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, 1998
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, 1998:
30,367,484 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,
1998 1997
---------------- ---------------
(in thousands)
<S> <C> <C>
Assets
Investments
Fixed maturities at fair value (amortized cost
$826,173 in 1998 and $791,945 in 1997) $ 864,764 $ 818,216
Equity securities at fair value (cost
$75,349 in 1998 and $69,452 in 1997) 86,696 79,182
Short-term investments at cost (note 2) 11,387 10,846
---------------- ---------------
Total investments 962,847 908,244
Cash 4,597 2,168
Accrued investment income 12,346 11,634
Indebtedness from affiliates (note 2) --- 3,035
Accounts receivable 105,837 91,596
Current income taxes recoverable 25,831 3,005
Reinsurance receivables for
losses and loss adjusting expenses 35,850 23,906
Mortgage loans held for sale (note 4) 71,770 29,521
Deferred policy acquisition costs 56,858 50,695
Prepaid reinsurance premiums 4,710 8,866
Mortgage servicing rights 44,151 35,931
Other assets 35,059 32,632
---------------- ---------------
Total assets $ 1,359,856 $ 1,201,233
================ ===============
</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,
1998 1997
---------------- ---------------
(in thousands)
<S> <C> <C>
Liabilities
Losses and loss adjusting expenses (note 3) $ 400,320 $ 378,026
Unearned premiums 261,175 239,763
Indebtedness due to affiliates 3,482 ---
Notes payable to nonaffiliates (note 4) 102,193 51,038
Notes payable to affiliates (note 2) 15,600 5,900
Guarantee of ESOP obligations 20,530 22,380
Deferred income taxes 7,658 5,515
Other liabilities (note 6) 149,661 68,527
---------------- ---------------
Total liabilities 960,619 771,149
---------------- ---------------
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 30,175 shares
in 1998 and 30,532 shares in 1997 (note 5) 30,175 30,532
Additional paid-in capital 103,392 112,490
Retained earnings 211,940 244,079
Accumulated other comprehensive income 32,359 23,314
Unearned compensation related to ESOP (16,441) (18,143)
---------------- ---------------
Total stockholders' equity 399,237 430,084
---------------- ---------------
Total liabilities and stockholders' equity $ 1,359,856 $ 1,201,233
================ ===============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
4
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues
Earned premiums $ 147,116 $ 137,816 $ 437,716 $ 405,559
Investment income 13,034 12,968 39,903 38,494
Realized investment gains 12 17 340 17
Income from affiliates (note 2) 1,393 1,783 4,037 3,800
Other income 16,463 13,582 49,025 40,747
----------- ----------- ----------- -----------
178,018 166,166 531,021 488,617
----------- ----------- ----------- -----------
Losses and expenses
Losses and loss adjusting expenses (note 3) 114,847 94,725 321,654 277,414
Amortization of deferred
policy acquisition costs 32,593 30,298 96,880 89,005
Other underwriting expenses (note 6) 80,207 5,151 89,530 15,033
Other expenses (note 6) 19,039 12,801 50,178 38,749
Interest expense 505 454 1,578 1,217
----------- ----------- ----------- -----------
247,191 143,429 559,820 421,418
----------- ----------- ----------- -----------
Income (loss) before income
taxes and minority interest (69,173) 22,737 (28,799) 67,199
----------- ----------- ----------- -----------
Income taxes
Current (20,183) 6,182 (8,117) 20,791
Deferred (2,047) 341 (2,749) (1,630)
----------- ----------- ----------- -----------
(22,230) 6,523 (10,866) 19,161
----------- ----------- ----------- -----------
Income (loss) before minority interest (46,943) 16,214 (17,933) 48,038
Minority interest in net income
of consolidated subsidiary 164 147 425 374
----------- ----------- ----------- -----------
Net income (loss) (47,107) 16,067 (18,358) 47,664
Other comprehensive income (net
of income taxes) 7,002 5,648 9,045 7,155
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (40,105) $ 21,715 $ (9,313) $ 54,819
=========== =========== =========== ===========
Net income applicable to common stock (note 7) $ (47,986) $ 15,188 $ (20,994) $ 45,028
=========== =========== =========== ===========
Earnings per share (note 7)
Basic $ (1.59) $ 0.50 $ (0.69) $ 1.48
=========== =========== =========== ===========
Diluted $ (1.57) $ 0.49 $ (0.68) $ 1.46
=========== =========== =========== ===========
</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,
-----------------------------------
1998 1997
---------------- ---------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ (18,358) $ 47,664
Adjustments to reconcile net income to net cash
provided by operating activities
Realized investment gains (340) (17)
Depreciation and amortization 9,391 9,586
Indebtedness with affiliates 6,517 (303)
Accounts receivable, net (26,186) (16,561)
Accrued investment income (712) 115
Deferred policy acquisition costs (6,163) (4,385)
Mortgage loans held for sale, net (2,814) (1,826)
Other assets (5,042) 1,467
Losses and loss adjusting expenses 22,294 11,147
Unearned premiums, net 25,568 19,935
Cost of ESOP shares allocated 1,702 2,385
Current income taxes (22,826) 279
Deferred income taxes (2,749) (1,630)
Other, net 81,777 (3,512)
---------------- ---------------
Net cash provided by operating activities 62,059 64,344
---------------- ---------------
Cash flows from investing activities
Purchase of fixed maturities (121,640) (114,061)
Purchase of equity securities (15,598) (38,696)
Purchase of equipment (7,272) (5,023)
Sale of fixed maturities 21,334 45,087
Maturities, calls, and principal reductions of fixed maturities 63,820 64,017
Sale of equity securities 9,806 354
Short-term investments, net (541) (3,108)
Sale of equipment 497 284
---------------- ---------------
Net cash used in investing activities (49,594) (51,146)
---------------- ---------------
Cash flows from financing activities
Notes payable to nonaffiliates, net 3,500 310
Notes payable to affiliates, net 9,700 2,125
Issuance of common stock 5,443 4,500
Repurchase of common stock (14,898) (7,354)
Dividends paid to stockholders, net of income tax benefit (13,781) (12,331)
---------------- ---------------
Net cash used in financing activities (10,036) (12,750)
---------------- ---------------
Net increase in cash 2,429 448
Cash at beginning of year 2,168 1,067
---------------- ---------------
Cash at end of quarter $ 4,597 $ 1,515
================ ===============
</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, 1997.
(2) Transactions with Affiliates
Pursuant to the terms of the Intercompany Operating Agreement, the Company
leases employees to ALLIED Mutual Insurance Company (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,
1998 and 1997, the Company received revenues of $2.2 million and $1.9 million
for employees leased to affiliates, respectively, which are included in income
from affiliates.
Certain subsidiaries of the Company provide data processing and other services
for ALLIED Mutual and its subsidiaries. Included in income from affiliates are
revenues of $1.8 million and $1.9 million relating to services performed for
ALLIED Mutual and its subsidiaries for the first nine months of 1998 and 1997,
respectively.
The Company and its affiliates deposit their excess cash into a short-term
investment fund. The fund was established to concentrate short-term cash in a
single account to maximize yield. AID Finance Services, Inc., a wholly-owned
subsidiary of ALLIED Mutual, is the fund administrator. At September 30, 1998,
the Company and its subsidiaries had $6.1 million invested in the fund and had
several short-term unsecured notes payable to the fund totaling $15.6 million.
The interest rate on the borrowings ranged from 5.8% to 8.8%.
The Company and its subsidiaries had interest income from affiliates of $649,000
and $372,000 in the first nine months of 1998 and 1997, respectively. Interest
paid to affiliates was $532,000 and $281,000 in the first nine months of 1998
and 1997, respectively.
(3) Reinsurance
The Company's property-casualty subsidiaries purchase property catastrophe
reinsurance from a large number of reinsurers each of which provides a
relatively small percentage of the total cover. For 1998, the pool liability of
the cover is 90% of $120 million with a retention of $11 million. A
reinstatement agreement exists allowing purchases of reinsurance for an
additional catastrophe occurring in the same year. In the second and third
quarter of 1998, the property-casualty segment exceeded the retention level and
recovered $16.2 million under the property catastrophe reinsurance. Additional
reinsurance was purchased in the second quarter under the reinstatement
agreement.
Effective January 1, 1998, the Company's property-casualty subsidiaries and
ALLIED Mutual entered into a property catastrophe reinsurance agreement with a
nonaffiliated reinsurer. The agreement is an aggregate catastrophe excess of
loss reinsurance program that covers the property-casualty segment's share of
pooled losses up to $25 million in excess of $25 million in the aggregate for
any one quarter or in excess of $60 million in the aggregate for any one year.
In the second quarter of 1998, the property-casualty segment received the
maximum recovery of $16 million under the excess of loss reinsurance program.
(4) Notes Payable to Nonaffiliates
At September 30, 1998, the mortgage banking subsidiary had borrowed $88.2
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 $95 million or 98% of the mortgage credit borrowing base. The
outstanding borrowings were secured by $71.8 million of pledged mortgage loans
<PAGE>
7
held for sale, mortgage servicing rights on loans with a principal balance of
$3.1 billion, and foreclosure loans. Interest rates applicable to the mortgage
loan warehousing agreements vary with the level of investable deposits
maintained at the respective commercial banks.
The mortgage banking subsidiary also had $9 million of 8.4% senior secured notes
outstanding as of September 30, 1998. 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 $5 million committed credit
facility through a line of credit agreement with AMCO Insurance Company (AMCO).
