UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number 0-22404
ALLIED Life Financial Corporation
(Exact name of registrant as specified in its charter)
Iowa
(State or other jurisdiction of incorporation or organization)
42-1406716
(I.R.S. Employer Identification No.)
701 Fifth Avenue, Des Moines, Iowa
(Address of principal executive offices)
50391-2003
(Zip Code)
515-280-4211
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 5, 1997 the number of Registrant's Common Stock, no par value,
outstanding was 4,503,599. The aggregate market value of the Common Stock of the
Registrant (based on the average bid and asked prices at closing) held by
nonaffiliates at March 5, 1997 was $57,414,915.
Documents Incorporated By Reference
TheRegistrant's definitive proxy statement (1997 Proxy Statement), which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1996, is incorporated by reference under Part III.
The index to the exhibits is located on page 76.
This document contains 107 pages.
<PAGE>
TABLE OF CONTENTS
Part I
Item 1. Business........................................................1
Item 2. Properties.....................................................19
Item 3. Legal Proceedings..............................................19
Item 4. Submission of Matters to a Vote of Security Holders............19
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholders
Matters........................................................20
Item 6. Selected Financial Data........................................21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................22
Item 8. Financial Statements and Supplementary Data....................33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................61
Part III
Item 10. Directors and Executive Officers of the Registrant.............61
Item 11. Executive Compensation.........................................61
Item 12. Security Ownership of Certain Beneficial Owners and Management.61
Item 13. Certain Relationships and Related Transactions.................61
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.......................................................62
Index to Financial Statement Schedules.........................62
Signatures.................................................... 75
Index to Exhibits..............................................76
<PAGE>
PART I
Item 1. Business
ALLIED Life Financial Corporation (the Company) is a holding company that
through its principal subsidiary ALLIED Life Insurance Company (ALLIED Life)
underwrites, markets, and distributes a select portfolio of life insurance and
annuity products to individuals who live primarily in rural and suburban areas
of the midwestern and western United States. The Company was organized in 1993
by ALLIED Mutual Insurance Company (ALLIED Mutual). ALLIED Mutual has been
engaged in the property-casualty business since 1929. Prior to that, ALLIED
Life, organized in 1966, was a wholly-owned subsidiary of ALLIED Mutual. The
financial information included herein consists of the accounts of the Company
and its wholly-owned subsidiaries: ALLIED Life, ALLIED Life Brokerage Agency
(ALBA), and ALLIED Group Merchant Banking Corporation (AGMB).
At December 31, 1996, ALLIED Mutual owned 54% of the outstanding voting
stock of the Company and the ALLIED Life Employee Stock Ownership Trust owned
1%. The remainder was owned by public stockholders.
The Company's long-term growth strategy is to: (1) provide its independent
agents with well-designed products that are easy to understand, meet the needs
of their customers and reward persistency over time, and (2) strengthen its
distribution systems, which include marketing life insurance and annuity
products through the independent property-casualty agencies (the ALLIED
Agencies) representing ALLIED Mutual and the property-casualty insurance
subsidiaries of ALLIED Group, Inc., and through the traditional distribution
system, which includes independent marketing organizations, financial
institutions, and independent life agencies. ALLIED Group, Inc.
is an 18.3% owned subsidiary of ALLIED Mutual.
There are 2,257 independent ALLIED Agencies which provide the Company with
access to numerous agency customers in addition to approximately 600,000
households having one or more ALLIED property-casualty policy. Management
believes that demand by these agencies for the Company's life insurance and
annuity products is a result of several factors: (1) the Company's well-designed
life products, coupled with a demonstrated commitment to service and support
from a known insurance company, provide each agency with a competitive advantage
in its local market; (2) sales of life insurance products enhance the agencies'
relationships with their policyholders creating the potential for increased
persistency of both life and property-casualty insurance policies; (3) life
insurance sales, particularly given their high first-year commissions relative
to property-casualty business, can provide substantial additional income to an
agency; and (4) an annual ALLIED property-casualty/life sales incentive trip is
available to qualifying agencies that achieve minimum property-casualty
production targets as well as specified minimum life insurance and annuity
production targets.
The Company's products are designed to meet traditional needs, such as
family income protection, supplemental retirement savings, mortgage protection,
and college savings. The products are also designed to appeal to a wide array of
consumers in the middle income and small business owner markets. The Company
provides the independent ALLIED Agencies with many opportunities to cross-sell
life insurance and deferred annuities to their existing property-casualty
customers. Life insurance protection is sold as important elements of a total
personal lines insurance package which may include auto insurance, homeowners
insurance, personal liability, and inland marine coverage. The Company's
annuities are marketed primarily as tax-deferred accumulation vehicles to
individuals in anticipation of their retirement.
See "Forward-looking Information" on page 22 for an outline of factors that
may affect actual results.
1
<PAGE>
Marketing and Distribution
General
ALLIED Life's products are sold through two distribution systems: the
independent ALLIED Agencies and a traditional life insurance distribution
system. In 1996, the Company sold 75% of its new life insurance face amount and
43% of its collected annuity premium through the ALLIED Agencies and the
remainder of its products were sold through traditional distribution channels.
Effective July 26, 1996, the Company split its property-casualty and traditional
distribution systems into two separate areas of responsibility in an effort to
improve traditional distribution sales. The Company hired Joseph P. Ross as Vice
President, Marketing for the traditional distribution system for life and
annuity products. Mr. Ross has twelve years experience in the insurance industry
and his duties will be to recruit life marketing organizations and develop their
sales, specifically in universal life and annuity products. Thomas F. Van
Fossen, Vice President, Marketing, will be responsible for the marketing and
sales of life and annuity products in the property-casualty marketplace.
Property-Casualty Distribution System
The property-casualty distribution system encompasses 2,257 independent
ALLIED Agencies. The Company's relationship with the ALLIED Agencies is
supported through a joint marketing arrangement between ALLIED Life and the
ALLIED property-casualty affiliates (p-c affiliates) which provides for: (1) the
promotion of ALLIED Life products through the p-c affiliates, in return for
financial incentives related to successful new sales efforts; (2) shared data
processing and client database resources, including the provision of on-line
price quotes for universal life and term products; and (3) combined billing for
all insurance products involving personal lines coverages, including life
insurance, annuities, auto, homeowners, excess liability, and other types of
insurance.
The Company's marketing staff works with the following personnel to
generate p-c business.
Regional Directors. The 16 ALLIED Life Regional and 4 Life Marketing
Directors are the Company's primary field marketing representatives to the
ALLIED Agencies and are primarily responsible for the annual growth in life
insurance and annuity sales in their respective geographic territories.
Regional Directors, who are independent contractors and are not employees
of the Company, implement the Company's sales strategies in the ALLIED Agencies,
including packaging life insurance effectively with other personal lines
coverages, promoting combined billing convenience, and expanding annuity sales
and business continuation planning for small commercial property-casualty
accounts. Each Regional Director is responsible for approximately 100 ALLIED
Agencies. Regional Directors also recruit and train life insurance specialists
(see Independent Property-Casualty Agencies on page 3) for certain ALLIED
Agencies, as appropriate. Although substantially all of their life and annuity
production is derived from sales by the ALLIED Agencies, Regional Directors also
generate life and annuity production from non-property-casualty agencies.
Regional Directors are compensated solely on an override and incentive
basis. Regional Directors' incentive compensation is based upon the achievement
of an annual production goal, determined by formula based on past production,
the Company's annual sales increase goal, and the persistency of the book of
business. Regional Directors who achieve certain levels of production may
qualify for the annual ALLIED property-casualty/life incentive trip. (See ALLIED
Property-Casualty/Life Incentive Trip on page 3).
2
<PAGE>
Life Marketing Directors have responsibilities similar to those of
the Regional Directors, but represent the Company in the newer property-
casualty territories where there is not yet an established ALLIED Agency system.
The Life Marketing Director is an employee of the Company and is compensated on
a salary and production incentive basis.
Property-Casualty Marketing Representatives. ALLIED property-casualty
marketing representatives are employees of ALLIED Group, Inc. Their primary
responsibility is to promote the sale of property-casualty products by the
independent ALLIED Agencies. The field marketing representatives, however, are
also responsible for promoting the relationship between the ALLIED Agencies and
ALLIED Life in order to enhance the sale of life insurance products. The
compensation of the marketing representatives includes bonuses based on the sale
of ALLIED Life products by the ALLIED Agencies. In addition, their eligibility
for the annual incentive trip partially depends on the level of life insurance
sales achieved by the ALLIED Agencies under their supervision.
Independent Property-Casualty Agencies. The ALLIED Agencies either sell
life insurance and annuity products themselves, with the support of their
Regional Director and the systems capabilities of ALLIED Life, or they work in
conjunction with life insurance specialists. Life insurance specialists are
independent life insurance agents either employed by an ALLIED Agency or working
with an ALLIED Agency on a joint basis. Their primary activity is to market life
insurance and annuities to existing ALLIED Agency clients. Life specialists may
be recruited and introduced to an ALLIED Agency by its Regional Director when
the agency becomes large enough to justify a full-time life insurance agent or
when an agency would prefer one specialist to handle all of its life insurance
sales. The compensation of the life specialist is usually directly related to
life and annuity production, in the form of split commissions, draws against
agency commissions or salary, and incentives from the agency. Life specialists
are independent agents and may sell the products of other life insurance
companies.
ALLIED Property-Casualty/Life Incentive Trip. The ALLIED p-c affiliates and
ALLIED Life annually sponsor a joint incentive trip for both life and
property-casualty agents who have met incentive sales objectives. The incentive
trip is an important motivating factor in encouraging the ALLIED Agencies to
sell ALLIED Life's products. ALLIED Agencies qualify for the trip based upon
achieving their property-casualty objectives as well as certain life and annuity
new business objectives. Failure to achieve the life qualification may preclude
an agency from participation, even if it meets its property-casualty production
goals. Those agencies with insufficient property-casualty growth or agencies
selling through the traditional distribution system may still qualify for the
incentive trip by producing a substantial volume of new life and annuity
premium.
The following table shows the history of the ALLIED Agencies qualifying for
the annual ALLIED property-casualty/life incentive trip.
<TABLE>
Year Ended December 31,
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Incentive trip production credit premiums
from qualifying ALLIED Agencies (1) 3,787,256 3,694,750 3,257,000
Total incentive trip production credit
premiums for all ALLIED Agencies (1) 6,098,912 5,541,484 5,336,000
Percentage of incentive trip production
credit premiums earned by qualifying ALLIED Agencies 62% 67% 61%
Number of qualifying ALLIED Agencies 197 174 191
<FN>
(1) Production credit premiums represent annualized first-year target premium for universal life and term life
and 2% of annuity premium collected. The minimum qualification level for 1997 is 9,200 production credit premiums.
</FN>
</TABLE>
3
<PAGE>
Traditional Life Insurance and Annuity Distribution System
The Company has traditional agency relationships with a number of
independent life agencies, independent marketing organizations and financial
institutions. These agency relationships represent an important source of
business for the Company and in 1996 produced approximately 25% of the total new
face amount of life insurance sold and 57% of the total annuity premium
collected. A separate vice president, marketing, supervises the operation and
performance of the Company's traditional distribution system and is responsible
for its life insurance and annuity production.
The Company has agency relationships with independent marketing
organizations, most of which have more licensed agents covering a larger
geographic area than a traditional independent life insurance agency. These
organizations have their own insurance marketing systems and generally sell the
Company's life insurance products. Additionally, the Company has agency
relationships with traditional independent life agents which generally cover a
smaller geographic area than the independent marketing organizations.
The Company markets its annuity products through financial institutions
(commercial and savings banks), and through annuity marketing agencies.
Institutional annuity marketing is developed through agency relationships with
third-party marketing agencies specializing in financial institutions as well
as directly through several midwestern-based financial institutions. In
1996, annuity premiums collected by the Company from financial institutions were
$26.8 million, representing 67% of the Company's total annuity premiums
collected within the traditional distribution channel. Annuity marketing
agencies represent a small but growing volume of annuity business. The Company
is developing sales of its universal life and term life insurance products
through both types of annuity marketing systems.
4
<PAGE>
Production by Distribution System
The following tables show production information by distribution system for
ALLIED Life for the years indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
(dollars in thousands)
Life insurance face amount in force
Directly produced by agents
Property-casualty agencies
Universal Life $2,809,270 $2,627,447 $2,426,012
Term life 3,200,793 2,506,890 1,981,560
Whole Life 34,521 34,402 34,757
---------- ---------- ----------
6,044,584 5,168,739 4,442,329
---------- ---------- ----------
Traditional agencies
Universal life 1,531,331 1,588,116 1,501,476
Term life 997,711 908,647 763,627
Whole life 14,558 15,778 13,613
---------- --------- ---------
2,543,600 2,512,541 2,278,716
---------- --------- ---------
Other 371,130 433,236 521,692
---------- --------- ---------
Total $8,959,314 $8,114,516 $7,242,737
========== ========== ==========
Life insurance face amount sold
Directly produced by agents
Property-casualty agencies
Universal life $ 282,388 $ 384,763 $ 503,665
Term life 1,127,060 889,624 759,740
Whole life 3,115 2,775 1,779
---------- ---------- ---------
1,412,563 1,277,162 1,265,184
---------- ---------- ---------
Traditional agencies
Universal life 128,247 224,937 375,679
Term life 348,917 333,920 364,873
Whole life 1,124 1,736 541
---------- ---------- ---------
478,288 560,593 741,093
---------- ---------- ---------
Other 1,890,851 1,837,755 2,006,277
Total 9,431 21,549 59,778
---------- ---------- ---------
$1,900,282 $1,859,304 $2,066,055
========== ========== ==========
Annuity Premiums
Deferred annuities
Property-casualty agencies $ 30,816 $ 30,321 $ 37,611
Traditional agencies 40,188 45,956 48,646
---------- ----------- ----------
71,004 76,277 86,257
---------- ----------- ----------
Immediate annuities 1,227 2,362 1,595
---------- ----------- ----------
Total $ 72,231 $ 78,639 $ 87,852
========== =========== ==========
</TABLE>
The Company has experienced double-digit growth in its face amount of life
insurance in force and annuity account balance since 1994. The total face amount
of life insurance in force grew at an average annual rate of 11.9% beginning at
year end 1994 through year end 1996 and is up 10.4% at December 31, 1996 as
compared to the prior year end. Annuity account balance grew at an average
annual rate of 18.1% beginning at year end 1994 through year end 1996 and is up
13.4% at December 31, 1996 compared to the prior year end.
5
<PAGE>
The face amount of new term life insurance sold totaled $1.5 billion
accounting for 78% of 1996 new insurance production. Term life insurance
provides protection during a specified number of years that expires without
policy cash value if an insured survives the stated period. The face amount of
new term life insurance sold increased 20.6% in 1996 due to the popularity of
the Company's 10- and 20-year term life insurance products. For further
information on this product line see Term Life Insurance on page 9.
The face amount of new universal life insurance sold totaled $410.6 million
representing 22% of 1996 new insurance production. Universal life insurance is
flexible premium life insurance that allows policyholders to change the death
benefit from time to time (with satisfactory evidence of insurability for
increases) and vary the amount or timing of premium payments. Premiums minus
policyholder assessments are credited to cash value or accumulative accounts to
which interest is credited at rates that may change from time to time. The
savings element of universal life products have become less attractive over the
last several years due to generally lower interest rates and an increasing
equity market. For further information on this product line see Universal Life
Insurance on page 8.
During 1996, first-year fixed deferred annuity premiums decreased 10.4% to
$68.1 million. Fixed deferred annuities are tax-deferred cash accumulation
contracts that pay a fixed interest rate established by the insurance company.
The Company issues single and flexible premium annuities that permit additional
deposits by policyholders after initial premiums are paid. Lower first and
second quarter sales were caused by a flat interest yield curve, which allowed
banks and other financial institutions to offer short-term certificates of
deposit at more competitive interest rates. Interest rates rose during the
middle of the year, and sales reached expected levels in the third and fourth
quarters. For further information on this product line, see Annuities on page
10.
6
<PAGE>
Market Area
The following table shows direct life insurance premiums and annuity
considerations for ALLIED Life by state for the years indicated.
<TABLE>
1996 1995 1994
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Life
Insurance Annuity Percentage Percentage Percentage
Premiums Considerations Total (1) of Total of Total of Total
(Dollars in thousands)
Iowa $ 9,869 $15,078 $ 25,451 21.5% 26.1% 29.6%
Wisconsin 1,859 11,549 13,415 11.3 7.0 6.0
California 9,770 2,953 12,802 10.8 10.0 10.2
Illinois 1,233 10,794 12,487 10.6 5.5 4.7
Utah 1,244 8,554 9,801 8.3 5.8 5.7
Nebraska 4,413 2,534 7,276 6.2 6.2 4.8
Kansas 3,399 2,287 5,916 5.0 5.6 6.0
Idaho 1,266 4,078 5,375 4.5 1.3 1.6
Missouri 2,059 1,877 4,059 3.4 6.6 5.6
Oregon 378 3,328 3,706 3.2 0.5 0.2
Minnesota 2,064 950 3,036 2.6 4.8 3.7
South Dakota 522 1,924 2,475 2.1 5.9 9.5
Other (2) 5,671 6,325 12,406 10.5 14.7 12.4
------- ------- -------- ------ ----- -----
$43,747 $72,231 $118,205 100.0% 100.0% 100.0%
======= ======= ======== ====== ===== =====
<FN>
(1) Total includes accident and health and other miscellaneous premiums not
separately shown in the table. (2) Includes all other jurisdictions, none of
which accounted for more than 2% in 1996.
</FN>
</TABLE>
For more information regarding premium by state and the states where ALLIED
Life is admitted for insurance business, see the 1996 Annual Report, page 3.
Subsidiaries
ALBA is a general agency which uses the ALLIED Life agency force to sell
complementary insurance products not developed nor written by ALLIED Life, such
as health insurance, major medical, and disability insurance. ALBA's revenues
amounted to $681,000 in 1996, $496,000 in 1995, and $476,000 in 1994. AGMB is a
registered broker-dealer which facilitates securities transactions for the
insurance agents of the Company and its affiliates who are licensed to sell
securities. AGMB's revenues for 1996, 1995, and 1994 were $389,000, $203,000,
and $189,000.
7
<PAGE>
Products
Universal Life Insurance
The Company's universal life policies provide permanent life insurance
protection with a flexible premium structure that allows the customer to
pre-fund future insurance costs and to accumulate savings on a tax-deferred
basis. The policyholder may surrender the policy at any time and receive the
accumulated account balance less a specified surrender charge based on the
duration of the contract and the amount of the coverage.
The following table reflects the account value, average face amount and
average policyholder age at date of issue for the Company's universal life
products (excludes riders):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Average Average Number Average
Account Face of Issue
Value Amount Policies Age
Policies sold in 1996:
Policies with a minimum face amount in excess of
$150,000 $ 7,833 $358,414 390 44
All other policies 2,023 50,987 3,009 39
Total policies in force as of December 31, 1996:
Policies with a minimum face amount in excess of
$150,000 $10,826 $326,748 5,000 40
All other policies 3,827 57,698 33,033 36
</TABLE>
When the Company issues a universal life policy it receives an initial
premium based on the face amount of insurance purchased and the premium is
reflected as a deposit to the policyholder's account. Additional premiums may be
deposited by the policyholder up to a specified maximum. The Company deducts an
expense allowance from each premium within a contractually specified range and
credits the remainder to the policyholder's account. Thereafter, the account
balance is charged monthly for the cost of insurance, which reflects mortality
and benefit charges and an administrative fee, and is credited interest monthly
at current crediting rates. Certain of the Company's universal life policies are
designed to encourage policyowner persistency and larger account balances by
providing higher crediting rates for larger account balances as well as those
maintained for longer periods.
Policy liabilities for universal life contracts are comprised of
policyholder account balances. The following table shows changes in account
balances for each year in the five-year period ended December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Benefit
Account Payments Account Deferred Average
Balance, Plus Balance, Policy Interest
Beginning of Premiums Interest Cost of Expense Surrender End of Acquisition Credited
Year Year Received Credited Insurance Allowances Charges Year Costs Rate
(dollars in thousands)
1992 $110,714 $26,120 $8,626 $ (9,487) $(3,020) $ (7,303) $125,650 $36,794 7.3%
1993 125,650 32,468 9,293 (11,498) (3,931) (10,541) 141,441 40,890 7.0
1994 141,441 29,640 9,229 (13,810) (3,591) (7,064) 155,845 46,653 6.2
1995 155,845 30,382 9,530 (15,563) (4,448) (7,092) 168,654 51,774 5.9
1996 168,654 32,644 9,490 (16,178) (4,549) (7,334) 182,727 56,333 5.4
</TABLE>
8
<PAGE>
The Company's universal life products are designed to provide long-term
returns to its policyowners. Most of the Company's products currently being sold
are structured so that the Company's policy acquisition costs will be recovered
on an in force basis upon the receipt of 5 to 10 years of annual premiums,
depending on the product. In the event of an early surrender, the Company
imposes surrender charges in order to fully recover its acquisition costs at the
point of surrender by the policyowner. Additionally, variable periodic mortality
and benefit charges, percent-of-premium loads, and monthly policy fees cover the
costs of insurance and other benefits, policy administration and taxes, and
provide the Company with a profit margin. The products are structured so
policyowners are rewarded for higher cash values and life insurance face
amounts.
Term Life Insurance
Over 80% of the Company's current term life insurance sales are 10- and
20-year level premium policies. Under these policies, the customer purchases
basic term insurance protection without the tax-deferred accumulation feature
available under the Company's universal life insurance policies. Term life
insurance provides only a death benefit for a specified period of time to the
policyowner for a lower premium than would be required for a comparable face
amount of universal life insurance. Cash value does not accumulate, rather, the
premium charged is a function of mortality risk and policy expenses.
The following table reflects the average face amount and average
policyholder age at date of issue for the Company's term life products (excludes
riders):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Number Average Average
of Face Issue
Policies Amount Age
Policies sold in 1996:
Policies with a minimum face amount in excess of $150,000 2,058 $403,296 41
All other policies 5,746 96,303 41
Total policies in force as of December 31, 1996:
Policies with a minimum face amount in excess of $150,000 6,922 $373,875 41
All other policies 16,083 92,134 39
</TABLE>
The Company encourages the conversion of term life insurance to universal
life insurance, and as an incentive it credits a portion of the term life
premium as an additional deposit into the universal life insurance account of a
policyholder upon conversion. The credit is substantially offset by a reduction
in the commission payable to the agent. The agent has incentive to encourage
term conversion because the reduced commission payable upon conversion still
exceeds the commission payable on the renewal of a term life insurance policy.
This incentive to convert is promoted directly to the term policyowner at each
of the first five policy renewals. Term conversions represented 8.5% of 1996
universal life face amount sold. Universal life insurance face amount sold
resulting from conversions from ALLIED Life term products were $38.9 million in
1996, $30.5 million in 1995, and $65.3 million in 1994.
Group Life and Other In Force Life Policies
As of December 31, 1996, the Company had $267.5 million face amount of
group term life insurance in force on 2 employee groups, one of which is the
ALLIED Group, Inc. employee group.
9
<PAGE>
As of December 31, 1996, the Company had $49.1 million face amount of other
life insurance products in force consisting of smaller, non-participating whole
life policies. These are guaranteed premium and cash value contracts.
Annuities
The Company offers a variety of fixed deferred annuity products, including
single premium and flexible premium designs, to customers who wish to accumulate
savings on a tax-deferred basis. Annuities currently enjoy an advantage over
certain other savings vehicles because the annuity buyer receives a tax-deferred
accrual of interest on his or her investment during the accumulation period.
Annuities generally are marketed to individuals in anticipation of retirement.
