UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1997:
20,375,535 shares of Common Stock.
<PAGE>
2
PART I
Item 1. Financial Statements
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- -------------
(in thousands)
<S> <C> <C>
Assets
Investments
Fixed maturities at fair value (amortized cost
$780,998 in 1997 and $775,166 in 1996) $ 803,462 $ 792,268
Equity securities at fair value
(cost $56,230 in 1997 and $17,880 in 1996) 64,460 20,384
Short-term investments at cost (note 2) 10,101 6,993
-------------- -------------
Total investments 878,023 819,645
Cash 1,515 1,067
Accrued investment income 11,448 11,563
Accounts receivable 92,612 84,706
Current income taxes recoverable 2,592 2,878
Reinsurance receivables for losses
and loss adjusting expenses 26,838 18,183
Mortgage loans held for sale (note 3) 24,119 12,054
Deferred policy acquisition costs 51,056 46,671
Prepaid reinsurance premiums 8,866 7,838
Mortgage servicing rights 34,851 33,094
Other assets 33,646 39,960
-------------- -------------
Total assets $ 1,165,566 $ 1,077,659
============== =============
.
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
3
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- -------------
(in thousands)
<S> <C> <C>
Liabilities
Losses and loss adjusting expenses $ 373,338 $ 362,191
Unearned premiums 241,559 220,596
Indebtedness to affiliates 1,827 2,130
Notes payable to nonaffiliates (note 3) 42,293 31,744
Notes payable to affiliates (note 2) 4,475 2,350
Guarantee of ESOP obligations 24,180 24,370
Deferred income taxes 4,540 2,244
Other liabilities 61,836 61,443
-------------- -------------
Total liabilities 754,048 707,068
-------------- -------------
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 20,327 shares in
1997 and 20,383 shares in 1996 (note 4) 20,327 20,383
Additional paid-in capital 122,188 126,078
Retained earnings 230,609 195,276
Unrealized appreciation of investments (net of deferred
income tax of $10,840 in 1997 and $6,907 in 1996) 19,854 12,699
Unearned compensation related to ESOP (19,272) (21,657)
-------------- -------------
Total stockholders' equity 411,518 370,591
-------------- -------------
Total liabilities and stockholders' equity $ 1,165,566 $ 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 Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues
Earned premiums $ 137,816 $ 124,246 $ 405,559 $ 364,229
Investment income 12,968 12,444 38,494 36,608
Realized investment gains 17 26 17 65
Other income (note 2) 15,365 14,003 44,547 39,737
------------ ------------ ------------ ------------
166,166 150,719 488,617 440,639
------------ ------------ ------------ ------------
Losses and expenses
Losses and loss adjusting expenses 94,725 89,279 277,414 265,317
Amortization of deferred
policy acquisition costs 30,298 27,063 89,005 79,888
Other underwriting expenses 5,151 4,359 15,033 14,226
Other expenses 12,801 9,356 38,749 29,451
Interest expense 454 381 1,217 1,151
------------ ------------ ------------ ------------
143,429 130,438 421,418 390,033
------------ ------------ ------------ ------------
Income before income taxes
and minority interest 22,737 20,281 67,199 50,606
------------ ------------ ------------ ------------
Income taxes
Current 6,182 5,579 20,791 13,485
Deferred 341 243 (1,630) 1,166
------------ ------------ ------------ ------------
6,523 5,822 19,161 14,651
------------ ------------ ------------ ------------
Income before minority interest 16,214 14,459 48,038 35,955
Minority interest in net income
of consolidated subsidiary 147 --- 374 ---
------------ ------------ ------------ ------------
Net income $ 16,067 $ 14,459 $ 47,664 $ 35,955
============ ============ ============ ============
Net income applicable
to common stock $ 15,188 $ 13,580 $ 45,028 $ 32,724
============ ============ ============ ============
Earnings per share
Primary $ .75 $ .67 $ 2.22 $ 1.71
============ ============ ============ ============
Fully diluted $ .75 $ .67 $ 2.22 $ 1.61
============ ============ ============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
5
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 47,664 $ 35,955
Adjustments to reconcile net income to net cash
provided by operating activities
Realized investment gains (17) (65)
Depreciation and amortization 9,586 8,037
Indebtedness with affiliates (303) 1,825
Accounts receivable, net (16,561) (7,604)
Accrued investment income 115 (496)
Deferred policy acquisition costs (4,385) (4,835)
Mortgage loans held for sale, net (1,826) (4,859)
Other assets 1,467 (2,837)
Losses and loss adjusting expenses 11,147 13,443
Unearned premiums, net 19,935 22,544
Cost of ESOP shares allocated 2,385 1,709
Current income taxes 279 (23)
Deferred income taxes (1,630) 1,166
Other, net (2,420) 3,576
------------ ------------
Net cash provided by operating activities 65,436 67,536
------------ ------------
Cash flows from investing activities
Purchase of fixed maturities (114,061) (173,170)
Purchase of equity securities (38,696) (7,824)
Purchase of equipment (5,023) (7,079)
Sale of fixed maturities 45,087 64,168
Maturities, calls, and principal reductions of fixed maturities 64,017 81,263
Sale of equity securities 354 554
Short-term investments, net (3,108) (295)
Sale of equipment 284 116
------------ ------------
Net cash used in investing activities (51,146) (42,267)
------------ ------------
Cash flows from financing activities
Notes payable to nonaffiliates, net 310 1,810
Notes payable to affiliates, net 2,125 (545)
Issuance of common stock 4,500 1,638
Repurchase of common stock (7,354) (16,525)
Minority interest in additional paid-in capital (1,092) ---
Dividends paid to stockholders, net of income tax benefit (12,331) (11,561)
------------ ------------
Net cash used in financing activities (13,842) (25,183
------------ ------------
Net increase in cash 448 86
Cash at beginning of year 1,067 1,465
------------ ------------
Cash at end of quarter $ 1,515 $ 1,551
============ ============
</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 September 30, 1997, The ALLIED Group Employee Stock Ownership Trust (ESOP
Trust) owned 25.3% and ALLIED Mutual Insurance Company (ALLIED Mutual), an
affiliated property-casualty insurance company, controlled 18.4% of the
outstanding voting stock of the Company.
Minority interest
The minority interest in a 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
$2.2 million at September 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
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic EPS $ .75 $ .67 $ 2.22 $ 1.71
Diluted EPS $ .74 $ .65 $ 2.18 $ 1.58
</TABLE>
<PAGE>
7
(2) Transactions with Affiliates
Pursuant to the terms of the Intercompany Operating Agreement, the Company
leases employees to ALLIED Mutual and certain of its subsidiaries. Each company
that leases employees is charged a fee based upon costs incurred for salaries,
related benefits, taxes, and expenses associated with the employees it leases.
For the nine months ended September 30, 1997 and 1996, the Company received
revenues of $1.9 million and $1.9 million for employees leased to affiliates,
respectively, which are included in other income.
Subsidiaries of the Company provide data processing and other services for
ALLIED Mutual and its subsidiaries. Included in other income are revenues of
$1.9 million and $1 million relating to services performed for ALLIED Mutual and
its subsidiaries for the first nine months 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 $2.2 million in the first nine months of 1997. The
segment had recoveries of $2 million from ALLIED Mutual under the agreement in
the first nine months 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 $2.2 million in the first nine months of 1996. There were recoveries
from ALLIED Mutual under this agreement of $3.3 million in the first nine months
of 1996.
The Company and its subsidiaries 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
September 30, 1997, the Company and its subsidiaries had $6 million invested in
the fund and had several short-term unsecured notes payable to the fund totaling
$4.5 million. The interest rate on the borrowings was 8.8%.
The Company had interest income from affiliates of $372,000 and $360,000 in the
first nine months of 1997 and 1996, respectively. Interest paid to affiliates
was $281,000 and $211,000 in the first nine months of 1997 and 1996,
respectively.
(3) Notes Payable to Nonaffiliates
At September 30, 1997, the mortgage banking subsidiary had borrowed $31.5
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 $24.1 million of pledged mortgage loans
held for sale, mortgage servicing rights on loans with a principal balance of
$2.9 billion, and foreclosure loans. Interest rates applicable to the mortgage
loan warehousing agreements vary with the level of investable deposits
maintained at the respective commercial banks.
<PAGE>
8
The mortgage banking subsidiary also had $10.5 million of 8.4% senior secured
notes outstanding as of September 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 6.5% at September 30, 1997. AMCO had an
outstanding balance under this line of credit of $310,000 at September 30, 1997.
The borrowings were secured by United States Government securities with a
carrying value of $16.3 million.
(4) Common Stock
During the first nine months 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).
<PAGE>
9
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1997 1996
---------------- ---------------
(in thousands)
<S> <C> <C>
Revenues *
Property-casualty $ 418,506 $ 381,715
Excess & surplus lines 29,901 24,423
Eliminations and other 40,210 34,501
---------------- ---------------
Total $ 488,617 $ 440,639
================ ===============
Income before income taxes and minority interest *
Property-casualty $ 59,543 $ 41,432
Excess & surplus lines 7,359 5,274
Eliminations and other 297 3,900
---------------- ---------------
Total $ 67,199 $ 50,606
================ ===============
September 30, December 31,
1997 1996
---------------- ---------------
(in thousands)
Assets
Property-casualty $ 989,410 $ 917,537
Excess & surplus lines 142,536 131,405
Eliminations and other 33,620 28,717
---------------- ---------------
Total $ 1,165,566 $ 1,077,659
================ ===============
</TABLE>
* Including realized investment gains or losses.
(6) Subsequent Event
At its October meeting, the Board of Directors approved a 3-for-2 stock split to
be distributed November 28, 1997 to shareholders of record on November 14 and
declared a fourth-quarter dividend of $0.12 on the post-split shares. The split
will increase the Company's common shares outstanding to approximately 30.6
million.
<PAGE>
10
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 85.7%
and 86.6% of consolidated revenues for the nine months ended September 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 nine months of 1997 were $488.6 million, up
10.9% over the $440.6 million reported for the first nine months of 1996. For
the third quarter, consolidated revenues increased 10.2% over the same period in
1996. The increase occurred primarily because of the growth in earned premiums
for the nine and three months ended September 30, 1997.
Income before income taxes and minority interest for the first nine months of
1997 was up 32.8% to $67.2 million from $50.6 million for the same period in
1996. For the three months ended September 30, 1997, income before income taxes
and minority interest was up 12.1% to $22.7 million. The increase was due to
higher revenues combined with an improved loss experience for the nine and three
months ending September 30, 1997. Wind and hail losses for the first nine months
of 1997 were down 25.7% to $26.2 million compared to $35.3 million for the same
period in 1996. For the third quarter wind and hail losses were down 8.9% to
$10.6 million.
Net income was up 32.6% to $47.7 million, bringing fully diluted earnings per
share to $2.22 for the nine months ended September 30, 1997, from $36 million
($1.61 per share) for the corresponding period in 1996. Fully diluted earnings
per share before realized investments gains and losses were $2.22 for the first
nine months of 1997 compared with $1.61 for the same period of 1996. For the
three months ended September 30, 1997 and 1996, fully diluted earnings per share
before realized gains were $0.75 and $0.66, respectively.
Book value per share at September 30, 1997 increased to $19.33 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 nine months of 1997. The fair
value of investments in fixed maturities was $22.5 million above cost at
<PAGE>
11
September 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 $18.61 at September 30, 1997 compared to $16.85 at
December 31, 1996.
Property-casualty
Net written premiums for the pool (including ALLIED Mutual) totaled $628
million, a 9% increase over production in the first nine months of 1996. The
average premium per policy for personal lines was up 6.2% from the first nine
months of 1996 to $631 while the policy count grew 6.5%. The average premium per
policy for commercial lines excluding crop-hail increased 5.1% from the first
nine months of 1996 to $1,149 and the policy count was up 1.4%. Earned premiums
for the property-casualty segment were 68.1% personal lines and 31.9% commercial
lines in the first nine months of 1997. The business mix for the first nine
months of 1996 was 66.6% personal lines and 33.4% commercial lines.
Revenues for the property-casualty segment increased to $418.5 million from
$381.7 million for the nine months ended September 30, 1997 and 1996,
respectively. Revenues for the three months ended September 30, 1997, increased
8.3% to $142.7 million. Direct earned premiums for the segment were $420.1
million for the first nine months of 1997 compared with $365.5 million one year
earlier. Earned premiums increased 10.6% for the first nine months of 1997 to
$380.8 million from $344.4 million; earned premiums for the third quarter
increased 8.9% to $129.4 million from $118.8 million for the same period in
1996. The increase resulted from growth in insurance exposure and increase in
average premium per policy.
Investment income for the first nine months of 1997 was $33.3 million compared
to $31.4 million for the same period in 1996. For the three months ended
September 30, 1997, investment income increased 4.1% to $11.2 million compared
to $10.8 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 nine months ended September 30, 1997 and 1996,
respectively. Realized investment gains were $16,000 in the first nine months of
1997 compared with realized gain of $197,000 in the first nine months of 1996.
Other income for the first nine months of 1997 and 1996 was $4.4 million and
$5.7 million, respectively.
Income before income taxes increased 43.7% to $59.5 million from $41.4 million
in the first nine months of 1996. A 9.6% growth in revenues, combined with an
improved loss experience in the first nine months of 1997 contributed to the
increase. The growth in revenues more than offset the 5.5% growth in expenses
for the nine month period ended September 30, 1997.
The statutory combined ratio (after policyholder dividends) for the first nine
months of 1997 was 94.0 compared to 98.5 reported in the first nine months of
1996. The improvement in the combined ratio was primarily attributed to a
4.4-point decrease in the nine month loss and loss adjusting expense ratio. The
segment also realized a slight improvement in its underwriting expense ratio
(0.1 point). The impact of wind and hail losses on the combined ratio was 6.9
points and 10.3 points for the nine months ended September 30, 1997 and 1996,
respectively. The generally accepted accounting principles (GAAP) underwriting
gain was $21.8 million compared with a gain of $4.1 million for the first nine
months of 1996. On a fully diluted basis, the impact of wind and hail losses on
the results of operations was $0.84 per share versus $1.11 per share in the
first nine months of 1996.
<PAGE>
12
The following table presents the property-casualty's statutory combined ratio by
line of business for the three and nine months ended September 30, 1997 and
1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Personal automobile 92.6 97.4 92.9 98.0
Homeowners 98.3 101.8 99.8 108.1
Personal lines 94.2 98.6 94.8 100.7
Commercial automobile 85.6 92.8 89.9 98.5
Workers' compensation 90.8 81.0 89.0 75.1
Other property/liability 99.5 97.5 94.5 99.1
Other lines 61.8 40.3 61.0 46.9
Commercial lines 95.5 93.4 92.5 94.3
Total 94.5 96.8 94.0 98.5
</TABLE>
The personal auto statutory combined ratio improved to 92.9 for the first nine
months of 1997 from 98.0 for the same period in 1996. The improvement was
largely due to a 4.7-point decrease in the loss and loss adjusting expense
ratio; the underwriting expense ratio also improved 0.4-points. The statutory
combined ratio for the homeowners line was 99.8 for the first nine months of
1997 compared with 108.1 for the same period of 1996. The improvement was due to
a 8.7-point decrease in the loss and loss adjusting expense ratio, that more
than offset the slight increase experienced in the underwriting expense ratio.
The impact of lower wind and hail losses on the combined ratio for the
homeowners line decreased to 19.6-points from 28.7-points for the first nine
months of 1996. Overall, the personal lines statutory combined ratio decreased
to 94.8 in the first nine months of 1997 from 100.7 in the same period of 1996.
The statutory combined ratio for commercial lines decreased to 92.5 in the first
nine months of 1997 from 94.3 for the first nine months of 1996. The improvement
of personal and commercial lines combined ratio was attributable to higher
earned premiums, combined with a favorable loss experience in the first nine
months of 1997.
Excess & Surplus Lines
Earned premiums increased 25% to $24.8 million for the first nine months of 1997
from $19.8 million for the same period in 1996. For the three months ended
September 30, 1997 and 1996, earned premiums were $8.5 million and $5.4 million,
respectively. Net written premiums increased 27.8% to $25.8 million for the nine
months ended September 30, 1997 from $20.2 million in the same period of 1996.
The segment's major product lines all experienced increases in net written
premiums due to the segment's intensified marketing efforts and the addition of
19 new agencies (a 26.8% increase) over the last 21 months. For the nine months
ended September 30, 1996, net written premiums were adversely affected by higher
reinsurance costs, which were retroactive to the beginning of the year. Direct
earned premiums increased to $32.2 million for the nine months ended September
30, 1997 from $27.6 million for the same period in 1996. For the nine month
period ended September 30, 1997, the segment's book of business was comprised of
3% personal lines and 97% commercial lines. The business mix for the first nine
months of 1996 was 2.7% personal lines and 97.3% commercial lines.