Interest on any outstanding borrowings is payable at an annual rate equal to the
federal funds unsecured rate for Federal Reserve member banks, which was 5.7% at
September 30, 1998. The Company had an outstanding balance under this line of
credit of $5 million at September 30, 1998. The borrowings were secured by
United States Government securities with a carrying value of $16.6 million. The
line of credit agreement was terminated on October 1, 1998.
(5) Common Stock
During the first nine months of 1998, the Company canceled 557,600 shares of its
common stock purchased on the open market at an average price per share of
$26.72. The program to repurchase up to 2 million shares of Company common stock
over the next twelve months was approved by the Board of Directors on May 5,
1998. The program can be terminated at any time and is pursuant to Rule 10b-18
of the Securities Exchange Act of 1934. As of September 30, 1998, 1.4 million
shares remain available under the program for repurchase.
(6) Merger Agreement with Nationwide
On June 3, 1998, the Company entered into a Merger Agreement with Nationwide
Mutual Insurance Company (Nationwide) that provides for the acquisition of all
of the outstanding common stock of the Company pursuant to a tender offer price
of $48.25 in cash per share. The expiration date of the tender offer was
September 30, 1998 (note 9). For the nine months ended September 30, 1998, the
Company and AMCO incurred $13.8 million in legal expenses associated with the
merger, which are included in other expenses. Included in other liabilities was
$8.7 million in accrued merger expenses
Included in other underwriting expenses is dividends to policyholders, which
increased due to a $110 million extraordinary dividend ALLIED Mutual paid to its
policyholders. Dividends to policyholders are a pooled expense and the
property-casualty segment's share of the dividends to policyholders was $70.4
million. As of September 30, 1998, the extraordinary dividend was declared but
unpaid and included in other liabilities.
<PAGE>
8
(7) Earnings per Share
The following table presents a reconciliation of the numerators and denominators
of the basic and diluted earnings per share computation for the three and nine
months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------------- -------------- ------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator
Net income $ (47,107) $ 16,067 $ (18,358) $ 47,664
Preferred stock dividends (879) (879) (2,636) (2,636)
------------- -------------- ------------- --------------
Net income applicable to common stock $ (47,986) $ 15,188 $ (20,994) $ 45,028
============= ============== ============= ==============
Denominator (weighted average shares)
Basic shares outstanding 30,148 30,471 30,338 30,474
Dilutive potential common shares 443 369 373 317
------------- -------------- ------------- --------------
Diluted shares outstanding 30,591 30,840 30,711 30,791
============= ============== ============= ==============
Basic earnings per share $ (1.59) $ 0.50 $ (0.69) $ 1.48
============= ============== ============= ==============
Diluted earnings per share $ (1.57) $ 0.49 $ (0.68) $ 1.46
============= ============== ============= ==============
</TABLE>
All outstanding options were included in the dilutive computation per share for
the three and nine months ended September 30, 1998. The exercise prices on the
outstanding options were less than the average market price per share .
(8) Segment Information
The Company has two reportable operating segments: property-casualty and excess
& surplus lines. For the nine months ended September 30, 1998 and 1997, the
property-casualty and excess & surplus lines accounted for 85.5% and 5.8% of
consolidated revenues, respectively. Included in all other are mortgage banking,
data processing operations, and employee leasing services to affiliated
companies. All segments operated exclusively in the United States. The following
table presents a summary of the Company's operating segments for the nine months
ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Revenues Income (loss)
------------------------------------------------------------------ before income
Revenues Revenues Realized taxes and
from from investment Total minority
nonaffiliates affiliates gains (losses) revenues interest *
------------- ------------- -------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Nine months ended
September 30, 1998
Property-casualty $ 452,693 $ 851 $ 325 $ 453,869 $ (32,531)
Excess & surplus lines 30,619 --- 11 30,630 8,966
All other 43,332 96,198 4 139,534 (5,234)
Eliminations --- (93,012) --- (93,012) ---
------------- ------------- -------------- ------------- -------------
Total $ 526,644 $ 4,037 $ 340 $ 531,021 $ (28,799)
============= ============= ============== ============= =============
</TABLE>
<PAGE>
9
<TABLE>
<CAPTION>
Revenues Income (loss)
----------------------------------------------------------------- before income
Revenues Revenues Realized taxes and
from from investment Total minority
nonaffiliates affiliates gains (losses) revenues interest *
------------- ------------- -------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Nine months ended
September 30, 1997
Property-casualty $ 417,731 $ 759 $ 16 $ 418,506 $ 59,543
Excess & surplus lines 29,905 --- (4) 29,901 7,359
All other 37,164 84,210 5 121,379 297
Eliminations --- (81,169) --- (81,169) ---
------------- ------------- ------------- ------------- -------------
Total $ 484,800 $ 3,800 $ 17 $ 488,617 $ 67,199
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Assets
------------------------------------
September 30, December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Property-casualty $ 1,131,216 $ 1,012,926
Excess & surplus lines 152,273 141,814
All other 596,217 560,270
Eliminations (519,850) (513,777)
---------------- ----------------
Total $ 1,359,856 $ 1,201,233
================ ================
</TABLE>
* includes realized investment gains or losses.
(9) Subsequent Events
On October 1, 1998, Nationwide announced that ALLIED Mutual merged into
Nationwide and that it had accepted for purchase all shares of the Company stock
validly tendered. A total of 27,756,419 shares of the Company's common stock had
been tendered; representing 92.3% of the total shares outstanding. The second
step of the acquisition was to merge the Company into Nationwide Group
Acquisition Corporation, a wholly-owned subsidiary of Nationwide. All shares not
previously purchased in the tender offer will be converted into the right to
receive $48.25 in cash (subject to dissenter appraisal rights). On November 12,
1998, pursuant to the short-term merger statute under Iowa corporate law, the
Company merged with Nationwide Group Acquisition Corporation. The Company is the
surviving corporation. On November 12, 1998, the Company also requested that the
New York Stock Exchange delist and deregister the Company's common stock.
On October 13, 1998, the Company entered into a definitive agreement to sell its
data processing subsidiaries for $25.8 million to Fiserv, Inc. The Company will
realize a pretax gain of approximately $22 million from the sale. The sale is
expected to close November 30, 1998.
As a result of the tender offer by Nationwide Group Acquisition Corporation on
September 30, 1998, as of October 1, 1998, the Company took, and caused certain
of its subsidiaries to take, certain actions with respect to various
intercompany agreements. The Company entered into an amendment to the
Intercompany Operating Agreement between the Company, ALLIED Life Financial
Corporation, and ALLIED Mutual (the successor in interest was Nationwide by
virtue of the merger). The amendment provided that the agreement will terminate
as of December 31, 1998.
<PAGE>
10
On October 1, 1998, the Company's property-casualty subsidiaries entered into an
amendment to the Second Amended and Restated Reinsurance Pooling Agreement
between the Company's property-casualty subsidiaries and ALLIED Mutual (the
successor in interest was Nationwide by virtue of the merger) whereby all of the
business generated by the Nationwide Reinsurance Pool, of which Nationwide is a
participant, would be kept separate from ALLIED's reinsurance pool for the
calendar year 1998. The amendment also provided for the termination of the
Second Amended and Restated Reinsurance Pooling Agreement as of January 1, 1999.
As of November 4, 1998, the board of directors of the Company's
property-casualty subsidiaries authorized the execution of quota-share
reinsurance agreements, whereby the business written by such subsidiaries and
Nationwide Insurance Company of America, a subsidiary of Nationwide, would be
100% reinsured by AMCO commencing as of January 1, 1999. AMCO in turn will enter
into a quota-share reinsurance agreement with Nationwide, whereby the business
written and reinsured by AMCO will be 100% reinsured by Nationwide commencing as
of January 1, 1999.
Also as of November 4, 1998, the board of directors of the Company's excess &
surplus lines subsidiary authorized the execution of a quota-share reinsurance
agreement with Scottsdale Insurance Company, a subsidiary of Nationwide, whereby
the business written by the Company's excess & surplus lines subsidiary will be
100% reinsured by Scottsdale Insurance Company commencing as of January 1, 1999.
On October 1, 1998, the Company's property-casualty subsidiaries entered into an
amendment to the ALLIED Group Joint Marketing Agreement between the Company's
property-casualty subsidiaries and ALLIED Mutual (the successor in interest was
Nationwide by virtue of the merger), whereby certain change in control and
non-compete provisions were waived by the parties.
On October 1, 1998, the Company's property-casualty subsidiaries amended the
Intercompany Cash Concentration Fund Agreement and the ALLIED Management
Information Services Agreement whereby certain change in control provisions were
waived by the parties.
On October 1, 1998, the Company terminated the Stock Rights Agreement with
ALLIED Mutual (the successor in interest was Nationwide by virtue of the
merger).
As of November 12, 1998, the board of directors of the Company terminated the
ALLIED Group, Inc. Employee Stock Purchase Plan, the ALLIED Life Employee Stock
Purchase Plan, and the ALLIED Group, Inc. Dividend Reinvestment and Stock
Purchase Plan.
<PAGE>
11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking Information
The Private Securities Litigation Reform Act of 1995 provides a safe harbor to
encourage companies to provide prospective information so long as it is
identified as forward-looking and accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed. Forward-looking statements are related
to the plans and objectives of management for the future operations, economic
performance, or projections of revenues, income, earnings per share, capital
expenditures, dividends, capital structure, or other financial items. In the
following discussion and elsewhere in this report, statements containing words
such as expect, anticipate, believe, estimates, goal, objective, or similar
words are intended to identify forward-looking statements. ALLIED Group, Inc.