The following table reflects the average account value and average
policyholder age at date of issue for the Company's deferred annuity products :
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Number Average Average
of Account Issue
Policies Value Age
Annuities sold in 1996: 3,451 $20,906 69
Total policies in force as of December 31, 1996: 23,305 19,914 65
</TABLE>
Policy liabilities for annuity contracts without mortality risk are
comprised of policyholder account balances. The following table shows changes in
account balances for each year in the five-year period ended December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Benefit
Account Payments Account Deferred Average
Balance, Plus Balance, Policy Interest
Beginning of Considerations Interest Surrender End of Acquisition Credited
Year Year Received Credited Charges Year Costs Rate
(dollars in thousands)
1992 $165,179 $50,000 $13,683 $(7,294) $221,568 $ 10,545 7.2%
1993 221,568 56,427 16,682 (23,292) 271,385 15,114 6.7
1994 271,385 86,899 17,723 (32,617) 343,390 21,393 5.8
1995 343,390 77,199 22,613 (30,986) 412,216 25,613 5.9
1996 412,216 71,770 24,566 (41,047) 467,505 25,623 5.6
</TABLE>
Annuity account balances have increased from $221.6 million at December 31,
1992 to $467.5 million at December 31, 1996, an average yearly increase of
27.7%. Considerations received decreased 7% in 1996 compared to 1995 due to a
flat interest yield curve which allowed financial institutions to offer
short-term investments at more competitive interest rates. Benefit payments plus
surrender charges in the table above have increased in recent years due
primarily to the fact that the Company wrote very few annuities prior to 1989.
Thus the increasing age of the Company's annuity portfolio results in more
surrenders because the older products have lower surrender charges.
The Company's deferred annuities are sold as an alternative to bank
certificates of deposit and other taxable savings vehicles. Annuity premiums are
typically invested in intermediate term, investment grade securities with the
investment terms generally matching the underlying product surrender charge
periods of three to nine years. For most plans, the initial interest is
guaranteed for one to three years with renewal crediting rates based on port-
10
<PAGE>
folio earnings and market conditions. As a competitive enhancement, some of the
Company's annuity products include interest rate bonuses which are added to the
policies account value at various points during the contract period.
Liquidity benefits are provided in the form of no-penalty partial withdrawal
allowances, interest income payments, a nursing home waiver, and bonus
annuitization options.
Several of the Company's annuity products provide 1% to 2% first-year
interest bonuses and additional annual interest bonuses for long-term
persistency. The present value of the interest rate bonuses are generally
deducted from agents compensation, allowing the Company to maintain its targeted
profit margin.
Surrender charges, which the Company imposes in the early years of a
policy, reduce the amount payable to a policyholder upon surrender of a policy
and generally permits the Company to recover its acquisition costs. These
charges also reduce the statutory reserve applicable to the policy.
During the second quarter of 1996, the Company introduced an equity
indexed-annuity product. While guaranteeing the return of principal to the
customer, interest credited is based on a percentage of the gain of the S&P 500
Index(R). A portion of the premium from each customer is invested in investment
grade fixed income securities to cover the minimum guaranteed value due the
customer at the end of the term. A portion of the premium is used to purchase
S&P 500 call options to hedge the growth in interest credited to the customer as
a direct result of increases in the S&P 500 Index(R). The call options provide
the Company the opportunity to participate in the increases of the S&P 500
Index(R) if the market advances. See notes 1 and 3 of the 1996 Notes to
Consolidated Financial Statements for additional information regarding call
options.
Insurance Operations
The Company's insurance and annuity operations achieve significant cost
efficiencies through automation of policy issue and administration. Budgetary,
quality service, and time service standards are established and closely
monitored. Internal financial analysis and reporting are used to focus on the
most profitable elements of the Company's operations and to identify cost saving
and marketing opportunities.
The Company is headquartered in Des Moines, Iowa, and physically located in
the ALLIED property-casualty companies' home office. This close proximity
facilitates marketing plan implementation between ALLIED Life and the ALLIED
property-casualty affiliates. It also allows the Company to lease automation
systems and support from ALLIED Group, Inc. on a more cost effective basis. See
"Certain Transactions and Relationships" in the 1997 Proxy Statement for
additional information.
Life Insurance Underwriting
The Company had adopted and follows detailed, uniform underwriting
standards and procedures designed to properly assess and quantify life insurance
risks before issuing policies to individuals. Underwriting administration is
automated and management emphasizes the achievement of quality and time service
objectives. The Company's underwriters review each applicant's written
application, which is prepared under the supervision of the Company's agents or
representative, and any required medical records. The Company employs blood and
urine testing to provide additional information on nicotine and cocaine use and
alcohol abuse. Based on the results of these tests, the Company adjusts the
mortality charge or declines coverage completely.
Any nicotine use by a life applicant within the preceding one year results
in a substantially higher mortality charge. In accordance with industry
practice, material misrepresentations on a policy application can result in the
cancellation by the Company of the policy generally within the first 2 years
upon the return of any premiums paid.
11
<PAGE>
The increasing incidence of Acquired Immune Deficiency Syndrome (AIDS) has
not thus far adversely affected the Company's mortality experience. The Company
considers AIDS information and testing results in its underwriting and pricing
decisions. The Company's blood test includes a screening for AIDS antibodies.
Reinsurance
In keeping with industry practices, the Company reinsures portions of its
life insurance and disability income exposure with unaffiliated insurance
companies under traditional indemnity reinsurance agreements. New insurance
sales are reinsured above prescribed limits and do not require the reinsurer's
prior approval within certain guidelines. These treaties are automatically
renewed and nonterminable for the first 10 years with regard to cessions already
made and are terminable after 90 days with regard to future cessions. After 10
years, the Company has the right to terminate and can generally discontinue the
reinsurance on a block of business. This is normally done to increase the
Company's retention on older business to the same level as current cessions.
Generally, the Company enters into indemnity reinsurance arrangements to
assist in diversifying its risk and to limit its maximum loss on risks that
exceed the Company's policy retention limits, which are currently $150,000 or
less per life ($250,000 or less per life for ages 59 and under). Indemnity
reinsurance does not fully discharge the Company's obligation to pay policy
claims on the reinsured business. The Company, as the ceding insurer, remains
responsible for policy claims to the extent the reinsurer fails to pay such
claims. No reinsurer of business ceded by the Company has failed to pay any
material policy claims (either individually or in the aggregate) with respect to
such ceded business. At December 31, 1996, the Company had ceded to reinsurers
$2.6 billion of insurance in force, substantially all of which was reinsured
with insurance companies rated A (excellent) or better by A.M. Best. There is
currently no reinsurance with affiliated insurance companies and all reinsurance
entered into is in the ordinary course of business. The Company continually
monitors the financial strength of its reinsurers and the availability of
replacement coverages in the reinsurance market. If for any reason such
reinsurance coverages would need to be replaced, the Company believes that
replacement coverages from financially responsible reinsurers would be
available.
Policy Liabilities
The policy liabilities reflected in the consolidated financial statements
are calculated in accordance with generally accepted accounting principles
(GAAP). Liabilities for universal life and annuity policies consist of the
premiums and considerations received plus accumulated credited interest, less
accumulated policyholder assessments and benefits. For traditional products,
liabilities for future policy benefits have been provided based on the net level
premium method. These liabilities are based upon actuarial tables adjusted for
ALLIED Life's actual mortality and persistency experience and investment income.
GAAP policy liabilities differ from those established for statutory reporting
purposes due to the use of different assumptions regarding mortality and
interest rates and the introduction of lapse assumptions into the GAAP policy
liability calculation. Actual mortality experience in a particular period may be
greater than expected mortality experience and, consequently, may materially
affect the Company's operating results for such period. See note 1 of the 1996
Notes to Consolidated Financial Statements for additional information regarding
policy liability assumptions under GAAP.
Interest Crediting Policy
On a monthly basis, or more frequently if required, the Company reviews and
establishes current period interest rates based upon existing and anticipated
investment opportunities. This applies to both new sales
12
<PAGE>
as well as in force universal life insurance and annuity products after any
initial guaranteed period. The Company attempts to match the duration of the
asset-liability characteristics of various universal life insurance and annuity
products with the underlying investment opportunities available. Interest rates
are then established based on each product's required interest spread and market
conditions at the time. Interest rates are reviewed and, if appropriate,
adjusted for money received in the Company's home office on or after the
effective date of the interest rate change.
Investments
Without prior approval from the Company's Investment Committee, the
investment policy for ALLIED Life requires purchases of securities for the fixed
maturity portfolio to be invested in debt obligations rated "BBB" or higher at
the time of acquisition. Any security which is rated below "BBB" or is non-rated
requires approval from the Company's Investment Committee prior to its purchase.
At December 31, 1996, 89% of the Company's fixed maturity investments were rated
"A" or higher, and less than 1% were rated lower than investment grade. At
December 31, 1996, the fair value of ALLIED Life's fixed maturity portfolio was
approximately $6.1 million more than the financial statement carrying value.
The carrying values and the investment ratings of all of the Company's
investments in fixed maturities are reviewed on an ongoing basis for credit
deterioration, and if this review indicates a decline in fair value below cost
that is other than temporary, the Company's carrying value in the investment is
reduced to its estimated realizable value and a specific write-down is taken.
Such reductions in carrying value are recognized as realized losses and charged
to income. No such reductions in carrying value were recognized for the years
ended December 31, 1996 and 1995.
In November of 1995, the Financial Accounting Standards Board (FASB) issued
a Special Report entitled "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." The Special
Report allowed companies to reassess the appropriateness of the classification
of all securities and make any resulting transfers concurrent with the initial
adoption of the implementation guide but no later than December 31, 1995.
Effective November 30, 1995, the Company made such reassessment and reclassified
$215.2 million of held-to-maturity securities to available for sale. The net
effect of such reclassification increased stockholders' equity by $4.4 million.
13
<PAGE>
The table below shows the composition of the Company's investments at
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Estimated 1996 1995
Fair Carrying Percent Percent
Investment Category Value Value Of Total Of Total
(dollars in thousands)
Fixed maturities:
U.S. Treasury obligations (1) $ 34,904 $ 34,941 4.8% 1.4%
Foreign governments 11,119 10,888 1.5 2.0
Public utilities 91,300 90,351 12.5 10.3
Asset-backed securities (other than first lien mortgages) 22,856 22,509 3.1 3.9
Mortgage-backed securities:
Pools 122,611 121,657 16.8 21.4
Collateralized mortgage obligations 92,417 92,142 12.8 14.5
--------- --------- ---- ----
Total mortgage-backed securities 215,028 213,799 29.6 35.9
--------- --------- ---- ----
Corporate debt securities:
Investment grade (BBB or greater) (2) 330,430 327,010 45.3 43.3
Non-investment grade (BB + or below) (2) --- --- --- 0.7
--------- --------- ----- ----
Total corporate debt securities 330,430 327,010 45.3 44.0
--------- --------- ----- ----
Total fixed maturities 705,637 699,498 96.8 97.5
--------- --------- ----- ----
Equity securities 6,407 6,406 0.9 0.6
Mortgage loans on real estate (3) 1,457 1,457 0.2 0.3
Policy loans 10,307 10,307 1.4 1.4
Other invested assets (4) 4,276 3,751 0.5 ---
Short-term investments 920 920 0.2 0.2
--------- --------- ----- -----
Total investments $729,004 $722,339 100.0% 100.0%
========= ======== ===== =====
<FN>
(1) All such securities are backed by the full faith and credit of the United
States government.
(2) Ratings are assigned primarily by Standard & Poor's or a recognized equivalent.
(3) Consists of single family residential and farm mortgages.
(4) Consists of instruments purchased for hedging purposes.
</FN>
</TABLE>
14
<PAGE>
The following table sets forth the composition of the Company's portfolio
of fixed maturity investments by rating at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Estimated 1996 1995
Fair Carrying Percent Percent
Rating (1) Value Value Of Total Of Total
(dollars in thousands)
AAA $269,839 $267,985 38.3% 42.9%
AA 83,731 82,150 11.7 10.8
A 275,734 273,046 39.0 39.9
BBB 74,769 74,753 10.7 4.5
-------- -------- ---- ----
Total investment grade fixed maturities 704,073 697,934 99.7 98.1
-------- -------- ---- ----
Non investment grade
1,564 1,564 0.3 1.9
-------- -------- ---- ----
Total fixed maturities $705,637 $699,498 100.0% 100.0%
======== ======== ===== =====
<FN>
(1) Ratings are assigned primarily by Standard & Poor's or a recognized equivalent.
</FN>
</TABLE>
The following table sets forth expected maturities in the Company's fixed
maturity portfolio at December 31, 1996. Expected maturities at December 31,
1996 are shorter than contractual maturities because of mortgage backed and
call-option securities in the portfolio. Borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. Expected
maturities are based on the same prepayment assumptions used in amortizing
premiums and discounts on these securities. For additional information on
contractual maturities, see note 2 of the 1996 Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995
Amortized Percent Percent
Cost Of Total Of Total
(dollars in thousands)
One year or less $ 38,827 5.6% 7.6%
Over 1 year through 5 years 171,830 24.8 24.8
Over 5 years through 10 years 343,707 49.7 44.8
Over 10 years through 20 years 103,031 14.9 17.2
Over 20 years 34,500 5.0 5.6
------- ------ -----
Total $691,895 100.0% 100.0%
======= ====== =====
</TABLE>
15
<PAGE>
Investment results of the Company for each year in the three years ended
December 31, 1996 are shown on the following table.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
(dollars in thousands)
Average invested assets, net (1) $653,908 $584,223 $489,612
Investment income (2) 48,182 45,411 38,137
Average annual yield on total investments 7.4% 7.8% 7.8%
Realized investment gains (losses) $ 122 $ (722) $ (724)
<FN>
(1) Total invested assets, at cost, less balance outstanding on Federal Home
Loan Bank note payable (see (2) below), on an average quarterly basis.
(2) Investment income is net of interest and investment expenses and does not
include realized investment gains or losses or provision for income taxes.
</FN>
</TABLE>
Mortgage-backed securities (including collateralized mortgage obligations
[CMOs]) comprise 30.6% of the Company's total fixed maturity portfolio at
December 31, 1996. The mortgage-backed securities are backed primarily by first
lien single family residential mortgages. All of the mortgage-backed securities
are investment grade.
The Company's investments in CMOs consist of pools of mortgages divided
into sections or "tranches" which provide sequential retirement of bonds. As of
December 31, 1996, ALLIED Life held CMO investments with a carrying value of
$92.1 million (fair value of $92.4 million). As of December 31, 1996, 86.8% (84%
in 1995) of the Company's CMO investments were in planned amortization classes
(PACs) and sequential pay bonds. The Company invests primarily in PACs to
provide call protection and more stable average lives. This provides more
predictable cash flows within a range of prepayment speeds by shifting the
prepayment risks to support tranches. All of the Company's CMO investments have
an active secondary market and accordingly are not expected to affect the
Company's liquidity differently than other fixed maturity investments.
The following table shows the December 31, 1996 estimated fair value and
carrying value of the CMO portfolio by investment rating:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Estimated 1996 1995
Fair Carrying Percent Percent
Rating(1) Value Value Of Total Of Total
(dollars in thousands)
AAA $83,036 $82,923 90.0% 97.0%
AA 9,381 9,219 10.0 3.0
------- ------ ----- -----
Total investments in CMOs $92,417 $92,142 100.0% 100.0%
======= ======= ===== =====
<FN>
(1) Ratings are assigned primarily by Standard & Poor's or a recognized equivalent.
</FN>
</TABLE>
16
<PAGE>
The following table shows the December 31, 1996 estimated fair value and
carrying value of the CMO portfolio by type:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Estimated 1996 1995
Fair Carrying Percent Percent
Type of CMO Value Value Of Total Of Total
(dollars in thousands)
Planned amortization class $55,435 $55,427 60.2% 57.5%
Sequential pay 24,814 24,508 26.6 26.5
Other 12,168 12,207 13.2 16.0
------- ------ ----- -----
Total investments in CMOs $92,417 $92,142 100.0% 100.0%
======= ======= ===== =====
</TABLE>
Hedging Activities
In June 1996, the Company began interest rate hedging programs whereby
certain derivative financial instruments including cash settle put swaptions
(swaptions) and interest rate floors (floors) were purchased. Swaptions are
being purchased to reduce the negative effect of increased withdrawal activity
related to the Company's annuity liabilities that may result from extreme
increases in interest rates. As of December 31, 1996, the Company was party to
44 agreements for these instruments. The agreements expire quarterly from June
1999 through March 2006. They entitle the Company to receive payments from the
instrument's counter parties on future reset dates if the interest rate (which
is directly tied to the 5-year constant maturity swap curve) on any expiration
date is above a specified fixed rate (8.8% to 10.5% for instruments entered into
as of December 31, 1996). The notional amounts range from $3 million to $9
million (total of $244 million).
Floors are being purchased to reduce the negative effect that may result
from extreme decreases in interest rates to a level below the guaranteed
interest rates provided for in the universal life insurance contracts. The 28
agreements for the floors outstanding as of December 31, 1996 expire quarterly
from June 1999 through March 2006. They entitle the Company to receive payments
from the instrument's counter parties on future reset dates if the interest rate
(which is tied directly to the 10-year constant maturity treasury curve) on the
expiration date is below a specified fixed rate (5.0% for instruments entered
into as of December 31, 1996). The notional amounts for each quarter range from
$140 million to $270 million.
The costs of the interest rate hedging programs are not expected to have a
material impact on the interest rate margin. For both swaptions and floors, the
Company pays only the original premium and is not at risk of further payments
regardless of market conditions. The Company does not anticipate making any
further purchases of interest rate hedges in the near future.
Premiums paid to purchase these instruments are capitalized and included in
other invested assets. Through December 31, 1996, the Company had paid
approximately $4.1 million in premiums. Premiums are amortized into income over
the term of the instruments on a straight-line basis. Gains and losses on these
instruments and related assets are not recorded in income until realized.
The Company is exposed to the risk of losses in the event of nonperformance
of the counter parties of the above swaptions and floors. Losses recorded in the
Company's financial statements in the event of non-performance will be limited
to the unamortized premium paid to enter into the instruments. Economic losses
will be measured by the net replacement cost of such instruments or by their
fair value if the net fair value is in the Company's favor. The Company limits
its exposure to such losses by diversification among reputable counter parties
with appropriate credit ratings.
17
<PAGE>
Competition
The Company operates in a highly competitive industry. In connection with
the development and sale of its products, the Company encounters significant
competition from other insurance companies, many of whom have financial
resources substantially greater than those of the Company, as well as from other
investment alternatives available to its customers. The operating results of
companies in the insurance industry have historically been subject to
significant fluctuations due to competition, economic conditions, interest
rates, investment performance, maintenance of insurance ratings, and other
factors. Management believes that the Company's ability to compete with other
insurance companies is dependent upon, among other things, its ability to
attract and retain agents to market its insurance products, its ability to
develop competitive and profitable products, and its maintenance of high ratings
from A.M. Best (currently "A" [excellent]) and Duff and Phelps Credit Rating
Company (currently "A").
The Company competes on the basis of its distribution system, its
innovative product development, its strong financial condition, and its
high-quality agent services and marketing support. Growth in the Company's
distribution channels is based on providing a competitive product portfolio
combined with the value of its marketing, underwriting, and administrative
support services to agents.
Regulation
The Company's insurance subsidiary is subject to varying degrees of
regulation and supervision by the states in which it is admitted to transact
business. State insurance laws establish regulatory agencies with broad
administrative and supervisory powers related to granting and revoking licenses
to transact business, establishing guaranty fund associations, licensing agents,
approving policy forms, regulating premium rates for some lines of business,
establishing reserve requirements, prescribing the form and content of required
financial statements and reports, determining the reasonableness and adequacy of
statutory capital and surplus, and regulating the type and amount of investments
permitted. ALLIED Life must file guaranteed rates for the policies it
underwrites with the insurance departments of certain states in which it
operates; reinsurance generally is not subject to rate regulation. Insurance
departments also examine the affairs of insurance companies, which includes
periodic market conduct examinations by the regulatory authorities and review of
annual and other reports prepared on a statutory accounting basis required to be
filed on the financial condition of insurers or for other purposes. Further,
state insurance statutes typically place limitations on the amount of dividends
or other distributions payable by insurance companies in order to protect their
solvency. The Iowa statute requires that insurance companies pay dividends only
out of earned profits (unassigned surplus) and requires prior regulatory
approval for the payment of any dividend which exceeds the greater of either (I)
10% of statutory policyholders surplus (total capital stock and surplus) as of
December 31 of the preceding year or (ii) the statutory net gain from operations
of the insurer for the 12-month period ending the December 31 of the preceding
year.
The Company is also subject to statutes governing insurance holding company
systems. Typically, such statutes require the Company to periodically file
information with the state insurance regulatory authority, including information
concerning its capital structure, ownership, financial condition, and general
business operations. Under the terms of applicable state statutes, any person or
entity desiring to acquire more than a specified percentage (commonly 10%) of
the Company's outstanding voting securities is required first to obtain approval
of the applicable state insurance regulators. Chapter 521A of the Iowa Code
relating to holding companies, to which the Company is subject, requires
disclosure of transactions between the Company and its insurance subsidiary or
between an insurer and another subsidiary, that such transactions satisfy
certain standards, including that they be fair, equitable and reasonable, and
that the Insurance Commissioner be given an opportunity to disapprove certain
material transactions. Further, prior approval by the Iowa Insurance Division is
required for affiliated sales, purchases, exchanges, loans or extensions of
credit, guarantees or investments which involve 5% or more of the insurer's
admitted assets as of the preceding December 31st.
18
<PAGE>
Under insolvency or guaranty fund laws in states in which ALLIED Life
operates, insurers can be assessed, up to prescribed limits, for losses incurred
by policyholders as a result of the insolvency of other insurance companies. The
amounts and timing of such assessments are beyond the control of the Company and
generally have an adverse impact on the Company's earnings. A number of
insurance companies are under supervision resulting in assessments to cover
losses to policyholders of such companies. The Company cannot predict the amount
of any future assessments.
Recently, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government, and the National
Association of Insurance Commissioners (NAIC). The NAIC has recommended to the
states for adoption and implementation several regulatory initiatives.
Iowa as well as three other states have adopted the NAIC regulation for
life insurance policy sales illustrations. Additional states are expected to
adopt the new regulation in 1997. The effect of any adoption by individual
states is not expected to have a significant effect on the Company's insurance
production.
Employees
At December 31, 1996, ALLIED Life employed 113 persons. ALLIED Life employs
all persons serving the Company and its subsidiaries. None of the employees are
members of a collective bargaining unit. Management believes that relations with
its employees are good.
Item 2. Properties
The Company does not own any real estate. The Company's principal
operations are conducted from leased office space pursuant to a leasing
arrangement with ALLIED Mutual. See "Certain Transactions and Relationships" in
the 1997 Proxy Statement for additional information. Management considers the
leased space to be adequate for its needs.
Item 3. Legal Proceedings
The Company is a party to lawsuits arising in the normal course of
business. The Company believes the resolution of these lawsuits will not have a
material adverse effect on its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted during the fourth quarter of 1996 to a vote of
holders of ALLIED Life Financial Corporation stock.
19
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock trades on The Nasdaq Stock Market under the
symbol ALFC. As of December 31, 1996, there were 136 stockholders of record. The
following table shows the high and low market prices and dividends paid per
share for each calendar quarter for the two most recent years.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
High Low Last Dividends
1996
First qtr. $18 1/4 $16 1/2 $17 $.05
Second qtr. 21 1/2 15 20 .05
Third qtr. 20 15 1/4 15 3/4 .05
Fourth qtr. 18 3/4 15 3/4 17 1/2 .06
1995
First qtr. $16 3/4 $13 3/4 $15 $.04
Second qtr. 17 3/4 15 17 1/4 .04
Third qtr. 20 17 1/4 17 1/2 .04
Fourth qtr. 18 16 1/4 18 .05
</TABLE>
There are certain regulatory restrictions relating to the payment of
dividends (see note 10 of the 1996 Notes to Consolidated Financial Statements).
It is the present intention of the Board of Directors to declare quarterly cash
dividends.