Investment income for the first nine months of 1997 increased 11.5% to $5.1
million from $4.6 million for the same period in 1996. For the third quarter
only, investment income increased 10.9% to $1.7 million. Investment income
<PAGE>
13
increased due to a larger average balance in the investment portfolio. The
pretax yield on those assets was 6.3% in the first nine months of 1997 compared
to 6.3% for the same period in 1996. Invested assets increased 7.8% to $112.5
million at September 30, 1997 from $104.4 million at year-end 1996.
The statutory combined ratio (after policyholder dividends) was 90.6, which
produced a GAAP underwriting gain of $2.2 million for the first nine months of
1997. The combined ratio for the first nine months of 1996 was 95.7 which
resulted in a GAAP underwriting gain of $685,000. The combined ratio improved
primarily because of a 4.8-point improvement in the loss and loss adjusting
expense ratio in the first nine months of 1997, due to growth in earned premiums
and an improved loss experience. The underwriting expense ratio also improved
0.3-points in the first nine months of 1997 over the same period in 1996.
Income before income taxes for the nine months ended September 30, 1997
increased to $7.4 million from $5.3 million; for the quarter ended September 30,
1997, income before income taxes increased to $2.6 million from $1.7 million for
the same quarter in 1996. The segment had realized losses of $4,000 for the
first nine months of 1997 and had realized gains of $2,000 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 nine months of
1997 increased to $40.2 million from $34.5 million for the same period last
year. The increase was primarily due to a 26.2% increase in data processing
revenues from unafiliated companies.
Income before income taxes was $297,000 for the first nine months of 1997
compared to income before taxes of $3.9 million for the same period in 1996. The
decrease was due to higher operating expenses in 1997 that were primarily the
result of a larger percentage of overhead expenses being allocated to the
holding company and higher employee costs and amortization expenses in the data
processing segment. The data processing segment shortened the estimated life of
its software products in 1997. The mortgage banking servicing portfolio at
September 30, 1997 increased slightly to $2.9 billion from $2.8 billion at
year-end 1996.
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
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; 91.5% and 7.3%, respectively.
The ratings on 99.5% of the fixed income securities at September 30, 1997 were
investment grade or higher. The investment portfolio contained no real estate or
mortgage loans at September 30, 1997.
Invested assets were up 7.1% to $878 million from $819.6 million at year-end
1996. Nine-month consolidated investment income increased 5.2% to $38.5 million
from $36.6 million through September 30, 1996. For the quarter ended September
30, 1997, investment income was up 4.2% to $13 million over the third 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%. The lower yield is due in part to a higher proportional share of
investment income from tax-exempt securities
<PAGE>
14
Income Taxes
The Company's year-to-date effective income tax rate was 28.5% at September 30,
1997 and 28.4% for year-end 1996. The income tax expense for the first nine
months of 1997 rose on higher operating income up to $19.2 million from $14.7
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 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 nine months of 1997 and 1996, operating activities generated cash
flows of $65.4 million and $67.5 million, respectively. 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 $13 million of dividends to
stockholders in the first nine months of 1997. For the same period in 1996, the
funds generated from the operating activities were used to pay dividends to
stockholders of $12.3 million. Dividend payments to common stockholders totaled
$10.4 million for the nine months ended September 30, 1997, up from $9.1 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
September 30, 1996. In the first nine months of 1997 and 1996, the Company paid
dividends of $2.6 million on the 6-3/4% Series preferred stock. The Company also
paid dividends of $595,000 on the ESOP Series preferred stock (ESOP Series) in
the nine months ended September 30, 1996.
<PAGE>
15
The Company relies primarily on dividend payments from its property-casualty
subsidiaries to pay preferred and common stock dividends to stockholders. During
the first nine months of 1997, the Company received dividend payments of $12.2
million from the property-casualty subsidiaries and $57,000 from noninsurance
subsidiaries. During the same period of 1996, the Company received dividend
payments of $11.2 million from the property-casualty subsidiaries and $107,000
from noninsurance subsidiaries.
During the first nine months 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 an additional 100,300 shares. During the nine months ended
September 30, 1996, the Company had repurchased and canceled 443,000 of its
common stock under the repurchase program approved by the Board on December 14,
1994. The shares were purchased at an average price per share of $37.30.
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 September 30, 1997, short-term
borrowings amounted to $31.5 million to be repaid through the subsequent sale of
mortgage loans held for sale and long-term borrowings amounted to $10.5 million
to be repaid over the next seven 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.
At its October meeting, the Board of Directors approved a 3-for-2 stock split to
be distributed November 28, 1997 to shareholders of record on November 14 and
declared a fourth-quarter dividend of $0.12 on the post-split shares. The split
will increase the Company's common shares outstanding to approximately 30.6
million.
Management anticipates that short-term and long-term capital expenditures, cash
dividends, and operating cash needs will be met from existing capital and
internally generated funds. As of September 30, 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>
16
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) 10.29 The ALLIED Group Employee Stock Ownership Plan, as
amended and restated effective January 1, 1996.
10.35 Third Amendment to the Term Credit Agreement and
Guaranty, dated September 26, 1997.
11 Statement re Computation of Per Share Earnings.
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the third
quarter ended September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIED Group, Inc.
(Registrant)
Date: November 6, 1997 /s/ Jamie H. Shaffer
-----------------------------------------
Jamie H. Shaffer, Senior Vice President,
Chief Financial Officer, and Treasurer
<PAGE>
17
ALLIED Group, Inc. and Subsidiaries
INDEX TO EXHIBITS
EXHIBIT
NUMBER ITEM PAGE
10.29 The ALLIED Group Employee Stock Ownership Plan, as
amended and restated effective January 1, 1996. 18
10.35 Third Amendment to the Term Credit Agreement and
Guaranty, dated September 26, 1997. 76
11 Statement re Computation of Per Share Earnings 77
27 Financial Data Schedule 78
<PAGE>
18
Exhibit 10.29
Officer Adoption
of
Amendment and Restatement
of
The ALLIED Group Employee Stock Ownership Plan
----------------------------------------------
By virtue and in exercise of the amending power reserved to ALLIED Group,
Inc. (the "Company") pursuant to section 12.1 of the ALLIED Group Employee Stock
Ownership Plan (the "Plan"), and pursuant to resolutions to amend adopted
November 21, 1996 and July 29, 1997 by the Compensation Committee of the Board
of Directors, the Plan is hereby amended and restated, effective as of January
1, 1996, in the form attached hereto.
IN WITNESS WHEREOF, the undersigned officers of the Company have caused
these presents to be signed on behalf of the Company and its corporate seal
affixed and attested, this 6th day of August, 1997.
ALLIED Group, Inc.
By: /s/ Douglas L. Andersen
-------------------------------------
Douglas L. Andersen
Its: President
-------------------------------------
Attest:
By: /s/ Sally J. Malloy
------------------------------------
Sally J. Malloy
Its: Secretary
------------------------------------
<PAGE>
19
THE ALLIED GROUP EMPLOYEE STOCK OWNERSHIP PLAN
----------------------------------------------
(As Amended and Restated
Effective as of January 1, 1996)
<PAGE>
20
Certificate
-----------
I, Sally J. Malloy, Secretary of ALLIED GROUP, INC., having in my custody
and possession the corporate records and seal of said Corporation, do hereby
certify that attached hereto is a true and correct copy of THE ALLIED GROUP
EMPLOYEE STOCK OWNERSHIP PLAN, as in effect on the date hereof.
WITNESS my hand and the corporate seal of the Corporation this 6th day of
August, 1997.
/s/ Sally J. Malloy
--------------------------------
Sally J. Malloy as Aforesaid
Secretary
(Seal)
<PAGE>
21
TABLE OF CONTENTS
-----------------
Section Page
- ------- ----
1 General........................................................1
1.1 Purpose and Effective Date.............................1
1.2 Employers and Related Companies........................1
1.3 The Trust..............................................1
1.4 Plan Administration....................................2
1.5 Plan Year..............................................2
1.6 Accounting Date........................................2
1.7 Applicable Laws........................................2
1.8 Gender and Number......................................2
1.9 Notices................................................2
1.10 Evidence...............................................2
1.11 Action By Employer.....................................2
1.12 No Reversion to Employers..............................2
1.13 Plan Supplements.......................................3
1.14 Military Service.......................................3
1.15 Defined Terms..........................................3
2 Plan Participation.............................................3
2.1 Eligibility for Participation..........................3
2.2 Participation Not Guarantee of
Employment...........................................4
2.3 Leased Employees.......................................4
2.4 Inactive Participation.................................4
3 Service........................................................4
3.1 Year of Eligibility Service............................4
3.2 Hour of Service........................................5
3.3 Years of Service.......................................5
3.4 One Year Period of Severance...........................6
3.5 One Year Break in Service..............................7
3.6 Year of Participation Service..........................7
3.7 Other Service..........................................7
4 Plan Contributions.............................................8
4.1 Mandatory Employer Contributions.......................8
4.2 Discretionary Employer Contributions...................8
4.3 Payment of Employer Contributions......................8
4.4 Participant Contributions..............................8
5 Plan Investments...............................................8
5.1 Investment in Company Stock............................8
5.2 Use of Loan Proceeds and Dividends.....................9
5.3 ESOP Loans.............................................9
5.4 Release of Company Stock
from Suspense Account................................9
-i-
<PAGE>
22
Section Page
- ------- ----
6 Plan Accounting................................................10
6.1 Participants' Accounts.................................10
6.2 Adjustment of Participants' Accounts...................10
6.3 Allocation and Crediting of
Earnings and Losses..................................11
6.4 Minimum Required Allocation Amounts....................13
6.5 Allocation and Crediting of Employer
Contributions and Forfeitures........................13
6.6 Compensation...........................................15
6.7 Eligible Participants..................................16
6.8 Stock Dividends, Splits and Other
Capital Reorganizations..............................16
6.9 Statement of Plan Interest.............................16
6.10 Expenses...............................................16
7 Limitations....................................................17
7.1 Limitation on Allocations to
Participant Accounts.................................17
7.2 Annual Additions.......................................18
7.3 Excess Annual Additions................................18
7.4 Highly Compensated Employees...........................18
7.5 Combined Plan Limitation...............................19
8 Vesting and Termination Dates..................................19
8.1 Determination of Vested Interest.......................19
8.2 Accelerated Vesting....................................19
8.3 Termination Dates......................................19
9 Distributions..................................................20
9.1 Distributions to Participants After
Termination of Employment............................20
9.2 Revocation of Annuity Form of Benefit..................22
9.3 Retirement Election Information........................22
9.4 Distributions to Beneficiaries.........................23
9.5 Pre-Retirement Election Information....................25
9.6 Revocation of Pre-Retirement Surviving
Spouse Annuity.......................................25
9.7 Limits on Commencement and Duration of
Distributions........................................26
9.8 Beneficiary Designations...............................28
9.9 Diversification by Participants........................28
9.10 Forfeitures of Unvested Contributions..................29
9.11 Application of Forfeitures.............................30
9.12 Payment in Cash or Company Stock.......................30
9.13 Distribution and Transfer of Company
Preferred Stock......................................30
9.14 Accrued Dividends......................................32
9.15 Facility of Payment....................................32
9.16 Interests Not Transferable.............................32
-ii-
<PAGE>
23
Section Page
- ------- ----
9.17 Absence of Guaranty....................................33
9.18 Missing Participants or Beneficiaries..................33
9.19 Direct Rollovers.......................................33
9.20 Distributions Pursuant to a Qualified
Domestic Relations Order.............................35
10 Shareholder Rights.............................................35
11 The Committee..................................................36
11.1 Membership.............................................36
11.2 Rights, Powers and Duties..............................36
11.3 Allocation and Delegation of
Committee Responsibilities and Powers................37
11.4 Application of Rules...................................37
11.5 Information to be Furnished to Committee...............37
11.6 Committee's Decision Final.............................37
11.7 Remuneration and Expenses..............................37
11.8 Exercise of Committee's Duties.........................38
11.9 Indemnification of the Committee.......................38
11.10 Resignation or Removal of
Committee Member.....................................38
11.11 Appointment of Successor Committee
Member...............................................38
12 Amendment and Termination......................................38
12.1 Amendment..............................................38
12.2 Termination............................................39
12.3 Merger and Consolidation of Plan,
Transfer of Plan Assets..............................39
12.4 Distribution on Termination and
Partial Termination..................................39
12.5 Notice of Amendment, Termination
or Partial Termination...............................40
12.6 Method of Plan Amendment or Termination................40
Appendix A - Defined Terms
Supplement A (Top-Heavy Status)
Supplement B (Non-Readily Tradeable Stock)
Supplement C (Transfers from Employer Plans)
Supplement D (Transfers to and from ALLIED Life Financial
Corporation Employee Stock Ownership Plan)
-iii-
<PAGE>
24
THE ALLIED GROUP EMPLOYEE STOCK OWNERSHIP PLAN
----------------------------------------------
(As Amended and Restated Effective as of January 1, 1996)
SECTION 1
---------
General
-------
1.1. PURPOSE AND EFFECTIVE DATE. Effective January 1, 1990 (the "Effective
Date") ALLIED Group, Inc., an Iowa corporation (the "Company"), established THE
ALLIED GROUP EMPLOYEE STOCK OWNERSHIP PLAN (the "Plan"), in order to promote the
mutual interests of the Company, its shareholders, its eligible employees and
the eligible employees of any Related Company (as defined in subsection 1.2)
which adopts the Plan (i) by providing such employees with an opportunity to
acquire equity interests in the Company and to exercise shareholder rights with
respect thereto, (ii) by causing the Plan to be a long-term investor in stock of
the Company, and (iii) by providing the Company and the eligible employees with
the tax benefits and other benefits provided under applicable laws to employee
stock ownership plans. The Plan is intended to meet the applicable requirements
of sections 401(a) and 4975(e)(7) of the Internal Revenue Code of 1986, as
amended (the "Code"). The following provisions constitute an amendment,
restatement and continuation of the Plan effective as of January 1, 1996. The
Plan is intended to be a combination stock bonus and money purchase plan. Except
for cash or cash equivalents required to be maintained for administrative and
other allowable purposes, the Plan shall be invested exclusively in shares of
stock of the Company which qualify as "employer securities" under section 409(l)
of the Code ("Company Stock").
1.2. EMPLOYERS AND RELATED COMPANIES. The Company and each Related Company
which adopts the Plan are referred to below collectively as the "Employers" and
individually as an "Employer". The term "Related Company" means any corporation,
trade or business during any period which it is, along with the Company, a
member of a controlled group of corporations as described in section 414(b) of
the Code. Only for the purposes of determining the Termination Date under
subsection 8.3, an Eligible Participant under subsection 6.7, and calculating
Hours of Service for the purposes of determining rights to participation,
allocations, and vesting, the term "Related Company" shall include ALLIED Life
Insurance Company.
1.3. THE TRUST. All contributions made under the Plan, and all earnings
with respect to such contributions, will be held, managed and controlled by a
trustee acting under a trust which forms a part of the Plan. The terms of the
trust and the trustee are set forth in a trust agreement known as THE ALLIED
GROUP EMPLOYEE STOCK OWNERSHIP TRUST (the "Trust Agreement"). All rights which
may accrue to any person under the Plan shall be subject to all of the terms and
provisions of the Trust Agreement as in effect from time to time.
-1-
<PAGE>
25
1.4. PLAN ADMINISTRATION. The authority to control and manage the operation
and administration of the Plan is vested in a Committee as described in section
11. Except as otherwise expressly provided in section 11, the Company shall be
the "Administrator" of the Plan and shall have the rights, duties and
obligations of an "administrator" as that term is defined in section 3(16)(A) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
of a "plan administrator" as that term is defined in section 414(g) of the Code.
1.5. PLAN YEAR. The term "Plan Year" means the calendar year.
1.6. ACCOUNTING DATE. The term "Accounting Date" means the last business
day of each Plan Year.
1.7. APPLICABLE LAWS. The Plan shall be construed and administered
according to the laws of the State of Iowa to the extent that such laws are not
preempted by the laws of the United States of America.
1.8. GENDER AND NUMBER. Where the context admits, words in any gender shall
include any other gender, words in the singular shall include the plural and the
plural shall include the singular.
1.9. NOTICES. Any notice or document required to be filed with the
Committee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Committee, in care of the Company at
its principal executive offices. Any notice required under the Plan may be
waived by the person entitled to notice.