(the Company) undertakes no obligation to update such forward-looking
statements, and it wishes to identify important factors that could cause actual
results to differ materially from those projected in the forward-looking
statements contained in the following discussion and elsewhere in this report.
The risks and uncertainties that may affect the operations, performance,
development, and results of the Company's business include but are not limited
to the following: (1) heightened competition, particularly intensified price
competition; (2) adverse state and federal legislation and regulations; (3)
changes in interest rates causing a reduction of investment income; (4) general
economic and business conditions which are less favorable than expected; (5)
unanticipated changes in industry trends; (6) adequacy of loss reserves; (7)
catastrophic events or the occurrence of a significant number of storms and wind
and hail losses; and (8) other risks detailed herein and from time to time in
the Company's other reports.
Overview
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the Interim
Consolidated Financial Statements and related footnotes included elsewhere
herein, and with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
The Company, a regional insurance holding company, and its subsidiaries operate
exclusively in the United States; primarily in the central and western states.
The largest segment includes three property-casualty insurance companies that
write personal lines (primarily automobile and homeowners) and small commercial
lines of insurance. The other reportable segment is excess & surplus lines
insurance. The property-casualty insurance segment accounted for 85.5% and 85.7%
of consolidated revenues for each of the nine months ended September 30, 1998
and 1997, 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 assumed by the pool administrator, AMCO
Insurance Company (AMCO), and then ceded back to the pool 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.
Merger with Nationwide Mutual Insurance Company
On June 3, 1998, the Company entered into a Merger Agreement with Nationwide
Mutual Insurance Company (Nationwide) that provides for the acquisition of all
of the outstanding stock of the Company by Nationwide pursuant to a revised
tender offer price of $48.25 in cash per share (the "Offer") to be followed by
the merger of an acquisition subsidiary of Nationwide with and into the Company,
in which shareholders (other than Nationwide, its acquisition subsidiary, and
shareholders validly exercising dissenters' rights of appraisal) would receive
$48.25 in cash per share (the "Merger"). The Board of Directors (Board)
unanimously approved the Offer and determined that the terms of the Offer and
the Merger are fair to and in the best interests of the Company's stockholders.
The Board unanimously recommended that the Company's stockholders accept the
Offer and tender their shares.
Nationwide's obligations to consummate the Offer and the Merger and to purchase
and pay for the shares are subject to a number of conditions, including, without
limitation, the condition that all insurance regulatory approvals necessary for
Nationwide's acquisition of control of the Company and its insurance
subsidiaries are obtained on terms and conditions reasonably satisfactory to
Nationwide.
<PAGE>
12
On July 20, 1998 and September 11, 1998, Nationwide received the Ohio
Department's and the Iowa Insurance Commissioner's approval, respectively, to
acquire control of the property-casualty subsidiaries of the Company. In
addition, on August 24, 1998, the Arizona Department of Insurance approved the
acquisition of control of the Company's excess & surplus subsidiary domiciled in
Arizona.
On October 1, 1998, Nationwide announced that ALLIED Mutual had merged into
Nationwide and that it had accepted for purchase all shares of the Company stock
validly tendered. A total of 27,756,419 shares of the Company's common stock had
been tendered; representing 92.3% of the total shares outstanding. The second
step of the acquisition was to merge the Company into Nationwide Group
Acquisition Corporation , a wholly-owned Subsidiary of Nationwide. All shares
not previously purchased in the tender offer will be converted into the right to
receive $48.25 in cash (subject to dissenters rights). On November 12, 1998,
pursuant to the short-form merger statute under Iowa corporate law, the Company
merged with Nationwide Group Acquisition Corporation. The Company is the
surviving corporation. On November 12, 1998, the Company also requested that the
New York Stock Exchange delist and deregister the Company's common stock.
As a result of the tender offer by Nationwide Group Acquisition Corporation on
September 30, 1998, as of October 1, 1998, the Company took, and caused certain
of its subsidiaries to take, certain actions with respect to various
intercompany agreements. The Company entered into an amendment to the
Intercompany Operating Agreement between the Company, ALLIED Life Financial
Corporation, and ALLIED Mutual (the successor in interest was Nationwide by
virtue of the merger). The amendment provided that the agreement will terminate
as of December 31, 1998.
On October 1, 1998, the Company's property-casualty subsidiaries entered into an
amendment to the Second Amended and Restated Reinsurance Pooling Agreement
between the Company's property-casualty subsidiaries and ALLIED Mutual (the
successor in interest was Nationwide by virtue of the merger) whereby all of the
business generated by the Nationwide Reinsurance Pool, of which Nationwide is a
participant, would be kept separate from ALLIED's reinsurance pool for the
calendar year 1998. The amendment also provided for the termination of the
Second Amended and Restated Reinsurance Pooling Agreement as of January 1, 1999.
As of November 4, 1998, the board of directors of the Company's
property-casualty subsidiaries authorized the execution of quota-share
reinsurance agreements, whereby the business written by such subsidiaries and
Nationwide Insurance Company of America, a subsidiary of Nationwide, would be
100% reinsured by AMCO commencing as of January 1, 1999. AMCO in turn will enter
into a quota-share reinsurance agreement with Nationwide, whereby the business
written and reinsured by AMCO will be 100% reinsured by Nationwide commencing as
of January 1, 1999.
Also as of November 4, 1998, the board of directors of the Company's excess &
surplus lines subsidiary authorized the execution of a quota-share reinsurance
agreement with Scottsdale Insurance Company, a subsidiary of Nationwide, whereby
the business written by the Company's excess & surplus lines subsidiary will be
100% reinsured by Scottsdale Insurance Company commencing as of January 1, 1999.
On October 1, 1998, the Company's property-casualty subsidiaries entered into an
amendment to the ALLIED Group Joint Marketing Agreement between the Company's
property-casualty subsidiaries and ALLIED Mutual (the successor in interest was
Nationwide by virtue of the merger), whereby certain change in control and
non-compete provisions were waived by the parties.
On October 1, 1998, the Company's property-casualty subsidiaries amended the
Intercompany Cash Concentration Fund Agreement and the ALLIED Management
Information Services Agreement whereby certain change in control provisions were
waived by the parties.
On October 1, 1998, the Company terminated the Stock Rights Agreement with
ALLIED Mutual (the successor in interest was Nationwide by virtue of the
merger).
As of November 12, 1998, the board of directors of the Company terminated the
ALLIED Group, Inc. Employee Stock Purchase Plan, the ALLIED Life Employee Stock
Purchase Plan, and the ALLIED Group, Inc. Dividend Reinvestment and Stock
Purchase Plan.
<PAGE>
13
Results of Operations
Consolidated revenues for the first nine months of 1998 were $531 million, up
8.7% over the $488.6 million reported for the same period of 1997. For the third
quarter only, consolidated revenues increased 7.1% to $178 million over the same
period in 1997. The increase occurred primarily because of the growth in earned
premiums for the nine and three months ended September 30, 1998.
The Company had a loss before income taxes and minority interest of $28.8
million and $69.2 million for the first nine and three months of 1998,
respectively. The loss was due to merger related expenses with Nationwide which
are included in other underwriting expenses. The loss was a result of $13.8
million in merger related expenses, the $110 million dividend paid to
policyholders of ALLIED Mutual, and adverse wind and hail experience. Dividends
to policyholders are a pooled expense and the property-casualty segment's share
of the dividends to policyholders was $70.4 million. For the nine and three
months ended September 30, 1997, income before income taxes and minority
interest was $67.2 million and $22.7 million, respectively. Wind and hail losses
increased 73.4% to $45.5 million for the nine months ended September 30, 1998
compared to $26.2 million for the same period in 1997. For the third quarter
wind and hail losses were up 20.9% to $12.9 million.
The Company's year-to-date effective income tax rate was (37.7)% and 28.5% at
September 30, 1998 and 1997, respectively. The decrease is due to operating
expenses exceeding revenues. The income tax benefit for the first nine months of
1998 was $10.9 million compared to an income tax expense of $19.2 million for
the same period in 1997.
A net loss of $18.4 million was recognized for the nine months ended September
30, 1998, bringing diluted earnings per share to $(0.68). For the same period in
1997, net income was $47.7 million and diluted earnings were $1.46 per share.
Diluted earnings per share before realized investment gains and losses were
$(0.69) for the first nine months of 1998 compared with $1.46 for the same
period of 1997. For the three months ended September 30, 1998 and 1997, diluted
earnings per share before realized gains were $(1.57) and $0.49, respectively.
The impact of the wind and hail losses on diluted earnings per share was $0.96
and $0.55 for the nine months ended September 30, 1998 and 1997, respectively.
For the third quarter of 1998 and 1997 the impact per share was $0.27 and $0.22,
respectively.
Book value per share at September 30, 1998 decreased to $12.52 compared to
$13.44 at December 31, 1997. The decline in the book value per share was
primarily due to the net loss realized for the nine months ended September 30,
1998. The fair value of investments in fixed maturities was $38.6 million above
cost at September 30, 1998 compared to $26.3 million above cost at December 31,
1997. If the investments in fixed maturities were reported at amortized cost,
the book value would have been $11.69 at September 30, 1998 compared to $12.88
at December 31, 1997.
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; 89.8% and 9%, respectively.
The ratings on 98.7% of the fixed income securities at September 30, 1998 were
investment grade or higher. The investment portfolio contained no real estate or
mortgage loans at September 30, 1998.