20
<PAGE>
Item 6. Selected Financial Data
At or for the year ended December 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Income Statement Data (Dollars in thousands, except per share data)
Revenues
Total insurance revenues $31,350 $29,934 $25,393 $20,822 $17,732
Investment income 48,182 45,411 38,136 33,243 28,979
Realized investment gains
(losses) 122 (722) (724) 2,154 2,511
Other income 1,056 688 648 277 236
------- ------- ------- ------ -------
Total revenues 80,710 75,311 63,453 56,496 49,458
------- ------- ------- ------ -------
Benefits and expenses
Policyholder benefits 47,988 46,063 37,359 32,870 27,660
Amortization of deferred policy
acquisition costs (2) 10,595 5,941 5,136 5,347 5,068
Commissions 3,316 2,725 2,627 2,390 1,904
Insurance operating expenses 6,801 6,313 5,715 4,966 4,316
------- ------ ------- ------ ------
Total benefits and expenses 68,700 61,042 50,837 45,573 38,948
------- ------ ------- ------ ------
Income before income taxes 12,010 14,269 12,616 10,923 10,510
Income taxes 3,937 4,557 4,059 3,739 3,709
------- ------ ------- ------ ------
Net income (1)(2) $ 8,073 $ 9,712 $ 8,557 $ 7,184 $ 6,801
======= ======= ======= ======= =======
Net income applicable to
common stock (1)(2) $ 6,471 $ 8,219 $ 7,226 $ 5,930 $ 5,551
Earnings per common share (1)(2) 1.41 1.78 1.58 1.67 1.63
Dividends paid per common share $ 0.21 $ 0.17 $ 0.13 $ 0.03 $ ---
Weighted average number of
common shares outstanding
(in thousands) 4,580 4,613 4,577 3,545 3,413
Balance Sheet Data
Investments at cost $714,483 $637,245 $554,889 $451,982 $372,080
Assets 835,600 759,947 643,340 532,588 439,060
Preferred stock 24,586 22,871 21,341 19,028 18,517
Stockholders' equity $99,942 $101,682 $ 76,027 $ 74,368 $54,123
Preferred shares outstanding
(in thousands) 2,238 2,087 1,948 1,754 1,707
Common shares outstanding
(in thousands) 4,497 4,633 4,586 4,572 3,413
Other Data
Death benefits per share $ 1.02 $ 1.03 $ 0.85 $ 0.86 $ 0.71
Book value per share 16.16 15.01 13.42 11.98 10.42
Statutory capital and surplus 46,544 45,504 47,413 42,403 28,726
Life insurance in force 8,959,314 8,114,516 7,242,737 5,915,558 4,875,840
Annuity account balances $467,505 $ 412,216 $ 343,390 $271,385 $221,568
<FN>
(1) The 1988 amounts are before the cumulative effect of a change in accounting
for income taxes (SFAS 96). (2) The 1996 amounts include an additional $2.8
million ($1.9 million or $0.42 per share net of income taxes) charge relating to
unlocking adjustments to deferred policy acquisitions costs.
</FN>
</TABLE>
21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking Information
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
to encourage companies to provide prospective information so long as it is
identified as forward-looking and is accompanied by meaningful cautions
identifying important factors that could cause actual results to differ
materially from the prospective information. The management of ALLIED Life
Financial Corporation (ALFC or the Company) is adhering to these provisions.
This report contains cautionary statements identifying important factors that
could cause actual results to differ materially from those projected in
forward-looking statements in the following discussion and elsewhere in this
report.
Forward-looking statements relate to future operations, strategies,
financial results, or other developments and are not based on historical
information. In particular, statements containing words such as "expect,"
"anticipate," "believe," "goal," "objective," or similar words generally qualify
as forward-looking statements.
The Company undertakes no obligation to update such forward-looking statements.
The risks and uncertainties that may affect the operations, performance,
development, and results of the Company's business include the following: (1)
heightened competition, particularly intensified price competition, the entry of
new competitors from the financial services sector, and the creation of new
products by competitors; (2) adverse state and federal legislation and
regulations, including federal tax laws affecting individuals, changes in the
taxation of insurance companies, federal legislation allowing the entry of new
competitors from the financial services sector, and the regulation of product
design and marketing of those products; (3) changes in interest rates causing a
reduction of investment income; (4) general economic and business conditions
that are less favorable than expected; (5) unanticipated changes in industry
trends; and (6) inaccuracies in assumptions regarding future morbidity,
persistency, mortality, and interest rates.
Overview
The following analysis of the consolidated results of operations and
financial condition of the Company should be read in conjunction with the
Selected Financial Data and Financial Statements and related footnotes included
elsewhere herein.
ALLIED Life Financial Corporation is an insurance holding company formed by
ALLIED Mutual Insurance Company (ALLIED Mutual) in July of 1993. The financial
statements include the accounts of ALLIED Life Insurance Company (ALLIED Life),
ALLIED Life Brokerage Agency, Inc. (ALBA), and ALLIED Group Merchant Banking
Corporation (AGMB). ALLIED Life accounts for substantially all of the Company's
operations and sells primarily life insurance and annuity products.
ALLIED Life's universal life insurance products provide life insurance
coverages with flexible premium payments determined by policyholders and
accumulate cash value over the policy term. Premiums received less policy
assessments for administration expenses and mortality costs are credited to
policyholder account balances, to which tax-deferred interest is credited at
rates adjusted periodically by ALLIED Life. Surrender charges may be deducted
from the account balances if policies are surrendered within a specified period
after their effective dates.
Term life insurance policies provide life insurance protection over a
specified number of years. Policyholders remit premiums for the insurance
protection but accumulate no cash value.
22
<PAGE>
Annuity contracts are products which provide for fixed or variable periodic
benefit payments that commence according to contract terms and permit interest
income to accumulate on a tax-deferred basis. Considerations paid by
policyholders are credited to their accounts and earn interest at rates
determined by ALLIED Life. To encourage policy persistency, surrender charges
are imposed against account balances for early termination of annuity contracts.
In accordance with Generally Accepted Accounting Principles (GAAP),
universal life insurance premiums received are shown as increases in liabilities
for policyholder account balances and not as revenues. Revenues reported for
universal life products consist of fee income from mortality charges,
administration expenses, and surrender charges assessed against the account
balances. Surrender benefits paid are reflected as decreases in liabilities for
these account balances and not as expenses. Interest credited to account
balances is reported as benefit expenses in the financial statements.
Premium revenues reported for term life insurance products are recognized
as revenues when due. Benefits relating to these products are associated with
earned premiums. They are reported as benefit expenses by means of the change in
the liabilities for future policy benefits so as to recognize profits over the
premium-paying periods of the policies.
Annuity considerations received and surrender benefits paid are shown as
increases and decreases to liabilities for policyholder account balances and are
not shown as revenues or expenses. Revenues reported for annuity products
consist of surrender charges deducted from policyholder accounts. Expenses
consist of interest credited to account balances.
Another source of revenues for ALLIED Life is investment income earned from
the funds deposited to accounts by universal life and annuity policyholders, a
portion of which is passed through to these policyholders in the form of
interest credited.
The costs related to acquiring new business (principally commissions),
certain costs of issuing policies, and certain other variable selling expenses
(defined as deferred policy acquisition costs) are capitalized and amortized
into expense primarily in proportion to the present value of expected gross
profits. This amortization is adjusted when ALLIED Life revises its current or
estimated future gross profits. For example, deferred policy acquisition costs
are amortized earlier than originally estimated when policy terminations are
higher than expected and when investments are sold at a gain prior to their
anticipated maturity.
Death and other policyholder benefits reflect ALLIED Life's exposure to
mortality risk. They fluctuate from period to period according to the level of
claims incurred under ALLIED Life's insurance retention limit.
Profitability is primarily affected by investment spread (the excess of
investment income earned over the amounts credited as interest to policyholder
accounts), mortality experience (difference between actual and expected death
and other policyholder benefits), and the ability to control policy acquisition
costs and other operating expenses. Because of ALLIED Life's relatively small
size, its operating results may be affected significantly by the level of death
and other policyholder benefits incurred in any one reporting period.
The tables on pages 24 and 25 reflects ALLIED Life's production information
and pretax operating results excluding realized investment gains (losses) and
related amortization of deferred policy acquisition costs for the years
indicated. The following analysis of life insurance operations should be read
with reference to the table.
23
<PAGE>
Results of Operations
1996 Compared with 1995
Consolidated revenues for the year ended December 31, 1996 were $80.7
million, a 7.2% increase over the $75.3 million reported for 1995. The increase
was attributable to life insurance premiums and other insurance income net of
reinsurance premiums ceded that rose 9.9% due to increased sales of term life
insurance. In 1996 the Company had realized gains on investments of $122,000 as
compared with realized losses of $722,000 in 1995. Consolidated revenues have
grown at a slower rate over the last several quarters due to lower sales of
universal life and annuity products. Investment income and policyholder
assessments on universal life have shown decreases in growth primarily because
of lower increases in invested assets and universal life account balances.
Life Insurance Operations
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31,
1996 1995 1994
(Dollars in thousands)
Production information
Life insurance
Life insurance face amount in force
directly produced by agents
Universal Life $4,340,601 $4,215,564 $3,927,488
Term life 4,198,504 3,415,536 2,745,187
Whole life 49,079 50,180 48,370
---------- ---------- ----------
8,588,184 7,681,280 6,721,045
---------- ---------- ----------
Other 371,130 433,236 521,692
---------- ---------- ----------
$8,959,314 $8,114,516 $7,242,737
========== ========== ==========
Face amount of new life insurance sold
directly produced by agents
Universal Life $ 410,635 $ 609,700 $ 879,344
Term life 1,475,977 1,223,544 1,124,613
Whole life 4,239 4,511 2,320
--------- --------- ---------
1,890,851 1,837,755 2,006,277
--------- --------- ---------
Other 9,431 21,549 59,778
--------- --------- ---------
$1,900,282 $1,859,304 $2,066,055
========== ========== ==========
Life insurance termination rate
Universal Life 6.1% 6.7% 6.7%
Term life 18.2% 18.9% 17.6%
Annuities
Account balance $ 467,505 $ 412,216 $ 343,390
First-year annuity premiums $ 68,063 $ 75,944 $ 85,787
</TABLE>
24
<PAGE>
Life Insurance Operations (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31,
1996 1995 1994
(Dollars in thousands)
Profitability
Investment income $48,145 $45,215 $38,015
------- ------- -------
Interest credited on
Annuities 24,732 22,613 17,723
Universal life 9,490 9,530 9,229
Other 464 324 263
------- ------- -------
Total interest expense 34,686 32,467 27,215
------- ------- -------
Investment spread 13,459 12,748 10,800
------- ------- -------
Fee income
Universal life charges 22,410 21,586 18,780
Annuity surrender charges 495 662 393
------- ------- -------
Total fee income 22,905 22,248 19,173
------- ------- -------
Other insurance income 8,445 7,686 6,220
------- ------- -------
Adjusted insurance revenues 44,809 42,682 36,193
------- ------- -------
Other expenses
Amortization of deferred policy
acquisition costs (1) 10,730 6,036 5,345
Renewal commissions 2,675 2,437 2,217
Other insurance operating expenses 5,848 5,501 5,330
Administrative fees 508 309 163
------- ------ ------
Total acquisition and operating expenses 19,761 14,283 13,055
------- ------ ------
Death benefits, net 6,945 6,894 5,733
Other policyholder benefits, net 6,357 6,702 4,412
------- ------ -------
Total other expenses 33,063 27,879 23,200
------- ------ -------
Insurance operating income before income
taxes and realized investment gains (losses) $11,746 $14,803 $12,993
======= ======= =======
<FN>
(1) Amounts exclude amortization of deferred policy acquisition costs resulting
from net realized investment gains (losses). In 1996, amortization includes an
additional charge of $2.8 million relating to unlocking adjustments to deferred
policy costs acquisition . See "Additional Charge to DPAC"on page 26.
</FN>
</TABLE>
Operating income before taxes (which exclude realized investment gains and
losses net of related amortization of deferred policy acquisition costs) for the
year includes an additional charge to deferred policy acquisition costs of $2.8
million reflecting changes in assumptions used to estimate future gross profits
on certain blocks of annuity business (see Additional Charge to DPAC on page
26). Including the additional charge of $2.8 million, operating income before
taxes was $11.8 million for 1996 compared with $14.9 million reported in 1995.
Operating earnings per share including the additional charge of $0.42 per share
were $1.37 in 1996 compared with $1.88 in 1995. Net income totaled $8.1 million
($1.41 per share) in 1996 and was $9.7 million ($1.78 per share) in 1995.
Life Insurance Operations
Total life insurance in force grew 10.4% to $9 billion at December 31, 1996
from $8.1 billion at December 31, 1995. The increase was due to policy retention
and new term life insurance sales.
25
<PAGE>
The face amount of new life insurance sold directly by agents in 1996
increased 2.9% to $1.9 billion from $1.8 billion in 1995. The face amount of new
universal life insurance sold decreased 32.6% to $410.6 million from $609.7
million. Universal life account balances increased 8.3% at year-end 1996 from
year-end 1995. Fee income increased 3% to $22.9 million from $22.2 million. The
savings element of universal life products has become less attractive over the
last several years due to generally lower interest rates and an increasing
equity market.
The face amount of new term life insurance sold directly by agents
increased 20.6% to $1.5 billion for 1996 from $1.2 billion for 1995. Sales of
term insurance with 10- and 20-year guaranteed rates were strong.
First-year annuity premiums decreased 10.4% to $68.1 million from $75.9
million for 1995. The decrease was due to lower sales in the first and second
quarter. The lower sales were caused by a flat interest yield curve, which
allowed banks and other financial institutions to offer short-term certificates
of deposit at more competitive interest rates. Interest rates rose during the
middle of the year, and sales reached expected levels in the third and fourth
quarters. The total annuity account balance increased 13.4% to $467.5 million at
year-end 1996 from $412.2 million at year-end 1995.
Adjusted insurance revenues increased 5.3% to $44.9 million for 1996 from
$42.7 million for 1995. The increase was primarily attributable to increased
investment spread and other insurance income (due to term life insurance sales).
The growth in life insurance in force and policyholder account balances
permitted invested assets at cost to increase 12.2% to $714.1 million at
December 31, 1996 from $636.7 million at December 31, 1995. Investment income
increased by 6.5%. ALLIED Life's return on invested assets decreased to 7.4% in
1996 from 7.8% in 1995.
Investment spread grew to $13.6 million from $12.7 million. Annual average
interest-credited rates on universal life contracts decreased to 5.4% from 5.9%
and on annuities decreased to 5.6% from 5.9%. The ratio of investment spread to
investment income decreased only slightly to 28% from 28.2% despite the volatile
interest rate environment during 1996. This is evidence of ALLIED Life's ability
to adjust interest credited to policyholder accounts to reflect trends in
investment earnings.
Death benefits net of reinsurance remained at $6.9 million. Other
policyholder benefits decreased 5.1% to $6.4 million from $6.7 million as
decreases in reserves for supplemental contracts and single premium immediate
annuities with life contingencies more than offset the increase in reserves on
new term life sales and policyholder bonus reserves on universal life products.
Other insurance operating expenses increased 6.3% to $5.8 million from $5.5
million.
Additional Charge to DPAC
Amortization of deferred policy acquisition costs (DPAC) was $10.7 million
in 1996. Included in that amount was an additional charge taken by the Company
of $2.8 million as the result of its annual DPAC study that suggested
refinements in assumptions concerning future annuity policy persistency and
interest rate spreads were necessary. Annuity DPAC reflects the deferred costs
(primarily commissions) associated with sales. These expenses are amortized in
proportion to the actual profits and estimated future profits of a given block
of annuity policies. Estimated future profits and amortization of costs are
reviewed annually for universal life insurance and annuity products and may be
reviewed more frequently if circumstances dictate. GAAP requires that the
estimated future profits and future amortization be recomputed based on actual
experience and updated expectations of future experience (unlocking). This
unlocking may result in both adjustments related to prior amortization as well
as changes to ongoing amortization rates.
While the Company will continue to re-evaluate the DPAC assumptions, it
does not anticipate making additional material adjustments to DPAC amortization
schedules in the foreseeable future. Further adjustments would be necessary only
if actual experience should differ significantly from the assumptions used in
the DPAC study models. DPAC amortization was $6 million in 1995.
26
<PAGE>
Primarily due to the additional charge of $2.8 million, operating income
before taxes decreased to $11.7 million in 1996 from $14.8 million in 1995.
Results of Operations
1995 Compared with 1994
Consolidated revenues for the year ended December 31, 1995 were $75.3
million, an 18.7% increase over the $63.5 million reported for 1994. The
increase was primarily attributable to higher investment income, which rose
19.1% to $45.4 million from $38.1 million, and policyholder assessments on
universal life contracts, which increased 15% to $20 million from $17.4 million.
These increases resulted from the growth in invested assets and policyholder
account balances during the year. Policyholder account balances increased 16.4%
primarily as a result of policy retention and premiums and considerations
received from universal life and annuity products.
Income before income taxes and realized investment (losses) gains net of
related amortization of deferred policy acquisition costs (operating income
before taxes) for 1995 increased 13.4% to $14.9 million from $13.1 million
reported for 1994. Net income totaled $9.7 million, up 13.5% from $8.6 million
in 1994. Operating earnings per common share rose to $1.88 for 1995 from $1.66
for 1994; net income per common share was $1.78 for 1995 compared with $1.58 for
1994.
Life Insurance Operations
Total life insurance in force grew 12% to $8.1 billion at December 31,
1995 from $7.2 billion at December 31, 1994. The increase was due to policy
retention and insurance sales.
The face amount of new life insurance sold directly by agents in 1995 decreased
8.4% to $1.8 billion from $2 billion in 1994. The primary factor was a 30.7%
decrease in the face amount of new universal life insurance sold to $609.7
million from $879.3 million. This decrease was partially due to the
discontinuance of the Champion product on January 1, 1995. Lower market interest
rate levels also affected sales. Policyholder account balances, however, were up
8.2%, and fee income increased 16% to $22.2 million from $19.2 million.
The face amount of new term life insurance sold directly by agents
increased 8.8% to $1.2 billion for 1995 from $1.1 billion for 1994. ALLIED Life
introduced a 10-year term life insurance product at the beginning of 1994, and
sales remained strong in 1995.
First-year annuity premiums decreased 11.5% to $75.9 million for 1995 from
$85.8 million for 1994. The decrease was due to a flat interest yield curve,
which made short-term certificates of deposit available at more competitive
interest rates. The total annuity account balance increased 20% to $412.2
million at year-end 1995 from $343.4 million at year-end 1994.
Adjusted insurance revenues increased 17.9% to $42.7 million for 1995 from
$36.2 million for 1994. The increase was primarily attributable to increased
investment spread, greater fee income, and other insurance income. The growth in
life insurance in force and policyholder account balances permitted invested
assets at cost to increase 15.4% to $636.7 million at December 31, 1995, from
$551.6 million at December 31, 1994, allowing investment income to increase by
18.9%. ALLIED Life's return on invested assets in 1995 remained unchanged from
1994 at 7.8%.
27
<PAGE>
Investment spread grew to $12.7 million from $10.8 million. Annual average
interest-credited rates on universal life contracts decreased to 5.9% from 6.2%
and on annuities increased to 5.9% from 5.8%. The ratio of investment spread to
investment income decreased only slightly to 28.2% from 28.4% despite the
volatile interest rate environment during 1995.
Amortization of deferred policy acquisition costs increased 12.9% to $6
million from $5.3 million because of ALLIED Life's increase in profitability.
Other insurance operating expenses increased 5.8% to $5.8 million from $5.5
million, a result of overall growth.
Death benefits net of reinsurance increased 20.3% to $6.9 million from $5.7
million. Other policyholder benefits increased 51.9% to $6.7 million from $4.4
million as a result of increased reserves on new term life sales and
supplemental contracts and an increase in policyholder bonus reserves on
universal life products.
ALLIED Life's operating income before taxes was up 13.9% to $14.8 million
from$13 million in 1994. The increase occurred because the improved investment
spread and increased fee income more than offset the higher expenses and
policyholder benefits.
Liquidity and Capital Resources
ALLIED Life Financial Corporation
As an insurance holding company, ALFC relies on dividends from ALLIED Life
to make dividend payments to its preferred and common stockholders. The ability
of ALLIED Life to pay dividends to the Company is limited by law to earned
profits (unassigned surplus) as of the dates dividends are paid. Such ability is
determined in accordance with accounting practices prescribed or permitted by
insurance regulatory authorities of the State of Iowa.
The Iowa Insurance Holding Company Act precludes ALLIED Life's payment of
an extraordinary dividend without prior notice to and approval of the Iowa
Insurance Commissioner. An extraordinary dividend is defined as any dividend or
distribution of cash or other property whose fair market value together with
that of other dividends or distributions made within the preceding twelve months
exceeds the greater of
(i) 10% of statutory policyholders' surplus (total capital stock and surplus)
as of December 31 of the preceding year or
(ii) the net gain from operations on a statutory basis for the twelve-month
period ending December 31 of the preceding year.
During 1997, the maximum amount available for distribution to the Company
from ALLIED Life without special regulatory approval of or notification to the
Iowa Insurance Commissioner is approximately $5.2 million.
A source of cash flows for ALFC is dividend payments from ALLIED Life.
During 1996, the Company paid cash dividends of $1.1 million to common and
preferred stockholders. ALLIED Life paid to the Company dividends of $1.4
million primarily to fund the Company's dividend requirement.
Annual dividends payable on the currently outstanding 6.75% Series
preferred stock are approximately $1.5 million. In accordance with the terms of
the 6.75% Series preferred stock, the Company may pay dividends thereon by
issuing additional shares of such stock for any quarter ending on or prior to
September 30, 1998. In 1996, the Company paid dividends in the form of 138,793
shares of 6.75% Series preferred stock.
28
<PAGE>
Effective August 6, 1996, the Board of Directors approved a stock
repurchase program to acquire shares of the Company common stock on the open
market. The Company completed the program during the third quarter of 1996,
repurchasing and cancelling 150,000 shares at an average cost of $16.94 per
share.
Consolidated
Life insurance companies generally produce a positive cash flow from
operations. Its adequacy is measured by liquidity. There should be sufficient
cash to meet benefit obligations to policyholders and normal operating expenses
as they are incurred and sufficient excess to help meet future policy benefit
payments and to write new business. ALLIED Life's liquidity position continued
to be favorable in 1996, with cash inflows at levels sufficient to provide the
funds necessary to meet obligations.
The Company's cash inflows consist primarily of deposits to policyholder
account balances, proceeds from sales, maturities and calls of investments, and
repayments of investment principal. The Company's cash outflows primarily are
related to policyholder account withdrawals, investment purchases, policy
acquisition costs, policyholder benefits, and current operating expenses. These
outflows are typically met from normal annual premium and net investment cash
inflows.
Company operations provided cash inflows of $15.5 million in 1996, $11.5
million in 1995, and $8.2 million in 1994. Cash inflows from financing
activities amounted to $62.5 million, $73.3 million, and $94.2 million during
1996, 1995, and 1994, respectively. These funds and the excess operating inflows
were used primarily to increase the Company's fixed maturity investment
portfolio.
Matching the investment portfolio maturities to the cash flow demands of
the insurance coverages being provided is an important consideration. The
Company continually monitors benefit and claims statistics to project future
cash requirements.
As part of this monitoring process, the Company performs cash-flow testing
of its assets and liabilities under various scenarios to evaluate the adequacy
of reserves. In developing its investment strategy, the Company establishes a
level of cash and securities that when combined with expected net cash inflows
from operations, maturities of fixed maturity investments, principal payments on
amortizing securities, and its insurance products is believed to be adequate to
meet anticipated short-term and long-term benefit and expense payment
obligations.
As of December 31, 1996, 96.8% of the Company's investments were in fixed
maturities. The investment policy for ALLIED Life requires that the fixed
maturity portfolio be invested primarily in debt obligations rated "BBB" or
higher when they are acquired. Of the Company's fixed maturity investments held
at year-end 1996, 89% were rated "A" or better; 1% were rated below investment
grade (below "BBB").
The carrying values of all the Company's investments in fixed maturities
are reviewed on an ongoing basis for credit deterioration. If review indicates a
decline in fair value below cost that is other than temporary, the Company's
carrying value in the investment is reduced to its estimated realizable value
and a corresponding write-down is taken. Such reductions in carrying value are
recognized as realized losses and charged to income. No reductions in carrying
value were recognized for the year ended December 31, 1996.
The Company's fixed maturity portfolio includes collateralized mortgage
obligations (CMOs). CMOs consist of pools of mortgages divided into tranches
that provide sequential retirement of bonds. To provide call protection and more
stable average lives, the Company invests primarily in planned amortization
classes (PACs) and sequential-pay bonds that generally provide more predictable
cash flows within a range of prepayment speeds by shifting some of the
prepayment risks to support tranches.