1.10. EVIDENCE. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.
1.11. ACTION BY EMPLOYER. Any action required or permitted to be taken by
an Employer under the Plan shall be by resolution of its Board of Directors, or
by a person or persons authorized by resolution of its Board of Directors,
subject to any prerequisites applicable to Board action required by law or
regulation or pursuant to its charter, by-laws or agreement.
1.12. NO REVERSION TO EMPLOYERS. No part of the corpus or income of the
Trust Fund shall revert to any Employer or be used for, or diverted to, purposes
other than for the exclusive benefit of Participants and other persons entitled
to benefits under the Plan, except as specifically provided in Article V of the
Trust Agreement.
-2-
<PAGE>
26
1.13. PLAN SUPPLEMENTS. The provisions of the Plan as applied to any
Employer or any group of employees of any Employer may, with the consent of the
Company, be modified or supplemented from time to time by the adoption of one or
more Supplements. Each Supplement shall form a part of the Plan as of the
Supplement's effective date. In the event of any inconsistency between a
Supplement and the Plan document, the terms of the Supplement shall govern.
1.14. MILITARY SERVICE. Notwithstanding any provisions of this Plan to the
contrary, contributions, benefits and service credit with respect to qualified
military service will be provided in accordance with Code section 414(u).
1.15. DEFINED TERMS. Terms used frequently with the same meaning are
indicated by initial capital letters, and are defined throughout the Plan.
Appendix A contains an alphabetical listing of such terms and the subsections in
which they are defined.
SECTION 2
---------
Plan Participation
------------------
2.1. ELIGIBILITY FOR PARTICIPATION. Subject to the terms and conditions of
the Plan, each employee of an Employer shall become a "Participant" in the Plan
on the Effective Date or, if later, the January 1 coincident with or next
preceding the date on which he has satisfied the following requirements:
(a) he has completed one Year of Eligibility Service (as defined in
subsection 3.1);
(b) he has attained at least age 21 years; and
(c) effective for Plan Years after December 31, 1995, he is employed by
his Employer on a salaried basis or hourly basis.
Notwithstanding the foregoing provisions of this subsection 2.1, if an employee
or a Participant has a Termination Date following completion of one Year of
Eligibility Service and attainment of age 21, he shall become a Participant on
the later of his date of reemployment or the January 1 following his original
date of employment if he had at least five Years of Service before his
Termination Date or if he incurred fewer than five consecutive One Year Breaks
in Service. If such a reemployed employee or Participant had fewer than five
Years of Service before his Termination Date and he incurred five or more
consecutive One Year Breaks in Service, he shall be considered a new employee
for eligibility purposes upon reemployment. If a reemployed employee who did not
complete a Year of Eligibility Service before his Termination Date incurs a One
Year Break in Service, he shall be considered a new employee for eligibility
purposes upon reemployment. The term "employee" as used herein and throughout
the Plan refers to a common law employee of an Employer who is subject to income
and employment tax withholding.
-3-
<PAGE>
27
2.2. PARTICIPATION NOT GUARANTEE OF EMPLOYMENT. Participation in the Plan
does not constitute a guarantee or contract of employment, and will not give any
employee or Participant the right to be retained in the employ of the Employers
or Related Companies nor any right or claim to any benefit under the terms of
the Plan unless such right or claim has specifically accrued under the terms of
the Plan.
2.3. LEASED EMPLOYEES. If, pursuant to one or more agreements between an
Employer or Related Company and one or more leasing organizations (within the
meaning of section 414(n) of the Code), a person provides services to the
Employer or Related Company on a substantially full-time basis for a period of
at least one year and for years beginning after December 31, 1996, such services
are performed under primary direction or control of the Employer or Related
Company, such person shall be a "Leased Employee". No Leased Employee, who is
not also an employee of an Employer and otherwise meets the requirements of
subsection 2.1, shall be eligible to participate in this Plan.
2.4. INACTIVE PARTICIPATION. Once an eligible employee becomes a
Participant in the Plan, he will remain a Participant for all purposes under the
Plan except the contribution provisions of section 4 as long as he continues to
have an Account balance under the Plan.
SECTION 3
---------
Service
-------
3.1. YEAR OF ELIGIBILITY SERVICE. The term "Year of Eligibility Service"
means, with respect to any employee or Participant, any Plan Year during which
he completes at least 1,000 Hours of Service, subject to the following:
(a) the term Year of Eligibility Service shall not include any Plan Year
commencing prior to the date on which the employee first completes
an Hour of Service; and
(b) the 12-consecutive-month period commencing on the date on which the
employee first completes an Hour of Service shall be deemed to be a
Year of Eligibility Service if he completes at least 1,000 Hours of
Service during such 12-consecutive-month period.
No service shall be recognized under this subsection 3.1 prior to the date
an entity first became a Related Company; except that an employee's last period
of continuous employment with Square Deal Insurance Company (Mutual) shall be
taken into account for purposes of determining on or after December 31, 1992
whether such employee has completed one Year of Eligibility Service.
-4-
<PAGE>
28
3.2. HOUR OF SERVICE. Subject to the following sentence, the term "Hour of
Service" means, with respect to any employee or Participant, each hour for which
he is paid or entitled to payment for the performance of duties for an Employer
or a Related Company or for which back pay, irrespective of mitigation of
damages, has been awarded to the employee or Participant or agreed to by an
Employer or a Related Company. In the case of an entity that ceases or has
ceased to be a Related Company, Hours of Service with such entity shall be
recognized for any period during which such entity was a Related Company. An
employee or Participant shall be credited with the number of Hours of Service
which otherwise would normally have been credited to him (or in any case in
which such hours cannot be determined, 8 Hours of Service per day, to a maximum
of 40 Hours of Service per week) for any period during which he performs no
duties for an Employer or a Related Company (irrespective of whether the
employment relationship has terminated) by reason of a vacation, holiday,
illness, incapacity (including disability), layoff, jury duty, military duty or
leave of absence but for which he is directly or indirectly paid or entitled to
payment by an Employer or a Related Company; provided, however, that an employee
or Participant shall not be credited with more than 501 Hours of Service for any
single continuous period during which he performs no duties for an Employer or a
Related Company. Payments considered for purposes of the foregoing sentence
shall include payments unrelated to the length of the period during which no
duties are performed but shall not include payments made solely as reimbursement
for medically related expenses or solely for the purpose of complying with
applicable workmen's compensation, unemployment compensation or disability
insurance laws.
3.3. YEARS OF SERVICE. The term "Years of Service" means, with respect to
any employee or Participant employed on a regular full time basis, the number of
years, including fractional portions thereof, elapsed since the first date for
which he completes an Hour of Service (INCLUDING HOURS OF SERVICE PRIOR TO
JANUARY 1, 1990), subject to the following:
(a) A Participant's number of Years of Service accrued after five
consecutive One Year Periods of Severance shall be disregarded for
purposes of determining the nonforfeitable percentage of his benefit
under the Plan derived from Employer contributions which accrued
prior to such break.
(b) For all purposes of the Plan:
(i) if an employee's or Participant's employment with the
Employers and the Related Companies is terminated and he
incurs a One Year Period of Severance, he shall not be
credited with service for the period between the date his
employment is terminated and the date, if any, of his
reemployment by an Employer or a Related Company;
-5-
<PAGE>
29
(ii) if an employee or Participant does not have a nonforfeitable
right under the Plan to any portion of his Account balances,
and he incurs five consecutive One Year Periods of Severance,
then his number of Years of Service, if any, accrued prior to
such break shall be disregarded and he shall be treated as a
new employee; and
(iii) in general, Years of Service shall not include any period of
employment with an entity prior to the date it first became a
Related Company; provided, however, that an employee's or
Participant's period of continuous employment with Sierra
Mutual Fire Insurance Company prior to July 1, 1975, and with
Farmers Mutual Insurance Company prior to August 1, 1976, and
Square Deal Insurance Company (Mutual) prior to December 31,
1992 shall be recognized, and further provided that Years of
Service shall include an employee's or Participant's last
period of continuous employment with any other business entity
which is acquired by or merged into an Employer to the extent,
if any, as the Company may determine by resolution of its
Board of Directors.
(iv) For purposes of determining the nonforfeitable percentage of a
Participant's benefit under the Plan derived from Employer
contributions, a Participant shall continue to accrue Years of
Service while eligible for disability benefits under the
Company's long-term disability plan.
The term "Years of Service" means, with respect to any employee other than an
employee employed on a regular full time basis, each Year of Eligibility Service
until such employee completes one Year of Eligibility Service. Thereafter, each
such employee shall be credited with Years of Service on the same basis as
employees employed on a regular full time basis, commencing with the first day
following the completion of one Year of Eligibility Service.
3.4. ONE YEAR PERIOD OF SEVERANCE. For purposes of subsection 3.3, the term
"One Year Period of Severance" means, with respect to any employee or
Participant, the 12-consecutive-month period commencing on the earlier of his
Termination Date (as defined in subsection 8.3) or the first anniversary of the
first date of a period in which the employee or Participant remains absent from
service with the Employers and Related Companies for any reason other than a
resignation, retirement, dismissal or death or a Family and Medical Leave Act
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30
Maternity or Paternity Absence (as defined below) if he is not paid or entitled
to payment for the performance of duties for the Employer or a Related Company
during that 12-consecutive-month period. Solely for purposes of determining
whether a One Year Period of Severance has occurred, an employee or Participant
who is absent from service beyond the first anniversary of the date on which his
Family and Medical Leave Act Maternity or Paternity Absence began, shall be
deemed to have terminated employment on the second anniversary of the date on
which the Family and Medical Leave Act Maternity or Paternity Absence began. The
Committee may require the employee or Participant to furnish such information as
it considers necessary to establish that such individual's absence was a Family
and Medical Leave Act Maternity or Paternity Absence. The term "Family and
Medical Leave Act Maternity or Paternity Absence" means an employee's or
Participant's absence from work because of the pregnancy of such individual, the
birth of a child of such individual, the placement of a child with such
individual in connection with the adoption of a child by such individual, or for
purposes of caring for the child by such individual immediately following such
birth or placement, determined in a manner consistent with the requirements of
the Family and Medical Leave Act.
3.5 ONE YEAR BREAK IN SERVICE. For purposes of subsections 2.1 and 3.1, the
term "One Year Break in Service" means, with respect to any employee or
Participant, a Plan Year in which the employee or Participant is credited with
fewer than 501 Hours of Service. Solely for purposes of determining whether a
Break in Service has occurred, an employee or Participant who is on a Family and
Medical Leave Act Maternity or Paternity Absence (as defined in subsection 3.4)
shall receive credit for the Hours of Service which would otherwise have been
credited to such individual but for such Absence to a maximum of 501 hours for
any single continuous period of such Absence. The Hours of Service credited
under this subsection shall be credited first in the Plan Year in which the
Absence begins if the crediting is necessary to prevent a One Year Break in
Service in that year, or if not, in the following Plan Year.
3.6 YEAR OF PARTICIPATION SERVICE. For purposes of subsection 6.7, the term
"Year of Participation Service" means a Plan Year during which the Participant
completes at least 1,000 Hours of Service.
3.7 OTHER SERVICE. Notwithstanding any provision of this section to the
contrary and only for calculating Hours of Service for the purposes of
determining rights to participation, allocations, and vesting, the service of an
employee who was employed with ALLIED Mutual Insurance Company prior to January
1, 1990, and who terminated from that employment and was transferred to, or
immediately employed by, an Employer, shall be treated as service for an
Employer under the Plan.
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31
SECTION 4
---------
Plan Contributions
------------------
4.1. MANDATORY EMPLOYER CONTRIBUTIONS. Subject to the conditions and
limitations of the Plan, for each Plan Year beginning on or after the Effective
Date, each Employer shall contribute to the Trustee, in cash or Company Stock,
or any combination thereof, on behalf of each of its employees who is an
Eligible Participant (as defined in subsection 6.7) under the Plan for such Plan
Year, that amount which, after the allocation of Forfeitures that are to be
allocated for that Plan Year in accordance with the provisions of subsection
9.11 and the allocation of dividends that are to be allocated for that Plan Year
pursuant to the last sentence of paragraph 6.3(b), results in the allocation to
Eligible Participants' Accounts of shares of Company Stock equal in value
(determined as of the last day of the Plan Year) to the aggregate Minimum
Required Allocation Amounts (as defined in subsection 6.4) for the Employer's
participating employees.
4.2. DISCRETIONARY EMPLOYER CONTRIBUTIONS. In addition to the Contributions
required under subsection 4.1 and subject to the conditions and limitations of
the Plan, for each Plan Year, each Employer may contribute to the Trustee, in
cash or Company Stock, or any combination thereof, such additional amounts, if
any, as such Employer shall determine on or before the last day on which a
Contribution for that Plan Year may be made in accordance with subsection 4.3.
4.3. PAYMENT OF EMPLOYER CONTRIBUTIONS. An Employer's Contributions
("Employer Contributions") for any Plan Year shall be due on the last day of
that Plan Year and, if not paid by the end of such Plan Year, shall be payable
to the Trustee as soon thereafter as practicable, but not later than the time
prescribed by law for filing the Employer's Federal income tax return for that
Plan Year, including any extensions of time, without interest.
4.4. PARTICIPANT CONTRIBUTIONS. Participants are neither required nor
permitted to make contributions under the Plan.
SECTION 5
---------
Plan Investments
----------------
5.1. INVESTMENT IN COMPANY STOCK. Subject to the provisions of subsection
5.2 and to the retention in cash or cash equivalents of such reasonable amounts
as may be necessary from time to time for the payment of expenses and
obligations and the administration of the Plan and Trust, all Plan assets,
including earnings thereon, shall be invested, within a reasonable time,
primarily in Company Stock. Subject to and consistent with the provisions of
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32
section 409(l) of the Code, Company Stock may consist of common stock of the
Company ("Company Common Stock") or convertible preferred stock of the Company
("Company Preferred Stock").
5.2. USE OF LOAN PROCEEDS AND DIVIDENDS. The proceeds of an ESOP Loan (as
described in subsection 5.3) shall be used within a reasonable time after
receipt to acquire shares of Company Stock or to repay all or any portion of
such ESOP Loan or any outstanding ESOP Loan. Cash dividends received on shares
of Company Stock acquired with the proceeds of an ESOP Loan shall, after the
payment of expenses of the Plan and the Trust as provided in subsection 6.10 or,
unless otherwise directed by the Committee, be used to make payments on such
ESOP Loan. Cash dividends received on shares of Company Stock which are not used
to pay expenses or make payments on an ESOP Loan in accordance with the
preceding sentence shall, at the direction of the Committee, either be
distributed to Participants and Beneficiaries (to the extent attributable to
shares of Company Stock allocated to their Accounts) no later than 90 days after
the close of the Plan Year in which such dividend was paid or be reinvested in
shares of Company Stock. Pending use in accordance with the foregoing provisions
of this subsection 5.2, ESOP Loan proceeds and cash dividends may be retained in
cash or cash equivalents.
5.3. ESOP LOANS. Under the terms of the Trust Agreement, the Trustee is
authorized to incur debt (an "ESOP Loan") at the direction of the Committee for
the purpose of acquiring Company Stock or for the purpose of repaying all or any
portion of any outstanding ESOP Loan. The Trustee has the authority to refinance
any existing ESOP Loan and such refinanced loan shall be the ESOP Loan from that
date until repaid or refinanced. The terms of any ESOP Loan shall be subject to
the conditions and restrictions set forth in Article III of the Trust. Shares of
Company Stock acquired with the proceeds of an ESOP Loan shall be credited to a
"Suspense Account" until released in accordance with subsection 5.4.
5.4. RELEASE OF COMPANY STOCK FROM SUSPENSE ACCOUNT. Subject to the
following provisions of this subsection 5.4, for each Plan Year throughout the
duration of an ESOP Loan, a portion of the shares of Company Stock acquired with
the proceeds of such ESOP Loan shall be withdrawn from the Suspense Account and
allocated to Participants in accordance with the provisions of paragraph 6.3(b)
and subsection 6.5. As of the last day of each Plan Year, the number of shares
of Company Stock which shall be released from the Suspense Account shall be
equal to the product of the number of shares of Company Stock which are then
held in the Suspense Account multiplied by a fraction, the numerator of which is
the amount of principal and interest paid on the loan for that Plan Year and the
denominator of which is the amount of principal and interest paid or payable on
the loan for that Plan Year and for all future years. For purposes of
determining the denominator of the fraction described in the preceding sentence
for any Plan Year, if the interest rate under the ESOP Loan is variable, the
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33
interest rate to be paid in future years shall be assumed to be equal to the
interest rate applicable as of the last day of that Plan Year. For purposes of
determining the numerator of the fraction described in the second preceding
sentence, (a) the amount of principal paid for any Plan Year shall be the sum of
all principal payments made during such year, with Employer Contributions and
with cash dividends paid on shares of Company Stock acquired with the proceeds
of an ESOP Loan, not theretofore applied to release shares under this subsection
5.4, plus all principal payments made after the last day of such year (i) with
Employer Contributions (and earnings thereon) made for such Plan Year in
accordance with the provisions of subsection 4.3, and (ii) with cash dividends
paid on shares of Company Stock acquired with the proceeds of an ESOP Loan, but
only to the extent that such contributions or dividends are designated by the
Committee to the Trustee as payments on account of such year, and (b) the amount
of interest paid for any Plan Year shall be the sum of all interest payments
falling due within such year and paid in accordance with the provisions of
subsection 4.3. Notwithstanding the preceding provisions of subsection 5.4, if
an ESOP Loan satisfies the requirements of Treas. Reg. section
54.4975-7(b)(8)(ii), the number of shares of Common Stock attributable to such
ESOP Loan which are withdrawn from the Suspense Account may be proportionate to
principal payments only.