Invested assets were up 6% to $962.8 million from $908.2 million at year-end
1997. Nine-month consolidated investment income increased 3.7% to $39.9 million
from $38.5 million through September 30, 1997. Investment income for the quarter
ended September 30, 1998, was up slightly to $13 million over the second quarter
of 1997. The increase was due to a larger average balance of invested assets.
The Company's pretax rate of return on invested assets for the nine months ended
September 30, 1998, was down to 5.7% from 6.0% for the same period last year.
The pretax yield was down as a result of the low interest rate environment and a
higher proportional share of investment income from tax-exempt securities.
Property-casualty
Net written premiums for the pool (including ALLIED Mutual) totaled $679.5
million, an 8.2% increase over production in the first nine months of 1997.
Growth was constrained by commercial lines that grew 3.3%, reflecting the highly
<PAGE>
14
competitive environment in which the commercial lines are operating. Personal
lines increased 10.3% over the same period in 1997. The average premium per
policy for personal lines was up 3.7% from the first nine months of 1997 to $638
while the policy count grew 5.2%. The average premium per policy for commercial
lines excluding crop-hail increased 1.7% from the first nine months of 1997 to
$1,169 and the policy count was up 2.6%. Earned premiums for the
property-casualty segment were 69.2% personal lines and 30.8% commercial lines
in the first nine months of 1998. The business mix for the first nine months of
1997 was 68.1% personal lines and 31.9% commercial lines.
Revenues for the property-casualty segment increased 8.4% to $453.9 million from
$418.5 million for the nine months ended September 30, 1998 and 1997,
respectively. Revenues for the quarter ended September 30, 1998, increased 6.7%
to $152.2 million. Direct earned premiums for the segment were $468.3 million
for the first nine months of 1998 compared with $420.1 million one year earlier.
Earned premiums increased 8.3% for the first nine months of 1998 to $412.4
million from $380.8 million; for the third quarter only, earned premiums
increase 7.2% to $138.7 million from $129.4 million for the same period in 1997.
The increase resulted from growth in insurance exposure and increase in average
premium per policy.
Investment income for the first nine months of 1998 was $34.7 million compared
to $33.3 million for the same period in 1997. For the three months ended
September 30, 1998, investment income increased 1.3% to $11.4 million compared
to $11.2 million for the same quarter in 1997. The increase was the result of a
larger average balance in invested assets. The pretax yield on invested assets
was 5.7% and 6.1% for the nine months ended September 30, 1998 and 1997,
respectively. The segment had realized investment gains of $325,000 and $16,000
in the first nine months of 1998 and 1997, respectively. Other income for the
first nine months of 1998 and 1997 was $6.4 million and $4.4 million,
respectively.
The segment realized a loss before income taxes of $32.5 million compared to net
income before income taxes of $59.5 million in the first nine months of 1997.
The loss was the combined result of merger related expenses, dividends to
policyholders, and higher wind and hail losses.
The statutory combined ratio (after policyholder dividends) for the first nine
months of 1998 was 117.0 compared to 94.0 reported in the first nine months of
1997. The higher combined ratio was primarily the result of a 17.5-point
increase in the underwriting expense ratio. The increase was due to merger
related expenses; dividends to policyholders of $70.4 million and legal expenses
of $5.8 million. The loss and loss adjusting expense ratio also increased
5.4-points; primarily due to higher wind and hail losses. The impact of wind and
hail losses on the combined ratio was 11 points and 6.9 points for the nine
months ended September 30, 1998 and 1997, respectively. The 1998 ratio also was
unfavorably impacted by an under accrual of contingency commissions for 1997,
one-time costs associated with setting up the new Central States Office, and
legal expenses. The generally accepted accounting principles (GAAP) underwriting
loss was $74 million compared with a gain of $21.8 million for the first nine
months of 1997.
The following table presents the property-casualty's statutory combined ratio by
line of business for the three and nine months ended September 30, 1998 and
1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Personal automobile 146.2 92.6 112.1 92.9
Homeowners 153.4 98.3 126.6 99.8
Personal lines 148.1 94.2 116.0 94.8
Commercial automobile 160.1 85.6 117.8 89.9
Workers' compensation 175.7 90.8 122.5 89.0
Other property/liability 172.6 99.5 119.8 94.5
Other lines 135.2 61.8 89.0 61.0
Commercial lines 170.4 95.5 119.4 92.5
Total 154.7 94.5 117.0 94.0
</TABLE>
<PAGE>
15
The personal auto statutory combined ratio deteriorated to 112.1 for the first
nine months of 1998 from 92.9 for the same period in 1997. The deterioration was
largely due to a 15.7-point increase in the underwriting expense ratio; the loss
and loss adjusting expense ratio increased 3.5-points. The impact of wind and
hail losses on the combined ratio for personal auto was up to 3.5 points from
2.5 points for the first nine months of 1997. The statutory combined ratio for
the homeowners line was 126.6 for the first nine months of 1998 compared with
99.8 for the same period of 1997. The deterioration was due to a 10.4-point
increase in the loss and loss adjusting expense ratio and a 16.4-point increase
in the underwriting expense ratio. The impact of higher wind and hail losses on
the combined ratio for the homeowners line increased to 31.7 points from
19.6 points for the first nine months of 1997. Overall, the personal lines
statutory combined ratio increased to 116.0 in the first nine months of 1998
from 94.8 in the same period of 1997. The statutory combined ratio for
commercial lines increased to 119.4 in the first nine months of 1998 from 92.5
for the first nine months of 1997. The deterioration of personal and commercial
lines combined ratio was primarily attributed to dividends paid to
policyholders, expenses associated with the merger, and higher wind and hail
losses in the second and third quarters of 1998.
Excess & Surplus Lines
Earned premiums increased to $25.3 million for the first nine months of 1998
from $24.8 million for the same period in 1997. Earned premiums for the quarter
ended September 30, 1998 and 1997 were $8.4 million and $8.5 million,
respectively. Net written premiums increased to $29.2 million for the nine
months ended September 30, 1998 from $25.8 million in the same period of 1997.
The increase is due to a change in reinsurance, effective January 1, 1998, from
the ceding of premiums on an written basis to an earned basis. For the nine
month period ended September 30, 1998, the segment's book of business was
comprised of 4% personal lines and 96% commercial lines. The business mix for
the first nine months of 1997 was 3% personal lines and 97% commercial lines.
Investment income for the first nine months of 1998 increased 4% to $5.3 million
from $5.1 million for the same period in 1997. For the quarter ended September
30, 1998 and 1997, investment income was $1.8 million and $1.7 million,
respectively. Investment income increased due to a larger average balance in the
investment portfolio. The pretax yield on those assets was 5.9% in the first
nine months of 1998 compared to 6.3% for the same period in 1997. The pretax
yield on invested assets for the year ended December 31, 1997 was 6.2%. Invested
assets increased 13% to $128.3 million at September 30, 1998 from $113.5 million
at year-end 1997.
The statutory combined ratio (after policyholder dividends) was 87.4, which
produced a GAAP underwriting gain of $3.6 million for the first nine months of
1998. The combined ratio for the first nine months of 1997 was 90.6 which
resulted in a GAAP underwriting gain of $2.2 million. The combined ratio
improved primarily due to a 2.3-point decrease in the underwriting expense ratio
in the first nine months of 1998. The loss and loss adjusting expense ratio also
improved slightly in the first nine months of 1998 from the same period in 1997.
Income before income taxes for the nine months ended September 30, 1998
increased to $9 million from $7.4 million; income before income taxes for the
third quarter of 1998 and 1997 were $4.2 million and $2.6 million, respectively.
The segment had realized gains of $12,000 in the first nine months of 1998 and
had realized losses of $4,000 in the same period of 1997.
Noninsurance Operations
Revenues for the noninsurance operations (including mortgage banking, data
processing operations, and employee leasing to affiliates) after eliminations
increased 15.7% to $46.5 million for the first nine months of 1998 from $40.2
million for the same period last year. The increase was primarily due to a $4.7
million increase in data processing revenues from consulting service fees.
Noninsurance operations reported a loss before income taxes of $5.2 million for
the first nine months of 1998 compared to income before income taxes of $297,000
for the same period in 1997. The decrease was primarily due to $8 million in
expenses associated with the Nationwide merger agreement. The mortgage banking
servicing portfolio at September 30, 1998 increased slightly to $3.1 billion
from $2.9 billion at year-end 1997.
New Accounting Pronouncement
In February of 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," effective for years beginning
after December 31, 1997. SFAS 132 revises the disclosure requirements but does
<PAGE>
16
not change the measurement or recognition of those plans. SFAS 132 superseded
SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." The adoption of SFAS 132 will result in revised and additional
disclosures but will have no effect on the financial position, results of
operations, or liquidity of the Company.
In June of 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal quarters beginning
after June 30, 1999. SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure the instruments at fair value. Early application
is encouraged, but is permitted only as of the beginning of any fiscal quarter
that begins after issuance of this statement. SFAS 133 shall not be applied
retroactively. Management has not determined the impact of SFAS 133 on the
financial position, results of operations, or liquidity of the Company at this
time.
Liquidity and Capital Resources
Substantial cash inflows are generated from premiums, pool administration fees,
investment income, and proceeds from sales and maturities of 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 that,
combined with expected cash flow, is believed adequate to meet anticipated
short-term and long-term payment obligations.
In the first nine months of 1998 and 1997, operating activities generated cash
flows of $62.1 million and $64.3 million, respectively. For both periods, the
primary source of funds was premium growth in the Company's property-casualty
insurance operations. The funds were used primarily to purchase fixed income and
equity securities and to repurchase Company common stock. Included in other
liabilities is $71.1 million in dividends declared to policyholders but unpaid
and $8.7 million in accrued merger expenses.