29
<PAGE>
At year-end 1996, all of the Company's CMOs were investment-grade
securities. They had a carrying value of $92.1 million and a fair value of $92.4
million; 86.8% of these investments were in PAC and sequential-pay bonds. All of
the Company's CMO investments have an active secondary market; therefore, their
effect on liquidity is not expected to differ from the effect of other fixed
maturity investments.
The Company has a line of credit agreement with the Federal Home Loan Bank
that provides additional liquidity. The agreement makes $25 million available
through March 13, 1997. Interest is payable at the current rate upon issuance.
From time to time, the Company has borrowed funds from its affiliates on an
arms-length basis. At December 31, 1996, the Company had an outstanding
borrowing of $20.5 million under the line of credit agreement. During 1996, the
Company entered into a note-payable agreement with ALLIED Mutual, an affiliate.
The outstanding borrowing at December 31, 1996 was approximately $1.6 million.
Management anticipates that funds to meet the Company's short-term and
long-term capital expenditures, cash dividends, and operating cash needs will
come from existing capital and internally generated funds. As of December 31,
1996, the Company had no material commitments for capital expenditures. As
additional capital needs arise, the Company will consider taking on additional
debt or issuing equity. Specific methods for meeting such needs will depend upon
financial market conditions at the time.
Effects of Inflation and
Interest Rate Changes
Management does not believe inflation has had a material effect on
consolidated results of operations. To reduce exposure to interest rate
fluctuations, management attempts to invest new funds in securities with
expected durations that match related policyholder obligations.
As a rule, the fair value of the Company's fixed maturity portfolio
increases or decreases in inverse relationship with fluctuations in interest
rates while investment income moves in direct relationship with interest rate
changes. For example, if interest rates decrease, the Company's fixed maturity
investments generally will increase in value. Investment income, on the other
hand, will decrease as fixed maturity investments mature or are sold and the
proceeds are reinvested at the lower interest rates.
Interest rate changes and the slope of the yield curve may have temporary
effects on the sale and profitability of the universal life and annuity products
offered by ALLIED Life. For example, if interest rates rise, competing
investments may become more attractive to potential purchasers until the
interest rates credited to policyholder account balances are increased. If
interest rates fall, profitability will be affected negatively until credited
rates are adjusted to compensate for the decline in investment income. ALLIED
Life sells universal life and annuity contracts that generally permit flexible
responses to interest rates, which are monitored constantly.
Hedging Activities
In June 1996, the Company began interest rate hedging programs whereby
certain derivative financial instruments including cash settle put swaptions
(swaptions) and interest rate floors (floors) were purchased. Swaptions are
being purchased to reduce the negative effect of increased withdrawal activity
related to the Company's annuity liabilities that may result from extreme
increases in interest rates. As of December 31, 1996, the Company was party to
44 agreements for these instruments. The agreements expire quarterly from June
1999 through March 2006. They entitle the Company to receive payments from the
instrument's counter parties on future reset dates if the interest rate (which
is directly tied to the 5-year constant maturity swap curve) on any expiration
date is above a specified fixed rate (8.8% to 10.5% for instruments entered into
as of December 31, 1996). The notional amounts range from $3 million to $9
million (total of $244 million).
30
<PAGE>
Floors are being purchased to reduce the negative effect that may result
from extreme decreases in interest rates to a level below the guaranteed
interest rates provided for in the universal life insurance contracts. The 28
agreements for the floors outstanding as of December 31, 1996 expire quarterly
from June 1999 through March 2006. They entitle the Company to receive payments
from the instrument's counter parties on future reset dates if the interest rate
(which is tied directly to the 10-year constant maturity treasury curve) on the
expiration date is below a specified fixed rate (5.0% for instruments entered
into as of December 31, 1996). The notional amounts for each quarter range from
$140 million to $270 million.
The costs of the interest rate hedging programs are not expected to have a
material impact on the interest rate margin. For both swaptions and floors, the
Company pays only the original premium and is not at risk of further payments
regardless of market conditions. The Company does not anticipate making any
further purchases of interest rate hedges in the near future.
Premiums paid to purchase these instruments are capitalized and included in
other invested assets. Through December 31, 1996, the Company had paid
approximately $4.1 million in premiums. Premiums are amortized into income over
the term of the instruments on a straight-line basis. Gains and losses on these
instruments and related assets are not recorded in income until realized.
At the beginning of the second quarter of 1996, the Company introduced an
equity-indexed annuity product that guarantees customers the return of
principal. Interest credited is based on a percentage of the gain of the S&P 500
Index(R). A portion of the premium from each customer is invested in investment
grade fixed income securities to cover the minimum guaranteed value due the
customer at the end of the term. A portion of the premium is used to purchase
S&P 500 call options (call options) to hedge the growth in interest credited to
the customer as a direct result of increases in the S&P 500 Index(R). The call
options provide the Company the opportunity to participate in the increases of
the S&P 500 Index(R) if the market advances. At December 31, 1996, the Company
had purchased 40 call options with notional amounts between $65,000 and $900,000
(total of $11.2 million).
Premiums paid to purchase call options are capitalized and included in
other assets. Through December 31, 1996, the Company had paid approximately $2.3
million in premiums. Premiums are amortized as an expense over the term of the
instruments on a straight-line basis. Gains and losses on these instruments and
related liabilities are not recorded in income until realized.
The Financial Accounting Standards Board (FASB) and the Securities and
Exchange Commission (SEC) are evaluating the accounting and disclosure
requirements for hedging activities and derivative financial instruments. As a
result of these deliberations, the Company's accounting treatment may change in
the future. The Company is actively monitoring the proposals that are in various
stages of discussion; the impact of the final standards cannot be clearly
projected at this time.
The Company is exposed to the risk of losses in the event of nonperformance
of the counter parties of the above swaptions, floors, and call options. Losses
recorded in the Company's financial statements in the event of non-performance
will be limited to the unamortized premium paid to enter into the instruments.
Economic losses will be measured by the net replacement cost of such instruments
or by their fair value if the net fair value is in the Company's favor. The
Company limits its exposure to such losses by diversification among reputable
counter parties with appropriate credit ratings.
31
<PAGE>
Emerging Regulatory Issues
The Company's insurance subsidiary is subject to regulation and supervision
by the states in which it is admitted to transact business. State insurance laws
generally establish supervisory agencies with broad administrative and
supervisory powers related to granting and revoking licenses to transact
business, establishing guaranty fund associations, licensing agents, approving
policy forms, regulating premium rates
for some lines of business, establishing reserve requirements, prescribing the
form and content of required financial statements and reports, determining the
reasonableness and adequacy of statutory capital and surplus, and regulating the
type and amount of investments permitted.
Recently, the insurance regulatory framework has received increased
scrutiny from various states, the federal government, and the National
Association of Insurance Commissioners (NAIC). The NAIC has recommended to the
states for adoption and implementation several regulatory initiatives.
Iowa as well as three other states have adopted the NAIC regulation for
life insurance policy sales illustrations. Additional states are expected to
adopt the new regulation in 1997. The effect of any adoption by individual
states is not expected to have a significant effect on the Company's insurance
production.
New Accounting Standards
In 1996 the Company adopted SFAS 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate the carrying
amount of such assets may not be recoverable. Management determined the adoption
had no impact on the Company's financial condition, results of operations, or
liquidity.
In 1996, the Company adopted SFAS 123, "Accounting for Stock-Based
Compensation." This statement establishes a fair value-based method of
accounting for stock-based compensation plans, but permits continued application
of the provisions of Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees," in determining compensation expense related to
stock-based compensation. Companies that continue to apply Opinion 25 must
nonetheless comply with the new disclosure requirements of SFAS 123. The Company
elected to continue to account for stock-based compensation under the provisions
of Opinion 25 and its related interpretations. This adoption had no impact on
the Company's financial condition, results of operations, or liquidity.
In June of 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
125 is effective for fiscal years beginning after December 31, 1996. Earlier or
retroactive application of this statement is not permitted. The Company will
adopt SFAS 125 on January 1, 1997. Management has determined that the
implementation will not have a material effect on its financial condition,
results of operations, or liquidity.
32
<PAGE>
Item 8. Financial Statements and Supplementary Data
Report of Management
The management of ALLIED Life Financial Corporation and its subsidiaries is
responsible for the accompanying financial information appearing in this annual
report. The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and include amounts based on the
best estimates and judgments of management.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and transactions are
properly authorized and recorded. Management continually monitors these internal
accounting controls, modifying and improving them as business conditions and
operations change. An internal audit department also evaluates the adequacy and
effectiveness of internal accounting controls and measures adherence to
established policies and procedures. The management of ALLIED Life Financial
Corporation believes that as of December 31, 1996, the Company's system of
internal accounting controls was adequate to accomplish the objectives discussed
herein.
The Company's financial statements for the years ended December 31, 1996,
1995, and 1994 have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The audits were made in accordance with generally accepted
auditing standards and included a consideration of the system of internal
accounting controls to the extent necessary to express an independent opinion on
the financial statements.
The audit committee of the Board of Directors, comprised solely of outside
directors, meets regularly with the independent auditors, management, and
internal auditors to review the scope and results of the audit work performed.
The internal auditors and independent auditors have access to the audit
committee to discuss the results of the audit, the adequacy of internal
accounting controls, and the quality of financial reporting.
/s/ Samuel J. Wells
Samuel J. Wells
President
/s/ Wendell P. Crosser
Wendell P. Crosser
Treasurer
/s/ Donald J. Iverson
Donald J. Iverson
Chief Actuary
33
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
ALLIED Life Financial Corporation
We have audited the accompanying consolidated balance sheets of ALLIED Life
Financial Corporation and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income, stockholders equity, and cash flows
for each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ALLIED Life
Financial Corporation and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Des Moines, Iowa
February 7, 1997
34
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31,
1996 1995 1994
Revenues
Insurance revenues
Policyholder assessments on
universal life contracts $ 20,727,368 $ 20,010,535 $ 17,400,941
Surrender charges 2,177,484 2,237,665 1,771,432
Life insurance premiums 13,004,909 12,567,592 9,986,835
Other insurance income 3,946,849 2,878,063 1,964,469
Reinsurance premiums ceded (8,506,924) (7,759,514) (5,731,138)
------------ ------------ -----------
Total insurance revenues 31,349,686 29,934,341 25,392,539
------------ ------------ -----------
Investment income (notes 2 and 4) 48,181,831 45,411,109 38,136,820
Realized investment gains (losses) (note 2) 122,097 (722,299) (724,432)
Other income 1,056,498 687,500 647,602
------------ ------------ -----------
80,710,112 75,310,651 63,452,529
------------ ------------ -----------
Benefits and Expenses
Policyholder benefits
Interest credited to policyholder
account balances
Annuity contracts 24,732,494 22,613,092 17,723,065
Universal life contracts 9,490,024 9,529,783 9,228,876
Other 463,095 323,836 262,734
Death benefits 10,046,323 13,035,473 10,309,345
Other policyholder benefits 7,388,199 6,702,322 4,411,497
Reinsurance recoveries (4,132,049) (6,141,674) (4,576,795)
---------- ---------- ----------
Total policyholder benefits 47,988,086 46,062,832 37,358,722
Amortization of deferred policy
acquisition costs 10,594,828 5,940,996 5,136,195
Commissions 3,316,200 2,725,016 2,626,471
Affiliated operating expenses (note 4) 839,468 1,410,847 1,554,104
Other insurance operating expenses 5,961,807 4,902,264 4,161,234
---------- ---------- ----------
68,700,389 61,041,955 50,836,726
---------- ---------- ----------
Income before income taxes 12,009,723 14,268,696 12,615,803
Income Taxes (note 13)
Current 5,796,944 4,673,414 3,745,677
Deferred (1,859,812) (117,200) 313,502
---------- ----------- -----------
3,937,132 4,556,214 4,059,179
---------- ----------- -----------
Net Income $8,072,591 $9,712,482 $8,556,624
========== ========== ==========
Net income applicable to common stock $6,471,502 $8,219,233 $7,226,131
Earnings per Common Share $ 1.41 $ 1.78 $ 1.58
Weighted average number of
common shares outstanding 4,580,148 4,613,207 4,576,950
</TABLE>
See accompanying Notes to Consolidated Financial Statements
35
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
1996 1995
Assets
Investments
Fixed maturities (notes 2 and 5)
Held to maturity, at amortized cost $ 199,208,835 $ 219,418,225
Available for sale, at fair value 500,289,070 425,098,718
Equity securities, at fair value (notes 2 and 5) 6,406,552 4,332,107
Mortgage loans on
real estate 1,456,688 1,829,450
Policy loans
10,306,724 9,526,033
Other invested assets (notes 3 and 5) 3,751,415 -----
Short-term investments, at cost (notes 2, 4, and 5) 919,687 721,612
------------ -----------
Total investments 722,338,971 660,926,145
------------ -----------
Accrued investment income 9,738,060 8,697,634
Accounts receivable 607,737 566,853
Reinsurance ceded receivables 5,786,434 7,626,401
Current income taxes recoverable ----- 869,664
Deferred policy acquisition costs 92,417,588 79,717,529
Other assets (notes 3 and 5) 4,710,933 1,543,033
------------- -----------
Total assets $ 835,599,723 $ 759,947,259
============= ============
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
1996 1995
Liabilities
Policy liabilities
Policyholder account balances
Annuity contracts (note 5) $467,504,991 $412,216,412
Universal life contracts (note 5) 182,726,695 168,654,188
Other 8,846,156 7,634,517
Future policy benefits 33,473,558 28,149,304
Policy and contract claims 3,735,623 4,827,540
Other policyholder funds 1,575,995 867,336
----------- -----------
697,863,018 622,349,297
Checks drawn in excess of bank balances 3,163,318 2,037,432
Current income taxes 940,576 -----
Deferred income taxes (note 13) 8,008,946 13,452,845
Indebtedness to affiliates (note 4) 2,188,068 139,380
Note payable (notes 5 and 12) 20,470,000 16,605,000
Other liabilities 3,024,175 3,681,485
----------- -----------
Total liabilities 735,658,101 658,265,439
----------- -----------
Stockholders' Equity
Preferred stock, no par value, issuable in series,
authorized 7,500,000 shares (note 7)
6.75% Series, authorized 2,440,000 shares, issued and
outstanding of 2,143,691 in 1996 and 2,004,898 in 1995 23,259,047 21,753,143
ESOP Series, authorized 300,000 shares, issued and
outstanding of 93,982 in 1996 and 82,029 in 1995 1,327,186 1,117,780
Common stock, no par value, $1 stated value,
authorized 25,000,000 shares, issued and outstanding
of 4,497,238 in 1996 and 4,632,559 in 1995 (notes 8 and 9) 4,497,238 4,632,559
Additional paid-in capital 46,596,171 48,773,783
Retained earnings (note 10) 21,751,088 16,237,501
Unrealized appreciation of investments, net (notes 6 and 14) 2,510,892 9,167,054
---------- -----------
Total stockholders' equity 99,941,622 101,681,820
---------- -----------
Contingent liabilities (notes 6 and 14)
Total liabilities and stockholders' equity $835,599,723 $759,947,259
=========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE>
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31,
1996 1995 1994
Preferred Stock at beginning of year $ 22,870,923 $ 21,340,930 $ 19,027,514
Issuance of shares of 6.75% Series for
stock dividends (note 7) 1,505,904 1,408,417 1,317,212
Issuance of shares of ESOP Series, net of
redemptions and issuance costs (note 7) 249,230 194,075 1,001,274
ESOP Series converted to common stock (note 7) (39,824) (72,499) (5,070)
----------- ------------ ----------
Preferred stock at end of year 24,586,233 22,870,923 21,340,930
----------- ------------ ----------
Common Stock at beginning of year 4,632,559 4,585,832 4,571,840
Issuance of shares of common stock
(notes 7, 8, and 9) 14,679 46,727 13,992
Repurchase of shares of common stock (note 8) (150,000) --- ---
----------- ----------- ----------
Common stock at end of year 4,497,238 4,632,559 4,585,832
----------- ----------- ----------
Additional Paid-in Capital at beginning of year 48,773,783 48,159,390 48,008,927
Issuance of shares of common stock,
net of issuance costs 213,638 614,393 150,463
Repurchase of shares of common stock (note 8) (2,391,250) --- ---
----------- ---------- ----------
Additional paid-in capital at end of year 46,596,171 48,773,783 48,159,390
----------- ---------- ----------
Retained Earnings at beginning of year 16,237,501 8,803,508 2,172,540
Net income 8,072,591 9,712,482 8,556,624
Dividends paid on preferred stock (notes 7 and 10) (1,601,089) (1,493,250) (1,330,492)
Dividends paid on common stock (notes 8 and 10) (957,915) (785,239) (595,164)
---------- ---------- ---------
Retained earnings at end of year 21,751,088 16,237,501 8,803,508
---------- ----------- ---------
Unrealized Appreciation (Depreciation)
of Investments at beginning of year 9,167,054 (6,863,046) 587,527
Unrealized appreciation (depreciation), net (note 1) (6,656,162) 16,030,100 (7,450,573)
---------- ------------ -----------
Unrealized appreciation (depreciation)
of investments at end of year 2,510,892 9,167,054 (6,863,046)
----------- ------------ -----------
Total Stockholders' Equity $99,941,622 $101,681,820 $76,026,614
=========== ============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
38
<PAGE>
Conslidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31,
1996 1995 1994
Cash Flows from Operating Activities
Net income $ 8,072,591 $ 9,712,482 $ 8,556,624
Adjustments to reconcile net
income to net cash provided by operating activities
Policyholder assessments on
universal life contracts (20,727,368) (20,010,535) (17,400,941)
Surrender charges (2,177,484) (2,237,665) (1,771,432)
Interest credited to policyholder
account balances 34,685,613 32,466,711 27,214,675
Realized investment (gains) losses (122,097) 722,299 724,432
Change in
Accrued investment income (1,040,426) (1,069,843) (1,062,223)
Reinsurance ceded receivables 1,839,967 (1,903,509) 914,871
Deferred policy acquisition costs (7,115,149) (11,297,923) (13,568,086)
Liabilities for future policy benefits 5,324,254 5,227,667 3,433,760
Policy and contract claims and other
policyholder funds (383,258) (87,242) 1,405,676
Income taxes
Current 1,810,240 508,994 (962,441)
Deferred (1,859,812) (117,200) 313,502
Other, net (2,848,909) (372,143) 373,241
----------- ----------- -----------
Net cash provided by operating activities 15,458,162 11,542,093 8,171,658
----------- ----------- -----------
Cash Flows from Investing Activities
Purchase of fixed maturities held to maturity (22,173,848) (15,581,878) (112,405,386)
Maturities, calls, and principal reductions of
fixed maturities held to maturity 42,276,480 32,831,589 44,048,098
Purchase of fixed maturities available for sale (140,827,756) (188,897,735) (66,883,192)
Proceeds from sale of fixed maturities available
for sale 38,648,792 79,185,013 20,490,959
Maturities, calls,and principal reductions
of fixed maturities available for sale 10,846,544 6,963,714 16,132,126
Purchase of equity securities (1,907,844) (2,164,564) (980,760)
Proceeds from sale of equity securities 21,326 457,262 -----
Proceeds from repayment and sale of mortgage loans 372,247 247,676 1,304,965
Purchase of other invested assets (4,145,000) ----- -----
Change in policy loans, net (780,690) (615,610) (913,381)
----------- ------------ ------------
Net cash used in investing activities (77,669,749) (87,574,533) (99,206,571)
----------- ------------ ------------
Cash Flows from Financing Activities
Change in checks drawn in excess of bank balances 1,125,887 (66,943) 126,129
Deposits to policyholder account balances 111,878,761 116,885,950 126,419,308
Withdrawals from policyholder account balances (52,920,707) (44,047,864) (47,781,742)
Change in note payable, net 3,865,000 605,000 14,900,000
Proceeds from note payable to affiliate 1,617,348 ----- -----
Proceeds from issuance of common stock, net 188,493 588,621 159,385
Proceeds from issuance of preferred stock, net 249,230 194,075 1,001,274
Repurchase of common stock (2,541,250) ----- -----
Dividends paid to stockholders (1,053,100) (870,072) (608,444)
----------- ----------- -----------
Net cash provided by financing activities 62,409,662 73,288,767 94,215,910
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Short-term Investments 198,075 (2,743,673) 3,180,997
Cash and short-term investments at beginning of year 721,612 3,465,285 284,288
----------- ----------- -----------
Cash and short-term investments at end of year $ 919,687 $ 721,612 $ 3,465,285
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
39
<PAGE>
(1) Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
ALLIED Life Financial Corporation (the Company), an insurance holding company,
and its wholly owned subsidiaries, that as of December 31, 1996 consisted of
ALLIED Life Insurance Company (ALLIED Life), ALLIED Life Brokerage Agency, Inc.
(ALBA), and ALLIED Group Merchant Banking Corporation (AGMB). At December 31,
1996, ALLIED Mutual Insurance Company (ALLIED Mutual) owned 54% of the
outstanding voting stock of the Company and the ALLIED Life Employee Stock
Ownership Trust (ESOP Trust) owned 1%. The remainder was owned by public
stockholders.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP), which differ in some respects
from those followed in reports to insurance regulatory authorities. All
significant intercompany balances and transactions have been eliminated. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Nature of Operations
The Company's operations consist primarily of those of ALLIED Life. ALLIED
Life underwrites, markets, and distributes a portfolio of life insurance and
annuity products to individuals who live primarily in rural and suburban areas
of the midwestern and western United States. ALLIED Life's products are sold
through two distribution systems: the independent agencies representing
affiliated property-casualty insurance companies (ALLIED Agencies) and a
traditional life insurance distribution system that includes financial
institutions and a number of independent life insurance marketing organizations.
In 1996 the ALLIED Agencies generated 75% of life insurance face amount sold and
43% of annuity premiums collected.
Investments
Investments in fixed maturities the Company has the positive intent and
ability to hold to maturity are classified as held to maturity and carried at
cost adjusted for amortization of premium or discount. Except for declines that
are other than temporary, changes in fair value are not reflected in the
consolidated financial statements. Investments in fixed maturities that may be
sold prior to maturity and are not bought and held principally for the purpose
of selling in the near term are segregated into an available for sale portfolio
and are carried at fair value. Unrealized appreciation and depreciation of
available for sale securities are excluded from income and reported as a
separate component of stock-holders' equity net of a valuation allowance for
related deferred policy acquisition costs and deferred income taxes.
40
<PAGE>
In November 1995, the Financial Accounting Standards Board (FASB) issued a
Special Report entitled "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." The Special
Report allowed companies to reassess the appropriateness of the classification
of all securities and make any resulting transfers concurrent with the initial
adoption of the implementation guide but no later than December 31, 1995.
Effective November 30, 1995, the Company made such reassessment and reclassified
$215,157,247 of held to maturity securities to available for sale. The net
effect of such reclassification increased stockholders' equity by $4,446,692.
Equity securities are carried at fair value with their unrealized
appreciation or depreciation reported as a net amount in a separate component of
stockholders' equity. Mortgage loans on real estate and policy loans are
recorded at the unpaid principal balance of such loans, which approximated fair
value as of December 31, 1996 and 1995. A majority of the Company's mortgage
loans are on residential real estate located in Iowa. All short-term investments
are recorded at cost which approximates fair value.
Cash settle put swaptions (swaptions), interest rate floors (floors), and
call options the Company uses for hedging purposes are carried at cost that is
amortized over the term of the instruments on a straight-line basis (see note 3
for a discussion of hedging activities). Swaptions and floors are included in
other invested assets; call options are included in other assets. The
amortization of the swaptions and floors is included as a reduction of
investment income; the amortization of the call options is included with annuity
interest credited. Gains and losses on these instruments and related assets and
liabilities will not be recorded as income until realized. The FASB and the
Securities and Exchange Commission are evaluating the accounting and disclosure
requirements for these instruments, and, as a result, this accounting treatment
may change in the future. The Company is actively monitoring the proposals that
are in various stages of discussion. The impact of the final standards can not
be clearly projected at this time.
The carrying values of all the Company's investments are reviewed on an
ongoing basis for credit deterioration; if this review indicates a decline in
fair value below cost that is other than temporary, the Company's carrying value
in the investment is reduced to its estimated realizable value and a specific
write-down is taken. Such reductions in carrying value are recognized as
realized losses and charged to income. Realized gains and losses on investments
sold are recognized on a specific identification basis.
