission, claims or losses, adjustment expense, salvage,
or otherwise, due from one party to the other under this Agreement or under any
other agreement heretofore or hereafter entered into between the Company and the
Reinsurers.
<PAGE>
32
INSOLVENCY FUNDS EXCLUSION CLAUSE
It is agreed that this Agreement excludes all liability of the Company
arising, by contract, operation of law, or otherwise, from its participation or
membership, whether voluntary or involuntary, in any insolvency fund.
"Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool,
association, fund, or other arrangement, howsoever denominated, established, or
governed, which provides for any assessment of or payment or assumption by the
Company of part or all of any claim, debt, charge, fee, or other obligation of
an insurer, or its successors or assigns, which has been declared by any
competent authority to be insolvent, or which is otherwise deemed unable to meet
any claim, debt, charge, fee, or other obligation in whole or in part.
<PAGE>
33
POOLS AND ASSOCIATIONS EXCLUSION CLAUSE
SECTION A
Excluding:
(a) All business derived directly or indirectly from any Pool, Association,
or Syndicate which maintains its own reinsurance facilities.
(b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1,
1968, for the purpose of insuring property whether on a country-wide
basis or in respect of designated areas. This exclusion shall not apply
to so-called Automobile Insurance Plans or other pools formed to provide
coverage for Automobile Physical damage.
SECTION B
It is agreed that business written by the Company for the same perils, which is
known at the time to be insured by, or in excess of underlying amounts placed in
the following Pools, Associations, or Syndicates, whether by way of insurance or
reinsurance, is excluded hereunder:
Industrial Risk Insurers (formerly Factory Insurance Association and Oil
Insurance Association), including Underwriters Grain Division.
Associated Factory Mutuals.
Improved Risk Mutuals.
Any Pool, Association, or Syndicate formed for the purpose of writing
Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs.
Nuclear Energy Property Insurance Association.
Nuclear Energy Liability Insurance Association.
Mutual Atomic Energy Reinsurance Pool.
Mutual Atomic Energy Liability Underwriters.
United States Aircraft Insurance Group.
Canadian Aircraft Insurance Group.
Associated Aviation Underwriters.
American Aviation Underwriters.
Section B does not apply:
(a) Where the Total Insured value over all interests of the risk in question
is less than $250,000,000.
(b) To interests traditionally underwritten as Inland Marine or Stock and/or
Contents written on a Blanket basis.
(c) To Contingent Business Interruption, except when the Company is aware
that the key location is known at the time to be insured in any Pool,
Association, or Syndicate named above, other than as provided for under
Section B (a).
(d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational
Establishments, Public Utilities (other than Railroad Schedules) and
Builders Risks on the classes of risks specified in this subsection (d)
only.
<PAGE>
34
Where the Clause attaches to Catastrophe Excesses, the following SECTION C is
added:
SECTION C
NEVERTHELESS the Reinsurers specifically agree that liability accruing to the
Company from its participation in residual market mechanisms including but not
limited to:
(1) The following so-called "Coastal Pools":
ALABAMA INSURANCE UNDERWRITING ASSOCIATION
FLORIDA WINDSTORM UNDERWRITING ASSOCIATION
LOUISIANA INSURANCE UNDERWRITING ASSOCIATION
MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION
NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION
SOUTH CAROLINA WINDSTORM AND HAIL UNDERWRITING ASSOCIATION
TEXAS CATASTROPHE PROPERTY INSURANCE ASSOCIATION
and
(2) All "Fair Plan" and "Rural Risk Plan" Business,
for all perils otherwise protected hereunder shall not be excluded, except that
this reinsurance does not include any increase in such liability resulting from:
(i) The inability of any other participant in such Residual Market Mechanisms
including but not limited to "Coastal Pool" and/or "Fair Plan" and/or
"Rural Risk Plan" to meet its liability.
(ii) Any claim against such "Coastal Pool" and/or "Fair Plan" and/or "Rural
Risk Plan" and/or Residual Market Mechanisms, or any participant therein,
including the Company, whether by way of subrogation or otherwise,
brought by or on behalf of any insolvency fund (as defined in the
Insolvency Funs Exclusion Clause incorporated in this Agreement).
<PAGE>
35
NORTH AMERICAN WAR EXCLUSION CLAUSE (REINSURANCE)
As regards interest which at time of loss or damage are on shore, no liability
shall attach hereto in respect of any loss or damage which is occasioned by war,
invasion, hostilities, acts of foreign enemies, civil war, rebellion,
insurrection, military or usurped power, or martial law or confiscation by order
of any government or public authority.
This War Exclusion Clause shall not, however, apply to interests which at time
of loss or damage are within the territorial limits of the United States of
America (comprising the fifty States of the Union and the District of Columbia
and including Bridges between the U.S.A. and Mexico provided they are under
United States ownership), Canada, St. Pierre and Miquelon, provided such such
interests are insured under policies endorsements or binders containing a
standard war or hostilities or warlike operations exclusion clause.
<PAGE>
36
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - USA
(1) This Agreement does not cover any loss or liability accruing to the
Company directly or indirectly and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy risks.