SECTION 6
---------
Plan Accounting
---------------
6.1. PARTICIPANTS' ACCOUNTS. The Committee shall cause an Account to be
established and maintained in the name of each Participant, which Account shall
be adjusted at the times and in the manner provided by the provisions of
subsection 6.2. All accounting with respect to shares of Company Stock,
including all adjustments and allocations under this section 6, shall be in
whole and fractional shares of such stock, in accordance with such procedures
and methods as are adopted from time to time by the Committee.
6.2. ADJUSTMENT OF PARTICIPANTS' ACCOUNTS. As of each Accounting Date on or
after the Effective Date, the Committee shall:
(a) FIRST, charge to the Account of each Participant all distributions
and payments made to him, or on his account, since the last
preceding Accounting Date that have not been charged previously;
(b) NEXT, adjust each Participant's Account for dividends, shares of
Company Stock, earnings and losses, if any, that are to be allocated
or credited as of that date in accordance with the provisions of
subsection 6.3, other than shares allocated pursuant to the last
sentence of paragraph 6.3(b);
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34
(c) FINALLY, allocate and credit to each Participant's Account his
portion, if any, of the amounts that are to be allocated and
credited as of that date in accordance with the last sentence of
subsection 6.3(b) and subsections 6.4 and 6.5.
6.3. ALLOCATION AND CREDITING OF EARNINGS AND LOSSES. Subject to subsection
6.10, Participant Accounts shall be adjusted for earnings and losses as follows:
(a) As of each Accounting Date, each Participant's Account shall be
adjusted to reflect any appreciation or depreciation in the fair
market value of shares of Company Stock allocated to his Account.
(b) If dividends paid on shares of Company Stock which were acquired
with the proceeds of an ESOP Loan and credited to a Participant's
Account, are used in accordance with subsection 5.2 to make payments
of principal or interest on such ESOP Loan, the Participant's
Account shall be allocated shares of Company Stock as of the last
day of each Plan Year with a fair market value as of such date equal
to the amount of such dividends. Shares of Company Stock released
from the Suspense Account during the Plan Year shall be used first
for this purpose. To the extent that additional shares are required,
shares of Company Stock contributed by the Employers or acquired
with Employer Contributions (other than Employer Contributions used
to make payments of principal and interest on ESOP Loans) during
such Plan Year shall be applied for such purpose. All other shares
of Company Stock released from the Suspense Account during any Plan
Year by reason of the use of dividends on allocated and unallocated
shares of Company Stock to make payments of principal and interest
on an ESOP Loan shall be allocated and credited to the Accounts of
Eligible Participants on the same basis as shares released from the
Suspense Account during any Plan Year on account of Employer
Contributions in accordance with subsection 6.5.
(c) As of each Accounting Date, each Participant's Account shall be
credited with any cash dividends or in-kind dividends (or shares of
Company Stock acquired on account of the reinvestment of such
dividends) paid to the Trustee since the last preceding Accounting
Date with respect to shares of Company Stock credited to the
Participant's Account (other than dividends which have been, or will
be, distributed in accordance with subsection 5.2 or which are used
or are to be used to repay the ESOP Loan).
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35
(d) If, pending investment in shares of Company Stock, cash
Contributions by the Employers are invested in cash equivalents,
earnings, if any, accrued thereon prior to the last day of the Plan
Year for which the contributions are made shall be allocated and
credited to the Accounts of all Participants as of the same date and
on the same basis as such Employer Contributions are allocated under
the provisions of subsection 6.5. Notwithstanding the preceding
sentence, if cash Employer Contributions to the Plan that are to be
used to repay an ESOP Loan are invested in cash or cash equivalents,
earnings, if any, accrued thereon shall also be used to repay such
ESOP Loan.
(e) Subject to subsection 6.10, all other Trust Fund earnings, if any,
shall be allocated to Participant Accounts as of each Accounting
Date, pro rata, according to their Account balances as determined as
of the immediately preceding Accounting Date after adjustment in
accordance with paragraph 6.2(a) to reflect distributions and
payments.
(f) The Account of a Participant, whose Termination Date occurs prior to
the end of a Plan Year and who receives or elects to receive an
immediate distribution of his Account in accordance with section 9,
shall be credited through the last day of the month preceding the
Account Liquidation date (as defined in subsection 9.13) with (i)
any cash dividends or in-kind dividends (or shares of Company Stock
acquired on account of the reinvestment of such dividends) paid or
accrued to the Trustee since the last Accounting Date preceding the
Participant's Termination Date with respect to shares of Company
Stock credited to such Participant's Account as of that last
Accounting Date (other than dividends which have been distributed in
accordance with subsection 5.2 or which are used to repay the ESOP
Loan) and (ii) any other Trust Fund earnings allocable to such
Participant's Account.
(g) The Account of a Participant, who terminates from employment and
does not receive or elect to receive an immediate distribution of
his Account, shall continue to be adjusted for earnings and losses
in accordance with paragraphs (a) through (c) and (e) of this
subsection until the Plan Year in which such Participant elects to
receive distribution of his Account (the "Election Plan Year"). The
Account of a Participant in his Election Plan Year shall be adjusted
for earnings and losses through the last day of the month preceding
the Account Liquidation Date.
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36
6.4. MINIMUM REQUIRED ALLOCATION AMOUNTS.
(a) As of each Plan Year beginning on or after the Effective Date, the
value (determined as of the last day of that Plan Year) of Company Stock
allocated to each Eligible Participant's Account as a result of Employer
Contributions made to the Plan for such Plan Year, dividends allocated for such
Plan Year pursuant to the last sentence of paragraph 6.3(b) and Forfeitures
arising during such Plan Year (pursuant to subsection 9.10) shall be at least
equal to the following "Minimum Required Allocation Amount":
the Eligible Participant's
If the Eligible Participant's Minimum Required
Years of Service are: Allocation Amount is:
- ----------------------------- --------------------------
Less than 6, 6% of his Compensation.
At least 6 but less than 11, 7% of his Compensation.
At least 11 but less than 21, 8% of his Compensation.
21 or more, 9% of his Compensation.
For purposes of this subsection 6.4, Years of Service shall have the meaning
provided in subsection 3.3 and shall be determined as of the last day of the
Plan Year; provided, however, that if an Eligible Participant incurs five
consecutive One Year Periods of Severance, then his number of Years of Service,
if any, accrued prior to such break shall be disregarded for purposes of this
subsection. For purposes of this subsection 6.4, a Participant's "Compensation"
shall have the meaning provided in subsection 6.6.
(b) Notwithstanding the foregoing, the Minimum Required Allocation Amount
for any Eligible Participant whose Termination Date occurs prior to the end of a
Plan Year shall be determined using the Participant's Years of Service and
Compensation up to his Termination Date.
6.5. ALLOCATION AND CREDITING OF EMPLOYER CONTRIBUTIONS AND FORFEITURES.
Subject to the provisions of paragraph 6.3(b) and section 7, allocation of
Employer Contributions and Forfeitures shall be made in accordance with the
following provisions of this subsection 6.5.
(a) Each Employer's Contributions for a Plan Year and any Forfeitures
arising under the Plan during that year pursuant to subsection 9.10
less any expenses paid from the Trust pursuant to section 6.10
(hereinafter "Net Expenses") shall be allocated as of the last day
of such Plan Year.
(b) (i) Employer Contributions and Forfeitures less Net Expenses
shall be allocated in shares of Company Stock. The number of
shares of Company Stock to be allocated for any Plan Year
shall be the sum of (A) the number of shares of Company Stock
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37
released from the Suspense Account by reason of Employer
Contributions that are used to make payments of principal or
interest on an ESOP Loan, PLUS (B) the number of shares of
Company Stock contributed directly to the Plan in the form of
shares of Company Stock, PLUS (C) the number of shares of
Company Stock acquired with Employer Contributions made in
cash and not used to make payments of principal or interest on
an ESOP Loan or to pay expenses, PLUS (D) the number of shares
of Company Stock forfeited during that year, MINUS (E) the
number of shares of Company Stock used to pay Net Expenses.
(ii) With respect to the Account of a Participant who dies or
retires (within the meaning of paragraphs (a), (b), (c) or (d)
of subsection 8.3) prior to the end of a Plan Year, or who
elects to transfer the Participant's Account pursuant to
subsection D-4 of Supplement D, the Committee may direct that
the allocation to his Account for that year be in a form other
than shares of Company Stock.
(c) The shares of Company Stock to be allocated for any Plan Year shall
be allocated and credited to the Accounts of Eligible Participants
in the following manner:
(i) FIRST, subject to the provisions of subparagraphs 6.5(c)(iii)
and (iv), each Eligible Participant's Account shall be
allocated and credited shares of Company Stock equal in value
to his Minimum Required Allocation Amount for that Plan Year;
(ii) NEXT, if after the application of the provisions of
subparagraph 6.5(c)(i), additional shares of Company Stock
remain to be allocated ("Extra Shares"), there shall be
allocated and credited to each Eligible Participant's Account
the number of shares of Company Stock equal to the product of
(A) times (B), where (A) is the number of Extra Shares for
that Plan Year, and (B) is a fraction, the numerator of which
is the number of shares of Company Stock allocated for that
Plan Year to the Eligible Participant's Account under
subparagraph 6.5(c)(i), and the denominator of which is the
aggregate number of shares of Company Stock allocated for that
Plan Year to all Eligible Participants' Accounts under
subparagraph 6.5(c)(i).
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38
(iii) Notwithstanding the foregoing, the Account of each Eligible
Participant whose Termination Date occurs prior to the end of
a Plan Year shall be allocated and credited as of that
Termination Date with cash equal to the Participant's Minimum
Required Allocation Amount as determined under paragraph (b)
of subsection 6.4.
(iv) Notwithstanding any provision contained herein to the
contrary, if in any Plan Year, the foregoing formula would
produce an allocation that would be inconsistent with the
requirements of Code section 401(a)(4), then the amount which
would have been allocated to a highly compensated employee, as
that term is defined in section 414(q) of the Code, but for
the fact that such allocation is inconsistent with the
requirements of Code section 401(a)(4), shall be allocated
among the highly and nonhighly compensated employees in a
manner that after the allocation, the requirements of Code
section 401(a)(4) will be satisfied.
6.6. COMPENSATION. A Participant's "Compensation" for any Plan Year means
wages, salaries, and fees for personal services actually rendered in the course
of employment with the Employer to the extent that the amounts are includable in
gross income. Compensation shall also include any salary deferral contributions
to a 401(k) plan or a section 125 cafeteria plan of the Employer. Compensation
shall not include distributions from a plan of deferred compensation, amounts
realized from the exercise of a non-qualified stock option or when restricted
stock (or property) either becomes freely transferrable or is no longer subject
to a substantial risk of forfeiture, or amounts realized from the sale, exchange
or other disposition of stock acquired under a qualified stock option.
Notwithstanding the foregoing, no Compensation in excess of $200,000 for any
Plan Year (or such larger amount as may be permitted for any Plan Year under ss.
401(a)(17) of the Code) will be taken into account for any purpose under the
Plan. Effective for Plan Years beginning after December 31, 1993, no
Compensation in excess of $150,000 for any Plan Year (or such larger amount as
may be permitted for any future Plan Year under section 401(a)(17) of the Code)
will be taken into account for any purpose under the Plan. Effective for Plan
Years beginning before January 1, 1997, in determining the limitation on
Compensation under section 401(a)(17) of the Code, the rules of section
414(q)(6) of the Code ("family aggregation") shall apply, except the term
"family" shall include only the spouse of the Participant and any lineal
descendants of the Participant who have not attained age 19 before the close of
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39
the year. If the limit on Compensation is exceeded, then the limitation shall be
pro-rated among the affected individuals in proportion to each such individual's
Compensation determined without regard to the limitation under section
401(a)(17) of the Code.
6.7. ELIGIBLE PARTICIPANTS.
(a) Subject to the following sentence, the term "Eligible Participant"
for any Plan Year shall include any Participant who is employed by
an Employer during the Plan Year exclusively on a regular full time
basis, and is employed by an Employer, or a Related Company, on
December 31 of that Plan Year. Notwithstanding the foregoing, the
term "Eligible Participant" for any Plan Year shall include any such
Participant who died or retired (within the meaning of paragraphs
(a), (b), (c) or (d) of subsection 8.3) during such Plan Year.
(b) The term "Eligible Participant" for any Plan Year commencing on or
after January 1, 1996 shall also include any Participant who is not
employed on a regular full time basis during the entire Plan Year
but who satisfies the remaining requirements of paragraph (a);
provided that such Participant completes a Year of Participation
Service during such Plan Year.
6.8. STOCK DIVIDENDS, SPLITS AND OTHER CAPITAL REORGANIZATIONS. Any stock
received by the Trustee as a stock split or dividend or as a result of a
reorganization or other recapitalization of the Company shall be allocated by
the Committee in the same manner as the Company Stock to which it is
attributable is then allocated.
6.9. STATEMENT OF PLAN INTEREST. During each Plan Year the Committee shall
provide each Participant with a statement of the Participant's account balance
under the Plan as of the close of the immediately preceding Plan Year.
6.10. EXPENSES. Notwithstanding anything herein to the contrary, the
reasonable and necessary expenses incurred by the Plan and the Trust in their
operation, and incurred by the Trustee in the performance of its duties,
including, but not limited to, fees for services provided to the Plan to value
the assets in the Trust and in Participant accounts, service charges under any
ESOP Loan, fees for legal services rendered to the Trustee, such compensation to
the Trustee as may be agreed upon in writing from time to time by the Committee,
and other proper charges and disbursements of the Trustee, shall be paid from
the Trust, except to the extent, if any, that such expenses are paid by the
Company. All taxes of any nature whatsoever that may be imposed under existing
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40
or future laws upon or in respect of the assets of the Trust or income therefrom
shall be paid from the Trust. Unless otherwise directed by the Committee,
dividends on allocated shares of Company Stock shall not be used to pay
expenses.
SECTION 7
---------
Limitations
-----------
7.1. LIMITATION ON ALLOCATIONS TO PARTICIPANT ACCOUNTS. Notwithstanding any
other provision of the Plan, allocations to Participant Accounts shall be
subject to the provisions of section 415 of the Code. Consistent with the
limitations set forth in such section, a Participant's Annual Additions (as
defined in subsection 7.2) for any Plan Year shall not exceed an amount equal to
the lesser of:
(a) 25 percent of the Section 415 Compensation (as defined below) paid
to the Participant in that Plan Year; or
(b) $30,000 (or, if greater, 25% of the limitation in effect under
section 415(b)(1)(A) of the Code);
REDUCED BY
----------
(c) the annual additions allocated to the Participant for that Plan Year
under any other defined contribution plan of an Employer or a
Related Company or Section 415 Affiliate.
A Participant's "Section 415 Compensation" for any Plan Year means the
Participant's wages, salaries, commissions, bonuses and other amounts received
during the Plan Year from any Related Company or Section 415 Affiliate (defined
below) for personal services actually rendered, including taxable fringe
benefits, nonqualified stock options taxable in the year of grant, amounts
taxable under a section 83(b) election and nondeductible moving expenses, but
excluding distributions from any deferred compensation plan (qualified or
nonqualified), amounts realized from the exercise of (or disposition of stock
acquired under) any nonqualified stock option or other benefits given special
tax treatment. "Section 415 Affiliate" means any entity that would be a Related
Company if the ownership test of sections 414(b) and (c) of the Code was 50%
rather than 80%. This subsection 7.1 shall be construed in accordance with
section 415(c)(3) of the Code and applicable regulations thereunder.