Deferred Policy Acquisition Costs
The costs of acquiring new business (principally commissions), certain
costs of issuing policies (such as medical examinations and inspection reports),
and certain other selling expenses, all of which vary with and are primarily
related to the production of new business, have been deferred. These costs for
universal life and annuity contracts are amortized in relation to the present
value of expected gross profits using the assumed crediting rate. This
amortization is adjusted retrospectively when the Company revises its estimates
of current or future gross profits to be realized from a group of policies.
These costs for term life insurance policies are amortized over the
premium-paying periods in proportion to the ratio of annual premium revenues to
total anticipated premium revenues. Anticipated premium revenues are estimated
using the same assumptions employed for computing liabilities for future policy
benefits.
41
<PAGE>
Deferred policy acquisition costs are reviewed at least annually to
determine that the unamortized portion of such costs does not exceed recoverable
amounts after anticipated investment income is taken into account. Expected
gross profits used in determining the recoverability and amortization pattern of
deferred policy acquisition costs are based on historical gross profits and
management's estimates and assumptions regarding future investment spreads,
maintenance expenses, and persistency of blocks of business. The accuracy of the
estimates and assumptions are affected by several factors, including factors
outside the control of management such as movements in interest rates and
competition from other investment alternatives. It is reasonably possible that
conditions affecting the estimates and assumptions will change and that such
changes will result in future adjustments to deferred policy acquisition costs.
Costs deferred amounted to $17,709,977, $17,239,118, and $18,704,281 for the
years ended December 31, 1996, 1995, and 1994, respectively. Amortization of
deferred policy acquisition costs, net of interest accretion, included in the
consolidated statements of income were $10,594,828, $5,940,996, and $5,136,195
for the years ended December 31, 1996, 1995, and 1994, respectively. In 1996 the
amortization included an additional charge of approximately $2,800,000 the
Company took in response to its annual deferred policy acquisition costs study.
The study suggested refinements in certain assumptions used to estimate future
gross profits to be realized from blocks of annuity business. The Company will
continue to re-evaluate all applicable assumptions but does not anticipate
making any further material adjustments in the foreseeable future. At December
31, 1996 unamortized deferred policy acquisition costs were decreased by
approximately $3,993,000 (decreased by $9,578,000 in 1995 and increased by
$1,315,000 in 1994) to recognize the impact of unrealized appreciation or
depreciation of investments on such deferred costs. The decreases and increase
net of deferred income taxes were charged and credited, respectively, to
stockholders' equity.
Policy Liabilities
Policyholder account balances for universal life and annuity contracts
consist of the deposits received plus accumulated credited interest less
withdrawals and accumulated policy-holder assessments. Interest credited to
policyholder account balances for universal life contracts averaged 5.4%, 5.9%,
and 6.2% in 1996, 1995, and 1994, respectively. Interest credited to
policyholder account balances for annuity contracts averaged 5.6%, 5.9%, and
5.8% in 1996, 1995, and 1994, respectively. Rates used to credit interest to
policyholder account balances are subject to periodic adjustment. Certain
universal life and annuity contracts offer persistency bonuses, which are
accrued in the accompanying financial statements based on assumptions of
investment yields, withdrawals, mortality, and other factors. For term life
insurance policies, liabilities for future policy benefits are provided
according to the net level premium method based on estimated investment yields,
withdrawals, mortality, and other assumptions that were appropriate at the time
the policies were issued.
Recognition of Revenues, Benefits, and Expenses
Revenues from universal life contracts include policy fees for administration
expenses, mortality charges, and surrender charges assessed against policyholder
account balances during the period; revenues from annuity contracts include only
surrender charges. Benefits and expenses relating to these contracts include
interest credited as well as benefits incurred in excess of policyholder
42
<PAGE>
account balances during the period. Premiums and considerations received and
surrender benefits paid on these contracts are reported as deposits to and
withdrawals from policyholder account balances.
Term life insurance premium revenues are recognized over the premium-paying
period. Benefits and expenses, taking into account the provisions for
liabilities for future policy benefits and the amortization of deferred policy
acquisition costs, are associated with earned premiums that result in the
recognition of profits over the life of the policy contracts.
The Company has no participating business.
Ceded Reinsurance
The Company reports reinsurance activity on a gross basis. Amounts paid or
deemed to have been paid that are recoverable under reinsurance contracts are
recorded as reinsurance ceded receivables. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account for
the underlying policies.
Stock-based Compensation
Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board (APB) Opinion
25, "Accounting for Stock Issued to Employees," and related interpretations.
Under these provisions, compensation expense was recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted SFAS 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS 123 allows entities to continue applying the
provisions of APB Opinion 25 and to provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value method defined in SFAS 123 had been applied.
The Company has elected to continue applying the provisions of APB Opinion 25
and to comply with the pro forma disclosure provisions of SFAS 123.
Postretirement Benefits Other Than Pensions
The Company participates in a medical plan (the Plan) sponsored by an
affiliate, ALLIED Group, Inc., which presently provides postretirement medical
benefits. The Plan is subject to termination or modification by ALLIED Group,
Inc. The Plan is contributory, with retiree contributions adjusted annually, and
contains other cost-sharing features such as deductibles and coinsurance. ALLIED
Group, Inc. collects a fee from the Company that represents its share of the
Plan's current net periodic postretirement benefit cost. The accumulated
postretirement benefit obligation and plan assets for the Company are combined
with those of the ALLIED Group, Inc. plan covering other affiliates' employees
and are not readily determinable on a separate basis.
43
<PAGE>
Taxes
The Company computes deferred income taxes under the asset and liability
method, which requires deferred tax liabilities and assets at the end of each
reporting period be determined using the tax rate expected to be in effect when
taxes are actually paid or recovered. Accordingly, income tax expense provisions
increase or decrease in the same period in which a change in tax rates is
enacted. Deferred income taxes reflect the impact of temporary differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities for tax reporting.
Earnings per Common Share
Earnings per common share calculations are based on the weighted average
number of shares of common stock outstanding for the period. Net income is
reduced by dividends on preferred stock. The dilutive effect of the ESOP Series
convertible preferred stock and stock options is not significant.
Cash Flows
For purposes of reporting cash flows, all short-term investments are
considered equivalent to cash since they have original maturities of three
months or less.
44
<PAGE>
(2) Investments
The following is a schedule of amortized cost and estimated fair value of
investments in fixed maturities and equity securities as of December 31, 1996
and 1995. The estimated fair value for fixed maturities and equity securities is
based on quoted market prices where available or on values obtained from
independent pricing services.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
1996
Fixed Maturities
Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 1,006,653 $ 26,330 $ (63,503) $ 969,480
Foreign governments 4,481,577 230,253 ----- 4,711,830
Corporate securities and
public utilities 128,885,574 5,219,159 (501,811) 133,602,922
Mortgage-backed securities 64,835,031 1,655,018 (426,458) 66,063,591
------------ ---------- ---------- -----------
$199,208,835 $7,130,760 $(991,772) $205,347,823
============ ========== ========== ============
Available for Sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 34,377,785 $ ----- $ (442,951) $ 33,934,834
Foreign governments 6,188,564 225,864 (7,509) 6,406,919
Corporate securities and
public utilities 306,416,491 8,597,903 (4,030,697) 310,983,697
Mortgage-backed securities 145,703,301 3,706,440 (446,121) 148,963,620
------------ ----------- ----------- ------------
$492,686,141 $12,530,207 $(4,927,278) $500,289,070
============ =========== =========== ============
Equity Securities $ 6,153,300 $ 253,252 $ ----- $ 6,406,552
============ =========== ============ =============
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
1995
Fixed Maturities
Held to Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 1,128,830 $ 52,613 $ (22,193) $ 1,159,250
Foreign governments 6,474,602 379,143 ----- 6,853,745
Corporate securities and
public utilities 138,656,373 9,391,428 (59,301) 147,988,500
Mortgage-backed securities 73,158,420 3,175,223 (82,915) 76,250,728
------------ ----------- ---------- ------------
$219,418,225 $12,998,407 $(164,409) $232,252,223
============ =========== ========== ============
Available for Sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 8,029,221 $ 162,329 $ ----- $ 8,191,550
Foreign governments 6,194,335 464,977 ----- 6,659,312
Corporate securities and
public utilities 230,707,307 16,366,887 (702,469) 246,371,725
Mortgage-backed securities 156,562,104 7,376,522 (62,495) 163,876,131
------------ ----------- ---------- ------------
$401,492,967 $24,370,715 $(764,964) $425,098,718
============ =========== ========== ============
Equity Securities $ 4,256,516 $ 111,923 $ (35,702) $ 4,332,107
============= ============ ========== ============
</TABLE>
46
<PAGE>
The table below presents the amortized cost and estimated fair value of
investments in fixed maturities at December 31, 1996 by contractual maturity.
Expected maturities at December 31, 1996 can differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
<S> <C> <C>
Amortized Estimated
Cost fair value
Held to Maturity
Due in 1 year or less $ 10,998,032 $ 11,125,300
Due after 1 year through 5 years 50,517,613 52,315,824
Due after 5 years through 10 years 50,563,883 53,111,323
Due after 10 years 22,294,276 22,731,785
Mortgage-backed securities 64,835,031 66,063,591
----------- -----------
Total held to maturity 199,208,835 205,347,823
----------- -----------
Available for Sale
Due in one year or less 1,999,821 2,006,380
Due in one through five years 55,604,921 56,664,943
Due in five through ten years 227,931,384 231,967,522
Due after ten years 61,446,714 60,686,605
Mortgage-backed securities 145,703,301 148,963,620
----------- -----------
Total available for sale 492,686,141 500,289,070
----------- -----------
Total fixed maturities $691,894,976 $705,636,893
=========== ===========
</TABLE>
As of December 31, 1996 and 1995, there were no investments that were
non-income producing for the previous twelve months.
For the years ended December 31, 1996, 1995, and 1994, the Company realized
gross gains of $561,244, $2,076,132, and $442,911 and gross losses of $454,355,
$2,822,054, and $372,087, respectively, from the call, prepayment, or sale of
investments from the available for sale portfolio. Those same years, the Company
also realized gross gains of $3,199, $24,142, and $488,910, respectively, from
the call or prepayment of investments from the held to maturity portfolio. The
Company realized no gross losses from the call or prepayment of investments from
that portfolio in 1996 and gross losses of $450 and $34,345, respectively, in
1995 and 1994. There were no sales from the held to maturity portfolio in 1996,
1995, and 1994. During 1994, the Company was notified that a bond in its
available for sale portfolio was rerated below investment grade. Though the bond
was not in default, the Company chose to write down the bond to estimated
realizable value and take the $1,250,000 loss through net income because the
chance of recovery of the principal seemed unlikely. This bond was sold in 1995.
47
<PAGE>
A summary of net realized investment gains (losses) and net changes in
unrealized (depreciation) appreciation of investments is as follows:
<TABLE>
Year ended December 31,
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Net realized investment gains (losses)
Fixed maturities
Held to maturity $ 3,199 $ 23,692 $ 454,565
Available for sale (216,616) (745,922) (1,179,176)
Equity securities 333,771 (269) ---
Mortgage loans 226 200 179
Other 1,517 --- ---
-------- -------- ---------
122,097 (722,299) (724,432)
-------- -------- ---------
Net changes in unrealized (depreciation)
appreciation of investments
Fixed maturities
Held to maturity (6,695,010) 29,973,670 (39,951,325)
Available for sale (16,002,822) 31,429,901 (8,922,858)
Equity securities 177,661 (30,863) 277
----------- ---------- -----------
(22,520,171) 61,372,708 (48,873,906)
----------- ---------- -----------
Net realized investment gains
(losses) and changes in unrealized
(depreciation) appreciation
of investments $(22,398,074) $60,650,409 $49,598,338
============ =========== ===========
</TABLE>
A summary of net investment income follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31,
1996 1995 1994
Interest on fixed maturities $48,899,316 $45,535,493 $37,813,564
Interest on mortgage loans 159,980 87,683 365,477
Interest on policy loans 713,246 632,464 600,216
Dividends on equity securities 273,565 346,720 217,499
Interest on short-term investments 84,196 60,302 30,896
Other, net 16,900 30,013 60,188
---------- ---------- ----------
Total investment income 50,147,203 46,692,675 39,087,840
---------- ---------- ----------
Investment expenses 872,000 574,000 442,000
Interest expense 699,786 707,566 509,020
Amortization expense, hedges 393,586 --- ---
----------- ----------- -----------
Net investment income $48,181,831 $45,411,109 $38,136,820
=========== =========== ===========
</TABLE>
48
<PAGE>
As required by law, fixed maturities and short-term investments were on
deposit with or on behalf of various insurance regulatory authorities at
December 31, 1996 and 1995, with carrying values of $681,101,979 and
$623,600,240, respectively. As of December 31, 1996 and 1995, bonds with a
carrying value of $30,284,338 and $32,871,190, respectively, were pledged as
collateral for the Company's line of credit with the Federal Home Loan Bank.
Investments in any one entity or its affiliates (other than U.S. Treasury
securities and obligations of U.S. government corporations and agencies)
exceeding 10% of the Company's consolidated stockholders' equity as of
December 31, 1996 consisted of fixed maturity securities issued by Hydro
Quebec at a carrying value of $11,189,000.
(3) Hedging Activities
In June 1996, the Company began interest rate hedging programs whereby
certain derivative financial instruments including swaptions and floors were
purchased. The Company also began to purchase S&P 500 call options as a result
of an equity indexed annuity product it introduced at the start of the second
quarter.
Swaptions are being purchased to reduce the negative effect on the Company's
fixed maturity investments and annuity liabilities of increased withdrawal
activity resulting from extreme rises in interest rates. As of December 31,
1996, the Company was party to 44 agreements that expire quarterly from June
1999 through March 2006. The agreements entitle the Company to receive
payments from the instrument's counter parties on future reset dates if the
interest rate (which is tied directly to the 5-year constant maturity swap
curve) on any expiration date is above a specified fixed rate (8.8% to 10.5%
for instruments entered into as of December 31, 1996). As of December 31,
1996, the notional amounts range from $3 million to $9 million (total of $244
million) and have an amortized cost of $2.6 million.
Floors are being purchased to reduce the negative effect that may result
from extreme decreases in interest rates to a level below the guaranteed
interest rates provided for in the Company's universal life insurance
contracts. The 28 agreements for the floors outstanding, as of December 31,
1996, expire quarterly from June 1999 through March 2006. The agreements
entitle the Company to receive payments from the instrument's counter parties
on future reset dates if the interest rate (which is tied directly to the
10-year constant maturity treasury curve) on the expiration date is below a
specified fixed rate (5.0% for instruments entered into as of December 31,
1996). As of December 31, 1996, the notional amounts for each quarter range
from $140 million to $270 million and have an amortized cost of $1.1 million.
The costs of the interest rate hedging programs are not expected to have a
material impact on the interest rate margin. For both swaptions and floors,
the Company pays only the original premium and is not at risk of further
payments regardless of market conditions.
The Company has introduced an equity-indexed annuity product that guarantees
the return of principal to the customer and credits interest based on a
percentage of the gain in the S&P 500 Index(R). A portion of the premium from
each customer is invested in investment grade fixed income securities to cover
the minimum guaranteed value due the customer at the end of the term. A
portion of the premium is used to purchase S&P 500 call options (call options)
to hedge the growth in interest credited to the customer as a direct result of
increases in the S&P 500 Index(R).
49
<PAGE>
The call options provide the Company the opportunity to participate in the
increases of the S&P 500 Index(R) if the market advances. As of December 31,
1996, the Company had purchased 40 call options with notional amounts ranging
from $65,000 to $900,000 (total of $11.2 million) and have an amortized cost
of $2.2 million.
The Company is exposed to the risk of losses in the event of nonperformance
of the counter parties of the above swaptions, floors, and call options.
Losses recorded in the Company's financial statements in the event of
nonperformance will be limited to the unamortized premium paid to enter into
the instruments. Any economic loss will be measured by the net replacement
cost of such instruments or by their fair value if net fair value is in the
Company's favor. The Company limits its exposure to economic loss by
diversifying purchases among reputable counter parties with appropriate credit
ratings.
(4) Affiliation and Transactions with Affiliates
The Company and its subsidiaries are parties to the Intercompany Operating
Agreement (the Agreement) with ALLIED Group, Inc., ALLIED Mutual, and each of
their respective subsidiaries. ALLIED Mutual controls 18.3% of the voting stock
of ALLIED Group, Inc. The Agreement provides for the continued availability of
office space, marketing services, agency forces, and computer and other
facilities generally in the manner they had been provided to affiliates in the
past. The Agreement extends through December 31, 2004, after which it may be
terminated on two years' notice given after December 31, 2002 by any party.
Expenses are charged to the Company based on specific identification or, if
undeterminable, the expenses are allocated on the basis of cost and time studies
that are updated annually. Rental expense incurred for office space allocated to
the Company by ALLIED Mutual amounted to approximately $253,000, $234,000, and
$189,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
ALLIED Life receives certain services from the Human Resources Department of
ALLIED Group, Inc. that include, but are not limited to, maintaining employment
documents, administering payroll and employee benefits, keeping related records,
placing employees, and providing termination counseling and processing. For such
services, ALLIED Life pays a fee to ALLIED Group, Inc. based on a percentage of
the Company's gross payroll. Also included in this fee is an amount that
represents the Company's share of the current net periodic postretirement
benefit cost for the ALLIED Group, Inc. medical plan. Amounts incurred were
approximately $156,000, $132,000, and $130,000 for the years ended December 31,
1996, 1995, and 1994 respectively.
The Company, ALLIED Life, and other affiliated companies are parties to the
Management Information Services Agreement (the Services Agreement) with AMCO
Insurance Company (AMCO), a subsidiary of ALLIED Group, Inc. Under the terms of
the Services Agreement, AMCO provides certain computer services, printing,
equipment leasing, and mail and communication services to ALLIED Life on a fee
basis. The annual fee is subject to renegotiation throughout the term of the
Services Agreement. The Services Agreement terminates on December 31, 2004 and
has an extension provision similar to the Intercompany Operating Agreement's.
Effective March 1, 1996, the Services Agreement was amended and certain
personnel previously providing computer-related services to the Company and its
subsidiaries were employed by ALLIED Life. As a result, fees paid for services
provided by such employees prior to the amendment date are now paid directly by
ALLIED Life. Expenses incurred under the Services Agreement were approximately
$863,000, $1,400,000, and $1,575,000 for the years ended December 31, 1996,
1995, and 1994, respectively.
50
<PAGE>
ALLIED Life, ALLIED Mutual, and the property-casualty subsidiaries of ALLIED
Group, Inc. are parties to the ALLIED Group Joint Marketing Agreement (JMA). The
JMA requires ALLIED Mutual and the property-casualty affiliates to promote to
their customers and agents the sale of the products of ALLIED Life. The JMA
provides for payment by ALLIED Life of an annual access fee of $100,000 plus an
annual new-production incentive fee. The JMA also provides for joint systems
development, including joint databases of customers and agents, multiple-account
billing systems, marketing plans and promotions, and other systems to be
developed. Development costs are to be allocated on a mutually agreeable basis
reflecting projected and actual utilization of the systems. The JMA continues to
the year 2008 and continues thereafter subject to termination on two years'
notice given by any party. The JMA contains noncompete provisions applicable
during its term and for a period of ten years thereafter. Fees and expenses
incurred under this agreement for the years ended December 31, 1996, 1995, and
1994 were approximately $165,000, $121,000, and $222,000, respectively.
ALLIED Life received premium income from ALLIED Group, Inc. for term life
insurance on its employee group in the amounts of approximately $452,000,
$418,000, and $430,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
The Company invests excess cash in a short-term investment fund with other
affiliated companies. AID Finance Services, Inc., a wholly owned subsidiary of
ALLIED Mutual, is the administrator of the fund. The fund was established to
concentrate short-term cash in a single account to maximize yield. At December
31, 1996 and 1995, the Company had $794,687 and $596,729, respectively, invested
in the fund, which is carried as a short-term investment. Interest earned from
the fund during 1996, 1995, and 1994 was $74,058, $77,356, and $109,991,
respectively.
The Company and its subsidiaries have from time to time borrowed funds from
affiliates as needed on an arms length basis. During 1996, the Company entered
into a note payable agreement with ALLIED Mutual. At December 31, 1996, the
outstanding balance of the note payable was approximately $1,617,000. At
December 31, 1995, there were no borrowings outstanding with affiliates. The
Company incurred interest expense to affiliates of $61,165, $51,181, and $7,123
in 1996, 1995, and 1994, respectively.
Management believes the costs incurred by its affiliates and allocated to the
Company would not be materially different than if they had been incurred from an
unrelated third party. The transactions discussed herein result in intercompany
balances that are created during the normal course of business and are settled
on a monthly basis unless otherwise indicated.
51
<PAGE>
(5) Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value of
the Company's significant financial instruments at December 31, 1996, and 1995:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1995
Estimated Estimated
Carrying fair Carrying fair
value value value value
Fixed maturity
investments $ 699,497,905 $ 705,636,894 $ 644,516,943 $ 657,350,941
Equity securities 6,406,552 6,406,552 4,332,107 4,332,107
Cash settle put
swaptions 2,614,517 2,201,581 ----- -----
Interest rate floors 1,136,898 2,074,862 ----- -----
Short-term
investments 919,687 919,687 721,612 721,612
Call options 2,174,751 2,813,866 ----- -----
Annuity contracts (467,504,991) (437,622,723) (412,216,412) (384,564,137)
Universal life
contracts (182,726,695) (132,976,695) (168,654,188) (124,035,194)
Note payable (20,470,000) (20,470,000) (16,605,000) (16,605,000)
</TABLE>
The fair values of certain fixed maturity investments, equity securities,
cash settle put swaptions, interest rate floors, and call options are based on
quoted market prices for those or similar investments. For unquoted securities,
the reported value is estimated by the Company on the basis of financial and
other information. Fair values of short-term investments approximate their
carrying values due to their short maturity. Fair values of the Company's
liabilities for annuity and universal life policyholder account balances are
estimated using the cash surrender value of the contracts. Due to the variable
interest rate and short-term nature of the note payable, the carrying value of
the note payable approximates fair value. The fair value approximates carrying
value for other financial instruments primarily due to their short-term nature.
(6) Reinsurance
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers under excess coverage
and coinsurance contracts. In 1996, the Company followed the policy of
reinsuring that portion of the risk in excess of $150,000 on each life ($250,000
for insureds aged 59 and under). The Company's long-term care and medicare
supplement insurance coverage is 100% ceded.
Reinsurance contracts do not relieve the Company of its obligations to
policyholders. The Company is contingently liable for these amounts and would
become actually liable in the event
52
<PAGE>
such reinsurers were unable to pay their portion of the claims. The Company
evaluates the financial condition of its reinsurers and monitors concentrations
of credit risk arising from similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies.
Assumed premiums and related benefits are not material to the Company's
consolidated financial position and results of operations.
(7) Preferred Stock
The Company is authorized to issue 7,500,000 shares of preferred stock
without par value. The preferred stock may be issued from time to time by the
Board of Directors in one or more series with such dividend rights, conversion
rights, voting rights, redemption provisions, liquidation preferences, and other
rights and restrictions as the Board of Directors may determine.
6.75% Series
The 6.75% Series Preferred Stock (6.75% Series) issued to ALLIED Mutual is
perpetual, nonconvertible, voting, and cumulative with respect to dividends. The
annual dividend rate is 6.75% of the liquidation preference of $10.85 ($0.7324
per share) and is payable quarterly. The Company, at its option, may pay the
dividend in additional shares of 6.75% Series for any quarter ending on or prior
to September 30, 1998. The 6.75% Series has no preemptive rights and is not
registered or traded. Upon any transfer by ALLIED Mutual, the 6.75% Series
becomes nonvoting and is callable under certain conditions.
The Company paid dividends to ALLIED Mutual on its outstanding 6.75% Series
through the issuance of 138,793, 129,808, and 121,402 shares of such stock in
1996, 1995, and 1994, respectively.