Operating cash flows were also used to pay $14.4 million of dividends to
stockholders in the first nine months of 1998. For the same period in 1997, the
Company paid dividends of $13 million to stockholders. Dividend payments to
common stockholders totaled $11.8 million for the nine months ended September
30, 1998, up from $10.4 million for the same period in 1997. The increase in
dividends to common stock shareholders is primarily due to a higher dividend per
share, 14.7% increase from September 30, 1997. In the first nine months of 1998
and 1997, the Company paid dividends of $2.6 million on the 6-3/4% Series
preferred stock.
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 1998, the Company received dividend payments of $13.3
million from the property-casualty subsidiaries and $557,000 from noninsurance
subsidiaries. During the same period of 1997, the Company received dividend
payments of $12.2 million from the property-casualty subsidiaries and $57,000
from noninsurance subsidiaries.
During the first nine months of 1998, the Company canceled 557,600 shares of its
common stock purchased on the open market at an average price per share of
$26.72. The program to repurchase up to 2 million shares of Company common stock
over the next twelve months was approved by the Board of Directors on May 5,
1998. The program can be terminated at any time and is pursuant to Rule 10b-18
of the Securities Exchange Act of 1934. As of September 30, 1998, 1.4 million
shares remain available under the program for repurchase.
On May 5, 1998, the Company announced an amendment to the reinsurance pooling
agreement between the Company's property-casualty segment and ALLIED Mutual.
Beginning July 1, 1998, the amended pooling agreement phases out the provisions
which provide that the pool administrator is reimbursed for such expenses by the
other pool participants on a set percentage-of-premiums basis. Once the
phase-out is completed by the year 2001, all underwriting expenses, loss
adjusting expense and premium collection expenses will be allocated based on
each participant's pool participation percentage in the same manner premiums and
losses are allocated.
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, 1998, short-term
<PAGE>
17
borrowings amounted to $88.2 million to be repaid through the subsequent sale of
mortgage loans held for sale and long-term borrowings amounted to $9 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.
On October 13, 1998, the Company entered into a definitive agreement to sell its
data processing subsidiaries for $25.8 million to Fiserv, Inc. The Company will
realize a pretax gain of approximately $22 million from the sale. The sale is
expected to close November 30, 1998.
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. The extraordinary dividend payable to policyholders
will be funded through the liquidation of the property-casualty segment's
investment portfolio. As of September 30, 1998, 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.
Costs associated with the Merger
The Company will incur additional merger-related costs until the transaction is
completed, but at this time the Company can not estimate what the amount of
those costs will be. The Company will expense such costs as they are incurred.
In the first nine months of 1998, expenses associated with the Merger Agreement
with Nationwide, including dividends to policyholders, lowered earnings for the
nine months ended September 30, 1998 by $1.94 per share.
Year 2000
In 1996, the Company assembled a full-time team to identify potential year 2000
issues, if any, in its information and departmental systems, as well as
administrative devices that might be effected (elevators, security systems,
etc.). Upon identifying a year 2000 issue the team determines when the system
may malfunction, what needs to be done to modify it, and then, after
modification, tests the system to verify that it is year 2000 compliant. The
Company has divided its year 2000 activities into three categories: mainframe
readiness, client/server readiness, and vendor interfacing readiness. The
Company believes it understands its potential exposure and has developed a plan
to mitigate those exposures for all three categories.
Mainframe Readiness -- The Company believes it has identified when each
application may malfunction and what needs to be modified to be compliant. By
the end of October 1998, all applications that may malfunction in 1998 will have
been modified and tested at least once. The Company believes it is on schedule
to having all mainframe applications modified and tested by year-end 1998.
In addition to modifying applications, the Company is in the process of
upgrading all system software on the mainframe to be compliant. The target date
for completion is December 31, 1998.
Client/Server Readiness -- The Company believes it has identified when each
internally developed client/server application may malfunction and what needs to
be modified to be compliant. By the end of October 1998, all internally
developed applications that may malfunction in 1998 will have been modified and
tested at least once. The Company believes it is on schedule to having all
internally developed client/server applications modified and tested by year-end
1998.
The Company has also identified client/server shrink wrap packages that are used
for critical business functions. The Company has developed a lab to test the
many different versions of these shrink wrap packages that are in use. Testing
of these packages has begun and is scheduled to be completed by midyear 1999.
Client/Server hardware has been verified as year 2000 compliant and the Company
has tested at least one of each of the various configurations that supports the
workstations. In addition, the Company tested the ability of the workstations to
handle the date roll over to the year 2000 as well as the personal computer's
ability to maintain a date change in the year 2000.
Vendor Interfacing Readiness -- The Company has identified all vendors with whom
it conducts electronic interfaces with and has contacted them to request a copy
of their year 2000 readiness plans. In addition, the Company plans to test all
interfaces prior to potential malfunction dates and have all testing completed
by midyear 1999.
<PAGE>
18
The Company actively monitors its progress towards being compliant and has had
two internal audits conducted on its process and progress. A third audit by an
outside auditing firm is currently in process.
Management of the Company does not expect year 2000 remediation costs to have a
material impact on its future financial position or results of operations. The
costs are expensed as they are incurred and the Company estimates that the total
cost of the year 2000 remediation to be approximately $2.9 million. As of
September 30, 1998, the Company has incurred a total cost of $2 million since
the project was initiated in 1996.
Management believes the worst case scenario, based on the Company's efforts to
mitigate any exposure, is that a non-mission critical application would not
perform properly, a supplier not being able to meet a scheduled delivery, or
some workstations would not work properly. While recognizing that some
uncertainty exists, the Company is in the process of developing a contingency
plan and has already assembled a team to address any year 2000 problems that may
have been missed during the mitigation efforts. The team will be put on alert
the day prior to an application's malfunction date to monitor the application's
performance and be ready to correct any problems.
The Company believes most significant year 2000 insurance claims are likely to
occur under error and omissions (E&O) insurance coverage, directors and officers
(D&O) liability insurance coverage, and commercial general liability. Management
believes exposure to material liability to be remote as of September 30, 1998,
because the emphasis of the Company's property-casualty business is primarily on
personal lines and small commercial business and does not write E&O and D&O
coverage types. However, the Company does anticipate that there may be year 2000
claims by its insureds resulting from malfunctioning technology, which cannot be
quantified at this time.
The Company's data processing segment has a line of property-casualty and life
insurance software products which it markets to affiliated and nonaffiliated
insurance companies. Management believes the segment's products are year 2000
compliant while operating in the Company's environment and will continue to
retest the products throughout 1998. The segment's customers have been advised
to test the software products in their operating environment for year 2000
compliance. Management believes any exposure to material liability was remote as
of September 30, 1998.
Contingencies
California has been 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
determined. Management of the Company continues to believe that the insurance
subsidiaries will not be liable for any material rollback of premiums.
On December 31, 1997, a complaint was filed by Mary M. Rieff, a policyholder of
ALLIED Mutual, in the Iowa District Court in and for Polk County Iowa, against
the Company and certain other individuals who are or were officers and/or
directors of ALLIED Mutual and the Company. The complaint, an alleged
policyholder derivative action brought on behalf of ALLIED Mutual, asserts,
among other things, (a) that the defendants were responsible for the
inappropriate transfer of ALLIED Mutual's corporate assets, the seizure of
certain corporate opportunities, and the implementation of an improper de facto
demutualization without informing or compensating policyholders or receiving the
appropriate approval from regulatory authorities; (b) that this allegedly
wrongful demutualization began on or about January 1, 1985 and was accomplished
through transfers of ALLIED Mutual's assets to the Company and to the individual
defendants for inadequate consideration; (c) that the individual defendants
breached fiduciary duties owed to ALLIED Mutual, wasted its corporate assets,
and intentionally interfered with its contracts, prospective business advantage,
and business relationships; and (d) that the defendants improperly transferred
substantial ownership of and control over the Company and ALLIED Mutual's
insurance business. The complaint further asserts that as a result of the
foregoing, ALLIED Mutual and its policyholders have suffered damages in excess
of $500 million. The complaint requests an accounting of the assets allegedly
wrongfully transferred to the Company and compensation to ALLIED Mutual for the
value of such assets, for the seizure of corporate opportunities, and for the de
facto demutualization of ALLIED Mutual. The complaint also asks for certain
other relief, including attorneys' fees and costs, equitable relief and
interest, and restitution for any assets wrongfully transferred or conveyed. On
June 1, 1998, the plaintiff filed a motion to enjoin the defendant directors of
ALLIED Mutual from considering, negotiating or approving any transaction on
behalf of ALLIED Mutual with Nationwide or any third party because of alleged
<PAGE>
19
conflicts of interest of the members of the Board of Directors of ALLIED Mutual.
On June 4, 1998, the complaint was amended to include a class action component.
On July 17, 1998, the Iowa District Court in and for Polk County, Iowa, ordered
that the plaintiff's motion for temporary and permanent injunctive relief be
denied. A motion to dismiss plaintiff's action has been filed and a hearing is
scheduled for November 20, 1998.
On May 21, 1998, a class action on behalf of all shareholders of the Company was
filed in Iowa District Court in and for Polk County, Iowa. Plaintiff seeks to
compel the Company to consider Nationwide's Offer or, in the alternative, to
recover damages caused by an alleged breach of fiduciary duty owed by the Board
to its shareholders.
The Company believes these suits are without merit and intends to defend them
vigorously. As is the case in all pending actions, the ultimate outcome is
uncertain.