Notwithstanding anything herein to the contrary, for years beginning after
December 31, 1997, a Participant's "Section 415 Compensation" shall include any
elective deferral, as defined in section 402(g)(3) of the Code, and any amount
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41
which is contributed or deferred by any Related Company or Section 415 Affiliate
at the election of the Participant and which is not includable in gross income
by reason of section 125 of the Code.
7.2. ANNUAL ADDITIONS. Subject to the provisions of subsection 7.4, a
Participant's "Annual Additions" for any Plan Year means the sum of (i) the
amount of the Employer Contributions allocated to his Account for that Plan Year
(determined, with respect to Employer Contributions made to enable the Trustees
to make payments on an ESOP Loan, as if such contributions were allocated in
cash, and not on the basis of the value of the Company Stock released from the
Suspense Account); and (ii) the amount of Forfeitures allocated to the
Participant's Account. The term Annual Additions shall also include employer
contributions allocated for a Plan Year to any individual medical account (as
defined in section 415(l) of the Code) of a Participant under a defined benefit
plan and any amount allocated for a Plan Year to the separate account of a
Participant for payment of post-retirement medical benefits under a funded
welfare benefit plan (as described in section 419A(d)(2) of the Code), which was
maintained by an Employer or a Related Company or a Section 415 Affiliate. Plan
earnings shall not constitute Annual Additions.
7.3. EXCESS ANNUAL ADDITIONS. If, as a result of the allocation of
Forfeitures, a reasonable error in estimating a Participant's Compensation or
such other mitigating circumstances as the Commissioner of Internal Revenue
shall prescribe, the Annual Additions for a Participant for a Plan Year exceed
the limitations set forth in subsection 7.1, the excess amounts shall be
treated, as necessary, in accordance with Treas. Reg. section 1.415-6(b)(6)(ii).
Notwithstanding anything herein or in any other plan of the Employer to the
contrary, to the extent that a Participant's Annual Additions exceed the
limitations set forth in subsection 7.1, the excess amount shall first be
reduced to the extent possible in such other plans of the Employer.
7.4. HIGHLY COMPENSATED EMPLOYEES. If not more than one-third of the
Employer Contributions for any Plan Year are allocated to Highly Compensated
Employees, as that term is defined in section 414(q) of the Code, then Annual
Additions for such Plan Year shall not include: (i) Employer Contributions
applied to the repayment of interest on an ESOP Loan and deductible for that
Plan Year under section 404(a)(9) of the Code; or (ii) Forfeitures of Company
Stock acquired with the proceeds of an ESOP Loan. For Plan Years beginning
before January 1, 1997, the term Highly Compensated Employee shall be defined in
accordance with the terms of the Plan as Amended and Restated Effective as of
January 1, 1990. For Plan Years beginning after December 31, 1996, the term
Highly Compensated Employee for any Plan Year shall include any employee of an
Employer who:
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42
(a) during the Plan Year or the preceding Plan Year, was a 5 percent
owner of an Employer or a Related Company; or
(b) for the preceding Plan Year, had compensation, as defined in
regulations promulgated under Code section 414(q), from the Employer
or a Related Company in excess of $80,000 (as adjusted under Code
section 414(q)), and if the Company elects, pursuant to regulations
promulgated under Code section 414(q), was in the top-paid group of
employees for such preceding year.
7.5. COMBINED PLAN LIMITATION. If a Participant participates or has
participated in any qualified defined benefit plan maintained by an Employer,
then for any Plan Year the sum of the defined benefit plan fraction (as defined
in section 415(e)(2) of the Code) and the defined contribution plan fraction (as
defined in section 415(e)(3) of the Code) for such Participant shall not exceed
1.0 (his "combined fraction"). If his combined fraction exceeds 1.0, then his
defined contribution plan fraction shall be reduced by limiting Employer
Contributions to the Plan to the extent necessary to reduce his combined
fraction to 1.0.
SECTION 8
---------
Vesting and Termination Dates
-----------------------------
8.1. DETERMINATION OF VESTED INTEREST. A Participant shall have a fully
vested, nonforfeitable interest in his entire Account upon his completion of
five Years of Service.
8.2. ACCELERATED VESTING. Notwithstanding the foregoing provisions of this
section 8, a Participant shall have a fully vested, nonforfeitable interest in
his entire Account when he dies while employed by an Employer or a Related
Company. In addition, in the event of the Plan's termination (in accordance with
subsection 12.2) or partial termination (as determined under applicable law and
regulations), each affected Participant shall be fully vested in his Account.
8.3. TERMINATION DATES. A Participant's "Termination Date" shall be the
date on which his employment with the Employers and the Related Companies is
terminated because of the first to occur of the following events:
(a) NORMAL OR LATE RETIREMENT. The Participant retires or is retired
from the employ of the Employers and the Related Companies on or
after his Normal Retirement Date. A Participant's "Normal Retirement
Date" shall be the date on which he meets the following
requirements:
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(i) he has attained age 65; and
(ii) he has completed 5 Years of Service.
(b) EARLY RETIREMENT. The Participant retires or is retired from the
employ of the Employers and the Related Companies on or after the
date he meets the following requirements:
(i) he has attained age 55; and
(ii) he has completed 5 Years of Service.
(c) DISABILITY RETIREMENT. The Participant is retired from the
employ of the Employers and the Related Companies at any age
because of disability, as determined in accordance with the
Company's long-term disability plan, on or after the date he
has completed 5 Years of Service.
(d) DEATH. The Participant's death.
(e) RESIGNATION OR DISMISSAL. The Participant resigns or is
dismissed from the employ of the Employers and the Related
Companies.
SECTION 9
---------
Distributions
-------------
9.1. DISTRIBUTIONS TO PARTICIPANTS AFTER TERMINATION OF EMPLOYMENT. If a
Participant's Termination Date occurs (for a reason other than his death) under
subsection 8.3, the vested portion of his Account shall be distributed in
accordance with the following provisions of this subsection 9.1, subject to the
rules of subsection 9.7:
(a) If the value of the vested portion of the Participant's Account does
not exceed $3,500 (and at the time of any prior distribution has
never exceeded $3,500), determined in accordance with paragraph (d)
below, the Committee shall direct the Trustee to distribute such
vested portion to him as soon as practicable in a lump sum payment.
(b) If the value of the vested portion of the Participant's Account
exceeds $3,500 (or at the time of any prior distribution has ever
exceeded $3,500), determined in accordance with paragraph (d) below,
such vested portion shall be distributed to the Participant on (or
as soon as practicable after) the Annuity Starting Date (as defined
in paragraph (c) below) he elects, as follows:
(i) subject to the provisions of subsection 9.2, by purchase from
an insurance company and distribution to him of an annuity
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44
contract providing for monthly distributions to him for his
lifetime only (with an installment refund) (a "Single Life
Annuity"), if he is unmarried as of his Annuity Starting Date;
or
(ii) subject to the provisions of subsection 9.2, by purchase from
an insurance company and distribution to him of an annuity
contract, which shall constitute receipt of the balance of his
account, providing for payment in the form of a Joint and
Survivor Annuity (as defined below), if he is legally married
under the laws of any jurisdiction on his Annuity Starting
Date. The term "Joint and Survivor Annuity" means an annuity
payable for the life of the Participant with a survivor
annuity payable for the life of his surviving spouse which is
equal to 50 percent of the amount of the annuity payable
during the joint lives of the Participant and his spouse (with
an installment refund).
(c) "Annuity Starting Date" shall mean the first day for which any
payment is made pursuant to the Participant's written election under
this section 9 in such format as the Committee shall require. The
Annuity Starting Date for any Participant shall be no earlier than
the first day of the first calendar month following the
Participant's Termination Date and no later than the Required
Beginning Date under section 9.7(b). A payment to a Participant
shall not be considered to occur after the Annuity Starting Date
merely because actual payment is reasonably delayed while the
Trustee takes the steps described in paragraph (c) of subsection
9.13 to establish the amount to be distributed to the Participant or
to be used to purchase an annuity for the Participant.
(d) The value of the vested portion of a Participant's Account under
this subsection, and under subsection 9.4, shall be determined by
the Committee on the first business day of the month after the month
in which the Participant's Termination Date occurs, and shall equal
the (i) number of Company Shares credited to that account as of the
Participant's Termination Date times the greater of the market value
of the Company Common Shares or the redemption value of the Company
Preferred Shares (in accordance with the then applicable provisions
of such Company Preferred Stock) on the last business day of the
month in which the Participant's Termination Date occurs, plus (ii)
the value of any other assets in the Participant's Account,
including cash, as of the last business day of the month in which
that Termination Date occurs. The valuation of a Participant's
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45
Account made by the Committee pursuant to this paragraph shall be
used under subsections 9.1 and 9.4 solely to determine whether such
Account will be distributed in the form of a lump sum, in accordance
with paragraphs 9.1(a) and 9.4(a), and shall not establish the value
of the benefits to be distributed under this section 9.
9.2. REVOCATION OF ANNUITY FORM OF BENEFIT. A Participant may revoke
payment in the Single Life Annuity or Joint and Survivor Annuity form and elect
an optional form of benefit payment (as described below) by filing a written
election with the Committee during the applicable Retirement Election Period (as
described below) in such form as the Committee shall require. A Participant may
rescind any prior revocation of the Single Life Annuity or Joint and Survivor
Annuity form at any time during the applicable Retirement Election Period. A
married Participant's revocation of a retirement Joint and Survivor Annuity
shall be effective only if during the Retirement Election Period, the
Participant's spouse consents in writing to such revocation, designation of a
beneficiary, if applicable, and election of an optional form of benefit payment
and the spouse's consent acknowledges the effect of such revocation, designation
and election and is witnessed either by a notary public or a Plan representative
appointed or approved by the Committee; provided, however, that, unless
otherwise provided by a qualified domestic relations order within the meaning of
section 414(p) of the Code, no spousal consent shall be required if:
(1) the Participant and his spouse are legally separated or the
Participant has been abandoned (within the meaning of local law) and
the Participant has a court order to such effect; or
(2) it is established to the satisfaction of a Plan representative
appointed or approved by the Committee that the consent of the
Participant's spouse cannot be obtained because there is no spouse,
because the spouse cannot be located or because of such other
circumstances as the Secretary of the Treasury may prescribe in
regulations.
A Participant's "Retirement Election Period" with respect to the revocation of
the Single Life Annuity or Joint and Survivor Annuity means the 90-day period
ending on his Annuity Starting Date, except as otherwise provided by Code
section 417(a)(7). Optional forms of benefit payment include a lump sum
distribution, straight life annuity, single life annuities with certain periods
of five, ten or fifteen years, and survivorship life annuities with survivorship
percentages of 50, 66-2/3 or 100 percent.
9.3. RETIREMENT ELECTION INFORMATION. Except as otherwise permitted in
accordance with Code section 417, no less than 30 and no more than 90 days
before the Annuity Starting Date, the Committee shall furnish the Participant
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46
with Election Information (as described below). No distribution shall be made
from a Participant's Account in accordance with this section 9 until the 30th
day after the date on which he has received Election Information and he has been
given the opportunity to make the election described in this subsection 9.3,
unless the Participant affirmatively elects and the spouse consents to an
earlier distribution in accordance with regulations promulgated under Code
sections 417 and 411(a)(11). The term "Election Information" shall consist of:
(a) a written description of the Single Life Annuity or the Joint and
Survivor Annuity, as applicable, and the relative financial effect
of payment of his Account balance in such form;
(b) notification of the right to revoke payment in such form and of the
spouse's rights with respect to revocation of the Joint and Survivor
Annuity form; and
(c) a general description of the eligibility conditions and other
material features of the optional forms of benefit payment and
information explaining the relative value of the optional forms of
payment.
The Committee may make such Election Information available to a Participant by:
(1) personal delivery to him;
(2) first-class mail, postage prepaid, addressed to the Participant at
his last known address as shown on his Employer's records; or
(3) permanentposting on a bulletin board located at the Participant's
work site, if he is not a terminated or retired Participant.
A Participant may request, by writing filed with the Committee during his
Election Period, an explanation, written in nontechnical language, of the terms,
conditions, and financial effect of payment in the form of a Single Life Annuity
or a Joint and Survivor Annuity, as applicable. If not previously provided to
the Participant, the Committee shall provide him with such explanation within 30
days of his request by one of the methods described in paragraph (1) or (2)
above, and the Participant's Retirement Election Period shall be extended, if
necessary, to include the 90th day next following the date on which he receives
such explanation.
9.4. DISTRIBUTIONS TO BENEFICIARIES. Subject to subsection 9.7, the
following rules shall apply if a Participant dies while any vested portion of
his Account remains undistributed:
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47
(a) If a Participant dies before his Annuity Starting Date and the value
of the vested portion of the Participant's Account does not exceed
$3,500 (and at the time of any prior distribution has never exceeded
$3,500), determined in accordance with paragraph (d) of subsection
9.1, above, such vested portion shall be distributed to his
Beneficiary as soon as practicable in a lump sum payment.
(b) If a Participant dies before his Annuity Starting Date and the value
of the vested portion of the Participant's Account exceeds $3,500
(or at the time of any prior distribution has ever exceeded $3,500),
determined in accordance with paragraph (d) of subsection 9.1,
above, such vested portion shall be distributed as follows:
(i) If he is legally married on the date of his death and as of
such date there is not in effect a waiver of the
Pre-Retirement Surviving Spouse Annuity (as defined below) in
accordance with subsection 9.6, the vested balance of the
Participant's Account shall be applied to purchase a contract
from an insurance company providing for payment in the form of
a Pre-Retirement Surviving Spouse Annuity, which contract
shall be distributed to the surviving spouse; provided,
however, that such surviving spouse may elect to have the
vested balance distributed in the form of a lump sum payment
by filing a written election with the Committee in such form
as it may require. The term "Pre-Retirement Surviving Spouse
Annuity" means a monthly annuity payable to the surviving
spouse for his life (with installment refund), with payments
commencing as of the first day of the month coincident with or
next following the later of the date of the Participant's
death or the date which otherwise would have been the
Participant's Normal Retirement Date; provided, however, that
the surviving spouse may elect to have annuity payments
commence as of any earlier date that is at least 30 days after
the date of the Participant's death.
(ii) If he is unmarried on the date of his death or if there is
then in effect a waiver of the Pre-Retirement Surviving Spouse
Annuity in accordance with subsection 9.6, the vested portion
of the Participant's Account balance shall be distributed as
soon as practicable after the date that is at least 30 days
after the date of the Participant's death to his Beneficiary
(as defined in subsection 9.8) in a lump sum payment.
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48
(c) If a Participant dies after distribution of his Account
balance has commenced (other than in the form of an annuity),
the remaining portion of his vested Account balance shall be
distributed to his Beneficiary in accordance with the
distribution method in effect on the date of the Participant's
death. If a Participant's death occurs after an annuity
contract has been purchased, no amounts shall be payable from
the Plan to any person on account of the Participant's death.
9.5. PRE-RETIREMENT ELECTION INFORMATION. Within the period (the
"Applicable Period") beginning on the first day of the Plan Year in which the
Participant attains age 32 and ending on the last day of the Plan Year preceding
the Plan Year in which the Participant attains age 35 (or if later, the period
ending one year after the date on which the individual becomes a Participant in
the Plan), the Committee shall provide the Participant with a written
explanation of the Pre-Retirement Surviving Spouse Annuity form of payment
comparable to the election information described in subsection 9.3; provided,
however, that if an employee first becomes a Participant or first notifies the
Committee of his marriage after the first day of the Plan Year in which he
attains age 32, the Committee shall make such explanation available to him on or
about the date he becomes a Participant or notifies the Committee of his
marriage, as the case may be. If a Participant's Termination Date occurs before
he reaches age 35, the Applicable Period is the period beginning one year before
his Termination Date and ending one year after his Termination Date.
9.6. REVOCATION OF PRE-RETIREMENT SURVIVING SPOUSE ANNUITY. A Participant
may revoke payment in the Pre-Retirement Surviving Spouse Annuity form and elect
payment of his vested Account balance at his death pursuant to paragraph
9.4(b)(ii) to any Beneficiary who he designates in accordance with the
provisions of subsection 9.8 by filing a written election with the Committee
during the applicable Pre-Retirement Election Period (as described below) in
such form as the Committee may require; provided, however, that a married
Participant's revocation of a Pre-Retirement Surviving Spouse Annuity form of
payment shall be effective only if his spouse consents to the designation in a
writing which:
(a) is filed with the Committee in such form as the Committee may
require during the applicable "Pre-Retirement Election Period",
which is the period beginning on the earlier of the Participant's
Termination Date, or the first day of the Plan Year in which the
Participant attains age 35, and ending on the date of his death;
(b) designates a specific beneficiary which may not be changed without
spousal consent (or the consent of the spouse expressly permits
designation by the Participant without any requirement of further
consent by the spouse and acknowledges the right to limit consent to
a specific beneficiary);
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49
(c) acknowledges the effect of such designation; and
(d) is witnessed either by a notary public or a Plan representative
appointed or approved by the Committee;
provided, however, that, unless otherwise provided by a qualified domestic
relations order within the meaning of section 414(p) of the Code, no spousal
consent shall be required if:
(1) the Participant and his spouse are legally separated or the
Participant has been abandoned (within the meaning of local
law) and the Participant has a court order to such effect; or
(2) it is established to the satisfaction of a Plan representative
appointed or approved by the Committee that the consent of the
Participant's spouse cannot be obtained because there is no
spouse, because the spouse cannot be located or because of
such other circumstances as the Secretary of the Treasury may
prescribe in regulations.