ESOP Series
On October 27, 1994, in conjunction with the establishment of the ESOP, the
Company sold 74,137 shares of Series A ESOP Convertible Preferred Stock (ESOP
Series) to the ESOP Trust for $15 per share. In 1996 and 1995, the ESOP Trust
purchased 14,787 and 14,650 shares of ESOP Series for $18.13 and $15 per share,
respectively. At December 31, 1996, a commercial bank, acting on behalf of the
ESOP participants as the trustee for the ESOP, was the holder of 93,982 shares
of the ESOP Series. The ESOP Trust purchased an additional 19,143 shares on
January 2, 1997 for $17.50 per share funded by a $238,000 employer contribution
from ALLIED Life and ESOP Series dividends.
As holder of the outstanding ESOP Series, the ESOP Trust is entitled to vote
the ESOP Series on all matters submitted to a vote of the holders of the common
stock of the Company, voting together with the holders of common stock and 6.75%
Series as one class. The ESOP generally provides that each ESOP participant is
entitled to direct the trustee how to vote (or whether to tender or exchange)
the shares of the ESOP Series allocated to the participant's account. Each share
of the ESOP Series is convertible into one share of common stock and has one
vote, subject to antidilution adjustments. During 1996, 1995, and 1994, 2,834,
5,263, and 338 shares of the ESOP Series were converted to common stock.
53
<PAGE>
The ESOP Series ranks senior to the common stock as to the payment of
dividends and has a cumulative annual dividend of $1.00 per share, payable each
June 30 and December 31. In the event of a liquidation of the Company, the
trustee as holder of the outstanding ESOP Series is entitled to receive $15 per
share plus accrued dividends prior to any distribution to the holders of common
stock.
The ESOP Series can be redeemed at the option of the Company, in whole or
part, at any time after three years from the date the shares are issued or,
under certain circumstances, in the third year or before. For redemptions in the
year 2004 and beyond, the redemption price is $15 per share plus accrued and
unpaid dividends, and in years prior to 2004, there is a premium above the $15
per share price as set forth in the Certificate of Designations for the ESOP
Series. The Company, at its option, may make payment of the redemption price in
cash, in shares of common stock, or a combination thereof. Upon receipt of a
redemption notice from the Company, the trustee, acting in its fiduciary
capacity, may elect to convert the ESOP Series to common stock prior to
redemption. If necessary to provide for distributions to participants or for
other special circumstances, the trustee may request the Company redeem shares
at $15 per share. In accordance with the foregoing, the Company redeemed 438
shares of the ESOP Series at $15 per share in 1995.
The ESOP Series has no preemptive rights and is not registered or traded.
Upon any transfer by the trustee, the ESOP Series is automatically converted
into shares of the Company's common stock.
(8) Common Stock
The Company and ALLIED Mutual have entered into a Stock Rights Agreement
(Agreement) which expires in 2008. Under the Agreement, ALLIED Mutual is
entitled to nominate and the Company is required to use its best efforts to
cause the election or retention of a number of members of the Company's Board of
Directors in proportion to ALLIED Mutual's percentage ownership of the total
number of shares of the Company's voting stock outstanding at the time of
nomination. In addition, the Company is required to elect to its Executive
Committee at least one Company director who has been nominated by ALLIED Mutual.
The Agreement restricts the ability of ALLIED Mutual to grant proxies to other
than affiliated individuals and to solicit other shareholders of the Company.
ALLIED Mutual also is prohibited from initiating or accepting a tender offer for
shares of the common stock except under certain conditions. The Company has a
right of first refusal with respect to any sale by ALLIED Mutual of the common
stock, subject to certain exceptions. ALLIED Mutual has incidental registration
rights and three-demand registration rights with respect to all stock of the
Company owned by ALLIED Mutual.
The Company has reserved 350,000 shares of common stock for issuance under
the ALLIED Life Financial Corporation Employee Stock Purchase Plan (ESPP). The
Company receives 85% of the fair market value of the shares issued under the
ESPP. During 1996, 1,934 shares were issued at prices ranging from $13.18 to
$17.37. During 1995 and 1994, 6,963 and 9,239 shares, respectively, were issued
at prices ranging from $12.33 to $19.13 for 1995 and $10 to $12.22 for 1994. At
December 31, 1996, 328,530 shares were available for issuance.
The Company has reserved 350,000 shares of common stock for issuance under
the ALLIED Life Financial Corporation Outside Director Stock Purchase Plan
(DSPP). Under the DSPP,
54
<PAGE>
participants pay 85% of the fair value of the shares issued. The 15% discount is
recognized as expense on the date of issue. During 1996, 2,677 shares were
issued at prices ranging from $17.37 to $17.38. During 1995 and 1994, 4,737 and
4,415 shares were issued at prices ranging from $17.06 to $17.13 and $11.75 to
$14.38. At December 31, 1996, 338,171 shares were available for issuance.
During 1995 the Company reserved 350,000 shares of common stock for issuance
under the ALLIED Life Financial Corporation Dividend Reinvestment and Stock
Purchase Plan. Any stockholder of record may participate in the plan and have
cash dividends reinvested in additional shares of Company common stock. The plan
also allows for optional cash payments. Shares of common stock purchased under
the plan may be either original issue shares or open market shares. The Company
has determined the purchased shares will be original shares until it determines
otherwise. The number of shares purchased by the plan participants is based upon
fair market value on a predetermined date. During 1996, 628 shares were issued
at prices ranging from $15.88 to $21. During 1995, 312 shares were issued at
prices ranging from $16.81 to $19.13. At December 31, 1996, 349,060 shares were
available for issuance.
During 1996, pursuant to rule 10b-18 under the Securities Exchange Act of
1934, the Company repurchased on the open market and cancelled 150,000 shares of
Company common stock at an average cost of $16.94 per share.
The dividend per common share for 1996, 1995, and 1994 was $0.21, $0.17, and
$0.13, respectively.
(9) Stock Option Plans
At December 31, 1996, the Company had four stock-based compensation plans,
two described in note 8 (the ESPP and DSPP) and two described below. The Company
applies APB Opinion 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its stock option plans
described below or for the ESPP. Had compensation cost for these items been
determined consistent with SFAS 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Net income
As reported $ 8,072,591 $ 9,712,482
Pro forma $ 8,018,197 $ 9,687,507
Earnings per share
As reported $ 1.41 $ 1.78
Pro forma $ 1.40 $ 1.78
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compen-sation cost for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting period
and compensation cost for options granted prior to January 1, 1995 is not
considered.
55
<PAGE>
The fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: dividend yield of 1.25%, expected
volatility of 45%, risk free interest rate of 7%, and expected life of 6 years.
During 1994, the Company reserved 186,800 shares of common stock for issuance
to key employees of the Company and its affiliates under the ALLIED Life
Financial Corporation Long-Term Management Incentive Plan (Incentive Plan).
Under the Incentive Plan, shares of common stock are available for grant until
December 31, 2003 as incentive and nonqualified stock options (collectively,
Options), stock appreciation rights (SARs), and restricted stock. The Options,
SARs, and restricted stock were issued to vest beginning two years after the
grant date at a rate of 25% per year and expire ten years after the date of
grant. Options, SARs, and restricted stock prices are based on the fair market
value as of the date of grant. As of December 31, 1996, the 41,372 outstanding
Options and SARs had exercise prices ranging from $12.88 to $17.63 and had a
weighted-average remaining contractual life of 8.4 years. At December 31, 1996,
139,717 shares were available for award under the Incentive Plan.
The Company has reserved 213,000 shares of common stock for issuance to key
employees of the Company and its affiliates under the ALLIED Life Financial
Corporation Executive Stock Option Plan (Option Plan) until September 1, 2003.
The Option Plan is a nonqualified stock option plan. Options are granted subject
to a vesting schedule whereby 33.3% of the options vest three years from the
date of grant, 66.7% of the options vest four years from the date of grant, and
100% of the options vest five years from the date of grant. The option price is
equal to the fair market value of the common stock at the time the option is
granted. Options granted under the Option Plan expire ten years from the date of
grant. As of December 31, 1996, the 168,709 outstanding options had exercise
prices ranging from $12 to $17.63 and had a weighted-average remaining
contractual life of 7.1 years. At December 31, 1996, 13,400 shares were
available for award under the Option Plan.
A summary of the status of the Company's stock option plans as of
December 31, 1996 and 1995 and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1995
Weighted Weighted
average average
Shares exercise price Shares exercise price
Outstanding at beginning of year 182,775 $12.27 226,950 $12.06
Granted 27,375 17.63 14,125 15.30
Exercised (5,251) 12.13 (26,650) 12.00
Cancelled --- --- (31,650) 12.33
------- ------ ------- ------
Outstanding at end of year 204,899 $12.99 182,775 $12.27
======= ====== ======= ======
Options exercisable
at end of year 54,378 $12.05 --- ---
Weighted-average fair
value of options granted
during the year $8.27 $7.08
</TABLE>
56
<PAGE>
The issuance of SARs and restricted stock under the Incentive Plan reduces
the number of Options available for future issuance. During 1996 and 1995, 1,355
and 3,428 shares of restricted stock were awarded at $17.25 and $15.50 per
share, respectively. At December 31, 1996, 4,157 restricted shares were
outstanding. The following table shows SAR activity for the years ended December
31, 1996 and 1995:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1995
Weighted Weighted
Number average Number average
of SARs exercise price of SARs exercise price
Outstanding at beginning of year 3,300 $14.10 2,000 $12.88
Granted 2,000 17.63 2,000 15.30
Exercised (118) 12.88 --- ---
Cancelled --- --- (700) 14.06
----- ------ ----- ------
Outstanding at end of year 5,182 $15.49 3,300 $14.10
===== ====== ===== ======
Options exercisable
at end of year 383 $12.88 --- ---
</TABLE>
(10) Retained Earnings
Retained earnings of ALLIED Life available for distribution as dividends to
ALLIED Life Financial Corporation are limited by law. Under the Iowa Insurance
Code, dividends may be paid by ALLIED Life only from statutory earned surplus,
which as of December 31, 1996 was $16,553,944. In addition, ALLIED Life may not
pay an extraordinary dividend without prior notice to and approval of the Iowa
Insurance Commissioner. An extraordinary dividend is defined as any dividend or
distribution of cash or other property whose fair market value together with
that of other dividends or distributions made within the preceding twelve months
exceeds the greater of (i) 10% of statutory policyholders' surplus (total
capital stock plus surplus) as of December 31 of the preceding year or (ii) the
statutory net gain from operations of the insurer for the twelve-month period
ending December 31 of the preceding year. During 1996, 1995, and 1994 the
Company paid cash dividends on common stock of $957,915, $785,239, and $595,164,
respectively. During 1996, 1995, and 1994 the Company paid cash dividends of
$95,185, $84,833, and $13,280, respectively, on preferred stock. ALLIED Life
paid to the Company dividends of $1,375,000, $800,000, and $747,500 during 1996,
1995, and 1994 primarily to fund the Company's cash dividend requirements.
During 1997, the maximum amount available for distribution to ALLIED Life
Financial Corporation from ALLIED Life without regulatory approval of the Iowa
Insurance Commissioner is $5,217,368.
Statutory capital and surplus for ALLIED Life was $46,543,735 and $45,503,922
at December 31 1996 and 1995, respectively. Statutory net income for ALLIED Life
was $5,291,433, $6,696,577, and $6,658,813 for the years ended December 31,
1996, 1995, and 1994, respectively.
57
<PAGE>
(11) Employee Retirement Plans
The ESOP established by the Company is a nonleveraged defined contribution
plan. The ESOP covers all employees who meet eligibility requirements. Shares of
the ESOP Series are allocated annually to each employee's account pursuant to a
formula based on employee compensation and years of service and held in trust
until the employee's termination, retirement, or death. The Company recognized
compensation expense for the amount contributed to the ESOP.
The Company's ESOP expense was $238,000, $176,000, and $207,000 in 1996,
1995, and 1994, respectively. During 1996, 1995, and 1994, the ESOP Trust
received $95,163, $84,826, and $13,257, respectively, from dividends on the ESOP
Series, which was used to purchase stock for participants.
(12) Line of Credit
The Company has a line of credit agreement with the Federal Home Loan Bank to
make available borrowings of up to $25,000,000. The line expires March 13, 1997.
Interest is payable at either an adjustable interest rate with the interest rate
set daily on the outstanding advance amount or at a fixed rate with the interest
rate set at issuance. As of December 31, 1996 and 1995, borrowings on this line
of credit agreement were $20,470,000 and $16,605,000 at an interest rate of 5.7%
and 5.92% per annum, respectively. The Company incurred interest expense to
nonaffiliates of $689,786, $656,385, and $501,897 in 1996, 1995, and 1994,
respectively.
(13) Federal Income Taxes
Total income taxes for the years ended December 31, 1996, 1995, and 1994 were
allocated as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Net income $3,937,132 $4,556,214 $4,059,179
Unrealized appreciation
of investments, net 3,584,087 4,475,910 248,238
---------- ---------- ----------
$7,521,219 $9,032,124 $4,307,417
========== ========== ==========
</TABLE>
58
<PAGE>
The income tax effects of temporary differences that gave rise to
significant portions of the deferred income tax assets and deferred income tax
liabilities at December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Deferred income tax assets
Policy liabilities $24,710,763 $20,446,857
Deferred policy acquisition costs
related to unrealized appreciation 1,397,645 3,352,363
Other 331,337 337,340
---------- ----------
Total gross deferred income tax assets 26,439,745 24,136,560
Less valuation allowance --- ---
---------- ----------
Net deferred income tax assets 26,439,745 24,136,560
---------- ----------
Deferred income tax liabilities
Deferred policy acquisition costs (30,362,697) (28,046,203)
Unrealized appreciation (2,749,663) (8,288,469)
Market discount on bonds (903,505) (817,062)
Other (432,826) (437,671)
Total gross deferred income tax ---------- ----------
liabilities (34,448,691) (37,589,405)
---------- ----------
Net deferred income tax liability $(8,008,946) $(13,452,845)
=========== ============
</TABLE>
The valuation allowance for deferred income tax assets at the beginning of
the years ended December 31, 1996 and December 31, 1995 was $0 and $2,701,193,
respectively. During 1995, the valuation allowance of $2,701,193 which was
established for the net unrealized depreciation on investments as of December
31, 1994 was eliminated.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
income tax assets will not be realized. Management considers primarily the
scheduled reversal of deferred income tax liabilities and tax planning
strategies in making this assessment and believes it is more likely than not the
Company will realize the benefits of these deductible differences at December
31, 1996.
For the years ended December 31, 1996, 1995, and 1994, the actual income tax
expense differed from the expected income tax expense based on the statutory
federal income tax rate of 35%, primarily as a result of a reduction of income
taxes related to prior years. The Company paid federal and state income taxes of
$3,929,001 $4,134,364, and $4,761,664 in 1996, 1995, and 1994, respectively.
Prior to 1984, life insurance companies were permitted to defer from taxation
a portion of statutory income. At December 31, 1983, the Company had accumulated
approximately $3,300,000 of this deferred income in what is referred to as its
policyholders' surplus account. This amount was frozen under the Deficit
Reduction Act of 1984 and could become taxable in the future only under certain
conditions that management considers remote. The accumulated amount of income
subject to current taxation less certain adjustments is set aside in another
special memorandum tax account called a shareholders' surplus account. Dividends
paid by the Company in excess of the balance in the shareholder's surplus
account cannont be paid without a portion of policyholders' surplus becoming
taxable. The balance of the shareholders' surplus account as approximately
$49,000,000 as of December 31, 1996.
59
<PAGE>
(14) Contingencies
The Company is required to comply with the regulations of every state in
which it operates. Every state administers a guaranty fund, which exists for the
protection of policyholders in the event of insurance company insolvencies. A
number of insurance companies are under supervision, resulting in large
assessments to cover losses to policyholders of such companies. Potential future
assessments, if any, are not reasonably determinable by the Company and have not
been accrued.
The Company is a party to lawsuits arising in the normal course of business.
The Company believes the resolution of these lawsuits will not have a material
adverse effect on its financial condition or results of operations.
(15) Unaudited Interim Financial Information
Quarter ended
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
March 31 June 30 September 30 December 31
1996 Operating Summary
Insurance revenues $ 7,370,355 $ 7,549,907 $ 8,618,696 $ 7,810,728
Net investment income $ 11,749,917 $ 11,936,957 $ 11,826,527 $ 12,668,430
Realized investment
(losses) gains $ (84,184) $ (60,290) $ (48,532) $ 315,103
Total revenues $ 19,324,074 $ 19,696,683 $ 20,644,094 $ 21,045,261
Total benefits and expenses $ 15,279,694 $ 16,055,781 $ 17,535,380 $ 19,829,534
Net income $ 2,697,300 $ 2,464,095 $ 2,105,435 $ 805,761
Earnings per common share $ .50 $ .45 $ .37 $ .09
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quarter ended
March 31 June 30 September 30 December 31
1995 Operating Summary
Insurance revenues $ 7,460,180 $ 7,259,247 $ 7,110,284 $ 8,104,630
Net investment income $ 10,688,042 $ 11,218,969 $ 11,644,171 $ 11,859,927
Realized investment losses $ (234,798) $ (334,282) $ (113,548) $ (39,671)
Total revenues $ 18,173,613 $ 18,309,182 $ 18,693,681 $ 20,134,175
Total benefits and expenses $ 14,701,164 $ 14,708,626 $ 15,331,311 $ 16,300,854
Net income $ 2,368,835 $ 2,443,371 $ 2,289,635 $ 2,610,641
Earnings per common share $ .44 $ .45 $ .42 $ .48
</TABLE>
Caution should be exercised in comparing the results of consecutive quarters.
Due to the relatively small size of ALLIED Life, the Company's operating results
may be significantly affected in any reporting period by the level of death and
other policyholder benefits incurred.
60
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information under the caption "Directors and Executive Officers" in the
1997 Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
The information under the caption "Compensation of Executive Officers" in
the 1997 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Security Ownership of Directors and
Executive Officers" in the 1997 Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions and Relationships"
in the 1997 Proxy Statement is incorporated herein by reference.
61
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Form 10-k
<TABLE>
(a) List of Financial Statements and Schedules. Page(s)
1. Financial Statements.
<S> <C>
Independent Auditors' Report. 34
Consolidated Statements of Income for the Years ended December 31,
1996, 1995, and 1994. 35
Consolidated Balance Sheets as of December 31, 1996 and 1995. 36-37
Statements of Stockholders' Equity for the Years ended December 31,
1996, 1995, and 1994. 38
Consolidated Statements of Cash Flows for the Years ended December 31, 1996, 1995,
and 1994. 39
Notes to Consolidated Financial Statements. 40-60
</TABLE>
2. Schedules.
<TABLE>
<S> <C>
Independent Auditors' Report on Schedules.
I. Summary of Investments-Other Than Investments in Related Parties. 68
II. Condensed Financial Information of Registrant. 69-72
III. Supplementary Insurance Information. 73
IV. Reinsurance. 74
</TABLE>
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in
the consolidated financial statements and notes thereto.
3. Executive Compensation Plans and Arrangements.
Short Term Management Incentive Compensation Plan for 1994
(Incorporated by reference to Exhibit 10.4 to the Company's June 30,
1994 Form 10-Q on file with the Commission), Exhibit 10.4.
ALLIED Life Financial Corporation Executive Stock Option Plan
(Incorporated by reference to the Company's Registration Statement on
Form S-8 filed with the Commission on November 19, 1993, Registration
No. 33-71906), Exhibit 10.5.
62
<PAGE>
ALLIED Life Financial Corporation Outside Director Stock Purchase Plan
(Incorporated by reference to the Company's Registration Statement on
Form S-8 filed with the Commission on November 19, 1993, Registration
No. 33-71962), Exhibit 10.6.
ALLIED Life Financial Corporation Long-Term Management Incentive Plan
(Incorporated by reference to Exhibit 10.18 to the Company's March 31,
1994 Form 10-Q on file with the Commission), Exhibit 10.18.
Short Term Management Incentive Compensation Plan for 1995 (Incorporat-
ed by reference to Exhibit 10.23 to the Company's December 31, 1994
Form 10-K on file with the Commission), Exhibit 10.23.
Amendment dated July 21, 1995, the ALLIED Life Financial Corporation
Executive Stock Option Plan (Incorporated by reference to Exhibit 10.28
to the Company's June 30, 1995 Form 10-Q on file with the Commission),
Exhibit 10.28.
Short Term Management Incentive Plan for 1996 (Incorporate by reference
to Exhibit 10.32 to the Company's December 31, 1995 Form 10-K on file
with the Commission), Exhibit 10.32.
Short Term Management Incentive Plan for 1997, Exhibit 10.35.
Amendment date December 16, 1996 to ALLIED Life Financial Corporation
Long-Term Management Incentive Plan, Exhibit 10.36.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the fourth quarter ended
December 31, 1996.
(c) Exhibits.
NOTE: See "Index to Exhibits" on page number 76, which discloses the
specific page numbers for the exhibits included in this Form 10-K.
3. Articles of incorporation and bylaws.
3.1 Articles of Incorporation of ALLIED Life Financial Corporation
as of July 20, 1993 (Incorporated by reference to Exhibit 3.1
to the Company's Registration Statement on Form S-1 filed with
the Commission on September 16, 1993, Registration No.
33-68928).
3.2 Bylaws of ALLIED Life Financial Corporation as of July 20, 1993
and Amendment to the Bylaws dated December 14, 1994.
3.3 Articles of Amendment for Certificate of Designations, defining
the rights of holders of 6.75% Series Preferred Stock of ALLIED
Life Financial Corporation (Incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement on Form S-1
filed with the Commission on September 16, 1993, Registration
No. 33-68928).
3.4 Amendment to Articles of Amendment for Certificate of
Designations, defining the rights of holders of 6.75% Series
Preferred Stock of ALLIED Life Financial Corporation (Incorp-
orated by reference to Exhibit 3.4 to the Company's Regist-
ration Statement on Form S-1 filed with the Commission on Sept-
ember 16, 1993, Registration No. 33-68928).
63
<PAGE>
3.5 Certificate of Designations, defining the rights of holders of
Series A ESOP Convertible Preferred Stock of ALLIED Life
Financial Corporation. (Incorporated by reference to Exhibit
3.5 to the Company's June 30, 1994 Form 10-Q on file with the
Commission).
10. Material contracts.
10.1 Long Term Management Incentive Compensation Plan for 1991
(Incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 filed with the Commission on
September 16, 1993, Registration No. 33-68928).
10.2 Short Term and Long Term Management Incentive Compensation
Plans for 1992 (Incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1 filed with the
Commission on September 16, 1993, Registration No. 33-68928).
10.3 Short Term and Long Term Management Incentive Compensation
Plans for 1993, (Incorporated by reference to Exhibit 10.3 to
the Company's December 31, 1993 Form 10-K on file with the
Commission).
10.4 Short Term Management Incentive Compensation Plan for 1994,
(Incorporated by reference to Exhibit 10.4 to the Company's June
30, 1994 Form 10-Q on file with the Commission).
10.5 ALLIED Life Financial Corporation Executive Stock Option Plan
(Incorporated by reference to the Company's Registration
Statement on Form S-8 filed with the Commission on November 19,
1993, Registration No. 33-71906).
10.6 ALLIED Life Financial Corporation Outside Director Stock
Purchase Plan (Incorporated by reference to the Company's
Registration Statement on Form S-8 filed with the Commission
on November 19, 1993, Registration No. 33-71962).
10.8 Amended and Restated ALLIED Group Intercompany Operating
Agreement between ALLIED Life Insurance Company and certain of
its affiliated companies dated August 25, 1993 (Incorporated by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 filed with the Commission on September
16, 1993, Registration No. 33-68928).
10.9 The ALLIED Group Joint Marketing Agreement between ALLIED Life
Insurance Company and affiliated property-casualty insurance
companies dated August 30, 1993 (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form
S-1 filed with the Commission on September 16, 1993,
Registration No. 33-68928).
10.12 Federal Home Loan Bank Open Line of Credit Application and
Terms Agreement dated March 13, 1996 with ALLIED Life Insurance
Company, (Incorporated by reference to Exhibit 10.12 to the
Company's March 31, 1996 Form 10-Q on file with the
Commission).
10.14 Amended and Restated Management Information Services Agreement,
dated February 27, 1995 and effective January 1, 1994.