<PAGE>
20
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) 2.4 Termination of Stock Rights Agreement between ALLIED
Mutual Insurance Company and ALLIED Group, Inc.
10.09 Second Amendment to the Amended and Restated
Management Information Services Agreement
10.69 Termination of Consulting Agreement
10.70 Fourth Amendment to the Second Amended and Restated
Reinsurance Pooling Agreement
10.71 Fourth Amendment to the Amended and Restated ALLIED
Group Intercompany Operating Agreement
10.72 Second Amendment to the ALLIED Group Joint Marketing
Agreement
10.73 First Amendment to Intercompany Cash Concentration
Fund Agreement
27 Financial Data Schedule for September 30, 1998
(b) The Company filed no reports on Form 8-K during the third
quarter ended September 30, 1998.
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 13, 1998 /s/ Robert A. Oakley
-------------------------
Robert A. Oakley
Chief Financial Officer
<PAGE>
21
ALLIED Group, Inc. and Subsidiaries
INDEX TO EXHIBITS
EXHIBIT
NUMBER ITEM PAGE
2.4 Termination of Stock Rights Agreement between ALLIED Mutual
Insurance Company and ALLIED Group, Inc. 22
10.09 Second Amendment to the Amended and Restated Management
Information Services Agreement 23
10.69 Termination of Consulting Agreement 27
10.70 Fourth Amendment to the Second Amended and Restated Reinsurance
Pooling Agreement 28
10.71 Fourth Amendment to the Amended and Restated ALLIED Group
Intercompany Operating Agreement 30
10.72 Second Amendment to the ALLIED Group Joint Marketing Agreement 32
10.73 First Amendment to Intercompany Cash Concentration Fund Agreement 34
27 Financial Data Schedule for September 30, 1998 41
<PAGE>
22
Exhibit 2.4
TERMINATION OF STOCK RIGHTS AGREEMENT
For valuable consideration, the sufficiency of which is hereby acknowledged,
Nationwide Mutual Insurance Company, successor to ALLIED Mutual Insurance
Company, and ALLIED Group, Inc. hereby agree to terminate that certain Stock
Rights Agreement, that was entered between the parties and dated as of July 5,
1990.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective officers as of the October 1, 1998.
NATIONWIDE MUTUAL INSURANCE ALLIED GROUP, INC.
COMPANY
By: ______________________________ By: ______________________________
Print name: ______________________ Print name: ______________________
Title: ___________________________ Title: ___________________________
<PAGE>
23
Exhibit 10.09
SECOND AMENDMENT TO AMENDED AND RESTATED MANAGEMENT
INFORMATION SERVICES AGREEMENT
THIS SECOND AMENDMENT dated as of October 1, 1998 ("Amendment") is entered into
by and between AMCO Insurance Company ("AMCO"), ALLIED Group Information
Systems, Inc. ("AGIS"), Nationwide Mutual Insurance Company ("Nationwide"),
successor in interest to ALLIED Mutual Insurance Company, ALLIED Group, Inc.
("AGI"), ALLIED General Agency Company ("AGA"), ALLIED Group Life Financial
Corporation ("ALFC"), ALLIED Life Insurance Company ("ALLIED Life"), ALLIED Life
Brokerage Agency ("ALBA"), ALLIED Group Merchant Banking Corporation ("AGMBC"),
ALLIED Group Insurance Marketing Company ("AGIMC"), The Freedom Group, Inc.
("TFG"), and Midwest Printing Services, Ltd. ("Midwest Printing") to amend the
Amended and Restated Management Information Services Agreement entered into on
January 24, 1997 ("Agreement") and the First Amendment to Amended and Restated
Management Information Services Agreement entered into on the 24th day of
February, 1997. AGIS, AGI, AGA, AGMC, AGLC, ALFC, ALLIED Life, ALBA, AGMBC,
AGIMC, TFG, and Midwest printing shall be hereinafter referred to collectively
as the "Companies."
1. This Amendment shall be effective as of October 1, 1998.
2. Article VI of the Agreement is hereby amended by deleting all of the
words in Article VI with the exception of the heading and replacing
them with the following words:
"6.1 TERM AND TERMINATION. This Agreement shall be
effective on March 1, 1996 and shall continue in
effect through December 31, 2004, unless earlier
terminated per the terms of Sections 6.2 and/or 6.3
of this Agreement as to one or more of the parties.
This Agreement shall continue after December 31, 2004
unless, a party to this Agreement delivers to the
other parties a written notice that such party
intends to cease participation and terminate the
Agreement as to it on or before December 31, 2004 or
a specified date thereafter. The terminating party
must give the other parties written notice of
termination at least thirty (30) days prior to the
proposed termination date.
6.2 CHANGE OF CONTROL OF ALFC. In the event of a
Change of Control (as hereinafter defined in this
section) of ALFC, Nationwide and AGI shall permit
this Agreement to continue in effect, subject to the
terms of Section 6.4. "Change of Control" for the
purposes of this section shall mean an event whereby
a person, group, or entity that is not affiliated
with Nationwide or ALFC acquires the ownership of 50%
or more of the voting stock of ALFC. A person, group
or entity "affiliated" with Nationwide, or ALFC shall
mean a person, group or entity that directly or
indirectly through one or more intermediary controls,
is controlled by, or is under common control with
Nationwide or ALFC.
<PAGE>
24
6.3 CHANGE OF CONTROL OF AGI. In the event of a
Change of control of AGI (as hereinafter defined in
this section) Nationwide and ALFC shall permit this
Agreement to continue in effect, subject to the terms
of Section 6.4. "Change of Control" for the purposes
of this section shall mean an event whereby a person,
group, or entity that is not affiliated with
Nationwide, or AGI acquires 50% or more of the voting
stock of AGI. A person, group or entity "affiliated"
with Nationwide or AGI shall mean a person, group or
entity that directly or indirectly through one or
more intermediary controls, is controlled by, or is
under common control with Nationwide or AGI.
6.4 TERMINATION OF PARTICIPATION. In the event of a
Change of Control, as defined in section 6.2 and/or
6.3 of the Agreement, the acquired company's
participation, and the company's subsidiaries'
participation, in the Agreement shall be immediately
terminated.
6.5 WAIVER. Any exercise of the options granted to
Nationwide, AGI, or ALFC by the previous sections 6.2
or 6.3 of the Agreement, that have been deleted
pursuant to the terms of this Amendment, shall be
waived by Nationwide, AGI, and ALFC and shall be
deemed null and void as if never made.
3. Counterparts. This Amendment may be executed simultaneously in one or
more counterparts, each of which shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective officers as of the day and year first written above.
Nationwide Mutual Insurance Company
By: __________________________________
Print name: __________________________
Title: _______________________________
ALLIED Group, Inc.
By: __________________________________
Print name: __________________________
Title: _______________________________
AMCO Insurance Company
By: __________________________________
Print name: __________________________
Title: _______________________________
<PAGE>
25
ALLIED General Agency Company
By: __________________________________
Print name: __________________________
Title: _______________________________
ALLIED Life Financial Corporation
By: __________________________________
Print name: __________________________
Title: _______________________________
ALLIED Group Mortgage Company
By: __________________________________
Print name: __________________________
Title: _______________________________
ALLIED Life Insurance Company
By: __________________________________
Print name: __________________________
Title: _______________________________
ALLIED Group Merchant Banking Corporation
By: __________________________________
Print name: __________________________
Title: _______________________________
ALLIED Group Insurance Marketing Company
By: __________________________________
Print name: __________________________
Title: _______________________________
ALLIED Group Information Systems, Inc.
By: __________________________________
Print name: __________________________
Title: _______________________________
<PAGE>
26
ALLIED Life Brokerage Agency, Inc.
By: __________________________________
Print name: __________________________
Title: _______________________________
Midwest Printing Services, Ltd.
By: __________________________________
Print name: __________________________
Title: _______________________________
The Freedom Group, Inc.
By: __________________________________
Print name: __________________________
Title: _______________________________
<PAGE>
27
EXHIBIT 10.69
TERMINATION OF CONSULTING AGREEMENT
THIS AGREEMENT is made as of October 1, 1998, by and between John E.
Evans ("Evans") and ALLIED Group, Inc. ("AGI"), ALLIED Life Financial
Corporation ("ALFC"), and Nationwide Mutual Insurance Company, a successor
company to ALLIED Mutual Insurance Company ("Mutual").
WHEREAS, Evans and AGI, ALFC and Mutual entered into a Consulting
Agreement dated December 14, 1994, as amended December 18, 1994 and May 13, 1997
(the "Consulting Agreement") setting forth the services Evans was to render to
AGI, ALFC and Mutual following his retirement; and
WHEREAS, the parties desire to waive the termination provision set
forth in the Agreement and desire to mutually terminate said Agreement;
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants set forth below and other valuable consideration, the receipt of which
is hereby acknowledged, the parties agree as follows:
Effective October 1, 1998, Evans, AGI, ALFC, and Mutual agree to
terminate the Consulting Agreement and hereby release the others from all
claims, obligations and rights any may have or may have in the future against
any other party to the Consulting Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year above first written.
___________________________________ Date:____________
John E. Evans
Nationwide Mutual Insurance Company
By:________________________________ Date:____________
ALLIED Group, Inc.