(2) Without in any way restricting the operation of paragraph (1) of
this Clause, this Agreement does not cover any loss or liability accruing to the
Company, directly or indirectly and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
(i) Nuclear reactor power plants including all auxiliary property on
the site, or
(ii) Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
(iii) Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear material",
and for reprocessing, salvaging, chemically separating, storing
or disposing of "spent" nuclear fuel or waste materials, or
(iv) Installations other than those listed in paragraph (2) (iii)
above using substantial quantities of radioactive isotopes or
other products of nuclear fission.
(3) Without in any way restricting the operations of paragraphs, (1)
and (2) hereof, this Agreement does not cover any loss or liability by
radioactive contamination accruing to the Company, directly or indirectly, and
whether as Insurer or Reinsurer, from any insurance on property which is on the
same site as a nuclear reactor power plant or other nuclear installation and
which normally would be insured therewith except that this paragraph (3) shall
not operate:
(a) where the Company does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January
1960 this sub-paragraph (b) shall only apply provided the said
radioactive contamination exclusion provision has been approved
by the Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operations of paragraphs (1),(2)
and (3) hereof, this Agreement does not cover any loss or liability by
radioactive contamination accruing to the Company, directly or indirectly, and
whether as Insurer or Reinsurer, when such radioactive contamination is a named
hazard specifically insured against.
(5) It is understood and agreed that this Clause shall not extend to
risks using radioactive isotopes in any form where the nuclear exposure is not
considered by the Company to be the primary hazard.
(6) The term "special nuclear material" shall have the meaning given it
in the Atomic Energy Act of 1954 or by any law amendatory thereof.
(7) The Company to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
Note: Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that:
(a) all policies issued by the Company on or before 31st December
1957 shall be free from the application of the other provisions
of this Clause until expiry date or 31st December 1960 whichever
first occurs whereupon all the provisions of this Clause shall
apply.
(b) with respect to any risk located in Canada policies issued by the
Company on or before 31st December 1958 shall be free from the
application of the other provisions of this Clause until expiry
date or 31st December 1960 whichever first occurs whereupon all
the provisions of this Clause shall apply.
<PAGE>
37
EXHIBIT 10.62
SECOND AMENDMENT
TO CONSULTING AGREEMENT
THIS AMENDMENT is made this 13th day of May, 1997, 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, on December 18, 1996, ALLIED and Evans amended the Consulting
Agreement;
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. Effective June 1, 1997, Section III of the Consulting Agreement is
amended by deleting "$250,000" and replacing it with "$180,000".
2. All other terms and conditions remain in full force and effect.
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 Douglas L. Andersen, President
ALLIED Group, Inc. ALLIED Life Financial Corporation
By: /s/ Douglas L. Andersen By: /s/ Samuel J. Wells
----------------------------------- -----------------------------------
Douglas L. Andersen, President Samuel J. Wells, President
<PAGE>
38
Exhibit 11
ALLIED Group, Inc. and Subsidiaries
Computation of Per Share Earnings
For the Three and Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ---------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary
Net income $ 15,656 $ 7,548 $ 31,597 $ 21,496
Preferred stock dividends (879) (879) (1,757) (2,353)
----------- ----------- ---------- -----------
Adjusted net income $ 14,777 $ 6,669 $ 29,840 $ 19,143
=========== =========== ========== ===========
Earnings per share $ .73 $ 0.32 $ 1.47 $ 1.04
=========== =========== ========== ===========
Weighted average shares outstanding 20,275 20,866 20,317 18,425
=========== =========== ========== ===========
Fully Diluted
Net income $ 15,656 $ 7,548 $ 31,597 $ 21,496
Preferred stock dividends (879) (879) (1,757) (1,758)
----------- ----------- ---------- -----------
Adjusted net income $ 14,777 $ 6,669 $ 29,840 $ 19,738
=========== =========== ========== ===========
Earnings per share $ .73 $ 0.32 $ 1.47 $ 0.94
=========== =========== ========== ===========
Weighted average shares outstanding 20,275 20,866 20,317 20,888
=========== =========== ========== ===========
</TABLE>
The dilutive effect of ALLIED Group, Inc.'s common stock equivalents is less
than 3% and have not entered into the earnings per share computations.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
GROUP, INC.'S JUNE 30, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000774624
<NAME> ALLIED GROUP, INC
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 795,074
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 48,548
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 851,106
<CASH> 1,577
<RECOVER-REINSURE> 24,073
<DEFERRED-ACQUISITION> 49,244
<TOTAL-ASSETS> 1,140,504
<POLICY-LOSSES> 376,444
<UNEARNED-PREMIUMS> 233,312
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 50,944
0
37,812
<COMMON> 141,663
<OTHER-SE> 212,516
<TOTAL-LIABILITY-AND-EQUITY> 1,140,504
267,743
<INVESTMENT-INCOME> 25,526
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 29,182
<BENEFITS> 182,689
<UNDERWRITING-AMORTIZATION> 58,707
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 44,462
<INCOME-TAX> 12,638
<INCOME-CONTINUING> 31,597
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,597
<EPS-PRIMARY> 1.470
<EPS-DILUTED> 1.470
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