64
<PAGE>
10.15 First Amendment to Amended and Restated ALLIED Group Inter-
company Operating Agreement dated November 1, 1993
(Incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 filed with the Commission on
November 9, 1993, Registration No. 33-68928).
10.16 First Amendment to the ALLIED Group Joint Marketing Agreement
dated November 1, 1993 (Incorporated by reference to Exhibit
10.16 to the Company's Registration Statement on Form S-1 filed
with the Commission on November 9, 1993, Registration No.
33-68928).
10.17 Stock Rights Agreement between ALLIED Mutual Insurance Company
and ALLIED Life Financial Corporation dated August 25, 1993
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 filed with the Commission on
September 16, 1993, Registration No. 33-68928).
10.18 ALLIED Life Financial Corporation Long-Term Management
Incentive Plan (Incorporated by reference to Exhibit
10.18 to the Company's March 31, 1994 Form 10-Q on file with
the Commission).
10.19 Second Amendment to Amended and Restated ALLIED Group
Intercompany Operating Agreement dated May 16, 1994,
(Incorporated by reference to Exhibit 10.19 to the Company's
June 30, 1994 Form 10-Q on file with the Commission).
10.21 The ALLIED Life Financial Corporation Employee Stock Ownership
Trust, (Incorporated by reference to Exhibit 10.21 to the
Company's June 30, 1994 Form 10-Q on file with the Commission).
10.22 Stock Purchase Agreement dated October 27, 1994, between ALLIED
Life Financial Corporation and State Street Bank and Trust
Company, (Incorporated by reference to Exhibit 10.22 to the
Company's September 30, 1994 Form 10-Q on file with the
Commission).
10.23 Short Term Management Incentive Compensation Plan for 1995
(Incorporated by reference to Exhibit 10.23 to the Company's
December 31, 1994 Form 10-K on file with the Commission).
10.24 Third Amendment to Amended and Restated ALLIED Group
Intercompany Operating Agreement dated December 15, 1994
(Incorporated by reference to Exhibit 10.24 to the Company's
December 31, 1994 Form 10-K on file with the Commission).
10.25 Consulting Agreement between John E. Evans and ALLIED Group,
Inc., ALLIED Mutual Insurance Company, and ALLIED Life
Financial Corporation dated December 14, 1994 (Incorporated by
reference to Exhibit 10.25 to the Company's December 31, 1994
Form 10-K on file with the Commission).
10.26 Stock Purchase Agreement dated January 3, 1995 between ALLIED
Life Financial Corporation and State Street Bank and Trust
Company (Incorporated by reference to Exhibit 10.26 to the
Company's December 31, 1994 Form 10-K on file with the
Commission).
65
<PAGE>
10.29 Amendment dated July 21, 1995 to the ALLIED Life Financial
Corporation Executive Stock Option Plan (Incorporated by
reference to Exhibit 10.29 to the Company's June 30, 1995
Form 10-Q on file with the Commission).
10.30 Intercompany Cash Concentration Fund Agreement (Incorporated by
reference to Exhibit 10.30 to the Company's June 30, 1995 Form
10-Q on file with the Commission).
10.31 Stock Purchase Agreement dated January 2, 1996 between ALLIED
Life Financial Corporation and State Street Bank and Trust
Company (Incorporated by reference to Exhibit 10.31 to the
Company's December 31, 1995 10K on file with the Commission).
10.32 Short Term Management Incentive Plan for 1996 (Incorporated by
reference to Exhibit 10.32 to the Company's December 31, 1995
10K on file with the Commission).
10.33 Amended and Restated Management Information Services Agreement
Effective January 1, 1995 (Incorporated by reference to Exhibit
10.33 to the Company's December 31, 1995 10K on file with the
Commission).
10.34 Stock Purchase Agreement date January 2, 1997 between ALLIED
Life Financial Corporation and State Street Bank and Trust
Company.
10.35 Short Term Management Plan for 1997.
10.36 Amendment dated December 16, 1996 to ALLIED Life Financial
Corporation Long-Term Management Incentive Plan.
10.37 Amendment dated December 18, 1996 to Consulting Agreement
between John E. Evans and ALLIED Group, Inc., ALLIED Mutual
Insurance Company, and ALLIED Life Financial
Corporation.
10.38 Tax Sharing Agreement, dated January 1, 1997, between ALLIED
Life Financial Corporation, ALLIED Life Brokerage Agency, Inc.
and ALLIED Group Merchant Banking Corporation.
10.39 Amended and Restated Management Information Services
Agreement Effective March 1, 1996.
10.40 First Amendment to Amended and Restated Management Information
Services Agreement Effective March 1, 1996.
11 Statement re Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
(d) Financial statements required by Regulation S-X which are excluded from the
Annual Report to Stockholders by Rule 14a-3(b)(1).
None.
66
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
The Board of Directors and Stockholders
ALLIED Life Financial Corporation
Under date of February 7, 1997, we reported on the consolidated balance sheets
of ALLIED Life Financial Corporation and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996, as contained in the 1996 Annual Report. In connection with
our audits of the aforementioned consolidated financial statements, we also have
audited the related consolidated financial statement schedules listed in Part
IV, Item 14(a)2. These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statement schedules based on our audits.
In our opinion, such consolidated financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Des Moines, Iowa
February 7, 1997
67
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
SCHEDULE I-SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Column A Column B Column C Column D
Amount at
which
shown in
Amortized Fair the balance
Type of Investment Cost value sheet
Fixed maturities:
Held to maturity:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $ 1,006,653 $ 969,480 $ 1,006,653
Foreign governments 4,481,577 4,711,830 4,481,577
Corporate securities and public utilities 128,885,574 133,602,922 128,885,574
Mortgage-backed securities 64,835,031 66,063,591 64,835,031
----------- ------------ -----------
Total held to maturity 199,208,835 205,347,823 199,208,835
----------- ------------ -----------
Available for sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies 34,377,785 33,934,834 33,934,834
Foreign governments 6,188,564 6,406,919 6,406,919
Corporate securities and public utilities 306,416,491 310,983,697 310,983,697
Mortgage-backed securities 145,703,301 148,963,620 148,963,620
----------- ------------ -----------
Total available for sale 492,686,141 500,289,070 500,289,070
----------- ------------ -----------
Total fixed maturities $705,636,893 699,497,905
============
Equity Securities 6,153,300 $ 6,406,552 6,406,552
============
Mortgage loans on real estate 1,456,688 1,456,688
Policy loans 10,306,724 10,306,724
Other assets 3,751,415 3,751,415
Short-term investments 919,687 919,687
----------- -----------
Total investments $714,482,790 $722,338,971
============ ============
</TABLE>
68
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
SCHEDULE II
ALLIED Life Financial Corporation (Holding Company)
CONDENSED BALANCE SHEET
December 31, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Assets
Investments in subsidiaries, at equity $101,326,969 $101,284,772
Short-term investments, at cost 202,803 396,435
Accounts receivable 2,715 1,946
Current income taxes recoverable 42,796 3,852
------------ ------------
Total assets $101,575,283 $101,687,005
============ ============
Liabilities
Note payable to affiliate (note 2) $ 1,617,348 $ ---
Other liabilities 16,313 5,185
------------ ------------
1,633,661 5,185
------------ ------------
Stockholders' Equity
Preferred stock, no par value, issuable in series,
authorized 7,500,000 shares
6.75% Series, authorized 2,440,000 shares, issued and
outstanding of 2,143,691 in 1996 and 2,004,898 in 1995 23,259,047 21,753,143
ESOP Series, authorized 300,000 shares, issued and
outstanding of 93,982 in 1996 and 82,029 in 1995 1,327,186 1,117,780
Common stock, no par value, $1 stated value,
authorized 25,000,000 shares, issued and outstanding
of 4,497,238 in 1996, and 4,632,559 in 1995 4,497,238 4,632,559
Additional paid-in capital 46,596,171 48,773,783
Retained earnings 21,751,088 16,237,501
Unrealized appreciation of investments, net 2,510,892 9,167,054
----------- -----------
Total stockholders' equity 99,941,622 101,681,820
----------- -----------
Total liabilities and stockholders' equity $101,575,283 $101,687,005
=========== ===========
</TABLE>
See accompanying Note to Condensed Financial Statements.
69
<PAGE>
ALLIED Life Financial Corporation Subsidiaries
SCHEDULE II
ALLIED Life Financial Corporation (Holding Company)
CONDENSED STATEMENT OF INCOME For the
years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Equity in undistributed earnings of subsidiaries $6,698,358 $8,745,683 $7,496,523
Dividends received from subsidiaries 1,475,000 925,000 1,023,500
Investment income 24,288 184,693 105,240
Realized investment gains --- 65,207 ---
--------- --------- ---------
8,197,646 9,920,583 8,625,263
--------- --------- ---------
Operating expenses 154,277 179,396 41,138
Interest expense 44,084 15 1,324
--------- -------- ---------
198,361 179,411 42,462
--------- --------
Income before income taxes 7,999,285 9,741,172 8,582,801
Income tax (benefit) expense (73,306) 28,690 26,177
--------- -------- ---------
Net income (note 1) $8,072,591 $9,712,482 $8,556,624
========= ========= =========
</TABLE>
See accompanying Note to Condensed Financial Statements.
70
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
SCHEDULE II
ALLIED Life Financial Corporation (Holding Company)
CONDENSED STATEMENT OF CASH FLOWS
For the years ended December 31, 1996, December 31, 1995 and December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Cash Flows from Operating Activities (note 1)
Net income $8,072,591 $9,712,482 $8,556,624
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed earnings (6,698,358) (8,745,683) (7,496,523)
Realized investment gains --- (65,207) ---
Accrued investment income --- 21,184 (15,000)
Income taxes (41,456) (5,674) 12,618
Other, net 12,870 (94,549) (57,097)
---------- --------- ---------
Net cash provided by operating activities 1,345,647 822,553 1,000,622
---------- --------- ---------
Cash Flows from Investing Activities (note 1)
Purchase of fixed maturities available for sale --- (1,634,684) (1,193,813)
Proceeds from sale of fixed maturities
available for sale --- 4,431,722 ---
Investments in subsidiaries --- (3,500,000) ---
---------- --------- ---------
Net cash used in investing activities --- (702,962) (1,193,813)
---------- --------- ---------
Cash Flows from Financing Activities (note 1)
Proceeds from note payable to affiliate, net 1,617,348 --- ---
Proceeds from issuance of common stock, net 188,494 588,621 159,385
Proceed from issuance of preferred stock, net 249,229 194,075 1,001,274
Dividends paid to stockholders (1,053,100) (870,072) (608,444)
Repurchase of common stock (2,541,250) --- ---
---------- --------- ---------
Net cash (used in)provided by financing
activities (1,539,279) (87,376) 552,215
---------- --------- ---------
Net Increase in Cash and Short-term
investments (note 1) (193,632) 32,215 359,024
Cash and short-term investments at beginning
of year (period) 396,435 364,220 5,196
---------- --------- ---------
Cash and short-term investments at end of year $ 202,803 $ 396,435 $ 364,220
========== ========= =========
</TABLE>
See accompanying Note to Condensed Financial Statements.
71
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
SCHEDULE II
ALLIED Life Financial Corporation (Holding Company)
NOTE TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of ALLIED Life
Financial Corporation and its subsidiaries.
(1) Basis of presentation.
The accompanying condensed financial statements of ALLIED Life Financial
Corporation (ALFC) have been prepared in conformity with generally accepted
accounting principles (GAAP).
(2) Note payable to affiliate
During 1996, ALFC entered into a note payable agreement with ALLIED Mutual.
At December 31, 1996, the outstanding balance of the note payable was
approximately $1,617,000. In 1996, ALFC incurred interest expense of
approximately $44,000 relating to the note payable.
72
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
Future
policy Other
benefits, policy Benefits, Amortization
Deferred losses, claims Insurance claims, of deferred
policy claims and Unearned and premiums and Net losses and policy Other
acquisition loss revenue benefits other investment settlement acquisition operating Premiums
Segment costs expenses reserve payable consideration income expenses costs expense written
Year ended
December 31, 1996:
Life insurance $92,417,588 $692,551,400 $ --- $5,311,618 $31,349,686 $48,144,538 $47,988,086 $10,594,828 $9,029,862 $ ---
Other --- --- --- --- --- 37,293 --- --- 1,087,613 ---
----------- ----------- ----- ---------- ----------- ---------- ---------- ---------- --------- ------
Consolidated $92,417,588 $692,551,400 $ --- $5,311,618 $31,349,686 $48,181,831 $47,988,086 $10,594,828 $10,117,475 $ ---
=========== =========== ====== ========== =========== =========== =========== =========== =========== ======
Year ended
December 31, 1995:
Life insurance $79,717,529 $616,654,421 $ --- $5,694,876 $29,934,341 $45,214,515 $46,062,832 $ 5,940,996 $ 8,246,236 $ ---
Other --- --- --- --- --- 196,594 --- --- 791,891 ---
----------- ----------- ------ ---------- ----------- ----------- ----------- ---------- ----------- ------
Consolidated $79,717,529 $616,654,421 $ --- $5,694,876 $29,934,341 $45,411,109 $46,062,832 $5,940,996 $ 9,038,127 $ ---
=========== ============ ====== ========== =========== =========== =========== ========== =========== ======
Year ended
December 31, 1994:
Life insurance $79,312,433 $528,370,156 $ --- $5,782,118 $25,392,539 $38,014,750 $37,358,722 $5,136,195 $7,710,607 $ ---
Other --- --- --- --- --- 122,070 --- --- 631,202 ---
----------- ------------ ----- --------- ---------- ----------- ----------- ---------- ---------- ------
Consolidated $79,312,433 $528,370,156 $ --- $5,782,118 $25,392,539 $38,136,820 $37,358,722 $5,136,195 $8,341,809 $ ---
=========== ============ ======= ========== =========== =========== =========== ========== ========== ======
</TABLE>
73
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
SCHEDULE IV - REINSURANCE For the
years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Column A Column B Column C Column D Column E Column F
Percentage
Assumed of amount
Ceded to other from other assumed to
Gross amount companies companies Net amount net
Year ended December 31, 1996:
Life insurance in force $ 8,855,654,000 $ (2,633,078,000) $103,660,000 $6,326,236,000 1.6%
=============== ================= ============ ============== =====
Premiums:
Life insurance premiums:
and charges (1) $ 33,500,767 $ (6,275,140) $ 231,508 $ 27,457,135 0.8%
Accident and
health insurance 2,230,128 (2,231,784) --- (1,656) ---
--------------- -------------- ------------ ------------- ------
Total premiums $ 35,730,895 $ (8,506,924) $ 231,508 $ 27,455,479 0.8%
=============== ============== ============ ============= ======
Year ended December 31, 1995:
Life insurance in force $ 7,995,050,000 $ (2,538,119,000) $ 119,466,000 $5,576,397,000 2.1%
=============== ================= ============= ============== =====
Premiums:
Life insurance premiums:
and charges (1) $ 32,350,178 $ (6,388,320) $ 227,949 $ 26,189,807 0.8%
Accident and
health insurance 1,375,016 (1,371,194) --- 3,822 ---
--------------- -------------- ------------ -------------- ------
Total premiums $ 33,725,194 $ (7,759,514) $ 227,949 $ 26,193,629 0.9%
=============== ============== ============ ============= ======
Year ended December 31, 1994:
Life insurance in force $ 7,087,313,000 $ (2,466,646,000) $155,424,000 $4,776,091,000 3.3%
=============== ================= ============ ============== =====
Premiums:
Life insurance premiums:
and charges (1) $ 27,153,806 $ (5,059,200) $ 233,970 $ 22,328,576 1.1%
Accident and
health insurance 772,941 (671,938) --- 101,003 ---
--------------- ---------------- ------------ -------------- -----
Total premiums $ 27,926,747 $ (5,731,138) $ 233,970 $ 22,429,579 1.0%
=============== ================= ============ ============== =====
<FN>
(1) Includes life insurance premiums and policyholder assessments on universal
life contracts.
</FN>
</TABLE>
74
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALLIED Life Financial Corporation
(Registrant)
Date: March 4, 1997 By /s/ Wendell P. Crosser
Wendell P. Crosser
Vice President and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
<TABLE>
<S> <C> <C>
Signature Title Date
/s/ Samual J. Wells President (Principal Executive March 4, 1997
Samuel J. Wells Officer)
/s/ Wendell P. Crosser Vice President and Treasurer March 4, 1997
Wendell P. Crosser
/s/ John E. Evans Chairman of the Board and Director March 4, 1997
John E. Evans
/s/ James W. Callison Director March 4, 1997
James W. Callison
/s/ Harold S. Evans Director March 4, 1997
Harold S. Evans
/s/ Dennes H. Kelly, Jr. Director March 4, 1997
Dennis H. Kelly, Jr.
/s/ George D. Milligan Director March 4, 1997
George D. Milligan
</TABLE>
75
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
INDEX TO EXHIBITS
Exhibit
Number Item Page
10.34 Stock Purchase Agreement dated January 2, 1997
between ALLIED Life Financial Corporation
and State Street Bank and Trust Company 77
10.35 Short Term Management Incentive Plan for 1997 82
10.36 Amendment dated December 16, 1996 to
ALLIED Life Financial Corporation Long-Term
Management Incentive Plan. 87
10.37 Amendment dated December 18, 1996 to Consulting
Agreement between John E. Evans and ALLIED
Group, Inc., ALLIED Mutual Insurance Company,
and ALLIED Life Financial Corporation. 88
10.38 Tax Sharing Agreement, dated January 1, 1997, between
ALLIED Life Financial Corporation, ALLIED Life Brokerage
Agency, Inc. and ALLIED Group Merchant Banking 89
Corporation.
10.39 Amended and Restated Management Information Services
Agreement Effective March 1,1996. 92
10.40 First Amendment to Amended and Restated Management
Information Services Agreement Effective March 1, 1996 100
11 Statement re Computation of Per Share Earnings 102
21 Subsidiaries of the Registrant 103
23 Consent of KPMG Peat Marwick LLP 104
27 Financial Data Schedule 105
76
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of January 2, 1997, between ALLIED
LIFE FINANCIAL CORPORATION, an Iowa corporation (the "Company"), and STATE
STREET BANK AND TRUST COMPANY, a Massachusetts trust company, solely in its
capacity as trustee under the Plan defined below and not individually (the
"Trustee").
WITNESSETH;
WHEREAS, the Company has established and maintains The ALLIED Life
Financial Corporation Employee Stock Ownership Plan (the "Plan"), for the
benefit of all employees eligible to participate therein;
WHEREAS, the Plan qualifies as an "employee stock ownership plan"
within the meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986,
as amended (the "Code");
WHEREAS, the Company has established and maintains The ALLIED Life
Financial Corporation Employee Stock Ownership Trust (the "Trust") and the
Company has appointed the Trustee to act as the trustee thereof pursuant to a
trust agreement between the Company and the Trustee dated June 20, 1994 (the
"Trust Agreement");
WHEREAS, the Trust Agreement provides that the assets of the trust
created thereunder shall be invested in, among other things, shares of common
stock of the Company ("Common Stock") or convertible preferred stock of the
Company;
WHEREAS, the Company has designated 300,000 shares as a series of
convertible preferred stock, with no par value, called the Series A ESOP
Convertible Preferred Stock, of which 103,574 shares were previously issued and
of which it has offered 19,143 shares for sale to the Trustee (the "Series A
Preferred Stock");
WHEREAS, as directed by the ESOP Committee (the "Committee") under the
terms of the Trust Agreement, the Trustee is authorized to purchase shares of
Series A Preferred Stock and the Company wishes to issue and sell such shares of
Series A Preferred Stock to the Trustee, and no commission will be paid by the
Trustee in connection with the purchase of such shares of Series A Preferred
Stock; and
WHEREAS, the Trustee is required under the Trust Agreement to
independently determine (i.e., without direction from the Company) the purchase
price that shall be paid for any stock of the Company, and the Trustee has
received an opinion of Houlihan Lokey Howard & Zukin (the "Valuation Opinion")
that the purchase of the shares of Series A Preferred Stock pursuant to the
terms to this Agreement is fair and equitable to the participants in the Plan
and the price to be paid for the Series A Preferred Stock is not in excess of
adequate consideration.
NOW THEREFORE, in consideration of these premises and the mutual
promises contained herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. The Trustee hereby agrees to purchase (the "Purchase") with the funds
directed by the Committee, and the Company hereby agrees to issue and sell for
cash to the Trust 19,143 shares of Series A Preferred Stock (the "Series A
Preferred Stock") for an aggregate purchase price (the "Purchase Price") of
$335,000.00 (or $17.50 per share). The Company will pay all stamp and other
transfer taxes, if any, which may be payable in respect of the issuance, sale
and delivery of the Series A Preferred Stock and shall be entitled to any refund
thereof.
2. The Purchase shall be consummated at or about 8:00 A.M. Central Standard
Time on January 2, 1997 (such date of delivery being hereinafter called the
"Delivery Date") at the offices of the Company, Des Moines, Iowa or as otherwise
agreed by the parties hereto. On the Delivery Date, the Trustee shall deliver to
the Company the Purchase Price in immediately available funds together with an
opinion of Goodwin, Procter & Hoar, LLP, counsel to the Trustee, in the form
attached as Annex A hereto and a copy of the Valuation Opinion, and the Company
will deliver to the Trustee a certificate or certificates representing the
Series A Preferred Stock which shall be registered in the name of the Trustee,
as trustee under the Plan, or in the name of its nominee, together with an
opinion of Katherine E. Schmidt, Associate Corporate Counsel of the Company, in
the form attached as Annex B hereto.