By:________________________________ Date:____________
Douglas L. Andersen, President
ALLIED Life Financial Corporation
By:________________________________ Date:____________
Samuel J. Wells, President
<PAGE>
28
Exhibit 10.70
FOURTH AMENDMENT TO SECOND
AMENDED AND RESTATED
REINSURANCE POOLING AGREEMENT
THIS AGREEMENT made as of the 1st day of October, 1998 by and between Nationwide
Mutual Insurance Company ("Nationwide"), successor to ALLIED Mutual Insurance
Company ("Mutual"), AMCO Insurance Company ("AMCO"), ALLIED Property and
Casualty Insurance Company ("APC"), Depositors Insurance Company ("DIC"), for
and in consideration of their mutual promises and agreements herein and for
their mutual benefits. Nationwide, AMCO, APC and DIC are referred to as
"Affiliated Companies," Nationwide, AMCO, APC and DIC are hereinafter
collectively referred to as "Participants."
WITNESSETH:
WHEREAS, the Participants entered into a Second Amended and Restated Reinsurance
Pooling Agreement on December 14, 1992, as amended February 18, 1993, February
10, 1995 and May 5, 1998 (the "Agreement");
WHEREAS, the Participants desire to amend the Agreement to reflect the merger of
Nationwide and Mutual;
NOW, THEREFORE, in consideration of the foregoing premises and for the mutual
covenants contained herein and other good and valuable consideration, the
Participants agree as follows:
1. The Agreement is amended by adding Section 1.17:
"Section 1.17. The term "Merger Effective Date" shall mean the date of
the Effective Time as that term is defined in the Agreement and Plan
of Merger dated as of June 3, 1998, as amended on June 24, 1998 by and
between Mutual and Nationwide."
2. Effective 12:00 a.m. on the Merger Effective Date, this Agreement is
amended to provide that any and all references to "ALLIED Mutual Insurance
Company" are hereby changed to "Nationwide Mutual Insurance Company."
3. Section 2.1 of the Agreement is amended by deleting all of the words in
Section 2.1 and replacing them with the following words:
"This Agreement shall be terminated as of 12:01 a.m. on January 1,
1999."
4. Effective 12:00 a.m. on the Merger Effective Date, this Agreement is
amended to provide that Exhibit B - Non-Pooled Insurance Business be
deleted and replaced with the following:
<PAGE>
29
"EXHIBIT B - NON-POOLED INSURANCE BUSINESS
The Non-Pooled Insurance Business as of 12:00 a.m. on the Merger Effective
Date shall be:
A) All premiums written by the Square Deal Division of Nationwide
(fka Mutual),
B) Any premiums ceded or assumed pursuant to the Property Special
Catastrophe Excess Contract, dated 01-01-93,
C) Nationwide's net retained share of the Reinsurance Pooling
Agreement dated January 1, 1994 between Nationwide, Nationwide
Mutual Fire Insurance Company, Nationwide General Insurance
Company, Nationwide Property and Casualty Insurance Company,
Colonial Insurance Company of Wisconsin, Scottsdale Insurance
Company, Employers Insurance Company of Wausau A Mutual Company,
Wausau Underwriters Insurance Company Wausau General Insurance
Company, Wausau Business Insurance Company, Farmland Mutual
Insurance Company, Nationwide Agribusiness Insurance Company, and
Scottsdale Indemnity Company.
IN WITNESS WHEREOF, the undersigned parties hereto have executed this Amendment
as of the date and year above first written.
Nationwide Mutual Insurance Company Depositors Insurance Company
By: _____________________________ By: _________________________
Name: ___________________________ Name: _______________________
Title: __________________________ Title: ______________________
ALLIED Property and Casualty Insurance Company AMCO Insurance Company
By: _____________________________ By: _________________________
Name: ___________________________ Name: _______________________
Title: __________________________ Title: ______________________
<PAGE>
30
Exhibit 10.71
FOURTH AMENDMENT TO AMENDED AND RESTATED ALLIED GROUP
INTERCOMPANY OPERATING AGREEMENT
THIS AMENDMENT dated as of October 1, 1998 ("Amendment") is entered into by and
between Nationwide Mutual Insurance Company ("Nationwide"), successor in
interest to ALLIED Mutual Insurance Company ("Mutual"), ALLIED Group, Inc.
("AGI"), and ALLIED Life Financial Corporation ("ALFC") to amend the Amended and
Restated ALLIED Group Intercompany Operating Agreement made as of August 25,
1993, as amended as of November 1, 1993, May 16, 1994, and December 15, 1994
(the "Agreement").
1. This Amendment shall be effective as of October 1, 1998.
2. Section 10.1(a) of the Agreement is hereby amended, by deleting all of
Section 10.1(a) following the heading and by replacing the deleted
words with the following words:
"10.1(a) Term. This Agreement shall continue from January 1, 1990
through December 31, 1998."
3. Section 10.1(b) of the Agreement is hereby amended by replacing the
words "(A)t the time any notice of termination is given under this
Agreement," with "(U)pon termination of this Agreement,".
4. Section 10.3 of the Agreement is hereby amended, by deleting all of
the words in Section 10.3 and replacing them with the following words:
"Section 10.3. Waiver of Null and Void Options. Any exercise of
the options granted to Mutual, AGI and/or ALFC pursuant to the
terms of Sections 10.3 and 10.4 of the Agreement, as they were
written prior to this Amendment are hereby waived by Nationwide,
AGI and ALFC and shall be deemed null and void as if never made."
5. Section 10.4 of the Agreement is hereby amended by deleting all of the
words in Section 10.4 and replacing them with the following words:
"Section 10.4. End of Affiliation. A party to the Agreement shall
cease to be a party to the Agreement when the party ceases to be
a person, group or entity that is affiliated with Nationwide or any
of the parties to the Agreement. A party ceases to be a party to
the Agreement, when a person, group or entity that is not
affiliated with a party to the Agreement acquires 50% or more of
the voting stock of the party. A person, group or entity
"affiliated with a party to the Agreement" shall mean a person,
group or entity that directly or indirectly through one or more
intermediaries controls, is controlled by, or is under common
control with the parties to the Agreement."
<PAGE>
31
6. Counterparts. This Amendment may be executed simultaneously in one or
more counterparts, each of which shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective officers as of the day and year first written above.
Nationwide Mutual Insurance Company
By: __________________________________
Print name: ____________________________
Title: ________________________________
ALLIED Group, Inc.
By: __________________________________
Print name: __________________________
Title: _______________________________
ALLIED Life Financial Corporation
By: __________________________________
Print name: __________________________
Title: _______________________________
<PAGE>
32
Exhibit 10.72
SECOND AMENDMENT TO THE ALLIED GROUP JOINT MARKETING AGREEMENT
THIS SECOND AMENDMENT dated as of October 1, 1998 ("Amendment") is entered into
by and between ALLIED Life Insurance Company ("ALIC"), AMCO Insurance Company
("AMCO"), Nationwide Mutual Insurance Company ("Nationwide"), successor in
interest to ALLIED Mutual Insurance Company, ALLIED Property and Casualty
Insurance Company ("APC"), and Depositors Insurance Company ("DIC") to amend the
ALLIED Group Joint Marketing Agreement made as of August 30, 1993 and amended on
November 1, 1993 ("Agreement").
1. This Amendment shall be effective as of October 1, 1998.
2. Section 8.0 of the Agreement shall be hereby amended by adding
Sections 8.3, 8.4, 8.5 and 8.6, as follows and any term that is
defined in the Agreement, but not defined in this Amendment, shall
have the definition given to the term in the Agreement:
" 8.3 Nationwide Acquisition. The P/C Segment shall allow the
Agreement to continue in effect, following a Change of Control
(as defined in Section 8.1 of the Agreement), whereby Nationwide
or an affiliate or subsidiary of Nationwide has acquired the
ownership of 50% or more of the voting stock of ALIC or ALLIED
Life Financial Corporation ("ALFC").
8.3 Acquisition by Nationwide. ALIC shall allow the Agreement
to continue in effect following a Change of Control (as defined
in Section 8.2 of the Agreement), whereby Nationwide has
acquired the ownership of 50% or more of the voting stock of any
company in the P/C Segment or ALLIED Group, Inc.
8.5 Termination At Will. Nationwide may terminate this Agreement
or the participation of any one or more of the parties to this
Agreement at any time.
8.6 Waiver. Any exercise of options granted to the P/C Segment
and/or ALIC pursuant to Sections 8.1 and/or 8.2 of the
Agreement, that was made on or before October 1, 1998 shall
be waived by ALIC and the P/C Segment and shall be deemed null
and void as if never made."
3. Section 13 of the Agreement shall be amended by deleting all of the
words in section 13.0 with the exception of the heading, and by adding
the following words:
"This Agreement may be amended, modified, or altered only by a
writing signed by the parties hereto."
<PAGE>
33
4. This Amendment may be executed simultaneously in one or more
counterparts, each of which shall constitute one and the same
instrument.
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.