A Participant may rescind any prior revocation of the Pre-Retirement Surviving
Spouse Annuity form of payment at any time during the applicable Pre-Retirement
Election Period.
9.7. LIMITS ON COMMENCEMENT AND DURATION OF DISTRIBUTIONS. The following
distribution rules shall be applied in accordance with section 401(a)(9) and
401(a)(14) of the Code and applicable regulations thereunder, including the
minimum distribution incidental benefit requirement of Treas. Reg. section
1.401(a)(9)-2, and shall supersede any other provision of the Plan to the
contrary:
(a) Unless the Participant elects otherwise in writing in such form as
the Committee may require, distributions to a Participant must
commence no later than 60 days after the close of the Plan Year in
which the latest of the following events occurs: the Participant's
attainment of age 65; the 10th anniversary of the year in which the
Participant began participating in the Plan; or the Participant's
Termination Date.
(b) Notwithstanding any other provision herein to the contrary,
distribution of a Participant's Account balance shall commence no
later than his "Required Beginning Date", which shall mean April 1
of the calendar year following the calendar year in which he attains
age 70-1/2.
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50
(c) Distribution of a Participant's Account balance shall be made over
the life of the Participant or over the joint lives of such
Participant and his Beneficiary or over a period not extending
beyond the life expectancy of such Participant or the joint life
expectancy of such Participant and his Beneficiary.
(d) If a Participant dies after distribution of his vested interest in
the Plan has begun, the remaining portion of such vested interest,
if any, shall be distributed to his Beneficiary at least as rapidly
as under the method of distribution used prior to the Participant's
death.
(e) If a Participant dies before distribution of his vested interest in
the Plan has begun, distribution of such vested interest to his
Beneficiary shall be completed by December 31 of the calendar year
in which the fifth anniversary of the Participant's death occurs
(the "five-year rule"); provided, however, that the five-year rule
shall not apply to a natural person designated as Beneficiary by the
Participant or under the specific terms of the Plan, if:
(i) such vested interest will be distributed over the life of such
designated Beneficiary (or over a period not extending beyond
the life expectancy of such Beneficiary), and
(ii) such distribution to the Beneficiary begins not later than
December 31 of the calendar year next following the calendar
year in which the Participant died or, if such Beneficiary is
the Participant's surviving spouse, not later than the later
of (i) December 31 of the calendar year next following the
calendar year in which the Participant died; or (ii) December
31 of the calendar year following the calendar year in which
the Participant would have attained age 70-1/2.
(f) If the Participant's spouse is his Beneficiary and such spouse dies
before the distribution to such spouse begins, paragraph (e) shall
be applied as if the surviving spouse were the Participant.
(g) For purposes of paragraph (d) and (e), distribution of a
Participant's vested interest in the Plan is considered to begin on
his Required Beginning Date; provided, however, that distribution
irrevocably begun in the form of an annuity shall be considered to
begin on the date it actually commences.
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51
(h) For purposes of this subsection 9.7, the life expectancy of a
Participant or a Beneficiary will be determined in accordance with
Tables V and VI of Treas. Reg. section 1.72-9, and will not be
recalculated.
9.8. BENEFICIARY DESIGNATIONS. The term "Beneficiary" shall mean the
Participant's surviving spouse. However, if the Participant is not married, or
if the Participant is married but his spouse consents to the designation of a
person other than the spouse in accordance with the foregoing provisions of this
section 9, the term Beneficiary shall mean such person or persons as the
Participant designates to receive the vested portion of his Account upon his
death. Such designation may be made, revoked or changed (without the consent of
any previously designated Beneficiary except his spouse) only by an instrument
signed by the Participant and filed with the Committee prior to his death. If a
deceased Participant failed to designate a Beneficiary as provided above, or if
the designated Beneficiary of a deceased Participant dies before him or before
complete payment of the Participant's benefits, the Committee shall pay the
Participant's benefits in accordance with the following order of priority:
(a) to the Participant's surviving spouse;
(b) to the Participant's surviving children (including any children by
adoption) in equal shares;
(c) to the Participant's heirs at law under the laws of the state of the
Participant's domicile, in equal shares; or
(d) to the legal representative or representatives of the estate of the
Participant.
For purposes of the Plan, "spouse" means the person to whom the Participant is
legally married at the relevant time.
9.9. DIVERSIFICATION BY PARTICIPANTS. Notwithstanding any other provision
of the Plan to the contrary, during the 90-day period following the last day of
each Plan Year in a Participant's Qualified Election Period (as defined below),
the Participant may, by writing filed with the Committee in such form as it may
require, elect either to transfer to The ALLIED Group, Inc. Savings and
Investment Plan (or any successor thereto maintained by the Employers and
offering at least three investment options) (hereinafter referred to as the
"Savings Plan") or, in the case of a Participant who is no longer both an
employee and participant in the Savings Plan, to have distributed to him:
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52
(a) a portion of his Account balance not exceeding 25 percent (50
percent with respect to the Participant's election following the
last Plan Year in his Qualified Election Period) of the sum of:
(i) the number of shares of Company Stock allocated to his Account
at the end of the immediately preceding Plan Year; and
(ii) the number of shares of Company Stock previously transferred
under this subsection during his Qualified Election Period;
REDUCED BY
----------
(b) the number of shares of Company Stock previously transferred in
accordance with this subsection.
The provisions of this subsection 9.9 shall not apply to any Participant to the
extent that the value of the Company Stock allocated to his Account (determined
as of the first day on which the Participant would otherwise be entitled to make
a transfer election under this subsection) is $500.00 or less. Any amount
required to be transferred pursuant to a transfer election made during any Plan
Year in accordance with this subsection shall be transferred no later than the
180th day of that Plan Year. A Participant's "Qualified Election Period" means
the six-Plan-Year period beginning with the first Plan Year in which he has both
completed ten years of participation in the Plan and has attained at least age
55 years. For purposes of this subsection 9.9 only, years of participation in
the Plan shall include years of participation related to any benefit transferred
into the Plan pursuant to Supplements C or D.
9.10. FORFEITURES OF UNVESTED CONRIBUTIONS.
(a) A Participant's unvested portion of his Account shall be forfeited
as of the first Accounting Date after he has terminated employment.
For purposes of this subsection, if the value of the vested portion
of such a Participant's Account is zero, the Participant shall be
deemed to have received a distribution of such vested portion. Any
amounts forfeited under this paragraph shall be reallocated (as
described in subsection 9.11) on the first Accounting Date after a
Participant has terminated employment.
(b) If a Participant (i) who terminated employment and did not receive a
distribution of the vested portion of his Account, or (ii) who was
deemed to have received a distribution pursuant to the second
sentence of paragraph (a) of subsection 9.10, is subsequently
reemployed by an Employer or Related Company before the date the
Participant incurs five consecutive One Year Periods of Severance,
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53
the unvested portion of his Account will be restored to the amount
in his Account as of the Accounting Date preceding his Termination
Date or the date of such deemed distribution, whichever is
applicable. The amount restored to the Participant's Account shall
be unadjusted by any gains (including earnings and dividends) or
losses that occurred between the Accounting Date preceding his
Termination Date or the date of such deemed distribution, whichever
is applicable, and the date of his reemployment and shall be derived
from forfeitures arising in the year of his reemployment.
(c) There shall be no forfeiture or divestment of the vested portion of
any Participant's Account balance for any reason.
9.11. APPLICATION OF FORFEITURES. Any Forfeitures of unvested contributions
and earnings thereon during a Plan Year pursuant to subsection 9.10 not used to
pay Net Expenses under subsection 6.5(a) shall be allocated to the Accounts of
Eligible Participants in accordance with the provisions of subsection 6.5.
9.12. PAYMENT IN CASH OR COMPANY STOCK. Payments under any annuity contract
distributed pursuant to the provisions of this section 9 shall be made in cash.
In the event that a lump sum form of distribution is to be made pursuant to the
provisions of this section 9, the Participant, or in the event of his death his
Beneficiary, may elect, by writing filed with the Committee at such time and in
such form as the Committee may require, to have his Account balance distributed
either in the form of cash or in the form of Company Common Stock (and cash
equal to the fair market value of any fractional share of such stock). In the
event that a Participant or Beneficiary fails to properly make any such
election, he shall be deemed to elect distribution in cash.
9.13. DISTRIBUTION AND TRANSFER OF COMPANY PREFERRED STOCK.
(a) Notwithstanding any other provisions of the Plan to the contrary, no
Company Stock shall be distributed or transferred from the Plan in
the form of Company Preferred Stock. With respect to any portion of
a Participant's Account invested in Company Preferred Stock that is
to be distributed or transferred in accordance with the provisions
of this section 9, the Committee shall direct the Trustee either to
(i) cause the Company to redeem the shares of Company Preferred
Stock allocated to such portion for their redemption value in
accordance with the then applicable provisions of such Company
Preferred Stock, or (ii) convert such shares into shares of Company
Common Stock (and cash equal to the fair market value of any
fractional share of such stock) in accordance with the then
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54
applicable conversion rate of such Company Preferred Stock,
whichever the Committee determines will yield the greater value. The
day when the Committee makes said determination and directs the
Trustee to redeem or convert the Company Preferred Shares shall be
the Account Liquidation Date.
(b) With respect to the Account of a Participant who terminates from
employment, the Committee shall make the determination described in
paragraph (a), above, no earlier than the first business day of the
month following the later of the month in which the Participant's
Termination Date occurs, or the month in which the terminated
Participant elects to receive distribution of his Account. With
respect to the Account of a Participant who elects a transfer under
subsection 9.9, the Committee shall make said determination no
earlier than the first business day of the month after the month in
which the Participant makes such a transfer election. In making said
determination, the Committee shall consider the redemption value of
the Company's Preferred Stock and the bid market value of the
Company Common Stock, valued, (i) with respect to Participants
terminating or terminated from employment, as of the last business
day of the later of the month in which the Participant's Termination
Date occurs or the month in which a terminated Participant elects to
receive a distribution of his account, and (ii) with respect to a
Participant making a transfer election under subsection 9.9, as of
the last business day of the month in which such election is made.
(c) Where applicable after the conversion of Company Preferred Stock to
Company Common Stock or the redemption of Company Preferred Stock,
the Trustee, as appropriate, shall sell or purchase shares of
Company Common Stock in an orderly fashion through recognized public
markets. The amount distributed to the Participant, transferred at
the election of the Participant in accordance with subsection 9.9,
or used to purchase an annuity for the Participant shall be the
amount received by the Trustee as a result of a redemption,
conversion, purchase or sale (as described in this subsection 9.13),
plus any other assets in the Participant's Account, including cash,
paid in such form as is required by the provisions of this section
9.
(d) In no event shall the valuation made by or on behalf of the
Committee, in order to allow the Committee to make the determination
under paragraph (a) of this subsection, establish the value of the
benefits to be distributed under Section 9.
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55
(e) With respect to distributions to Participants whose Termination
Dates occur within one year after the Effective Date, the Committee
may direct the Trustee to use cash or cash equivalents held in the
Trust to distribute to those Participants benefits, plus applicable
earnings thereon in such form as is required by the provisions of
this section 9.
9.14. ACCRUED DIVIDENDS. Dividends accrued but not yet paid on the vested
portion of Company Stock allocated to a Participant's Account through the date
as of which the Account balance is determined for distribution purposes under
this section 9 shall be distributed with the Participant's Account balance or as
soon as practicable after such dividends have been paid to the Trustee.
9.15. FACILITY OF PAYMENT. Notwithstanding the provisions of this section
9, if, in the Committee's opinion, a Participant or other person entitled to
benefits under the Plan is under a legal disability or is in any way
incapacitated so as to be unable to manage such person's financial affairs, the
Committee may, until claim is made by a conservator or other person legally
charged with the care of such person or of the estate of such person, direct the
Trustee to make payment to a relative or friend of such person for the benefit
of such person. Thereafter, any benefits under the Plan to which such
Participant or other person is entitled shall be paid to such conservator or
other person legally charged with the care of such person or the estate of such
person.
9.16. INTERESTS NOT TRANSFERABLE. The interests of Participants and other
persons entitled to benefits under the Plan are not subject to the claims of
their creditors and may not be voluntarily or involuntarily assigned, alienated
or encumbered, except pursuant to a qualified domestic relations order.
(a) A qualified domestic relations order shall mean any judgment,
decree, or order (including approval of a property settlement
agreement) which relates to the provision of child support, alimony
payments, or marital property rights to a spouse, former spouse,
child or other dependent of a Participant which creates or
recognizes the existence of an alternate payee's right to, or
assigns to an alternate payee the right to, receive all or a portion
of the benefits payable with respect to a Participant under the
Plan, and which meets the following requirements:
(i) such order shall specify the name and last known mailing
address (if any) of the Participant and each such alternate
payee covered by the order;
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<PAGE>
56
(ii) such order shall specify the amount or percentage of the
Participant's benefits to be paid by the Plan to each such
alternate payee, or the manner in which such amount or
percentage is to be determined;
(iii) such order shall specify the number of payments or period to
which such order applies;
(iv) such order shall specify each plan to which such order
applies;
(v) such order shall not require the Plan to provide any type or
form of benefits, or any option not otherwise provided under
the Plan;
(vi) such order shall not require the Plan to provide increased
benefits (determined on the basis of actuarial value); and
(vii) such order shall not require the payment of benefits to an
alternate payee which are required to be paid to another
alternate payee under another order previously determined to
be a Qualified Domestic Relations Order.
(b) The Committee shall determine a set of non-discriminatory and
reasonable procedures to determine the qualified status of domestic
relations orders and to administer distributions under such
qualified orders in accordance with Section 414(p) of the Code.
9.17. ABSENCE OF GUARANTY. Neither the Trustee, the Committee nor the
Employers in any way guarantee the Trust Fund from loss or depreciation. The
Employers do not guarantee any payment to any Participant or Beneficiary of the
Plan. The liability of the Trustee to make any payment is limited to the
available assets of the Trust Fund.
9.18. MISSING PARTICIPANTS OR BENEFICIARIES. Each Participant and each
Beneficiary designated by a Participant must file with the Committee, from time
to time, in writing, such person's post office address and each change of post
office address. Any communication, statement or notice addressed to a
Participant or Beneficiary at the last post office address of such person filed
with the Committee or, in the case of a Participant, if no address is filed with
the Committee, then at the last post office address of the Participant as shown
on the Employers' records, will be binding on the Participant and his
Beneficiary for all purposes of the Plan. None of the Employers, the Committee
or the Trustee will be required to search for or locate a Participant or
designated Beneficiary.
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<PAGE>
57
9.19 DIRECT ROLLOVERS. This section applies to distributions made on or
after January 1, 1993. Notwithstanding any provision of the Plan to the contrary
that would otherwise limit a distributee's election under this section 9, a
distributee may elect, at the time and in the manner prescribed by the Committee
to have any portion of any eligible rollover distribution paid directly to an
eligible retirement plan specified by the distributee in a direct rollover.
(a) For purposes of this subsection, the following terms shall be
defined as follows:
(i) Eligible rollover distribution: An eligible rollover
distribution is any distribution of all or any portion of the
balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the
distributee's designated beneficiary, or for a specified
period of ten years or more; any distribution to the extent
such distribution is required under section 401(a)(9) of the
Code; and the portion of any distribution that is not
includable in gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to
employer securities). An eligible rollover distribution also
does not include a distribution of Code section 404(k)
dividends, and additional items designated by the Commissioner
in revenue rulings, notices, and other guidance.
(ii) Eligible retirement plan: An eligible retirement plan is an
individual retirement account described in section 408(a) of
the Code, an individual retirement annuity described in
section 408(b) of the Code, an annuity plan described in
section 403(a) of the Code, or a qualified trust described in
section 401(a) of the Code, that accepts the distributee's
eligible rollover distribution. However, in the case of an
eligible rollover distribution to the surviving spouse, an
eligible retirement plan is an individual retirement account
or individual retirement annuity.