Nationwide Mutual Insurance Company
By: __________________________________
Print name: __________________________
Title: _______________________________
ALLIED Life Insurance Company
By: __________________________________
Print name: __________________________
Title: _______________________________
Depositors Insurance Company
By: __________________________________
Print name: __________________________
Title: _______________________________
ALLIED Property and Casualty Insurance Company
By: __________________________________
Print name: __________________________
Title: _______________________________
AMCO Insurance Company
By: __________________________________
Print name: __________________________
Title: _______________________________
<PAGE>
34
Exhibit 10.73
FIRST AMENDMENT TO INTERCOMPANY CASH CONCENTRATION FUND AGREEMENT
THIS FIRST AMENDMENT dated as of October 1, 1998 ("Amendment") is entered into
by and among AID Finance Services, Inc. ("AID"), Nationwide Mutual Insurance
Company ("Nationwide"), as successor in interest to ALLIED Mutual Insurance
Company, ALLIED Group, Inc. ("AGI"), AMCO Insurance Company ("AMCO"), ALLIED
Property and Casualty Insurance Company ("APC"), Depositors Insurance Company
("Depositors"), Western Heritage Insurance company ("WHIC"), ALLIED Group
Information Systems, Inc. ("AGIS"), Midwest Printing Services, Ltd. ("MWP"), The
Freedom Group, Inc. ("TFG"), ALLIED General Agency Company ("AGA"), ALLIED Life
Financial Corporation ("ALFC"), ALLIED Life Insurance Company ("Life"), ALLIED
Group Insurance Marketing Company ("AGIMC"), ALLIED Group Merchant Banking
Corporation ("AGMBC"), and ALLIED Life Brokerage Agency, Inc. ("ALBA") to amend
the Intercompany Cash Concentration Fund Agreement effective the 24th day of
April, 1995 ("Agreement"). AID, NATIONWIDE, AGI, AMCO, APC, Depositors, WHIC,
AGLC, AGIS, MWP, TFG, AGA, ALFC, Life, AGMBC, ALBA, and AGIMC shall be referred
to collectively as the "Companies." AMCO, APC, Depositors, WHIC, AGLC, AGIS,
MWP, TFG, and AGA are referred to collectively as the "AGI Subsidiaries." Life,
AGMBC and ALBA are referred to collectively as the "ALFC Subsidiaries." AID and
AGIMC are referred to collectively as the "Mutual Subsidiaries."
1. This Amendment shall be effective as of October 1, 1998.
2. Section 6.2 of the Agreement is hereby amended, by deleting all of the
words in Section 6.2 except for the heading and replacing them with
the following words:
"(a) Nationwide acquisition. A change of control in any of the
Companies, AGI Subsidiaries, ALFC Subsidiaries or Mutual
Subsidiaries which results in a majority interest being held by
NATIONWIDE or an affiliate of NATIONWIDE, shall not be
considered a change of control for the purposes of Section 6.2
of the Agreement.
(b) Control Change. A change of control in any of the Companies,
AGI Subsidiaries, ALFC Subsidiaries, or Mutual Subsidiaries
which results in a majority interest being held by a person or
entity other than one of the Companies, AGI Subsidiaries, ALFC
Subsidiaries, or Mutual Subsidiaries, shall automatically
terminate that company's participation in this Agreement and all
funds invested in the Cash Concentration Fund ("CCF") by that
company will be immediately returned to any company terminated
by this paragraph.
(c ) Waiver. Any exercise of the options that were granted to
the Companies by Section 6.2 of the Agreement, as it was written
prior to this Amendment are hereby waived by the Companies and
shall be deemed null and void as if never made."
<PAGE>
35
(d) Termination at will. Nationwide may terminate this Agreement
or the participation of any one or more of the parties to this
Agreement at any time.
3. Section 9.3 of the Agreement shall be hereby amended to delete the
first sentence of the section and to replace that sentence with the
following sentence:
"All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally or if mailed by certified or
registered mail (return receipt requested) to the party at the
address of the party's Vice President - Finance, an Executive
Vice President, President or Chief Executive Officer at its
address as set forth on Exhibit I of this Amendment."
4. Section 5.1 of the Agreement shall be hereby amended by deleting all
of the words and headings written therein and replacing the deleted
words with the following:
"5.1. Loan from the CCF Fund. From and after October 1, 1998,
there shall be no borrowing from the CCF Fund by the Companies
(as defined in the Agreement). Any of the Companies that has
borrowed money from the CCF Fund but, has not as of October 1,
1998, fully repaid all principal balances, accrued interest and
other charges or penalties as required by the loan document
shall be required to repay the debt in full according to the
terms of the loan document."
5. Section 5.2 of the Agreement shall be hereby amended by deleting all
of the words and headings written therein and replacing the deleted
words with the following:
"5.2. CCF Funds may be Invested. The CCF Fund may be invested in
those classes or types of investments listed on Schedule 1
attached hereto and made a part hereof as if fully reprinted
herein."
6. Section 2.1 of the Agreement shall be amended by deleting the words,
"(T)ermination of any parties Participation in this Agreement prior
to December 31, 2004 shall require Coordinating Committee approval,
provided, however, that..." and by capitalizing the letter "t" in the
next word.
7. This Amendment may be executed simultaneously in one or more
counterparts, each of which shall constitute one and the same
instrument.
<PAGE>
36
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.
AID Finance Services. Inc.
By: _________________________________
Print name: __________________________
Title:_________________________________
ALLIED Group, Inc.
By: _________________________________
Print name: __________________________
Title: _______________________________
ALLIED Property and Casualty Insurance Company
By: _________________________________
Print name: __________________________
Title: _______________________________
Nationwide Mutual Insurance Company
By: __________________________________
Print name: __________________________
Title:_________________________________
Western Heritage Insurance Company
By: __________________________________
Print name: ___________________________
Title: ________________________________
ALLIED Group Information Systems, Inc.
By: __________________________________
Print name: __________________________
Title: ________________________________
The Freedom Group, Inc.
By: __________________________________
Print name: ___________________________
Title: ________________________________
AMCO Insurance Company
By:__________________________________
Print name: __________________________
Title: _______________________________
<PAGE>
37
Depositors Insurance Company
By: _________________________________
Print name: __________________________
Title: _______________________________
Midwest Printing Services, Ltd.
By: ________________________________
Print name: _________________________
Title: ______________________________
ALLIED General Agency Company
By: ________________________________
Print name: _________________________
Title: ______________________________
ALLIED Life Financial Corporation
By: ________________________________
Print name: _________________________
Title: ______________________________
ALLIED Group Merchant Banking Corporation
By: _________________________________
Print name: __________________________
Title: _______________________________
ALLIED Group Insurance Marketing Company
By: _________________________________
Print name: __________________________
Title: _______________________________
ALLIED Life Insurance Company
By: _________________________________
Print name: __________________________
Title: _______________________________
ALLIED Life Brokerage Agency, Inc.
By: ___________________________________
Print name: ____________________________
Title: _________________________________
<PAGE>
38
SCHEDULE 1
SCHEDULE OF PERMITTED INVESTMENTS
SEI DAILY INCOME TRUST - PRIME OBLIGATION FUND
TEMPORARY INVESTMENT FUND
<PAGE>
39
EXHIBIT I
NOTICES SHALL BE SENT TO THE ADDRESSES LISTED BELOW
AID Finance Services, Inc.
701 Fifth Avenue
Des Moines, Iowa 50391
Attn: Vice President - Finance
ALLIED Group, Inc.
701 Fifth Avenue
Des Moines, Iowa 50391
Attn: Vice President - Finance
ALLIED Property and Casualty Insurance Company
701 Fifth Avenue
Des Moines, Iowa 50391
Attn: Vice President - Finance
Nationwide Mutual Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215
Attn: Executive Vice President - Chief Financial Officer
Western Heritage Insurance Company
6263 North Scottsdale Road, Suite 240
Scottsdale, Arizona 85261
Attn: Vice President - Finance
ALLIED Group Information Systems, Inc.
701 Fifth Avenue
Des Moines, Iowa 50391
Attn: Vice President - Finance
The Freedom Group, Inc.
1425 60th Street NE
Cedar Rapids, Iowa 52410
Attn: Vice President - Finance
AMCO Insurance Company
701 Fifth Avenue
Des Moines, Iowa 50391
Attn: Vice President - Finance
<PAGE>
40
Depositors Insurance Company
701 Fifth Avenue
Des Moines, Iowa 50391
Attn: Vice President - Finance
Midwest Printing Services, Ltd.
3101 104th Street, Suite 7
Urbandale, Iowa 5091
Attn: Vice President - Finance
ALLIED General Agency Company
701 Fifth Avenue
Des Moines, Iowa 50391
Attn: Vice President - Finance
ALLIED Life Financial Corporation
701 Fifth Avenue
Des Moines, Iowa 50391
Attn: Vice President - Finance
ALLIED Group Merchant Banking Corporation
701 Fifth Avenue
Des Moines, Iowa 50391
Attn: Vice President - Finance
ALLIED Group Insurance Marketing Company
701 Fifth Avenue
Des Moines, Iowa 50391
Attn: Vice President - Finance
ALLIED Life Insurance Company
701 Fifth Avenue
Des Moines, Iowa 50391
Attn: Vice President - Finance
ALLIED Life Brokerage Agency, Inc.
701 Fifth Avenue
Des Moines, Iowa 50391
Attn: Vice President - Finance
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED
GROUP, INC.'S SEPT. 30, 1998 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-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 864,764
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 86,696
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 962,847
<CASH> 4,597
<RECOVER-REINSURE> 35,850
<DEFERRED-ACQUISITION> 56,858
<TOTAL-ASSETS> 1,359,856
<POLICY-LOSSES> 400,320
<UNEARNED-PREMIUMS> 261,175
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 117,793
0
37,812
<COMMON> 30,175
<OTHER-SE> 331,250
<TOTAL-LIABILITY-AND-EQUITY> 1,359,856
437,717
<INVESTMENT-INCOME> 39,903
<INVESTMENT-GAINS> 340
<OTHER-INCOME> 53,061
<BENEFITS> 321,654
<UNDERWRITING-AMORTIZATION> 96,880
<UNDERWRITING-OTHER> 89,530
<INCOME-PRETAX> (28,799)
<INCOME-TAX> (10,866)
<INCOME-CONTINUING> (18,358)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,358)
<EPS-PRIMARY> (0.690)
<EPS-DILUTED> (0.680)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