(iii) Distributee: A distributee includes an employee or former
employee. In addition, the employee's or former employee's
surviving spouse and the employee's or former employee's
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<PAGE>
58
spouse or former spouse who is the alternate payee under a
qualified domestic relations order, as defined in section
414(p) of the Code, are distributees with regard to the
interest of the spouse or former spouse.
(iv) Direct rollover: A direct rollover is a payment by the Plan to
the eligible retirement plan specified by the distributee.
(b) The Committee may prescribe reasonable procedures for the election
of direct rollovers under this section, including, but not limited
to:
(i) Requirements that the distributee provide the Committee with
adequate information, including, but not limited to, the name
of the eligible retirement plan to which the rollover is to be
made, a representation that the recipient plan is an
individual retirement plan, a qualified plan, or a 403(a)
annuity, as appropriate, acknowledgment from the recipient
plan that it will accept the direct rollover, and any other
information necessary to make the direct rollover;
(ii) Requirements that direct rollover elections be made within the
time periods permitted for electing optional forms of payment
pursuant to this section 9;
(iii) Requirements prohibiting the division of an eligible rollover
distribution into separate distributions to be paid to more
than one plan.
9.20 DISTRIBUTIONS PURSUANT TO A QUALIFIED DOMESTIC RELATIONS ORDER.
Notwithstanding the foregoing, a distribution may be made to an alternate payee
pursuant to a domestic relations order, even though the Participant is not
currently entitled to a distribution under the Plan, if the Committee determines
that the domestic relations order is a qualified domestic relations order
pursuant to Code section 414(p).
SECTION 10
----------
Shareholder Rights
------------------
Voting, tender and exchange rights with respect to shares of Company Stock
shall be exercised in accordance with the provisions of the Trust Agreement.
Notwithstanding the foregoing, if the Employer does not have a registration-type
class of securities, as defined in section 409(e)(4) of the Code, each
Participant or Beneficiary in the Plan is entitled to direct the Plan as to the
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59
manner in which voting rights of securities allocated to the Account of the
Participant or Beneficiary are to be exercised with respect to any corporate
matter which involves the voting of such shares with respect to the approval or
disapproval of any corporate merger or consolidation, recapitalization,
reclassification, liquidation, dissolution, sale of substantially all the assets
of a trade or business, or such similar transaction as the Secretary of the
Treasury may prescribe in regulations.
SECTION 11
----------
The Committee
-------------
11.1. MEMBERSHIP. The Committee referred to in subsection 1.4 shall consist
of three or more members appointed by the Board of Directors of the Company. The
members of the Committee shall be the "named fiduciaries" (as described in
section 402 of ERISA) under the Plan with respect to their authority under the
Plan and the Trust Agreement. In controlling and managing the operation and
administration of the Plan, the Committee shall act by the concurrence of a
majority of its then members by meeting, by writing without a meeting or by
informal action. The Committee, by written consent of a majority of its members,
may authorize any one of its members to execute any document, instrument or
direction on its behalf. A written statement by a majority of the Committee
members or by an authorized Committee member shall be conclusive in favor of any
person (including the Trustee) acting in reliance thereon.
11.2. RIGHTS, POWERS AND DUTIES. The Committee shall have such authority as
may be necessary to discharge its responsibilities under the Plan, including the
following discretionary authority, powers, rights and duties in addition to
those vested in it elsewhere in the Plan or Trust:
(a) To interpret and construe the provisions of the Plan.
(b) To adopt such rules of procedure and regulations as are consistent
with the provisions of the Plan and as it deems necessary and
proper.
(c) To conclusively determine all questions arising under the Plan,
including the power to determine the eligibility of employees and
the rights of Participants and other persons entitled to benefits
under the Plan and their respective benefits, and to remedy any
ambiguities, inconsistencies or omissions of whatever kind.
(d) To maintain and keep adequate records concerning the Plan and
concerning its proceedings and acts in such form and detail as the
Committee may decide.
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60
(e) To direct all benefit payments under the Plan.
(f) To perform the functions of a "plan administrator" as defined in
section 414(g) of the Code, for purposes of section 8 and for
purposes of establishing and implementing procedures to determine
the qualified status of domestic relations orders (in accordance
with the requirements of section 414(p) of the Code) and to
administer distributions under such qualified orders.
(g) To employ agents, attorneys, accountants or other persons (who may
also be employed by or represent the Employers) for such purposes as
the Committee considers necessary or desirable to discharge its
duties.
(h) To establish a claims procedure in accordance with section 503 of
ERISA.
(i) To furnish the Employers with such information with respect to the
Plan as may be required by them for tax or other purposes.
11.3. ALLOCATION AND DELEGATION OF COMMITTEE RESPONSIBILITIES AND POWERS.
In exercising its authority to control and manage the operation and
administration of the Plan, and to direct the Trustee under the Trust Agreement,
the Committee may allocate all or any part of its responsibilities and powers to
any one or more of its members and may delegate all or any part of its
responsibilities and powers to any person or persons selected by it. Any such
allocation or delegation may be revoked at any time. Any member or delegate
exercising Committee responsibilities and powers under this subsection shall
periodically report to the Committee on its exercise thereof and the discharge
of such responsibilities.
11.4. APPLICATION OF RULES. The Committee shall operate and administer the
Plan in a uniform and nondiscriminatory manner.
11.5. INFORMATION TO BE FURNISHED TO COMMITTEE. The Employers shall furnish
to the Committee such data and information as may be required. The records of
the Employers as to an employee's or Participant's period of employment,
termination of employment and the reasons therefor, leave of absence,
reemployment and Section 415 Compensation will be conclusive on all persons
unless determined to be incorrect. Participants and other persons entitled to
benefits under the Plan must furnish to the Committee such evidence, data or
information as it considers desirable to carry out the Plan.
11.6. COMMITTEE'S DECISION FINAL. To the extent permitted by law, any
interpretation of the Plan and any decision on any matter within the discretion
of the Committee made by it in good faith is binding on all persons. A
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<PAGE>
61
misstatement or other mistake of fact shall be corrected when it becomes known,
and the Committee shall make such adjustment on account thereof as it considers
equitable and practicable.
11.7. REMUNERATION AND EXPENSES. No remuneration shall be paid to any
Committee member as such by the Plan. However, the reasonable expenses of a
Committee member incurred in the performance of a Committee function shall be
reimbursed by the Employers.
11.8. EXERCISE OF COMMITTEE'S DUTIES. Notwithstanding any other provisions
of the Plan, the Committee shall discharge its duties hereunder solely in the
interests of the Participants in the Plan and other persons entitled to benefits
thereunder, and;
(a) for the exclusive purpose of providing benefits to Plan Participants
and other persons entitled to benefits thereunder; and
(b) with the care, skill, prudence and diligence under the circumstances
then prevailing that a prudent person acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise
of a like character and with like aims.
11.9. INDEMNIFICATION OF THE COMMITTEE. The Committee and the individual
members thereof shall be indemnified by the Employers against any and all
liabilities, losses, costs, and expenses (including reasonable legal fees and
expenses) of whatsoever kind and nature which may be imposed on, incurred by or
asserted against the Committee or its members by reason of the performance of a
Committee function if the Committee or such member did not act dishonestly or in
willful violation of the law or regulation under which such liability, loss,
cost or expense arises.
11.10. RESIGNATION OR REMOVAL OF COMMITTEE MEMBER. A Committee member may
resign at any time by giving ten days' advance written notice to the Employers,
the Trustee and the other Committee members. The Company may remove a Committee
Member by giving written notice to him, the other Employers, the Trustees and
the other Committee members.
11.11. APPOINTMENT OF SUCCESSOR COMMITTEE MEMBER. The Company may fill any
vacancy in the membership of the Committee and shall give prompt written notice
thereof to the other Committee members, the other Employers and the Trustee.
While there is a vacancy in the membership of the Committee, the remaining
members shall have the same powers as the full Committee until the vacancy is
filled.
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<PAGE>
62
SECTION 12
----------
Amendment and Termination
-------------------------
12.1. AMENDMENT. While the Employers expect and intend to continue the
Plan, the Board of Directors of the Company (the "Board of Directors") must
reserve and reserves the right, subject to the provisions of subsection 1.12, to
amend the Plan at any time, except as follows:
(a) the duties and liabilities of the Trustee cannot be changed without
its consent; and
(b) no amendment shall reduce a Participant's benefits to less than the
amount such Participant would be entitled to receive if such
Participant had resigned from the employ of all of the Employers and
Related Companies on the date of the amendment.
12.2. TERMINATION. The Plan will terminate as to all of the Employers on
any day specified by the Board of Directors if advance written notice of the
termination is given to the other Employers. Employees of any Employer shall
cease active participation in the Plan (and will be treated as inactive
Participants in accordance with subsection 2.4) on the first to occur of the
following:
(a) the date on which that Employer, by appropriate corporate action
communicated in writing to the Company, ceases to be a contributing
sponsor of the Plan;
(b) the date that Employer is judicially declared bankrupt or insolvent;
or
(c) the dissolution, merger, consolidation, reorganization or sale of
that Employer, or the sale by that Employer of all or substantially
all of its assets, except that, subject to the provisions of
subsection 12.3, with the consent of the Company, in any event such
arrangements may be made whereby the Plan will be continued by any
successor to that Employer or any purchaser of all or substantially
all of that Employer's assets, in which case the successor or
purchaser will be substituted for that Employer under the Plan.
12.3. MERGER AND CONSOLIDATION OF PLAN, TRANSFER OF PLAN ASSETS. In the
case of any merger or consolidation with, or transfer of assets and liabilities
to, any other plan, provisions shall be made so that each Participant in the
Plan on the date thereof, if the Plan then terminated, would receive a benefit
immediately after the merger, consolidation or transfer which is equal to or
greater than the benefit he would have been entitled to receive immediately
prior to the merger, consolidation or transfer, if the Plan had then terminated.
12.4. DISTRIBUTION ON TERMINATION AND PARTIAL TERMINATION. Upon termination
or partial termination of the Plan, all benefits under the Plan shall continue
to be paid in accordance with section 9 as that section may be amended from time
to time.
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<PAGE>
63
12.5. NOTICE OF AMENDMENT, TERMINATION OR PARTIAL TERMINATION. Affected
Participants will be notified of an amendment, termination or partial
termination of the Plan as required by law.
12.6. METHOD OF PLAN AMENDMENT OR TERMINATION. Any action taken to amend or
terminate the Plan shall be adopted by the Board of Directors or any individual
or committee to whom the power to amend or terminate has been delegated as
authorized under the by-laws of the Company. Such action to amend or terminate
the Plan shall be adopted by resolution, unanimous written consent, or any other
method authorized under the by-laws of the Company and shall be effective on the
date of its adoption or such other date as may be specified in the resolution or
other action.
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64
APPENDIX A
DEFINED TERMS
-------------
1.6 - Accounting Date
6.1 - Account
7.2 - Annual Additions
9.1(c) - Annuity Starting Date
9.5 - Applicable Period
9.8 - Beneficiary
12.1 - Board of Directors
1.1 - Code
1.4 - Committee
1.1 - Company
5.1 - Company Common Stock
5.1 - Company Preferred Stock
1.1 - Company Stock
6.6 - Compensation
6.6 - Earnings
1.1 - Effective Date
9.3 - Election Information
6.7 - Eligible Participant
2.1 - Employee
1.2 - Employer
4.3 - Employer Contributions
1.4 - ERISA
5.3 - ESOP Loan
12.1 - Exchange Act 9.7(b) Five Year Rule
3.4 - Family and Medical Leave Act Maternity or Paternity
Absence
9.10 - Forfeitures
7.4 - Highly Compensated Employee
3.2 - Hour of Service
9.1(b) - Joint and Survivor Annuity
2.3 - Leased Employee
6.4 - Minimum Required Allocation Amount
11.1 - Named Fiduciaries
6.5 - Net Expenses
8.3(a) - Normal Retirement Date
3.5 - One Year Break In Service
3.4 - One Year Period of Severance
2.1 - Participant
1.1 - Plan
1.5 - Plan Year
9.9 - Qualified Election Period
9.6(a) - Pre-Retirement Election
9.4(b) - Pre-Retirement Surviving Spouse Annuity
1.2 - Related Company
9.7(b) - Required Beginning Date
9.2 - Retirement Election Period
9.9 - Savings Plan
7.1 - Section 415 Affiliate
7.1 - Section 415 Compensation
9.1(b) - Single Life Annuity
5.3 - Suspense Account
8.3 - Termination Date
1.3 - Trust Agreement
1.3 - Trustee
<PAGE>
65
3.1 - Year of Eligibility Service
3.6 - Year of Participation Service
3.3 - Year of Service
<PAGE>
66
SUPPLEMENT A
TO
THE ALLIED GROUP EMPLOYEE STOCK OWNERSHIP PLAN
----------------------------------------------
(Top-Heavy Status)
APPLICATION A-1. This Supplement A to The Allied Group Employee Stock
Ownership Plan (the "Plan") shall be applicable on and after
the date on which the Plan becomes Top-Heavy (as described in
subsection A-4).
DEFINITIONS A-2. Unless the context clearly implies or indicates the
contrary, a word, term or phrase used or defined in the Plan
is similarly used or defined for purposes of this Supplement
A.
AFFECTED A-3. For purposes of this Supplement A, the term "Affected
PARTICIPANT Participant" means each Participant who is employed by an
Employer or a Related Company during any Plan Year for which
the Plan is Top-Heavy. The term "Affected Participant" shall
not include any Participant who is covered by a collective
bargaining agreement if retirement benefits were the subject
of good faith bargaining between his Employer and his
collective bargaining representative.
TOP HEAVY A-4. The Plan shall be "Top Heavy" for any Plan Year if,
as of the Determination Date for that year (as described in
paragraph (a) next below), the present value of the benefits
attributable to Key Employees (as defined in subsection A-5)
under all Aggregation Plans (as defined in subsection A-8)
exceeds 60% of the present value of all benefits under such
plans. The foregoing determination shall be made in accordance
with the provisions of section 416 of the Code. Subject to the
preceding sentence:
(a) The Determination Date with respect to any plan for
purposes of determining Top-Heavy status for any plan
year of that plan shall be the last day of the preceding
plan year or, in the case of the first plan year of that
plan, the last day of that year. The present value of
benefits as of any Determination Date shall be
determined as of the accounting date or valuation date
coincident with or next preceding the Determination
Date. If the plan years of all Aggregation Plans do not
coincide, the Top-Heavy status of the Plan on any
Determination Date shall be determined by aggregating
the present value of Plan benefits on that date with the
present value of the benefits under each other
Aggregation Plan determined as of the Determination Date
of such other Aggregation Plan which occurs in the same
calendar year as the Plan's Determination Date.
<PAGE>
67
(b) Benefits under any plan as of any Determination Date
shall include the amount of any distributions from that
plan made during the plan year which includes the
Determination Date or during any of the preceding four
plan years, but shall not include any amounts
attributable to employee contributions which are
deductible under section 219 of the Code, any amounts
attributable to employee-initiated rollovers or
transfers made after December 31, 1983 from a plan
maintained by an unrelated employer, or, in the case of
a defined contribution plan, any amounts attributable to
contributions made after the Determination Date unless
such contributions are required by section 412 of the
Code or are made for the plan's first plan year.
(c) Benefits attributable to a participant shall include
benefits paid or payable to a beneficiary of the
participant, but shall not include benefits paid or
payable to any participant who has not been employed by
an Employer or Related Company during any of the five
plan years ending on the applicable Determination Date.
(d) The present value of benefits under all defined benefit
plans shall be determined on the basis of a 7.5% per
annum interest factor and the 1971 Group Annuity Table
(Male) with Projection, Principal Mutual Modification,
set back 0 years for males, 6 years for females.
KEY EMPLOYEE A-5. The term "Key Employee" means an employee or deceased
employee (or beneficiary of such deceased employee) who is a
Key Employee within the meaning ascribed to that term by
section 416(i) of the Code. Subject to the preceding
sentence, the term Key Employee includes any employee or
deceased employee (or beneficiary of such deceased employee)
who at any time during the plan year which includes the
Determination Date or during any of the four preceding plan
years was:
(a) an officer of any Employer or Related Company with
Compensation in excess of 50 percent of the amount in
effect under section 415(b)(1)(A) of the Code for the
calendar year in which that year ends; provided,
<PAGE>
68
however, that the maximum number of employees who shall
be considered Key Employees under this paragraph (a)
shall be the lesser of 50 or 10% of the total number of
employees of the Employers and the Related Companies
disregarding excludable employees under Code section
414(q)(8);
(b) one of the 10 employees owning (or considered to own,
under Code section 318) the largest interests in any
Employer or any Related Company (disregarding any
ownership interest which is less than 1/2 of one
percent), excluding any employee for any plan year whose
Compensation did not exceed the applicable amount in
effect under section 415(c)(1)(A) of the Code for the
calendar year in which that year ends;
(c) a 5% owner of any Employer or of any Related Company; or
(d) a 1% owner of any Employer or any Related Company having
Compensation in excess of $150,000.
If the Employer has more than the maximum number of officers
to be treated as Key Employees, the officers shall be ranked
by amount of annual Compensation, and those with the greater
amount of annual Compensation during the determination period
shall be treated as Key Employees. To determine the ten
employees owning the largest interests in the Employer, if
more than one employee has the same ownership interest, the
employee(s) having the greater annual Compensation shall be
treated as owning the larger interest(s). The determination of
who is a Key Employee shall be made according to Code section
416(i) and the regulations thereunder.
COMPENSATION A-6. The term "Compensation" for purposes of this Supplement
A generally means Compensation within the meaning of section
415(c)(3) during any specified period, not exceeding $200,000
or such larger amount as may be permitted for any year under
Code section 401(a)(17). However, solely for the purposes of
determining who is a Key Employee, for Plan Years beginning on
or after January 1, 1989 and before January 1, 1997, the term
"Compensation" means Compensation as defined in Code section
414(q)(7), and for Plan Years beginning on or after January 1,
1997, the term "Compensation" means Compensation as defined in
Code section 414(q)(4).
<PAGE>
69
NON-KEY A-7. The term "Non-Key Employee" means any employee (or
EMPLOYEE beneficiary of a deceased employee) who is not a Key Employee.
AGGREGATION A-8. The term "Aggregation Plan" means the Plan and each
PLAN other retirement plan maintained by an Employer or Related
Company which is qualified under section 401(a) of the Code
and which:
(a) during the plan year which includes the applicable
Determination Date, or during any of the preceding four
plan years, includes a Key Employee as a participant;
(b) during the plan year which includes the applicable
Determination Date or, during any of the preceding four
plan years, enables the Plan or any plan in which a Key
Employee participates to meet the requirements of
sections 401(a)(4) or 410 of the Code; or
(c) at the election of the Employer, would meet the
requirements of sections 401(a)(4) and 410 if it were
considered together with the Plan and all other plans
described in paragraphs (a) and (b) next above.
The term "Required Aggregation Plan" means a plan described in
either paragraph (a) or (b) of this subsection A-8. The term
"Permissive Aggregation Plan" means a plan described in
paragraph (c) of this subsection A-8.
VESTING A-9. For any Plan Year during which the Plan is Top-Heavy the
Account balance of any Affected Participant who has completed
at least three Years of Service shall be 100% vested. If the
Plan ceases to be Top-Heavy for any Plan Year, the provisions
of this subsection A-9 shall continue to apply to (i) the
portion of an Affected Participant's Account balance which was
accrued and vested prior to such Plan Year (adjusted for
subsequent earnings and losses) and (ii) in the case of an
Affected Participant who had completed at least 3 Years of
Service the portion of his Account balances which accrue
thereafter.
MINIMUM A-10. For any Plan Year during which the Plan is Top-Heavy,
CONTRIBUTION the minimum amount of Employer contributions and Forfeitures
allocated to the Accounts of each Affected Participant who is
employed by an Employer or Related Company on the last day of
that year, who is a Non-Key Employee and who is not entitled
to a minimum benefit for that year under any defined benefit
Aggregation Plan which is Top-Heavy, nor is entitled to a
minimum benefit for that year under any other defined
<PAGE>
70
contribution Aggregation Plan maintained by the Employer
shall, when expressed as a percentage of the Affected
Participant's Compensation be equal to the lesser of:
(a) 3%; or
(b) the percentage at which Employer contributions and
Forfeitures are allocated to the Account of the Key
Employee for whom such percentage is greatest.
An Affected Participant shall be entitled to receive a minimum
contribution for any Plan Year during which the Plan is
Top-Heavy regardless of whether such Affected Participant has
completed 1,000 Hours of Service during that Plan Year.
Paragraph (b) next above shall not be applicable for any Plan
Year if the Plan enables a defined benefit plan described in
paragraph A-8(a) or A-8(b) to meet the requirements of
sections 401(a)(4) or 410 for that year. The amount which is
required to be contributed under this subsection A-10 shall be
reduced by any minimum contribution otherwise required under
the terms of any other defined contribution Aggregation Plan
with respect to that Participant. Employer contributions for
any Plan Year during which the Plan is Top-Heavy shall be
allocated first to Non-Key Employees until the requirements of
this subsection A-10 have been met and, to the extent
necessary to this subsection A-10, additional contributions
shall be required of the Employers.
AGGREGATE A-11. (a) Subject to the provisions of paragraph (b) of this
BENEFIT LIMIT subsection A-11, for any Plan Year during which the Plan is
Top-Heavy, paragraphs (2)(B) and (3)(B) of section 415(e) of
the Code shall be applied by substituting "1.0" for "1.25".
(b) If for any Plan Year the Plan would not be Top-Heavy under
subsection A-4 if "90%" were substituted for "60%" as it
appears in that subsection, paragraph A-10 shall be applied by
substituting "4%" for "3%" as it appears in that subsection,
and paragraph (a) of this subsection A-11 shall not apply.
EFFECTIVE A-12. The Effective Date of this Supplement A is January 1,
DATE 1990.
<PAGE>
71
SUPPLEMENT B
TO
THE ALLIED GROUP EMPLOYEE STOCK OWNERSHIP PLAN
----------------------------------------------
(Non-Readily Tradeable Stock)
APPLICATION B-1. The purpose of this Supplement B to The ALLIED Group
Employee Stock Ownership Plan (the "Plan") is to set forth the
rules that apply in the event that any Company Stock held or
distributed by the Plan is not readily tradeable on an
established securities market.
EFFECTIVE B-2. The Effective Date of this Supplement B is January 1,
DATE 1990.
DEFINITIONS B-3. Unless the context clearly implies or indicates the
contrary, a word, term or phrase used or defined in the Plan
is similarly used or defined for purposes of this Supplement
B.
PUT OPTION B-4. If Company Common Stock distributed from the Plan
to a Participant is not readily tradeable on an established
market (within the meaning of section 409(h)(1)(B) of the
Code), the Participant shall have a put option (as described
below) with respect to such stock for a period of 60 days
following the date of distribution of the Company Common Stock
and, if the option is not exercised within such 60-day period,
for an additional period of at least 60 days in the following
Plan Year. The put option shall provide that, upon the
Participant's exercise, the Company or, in the discretion of
the Committee, the Plan, shall repurchase the Company Common
Stock.
PAYMENT B-5. The payment for Company Common Stock repurchased pursuant
PURSUANT TO to a put option shall be made in a lump sum within 30 days of
PUT OPTION exercise of the put option or in substantially equal,
annual installments over a period not exceeding five (5)
years, with interest payable at a reasonable rate on any
unpaid installment balance and with the provision of adequate
security for the installment payments. Installment payments
made pursuant to the preceding sentence shall commence within
30 days of exercise of the put option.
INDEPENDENT B-6. If at any time the Company Common Stock or Company
APPRAISAL Preferred Stock held by the Plan is not readily tradeable on
an established securities market, all valuations of such
Company Stock with respect to activities carried on by the
Plan will be made by reference to an annual appraisal (or the
most recent update thereto, if any) performed by an
<PAGE>
72
independent appraiser within the meaning of section 401(a)
(28) (C) of the Code. The Committee may require such
independent appraisal to be provided more frequently, or to be
updated from time to time, if conditions affecting the market
value of the Company Stock warrant it.
NONTERMINABLE B-7. The provisions of this Supplement B shall continue to
RIGHTS apply even if the Plan ceases to be an employee stock
ownership plan under section 4975(e)(7) of the Code.
<PAGE>
73
SUPPLEMENT C
TO
THE ALLIED GROUP EMPLOYEE STOCK OWNERSHIP PLAN
----------------------------------------------
(Transfers from Employer Plans)
APPLICATION C-1. The purpose of this Supplement C to The ALLIED Group
Employee Stock Ownership Plan (the "Plan") is to set forth
provisions relating to the transfer of accrued benefits from
the ALLIED Mutual Insurance Company Retirement Income Plan
(the "Retirement Plan") to this Plan.
EFFECTIVE C-2. The Effective Date of this Supplement C is January 1,
DATE 1990.
DEFINITIONS C-3. Unless the context clearly implies or indicates the
contrary, a word, term or phrase used or defined in the Plan
is similarly used or defined for purposes of this Supplement
C.
TRANSFER C-4. Each Participant in the Plan on the Effective Date may
ELECTION elect, at such time and in accordance with such transfer
election procedures as are established by the Committee and
the trustee of the Retirement Plan, to have the trustee of the
Retirement Plan transfer the lump sum present value of his
accrued benefits under the Retirement Plan to this Plan.
TRANSFER C-5. The Committee shall establish and maintain a separate
ACCOUNT Transfer Account in the name of each Participant to reflect
the amount transferred to the Plan pursuant to paragraph C-4
on behalf of such Participant, and the earnings and losses
attributable thereto. Such Transfer Account shall be adjusted
in the same manner and at the same time as the Participant's
Account is adjusted pursuant to paragraphs 6.2(a) and 6.2(b),
subsection 6.3 (other than paragraph (d) thereof) and
subsection 6.8 of the Plan. Amounts transferred to the Plan
pursuant to paragraph C-4 shall not constitute Annual
Additions under subsection 7.2. For all purposes of the Plan,
references to a Participant's Account shall be deemed to
include his Transfer Account, as applicable.
VESTING C-6. A Participant shall at all times have a fully vested,
nonforfeitable interest in his Transfer Account.
<PAGE>
74
SUPPLEMENT D
TO
THE ALLIED GROUP EMPLOYEE STOCK OWNERSHIP PLAN
----------------------------------------------
(Transfers to and from ALLIED Life Financial Corporation
Employee Stock Ownership Plan)
APPLICATION D-1. The purpose of this Supplement D to The ALLIED Group
Employee Stock Ownership Plan (the "Plan") is to set forth
provisions relating to the transfer of accrued benefits to and
from the ALLIED Life Financial Corporation Employee Stock
Ownership Plan (the "ALLIED Life Financial Plan") by
Participants who were employed by the Company and are
subsequently employed by ALLIED Life Insurance Company
("ALLIED Life") and by participants in the ALLIED Life
Financial Plan who were employed by ALLIED Life and are
subsequently employed by the Company.
EFFECTIVE D-2. The Effective Date of this Supplement D is January 1,
DATE 1994. Notwithstanding the foregoing, this Supplement D will
be effective only if ALLIED Life adopts the ALLIED Life
Financial Plan.
DEFINITIONS D-3. Unless the context clearly implies or indicates the
contrary, a word, term or phrase used or defined in the Plan
or Supplement C is similarly used or defined for purposes of
this Supplement D.
TRANSFERS D-4. Participant who was employed with the Company and who
FROM THE terminated from that employment and was subsequently employed
PLAN by ALLIED Life, may elect, no later than the Election Date,
to transfer the Participant's Account and Transfer Account, if
applicable, to the ALLIED Life Financial Plan. For the
purposes of this Supplement D only, the "Election Date" shall
be the November 15th of the year in which the Participant
becomes Transfer Eligible. For the purpose of this Supplement
D only, a Participant becomes "Transfer Eligible" on the first
day of October after the later of the date the Participant
commenced employment with ALLIED Life or the date the
Participant became fully vested in the Plan. Notwithstanding
the foregoing, any Participant who was fully vested in the
Plan and commenced employment with ALLIED Life on or before
the date of receipt of a favorable determination letter from
the Internal Revenue Service on the termination of the ALLIED
Life Insurance Company Capital Accumulation Plan, may transfer
the Participant's Account and Transfer Account, if applicable,
<PAGE>
75
as soon as practicable after the receipt of such favorable
determination letter, by making an election in accordance with
such transfer elections procedures as are established by the
Committee. Any election under this section D-4 must be made in
accordance with such transfer election procedures as are
established by the Committee. Such a transfer may be made only
in cash and will be effected as soon as practicable after the
Election Date for which an election is made.
TRANSFERS TO D-5. A Participant who was employed with ALLIED Life and who
THE PLAN terminated from that employment and was subsequently employed
by the Company may elect to have his account balance from the
ALLIED Life Financial Plan transferred into the Participant's
Account in the Plan. Such a transfer must be made in
accordance with such transfer procedures as are established by
the Committee. Such a transfer may be received by the Plan
only in cash. Such cash shall be used to purchase shares of
Company Stock as of the Accounting Date coincident with or
immediately following the effective date of the transfer.
Amounts transferred to the Plan pursuant to this paragraph D-5
shall not constitute Annual Additions under subsection 7.2.
VESTING D-6. A Participant shall at all times have a fully vested,
nonforfeitable interest in the amount attributable to a
transfer made pursuant to this Supplement D.
<PAGE>
76
Exhibit 10.35
THIRD AMENDMENT TO
TERM CREDIT AGREEMENT AND GUARANTY
THIS AMENDMENT dated as of September 26, 1997 is entered into by and
among ALLIED Group, Inc. ("Company"), State Street Bank and Trust Company, not
in its individual capacity but as trustee for The ALLIED Group Employee Stock
Ownership Trust ("ESOP Trustee"), Bank of Montreal, Chicago Branch ("BOM"), and
Norwest Bank Iowa, National Association ("Norwest") to amend the Term Credit
Agreement and Guaranty dated March 13, 1995, as amended October 12, 1995 and
March 5, 1996 ("Agreement").
1. This Amendment shall be effective as of October 1, 1997.
2. The definition of "Applicable Margin" as set forth in Section 1.1 of
the Agreement is amended by replacing the table with the following:
Best's Applicable
Rating Margin
A+ 37.5
A 45.0
A- 62.5
Below A- 100.0
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers as of the day and year first above
written.
ALLIED Group, Inc. The ALLIED Group Employee Stock
Ownership Trust
By: /s/ Douglas L. Andersen By State Street Bank and Trust Company,
------------------------------ not individually, but solely in its
Douglas L. Andersen capacity as ESOP Trustee
President
Bank of Montreal, Chicago Branch
By: /s/ Maryanne E. Sullivan
------------------------------------
Title: Vice President
---------------------------------
By: /s/ Robert C. Meyer
------------------------------
Title: Director
---------------------------
Norwest Bank Iowa, National
Association
By: /s/ John D. Landry
------------------------------
Title: Assistant Vice President
---------------------------
<PAGE>
77
Exhibit 11
ALLIED Group, Inc. and Subsidiaries
Computation of Per Share Earnings
For the Three and Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ---------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Primary
Net income $ 16,067 $ 14,459 $ 47,664 $ 35,955
Preferred stock dividends (879) (879) (2,636) (3,232)
----------- ----------- ---------- -----------
Adjusted net income $ 15,188 $ 13,580 $ 45,028 $ 32,723
=========== =========== ========== ===========
Earnings per share $ 0.75 $ 0.67 $ 2.22 $ 1.71
=========== =========== ========== ===========
Weighted average shares outstanding 20,314 20,417 20,316 19,094
=========== =========== ========== ===========
Fully Diluted
Net income $ 16,067 $ 14,459 $ 47,664 $ 35,955
Preferred stock dividends (879) (879) (2,636) (2,636)
----------- ----------- ---------- -----------
Adjusted net income $ 15,188 $ 13,580 $ 45,028 $ 33,319
=========== =========== ========== ===========
Earnings per share $ 0.75 $ 0.67 $ 2.22 $ 1.61
=========== =========== ========== ===========
Weighted average shares outstanding 20,314 20,417 20,316 20,730
=========== =========== ========== ===========
</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 SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 803,462
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 64,460
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 878,023
<CASH> 1,515
<RECOVER-REINSURE> 26,838
<DEFERRED-ACQUISITION> 51,056
<TOTAL-ASSETS> 1,165,566
<POLICY-LOSSES> 373,338
<UNEARNED-PREMIUMS> 241,559
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 46,768
0
37,812
<COMMON> 20,327
<OTHER-SE> 353,379
<TOTAL-LIABILITY-AND-EQUITY> 1,165,566
405,559
<INVESTMENT-INCOME> 38,494
<INVESTMENT-GAINS> 17
<OTHER-INCOME> 44,547
<BENEFITS> 277,414
<UNDERWRITING-AMORTIZATION> 89,005
<UNDERWRITING-OTHER> 15,033
<INCOME-PRETAX> 67,199
<INCOME-TAX> 19,161
<INCOME-CONTINUING> 48,038
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,664
<EPS-PRIMARY> 2.220
<EPS-DILUTED> 2.220
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>