77
<PAGE>
3. The Company hereby represents, warrants and covenants to the Trustee as
follows:
4. the Company (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Iowa and (ii) has full corporate
power and authority to execute and deliver this Agreement, to carry out the
transactions contemplated hereby, to own, lease and operate its assets and
properties, and to carry on its business as now being conducted;
5. this Agreement has been duly authorized, executed and delivered by the
Company and constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights generally and to general
principles of equity (regardless of whether considered in a proceeding at law or
in equity);
6. the execution, delivery and performance of this Agreement by the Company
and the consummation of the transactions contemplated hereby will not violate
(i) the Company's Articles of Incorporation or By-laws, each as amended to date
or, (ii) any provision of any agreement, instrument, order, award, judgment or
decree to which the Company is a party or by which it or any of its businesses
or properties are bound, or (iii) any statute, rule or regulation of any
federal, state or local government or governmental agency applicable to the
Company except in the case of subparagraphs (ii) or (iii) of this Section 3(c)
for any such violations which either individually or in the aggregate do not
have a material adverse effect on the business or properties of the Company and
its subsidiaries taken as a whole;
7. except for any necessary applications with The Nasdaq Stock Market with
respect to any newly issued shares of Common Stock which may be issued upon
conversion of the Series A Preferred Stock, no approval, authorization or other
action by, or filing (other than such filings of the Company as may be necessary
in connection with any registration for sale of the common stock that may be
issuable upon conversion of the Series A Preferred Stock) with, any government
authority is required to be obtained or made by the Company in connection with
the execution, delivery and performance by the Company of this Agreement and the
consummation of the transactions contemplated hereby;
8. the Certificate of Designations was filed with the Secretary of State
effective June 21, 1994 prior to which the Series A Preferred Stock were duly
and validly authorized and, when issued and delivered to and paid for by the
Trustee pursuant to this Agreement, (i) will be validly issued, fully paid and
nonassessable and not liable to any further call or assessment, (ii) the
certificates representing the Series A Preferred Stock comply with the
applicable requirements of Iowa law and (iii) the Trustee will acquire full
right, title and interest in and to the Series A Preferred Stock free and clear
of any and all liens, claims, charges and encumbrances (other than rights of
participants in the Plan);
9. the Company (i) has duly and validly authorized and reserved for
issuance a sufficient number of shares of Common Stock, as may be issued, from
time to time, upon conversion of the Series A Preferred Stock and (ii) such
shares of Common Stock, when issued upon conversion of the Series A Preferred
Stock in accordance with the Certificate of Designations, will be validly
issued, fully paid and nonassessable and not liable to any further call or
assessment and will not be subject to preemptive rights;
10. the Plan has been duly authorized and established, and the Trust
Agreement has been duly authorized, by all necessary corporate action on the
part of the Company; the Plan constitutes in all material respects in form an
employee stock ownership plan within the meaning of Section 4975(e)(7) of the
Code, Code Regulation Section 54.4975-11 and Section 407(d)(6) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"); and the Series A
Preferred Stock constitutes a qualifying employer security within the meaning of
Section 4975(e)(8) of the Code; provided, however, that in making the
representations contained in this Section 3(g) the Company has relied upon the
correctness of the Trustee's representations contained in Section 4(h) of this
Agreement;
11. the Company's annual report on 10-K for the year ended December 31,
1995 and quarterly reports on 10-Q for the quarterly periods ended March 31,
June 30 and September 30, 1996, on the respective dates filed with the
Securities and Exchange Commission ("SEC"), conformed in all material respects
to the requirements of the Securities Exchange Act of 1934, as amended;
12. no person or other entity is entitled to any fees or commissions due to
the Company's actions in connection with the purchase and sale of the Series A
Preferred Stock;
13. the Company shall use its best efforts during the term of the Trust to
cause the Plan to maintain its qualification as an employee stock ownership plan
within the meaning of Section 4975 of the Code; and
78
<PAGE>
14. the Company has furnished and will continue to furnish to the Trustee
from time to time copies of all reports and financial statements which the
Company shall send or make available to its public stockholders generally, all
other written communications from the Company to public shareholders generally
and each regular or periodic report, proxy statement, registration statement or
prospectus, if any, filed by the Company with the SEC; and
15.The Trustee represents and warrants to the Company as follows:
16.the Trustee (i) is a duly organized and validly existing Massachusetts
trust company in good standing as a trust company and with full power and
authority to act as Trustee and exercise trust powers, including without
limitation, the trust powers provided in and contemplated by the Trust
Agreement, and (ii) has full corporate power and authority to execute and
deliver this Agreement and to carry out the transactions contemplated hereby;
17.this Agreement has been duly authorized, executed and delivered by the
Trustee and constitutes a valid and binding obligation of the Trustee,
enforceable against the Trustee in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights generally and to general
principles of equity (regardless of whether considered in a proceeding at law or
in equity);
18.the execution, delivery and performance of this Agreement by the Trustee
and the consummation of the transactions contemplated hereby will not violate
(i) the Trustee's Corporate Charter or By-laws, each as amended to date, or (ii)
any provision of any agreement, instrument, order, award, judgment or decree to
which the Trustee is a party or by which it or any of its businesses or
properties are bound or (iii) any statute, rule or regulation of any federal,
state or local government or governmental agency applicable to the Trustee
except in the case of subparagraphs (ii) or (iii) of this Section 4(c) for any
such violations which either individually or in the aggregate do not have a
material adverse effect on the business or properties of the Trustee; provided,
however, that in making the representations contained in clause (iii) of this
Section 4(c), the Trustee has relied upon the correctness of (1) the Company's
representations in Section 3(g), as limited by the proviso therein, and Section
3(i) of this Agreement and (2) the Committee's direction letter dated December
30, 1996;
19.no approval, authorization or other action by, or filing with, any
governmental authority is required to be obtained or made by the Trustee in
connection with the execution, delivery and performance by the Trustee of this
Agreement and the consummation of the transactions contemplated hereby;
20.the Trustee is acquiring the Series A Preferred Stock on behalf of the
Plan solely for investment purposes and not with a view to, or for sale in
connection with, any distribution thereof; provided, however, that the Series A
Preferred Stock will be allocated to the accounts of the participants in the
Plan pursuant to the terms of the Plan and distributions may be made to
participants and beneficiaries of the Plan in shares of Common Stock issuable
upon conversion of the Series A Preferred Stock or payable upon redemption of
the Series A Preferred Stock, including upon exercise of the rights set forth in
Section 7 of the Certificate of Designations, or in shares of Common Stock
otherwise acquired by the Trustee pursuant to the terms of the Plan, it being
understood that the Series A Preferred Stock are being sold to the Trustee
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act"), in reliance upon this
representation and warranty;
21.the purchase of the Series A Preferred Stock on the Delivery Date by the
Trust for the Purchase Price is for not greater than "adequate consideration" as
that phrase is defined in Section 3(18) of ERISA, and any proposed regulations
thereunder, and will not constitute a prohibited transaction under Section 406
of ERISA or Section 4975(c) of the Code by reason of the exemptions set forth in
Section 408(e) of ERISA and Section 4975(d) (13) of the Code; provided that in
making the representations contained in this Section 4(f), the Trustee has
relied upon the correctness of the Company's representations contained in
Sections 3(g), as limited by the proviso therein, and 3(i) of this Agreement as
well as the Valuation Opinion;
22.the Series A Preferred Stock purchased by the Trust have a conversion
price which is reasonable as of the date hereof; provided, however, that in
making the representations contained in this Section 4(g), the Trustee has
relied upon the correctness of the Valuation Opinion; and
23.no person or other entity is entitled to any commissions due to the
Trustee's actions in connection with the purchase and sale of the Series A
Preferred Stock.
79
<PAGE>
24. The Trustee hereby (i) acknowledges that the Series A Preferred Stock
purchased on behalf of the Trust pursuant to this Agreement may, by their terms,
be issued only to the Trustee or a successor trustee acting on behalf of the
Trust, (ii) acknowledges that the Trust Agreement provides that none of the
Series A Preferred Stock shall be transferred in any manner to participants
under the Plan but in lieu thereof shares of Common Stock shall be distributed
to participants or transferred to the participants' Section 401(k) accounts
pursuant to the terms of the Plan, (iii) acknowledges that the Certificate of
Designations provides that any Series A Preferred Stock that are transferred,
sold or otherwise disposed of by the Trustee shall be automatically, and without
any action on the part of the Company, converted into shares of Common Stock,
and (iv) agrees not to transfer, sell or otherwise dispose of any of the Series
A Preferred Stock or other shares of Series A Preferred Stock or to attempt to
do so, except in compliance with the Trust Agreement. Nothing contained in this
Section 5 shall be deemed to restrict the ability of the Trustee to convert
shares of Series A Preferred Stock into shares of Common Stock or to require the
Company to redeem shares of Series A Preferred Stock, in each case in accordance
with the Certificate of Designations, or the ability of the Trustee to transfer,
sell or otherwise dispose of shares of Common Stock of the Company issued upon
conversion of shares of Series A Preferred Stock or upon a redemption of shares
of Series A Preferred Stock.
25. The Trustee understands that the certificate(s) representing the Series
A Preferred Stock will bear the following legend and that a notation restricting
their transfer will be made on the stock transfer books of the Company:
The shares of Series A preferred stock represented by this
certificate have not been registered under the Securities Act of
1933, as amended. Such shares of stock may not be sold, assigned,
pledged or otherwise transferred in the absence of an effective
registration statement under said Securities Act covering such
transfer or an opinion of counsel satisfactory to the issuer that
registration under said Securities Act is not required.
The shares of stock represented by this certificate are subject to
restrictions on transfer set forth in the Certificate of
Designations relating to the Corporation's Series A ESOP
Convertible Preferred Stock and in a Stock Purchase Agreement
dated as of January 2, 1997. The Corporation will furnish a copy
of such agreement to the holder of this certificate without charge
upon written request.
26. The Company has at its expense, prepared, filed, and obtained the
effectiveness of, and will use its best efforts to cause to remain effective, a
registration statement on an appropriate form, including a final prospectus (the
"Registration Statement"), under and complying with the Securities Act and the
rules and regulations thereunder, relating to the number of shares of the
Company's Common Stock into which the Series A Preferred Stock are from time to
time convertible or as are acquired upon a redemption or repurchase, including a
redemption pursuant to the provisions of Section 7 of the Certificate of
Designations, as shall be necessary, in the opinion of counsel to the Company,
for the Trustee to carry out its responsibilities under the Plan and Trust
Agreement. Whenever shares of Common Stock are so registered, the Company shall
also use its best efforts to register or qualify such shares covered by the
Registration Statement under the "blue sky" or securities laws of such
jurisdictions within the United States as the Trustee may reasonably request;
provided, however, that the Company shall not be required to consent to the
general service of process for all purposes in any jurisdiction where it is not
then qualified to do business.
27. The Company agrees that it will use its best efforts to maintain the
qualification of the Plan as an employee stock ownership plan within the meaning
of Section 4975(e)(7) of the Code.
28. The representations, warranties and agreements in this Agreement shall
survive the date hereof and the Delivery Date.
80
<PAGE>
29. This Agreement shall be governed by and construed in accordance with the
laws of the State of Iowa applicable to contracts to be executed, delivered and
performed in such state, to the extent not preempted by the laws of the United
States of America. The parties hereby irrevocably and unconditionally consent to
submit to the exclusive jurisdiction of the courts of the State of Iowa and the
United States of America located in Polk County, Iowa for any actions, suits or
proceedings arising out of or relating to this Agreement. This Agreement, the
Plan and Trust Agreement (including documents referred to therein or delivered
pursuant thereto) set forth the entire Agreement of the parties with respect to
the subject matter contained herein and supersede all prior oral and written
agreements, if any, between the parties with respect to such subject matter.
This Agreement shall bind and inure to the benefit of all successors to, and
assigns of, the parties hereto; provided, however, that the Trustee shall not
assign or otherwise transfer its interest in, or obligations under, this
Agreement without the written consent of the Company, except that the Trustee
may assign, without the Company's written consent, all its rights hereunder to
any institution exercising trust powers in connection with any such institution
assuming the duties of a trustee under the Trust Agreement. In the event that
any provision of this Agreement shall be declared unenforceable by a court of
competent jurisdiction, such provision shall be stricken herefrom and the
remainder of this Agreement shall remain binding on the parties hereto. In the
event any such provision shall be so declared unenforceable due to its scope or
breadth, then it shall be narrowed to the scope or breadth permitted by law.
30. This Agreement may be executed in two counterparts, each of which shall be
deemed an original, but each of which taken together shall constitute one and
the same instrument.
31. This Agreement may not be modified with respect to the obligations of a
party hereto except by an instrument in writing signed by such party.
32. The terms and provisions of the Trust Agreement relating to the nature of
the responsibilities of the Trustee and the indemnification by the Company of
the Trustee are incorporated herein by reference and made applicable to this
Agreement.
33. All notices, requests, or other communications required or permitted to be
delivered hereunder shall be in writing, delivered to each party hereto at its
address specified in the Trust Agreement and shall become effective as therein
provided. Any party hereto may from time to time, by written notice given as
aforesaid, designate any other address to which notices, requests or other
communications addressed to it shall be sent.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date first above written.
ALLIED LIFE FINANCIAL CORPORATION
By /s/ Samuel J. Wells
Name Samual J. Wells
Title President
STATE STREET BANK AND
TRUST COMPANY solely in
its capacity as Trustee
under the Plan and Trust
Agreement referred to
herein and not individually
By /s/ Mariann E. Sullivan
Name: Mariann E. Sullivan
Title: Vice President
81
ALLIED LIFE FINANCIAL CORPORATION
SHORT TERM MANAGEMENT
INCENTIVE PLAN
1. PURPOSE
This ALLIED Life Financial Corporation Short Term Management Incentive
Plan (the "Plan") is effective January 1, 1997.
The purpose of this Plan is to encourage outstanding performance by
certain key employees of ALLIED Life Insurance Company in the attainment of
annual financial and operating goals of ALLIED Life Financial Corporation, Inc.
("ALFC") and its subsidiaries (collectively "ALLIED Life").
2. DEFINITIONS
The capitalized terms used throughout the Plan have the following
meaning:
(a) "Base Salary" is the annualized weekly base pay of the
Participant in effect as of December 31 of the Plan year.
(b) "Committee" shall mean the Compensation Committee of
the Board of Directors of ALFC.
(c) "Discretionary Award" is the increment above the Guaranteed Award
which is awarded to a Participant based on the discretion of the Committee. This
amount combined with the Guaranteed Award cannot exceed 150% of the
Participant's Eligible Individual Award.
(d) "Eligible Award Percentage" is that percentage amount set forth on
Exhibit B which shows the direct numeric relationship associated with the
attainment of Threshold, Goal, or Maximum performance, and it is used in
determining potential Eligible Tier Awards. The Eligible Award Percentage is
calculated as follows:
Example Calculation for Eligible Award Percentage for EPS
for a Participant in Tier B
Step 1: Compare actual EPS results for the fiscal year (if the actual
EPS results for the fiscal year do not meet the Threshold, then the
Eligible Award Percentage is 0, and no further calculations are
necessary) to the highest goal specified in Exhibit A that it exceeds
(in this example, assume the actual EPS results are $2.00)
$0.05 = $2.00 - $1.95
(Threshold)
Step 2: Interpolate between the Threshold and Goal (or between the Goal
and Maximum as the case may be) to determine what percentage the
Participant is above the Threshold or Goal. There is no need to
interpolate if the Maximum has been exceeded. In this example, $0.05 is
50% between Threshold ($1.95) and Goal ($2.05).
50% = $0.05 / ($2.05 - $1.95)
Step 3: Take the eligible award percentage for EPS from Exhibit B for
the Participant's particular tier category and for the goal level that
has been attained (e.g., Threshold or Goal) and interpolate based on
50% attainment. The eligible award percentages for EPS in Tier B on
Exhibit B are 15% for Threshold and 30% for Goal.
22.5% = ((30% - 15%) x 50%) + 15%
In this example, 18% is the Eligible Award Percentage for EPS for a
Participant in Tier B.
The same process is used to compute the Eligible Award Percentage for
Growth.
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<PAGE>
(e) "Eligible Individual Award" is the award potential for a
Participant based on EPS and Growth results. Eligible Individual Award is the
sum of (i) the Eligible Award Percentage for EPS multiplied by the Base Salary
for the Participant and (ii) the Eligible Award Percentage for Growth multiplied
by the Base Salary for the Participant. The Eligible Individual Award is the
base used to determine the Guaranteed Award and the Discretionary Award.
(f) "Eligible Tier Award" is the award potential for a tier based on
EPS and Growth results. Eligible Tier Award is the sum of all Eligible
Individual Awards for all of the Participants in a particular tier.
(g) "EPS" is ALFC consolidated fully diluted operating earnings per
share computed in accordance with generally accepted accounting principles
("GAAP"). EPS excludes realized investment gains and losses net of excess
deferred policy acquisition costs ("DPAC") amortization and net of income taxes.
(h) "Goal" is the expected level of performance used to
establish targeted awards as approved by the Committee.
(i) "Growth" is a performance indicator and is the increase in revenue
from the prior year stated in terms of a percentage increase or dollar target.
Revenue for ALFC is expressed as GAAP insurance revenues plus 2% first year
annuity premiums less single premium income annuities.
(j) "Guaranteed Award" is guaranteed to Participants and is
75% of their Eligible Individual Award.
(k) "Maximum" is the level of performance at which the
maximum eligible award could be made.
(l) "Participant" is a key employee recommended by the
Chairman of ALFC and approved by the Committee to participate in
this Plan.
(m) "Threshold" is the minimum level of performance that
will warrant an award. No award will be made for performance
under the Threshold.
3. PARTICIPATION AND TIERS
Participation in the Plan is tiered by responsibility level and the
short-term impact of the management position.
Responsibility Levels
Tier A President
Tier B Primary Vice Presidents
Tier C Other Vice Presidents
Tier D Key Managers
A participation list specifying the Participants in each tier shall be
approved by the Committee prior to each fiscal year. The Committee may amend
such list from time to time to add or delete Participants.
Each tier level of participation will have varying award opportunity at
the Threshold, Goal, and Maximum performance levels for each of the performance
indicators.
4. PERFORMANCE INDICATORS
Two performance indicators, EPS and Growth, will be used to measure the
success of ALLIED Life and the level of bonus to be paid under this Plan. The
Threshold for EPS must be attained before any award will be made based on
Growth, which is the second performance indicator.
5. AWARDS
(a) A Participant may receive an Eligible Individual Award under the
Plan. No award will be made for performance that does not meet the Threshold
goal for EPS. Upon meeting the Threshold goal for EPS, a Participant will
receive a Guaranteed Award. Depending on the determination of the Committee, a
Participant may or may not receive a Discretionary Award. A Participant's total
award is the sum of the Guaranteed Award and the Discretionary Award. The
Discretionary Award combined with the Guaranteed Award cannot exceed 150% of the
Participant's Eligible Individual Award.
(b) Total awards made to all of the Participants in a particular tier
shall not exceed 100% of the Eligible Tier Award, but the total awards for a
particular tier may be less than the Eligible Tier Award. Notwithstanding the
foregoing, if the Committee determines that a Participant has shown
extraordinary performance in a calendar year, the Committee may exceed the
Eligible Tier Award in order to increase the Discretionary Award for the
Participant showing such extraordinary performance.
83
<PAGE>
(c) In the event a Participant does not meet the Threshold goal for
EPS, the Committee may in unusual or extraordinary circumstances award the
Participant a special award under the Plan. This paragraph may only be invoked
by the Committee in rare and extreme situations.
6. PRORATED AWARDS
Employees who become eligible for participation in this Plan after the
beginning of the Plan year may receive a prorated award based on the time the
employee was a Participant and based on active time employed during the Plan
year. Prorated awards will be calculated by determining the number of calendar
weeks that a Participant has been eligible for a tier and dividing that number
by the calendar weeks in that Plan year.
7. DEATH, DISABILITY, OR RETIREMENT
In the event that a Participant dies, becomes disabled, or retires due
to age in accordance with ALLIED Life policy, a prorated award will be made
based on active time employed as a Participant during the Plan year.
8. PLAN YEAR
The Plan year will be ALFC's fiscal year.
9. TRANSFERABILITY
A Participant may not sell, pledge, donate, or otherwise assign any
interest in this Plan.
10. EMPLOYMENT
Nothing in this Plan confers upon a Participant any right to continued
employment or interferes with or limits in any way ALLIED Life's right to
terminate the employment of a Participant at any time.
11. TERMINATION OF EMPLOYMENT
If a Participant terminates employment or is terminated by ALLIED Life
for any reason other than death, disability, or retirement due to age in
accordance with ALLIED Life's policy, and if such termination date is prior to
the payment date of an award under the Plan, any right to an award under this
Plan is forfeited.
12. PLAN AMENDMENT OR TERMINATION
The Committee may amend or terminate the Plan at any time. Participants
will be notified of such action as soon as it is practical to do so.
In the event of any change in the corporate structure of ALFC affecting
the goals set forth in Exhibit A or the eligible award percentages set forth in
Exhibit B, and where such change in corporate structure would adversely affect a
Participant, the Committee may adjust or amend the Plan so as not to
disadvantage a Participant. In the event that a change in accounting rules or
procedures would affect the goals set forth in Exhibit A or the eligible award
percentages set forth in Exhibit B, and where such change in accounting rules or
procedures would adversely affect or create a windfall for a Participant, the
Committee may adjust or amend the Plan.
13. ADMINISTRATION
All matters pertaining to the administration of this Plan will be the
responsibility of the Committee, and any decisions of the Committee shall be
conclusive and binding. This includes all matters of interpretation, areas not
specified in the Plan, and any other issues that may affect the Plan.
14. GOVERNING LAW
The Plan will be administered, enforced, construed, and interpreted in
accordance with the laws of the State of Iowa.
84
<PAGE>
<TABLE>
EXHIBIT A
<CAPTION>
<S> <C> <C>
GOALS
Threshold Goal Maximum
EPS $2.00 $2.10 $2.20
GROWTH 12% 15% 18%
</TABLE>
85
<PAGE>
<TABLE>
EXHIBIT B
<CAPTION>
<S> <C> <C> <C>
ELIGIBLE AWARD PERCENTAGES
Threshold Goal Maximum Weight
Tier A - President:
EPS 19% 38% 56% 75%
Growth 6% 12% 19% 25%
Total 25% 50% 75% 100%
Tier B - Primary Vice Presidents:
EPS 15% 30% 45% 75%
Growth 5% 10% 15% 25%
Total 20% 40% 60% 100%
Tier C - Other Vice Presidents
EPS 12% 24% 36% 75%
Growth 4% 8% 12% 25%
Total 16% 32% 48% 100%
Tier D - Key Managers
EPS 3% 4.5% 6% 75%
Growth 1% 1.5% 2% 25%
Total 4% 6% 8% 100%
86
</TABLE>
AMENDMENT DATED DECEMBER 16, 1996
ALLIED LIFE FINANCIAL CORPORATION
LONG-TERM MANAGEMENT INCENTIVE PLAN
The ALLIED Life Financial Corporation Long-Term Management Incentive
Plan (the "Plan") was amended by the Executive Committee of the Board of
Directors of ALLIED Life Financial Corporation (the "Company") on December 16,
1996, to reflect the changes set forth below. Capitalized terms used herein
shall have the meaning as assigned thereto in the Plan.
1. Definition of Window Period. The definition of "Window
Period" as set forth in Article 2, subsection "ad", is deleted in
its entirety.
2. Committee. The references to Rule 16b-3(c)(2) in the
second paragraph of Section 3.1 are amended to read "Rule 16b-3".
3. Six-Month Holding Period. The second paragraph of Section 6.7 of the
Plan is amended by the deletion of the parenthetical "(provided that the Shares
which are tendered must have been held by the Participant for at least six (6)
months prior to their tender to satisfy the Option Price)".
4. Rule 16b-3 Requirements. Section 7.9 of the Plan is
deleted in its entirety and shall remain reserved for future use.
5. Amendment and Shareholder Approval. Section 11.1 of the
Plan is amended to read in its entirety as follows:
The Board may at any time and from time to time, alter, amend, suspend
or terminate the Plan in whole or in part; provided, that no amendment
which requires shareholder approval in order for the Plan to continue
to satisfy the requirements of Section 422 of the Code, shall be
effective unless such amendment shall be approved by the requisite vote
of shareholders of the Company entitled to vote thereon.
6. Share Withholding. Section 12.2 of the Plan is amended to
read in its entirety as follows:
With respect to withholding required upon the exercise of Options or
SARs, upon the lapse of restrictions on Restricted Stock, or upon any
other taxable event hereunder, Participants may elect to satisfy the
withholding requirement, in whole or in part, by having the Company
withhold Shares having a Fair Market Value on the date of the tax is to
be determined equal to the minimum statutory total tax which could be
imposed on the transaction. All elections shall be irrevocable, made in
writing, and signed by the Participant.
7. Requirements of Law. The second paragraph of Section 15.3
of the Plan is deleted in its entirety.
8. Securities Law Compliance. The first sentence of Section
15.4 of the Plan is amended to read in its entirety as follows:
With respect to Insiders, transactions under this Plan are intended to
comply with the applicable conditions of Rule 16b-3 or its successors
under the 1934 Act.
87
AMENDMENT TO
CONSULTING AGREEMENT
THIS AMENDMENT is made this 18th day of December, 1996, by and
between John E. Evans ("Evans") and ALLIED Group, Inc. ("AGI"),
ALLIED Mutual Insurance Company ("Mutual"), and ALLIED Life
Financial Corporation ("ALFC"). AGI, Mutual, and ALFC shall be
known collectively as "ALLIED".
WHEREAS, on December 14, 1994, ALLIED and Evans entered into a
Consulting Agreement setting forth the services which Evans was to render to
ALLIED following his retirement;
WHEREAS, the parties desire to amend the Consulting Agreement
as set forth herein;
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants set forth below and other valuable consideration, the receipt of which
is hereby acknowledged, the parties agree as follows:
1. Section IV of the Consulting Agreement is amended to add
new subsection (c) as follows:
(c) Payment of expenses associated with income tax preparation and
other tax services, provided that ALLIED may review Evans' tax returns
at any time.
2. Subsection (a) of Section V of the Consulting Agreement is
amended to read as follows:
(a) the mutual agreement of the parties;
3. The last sentence of Section V of the Consulting Agreement which
begins "If this Agreement has..." is deleted in its entirety.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year above first written.
ALLIED Mutual Insurance Company
/s/ John E. Evans By:/s/ Douglas L. Andersen
John E. Evans
Its: President
ALLIED Group, Inc. ALLIED Life Financial Corporation
By:/s/ Jamie H. Shaffer By:/s/ Samuel J. Wells
Its: President (Financial) Its: President
88
TAX SHARING AGREEMENT
Agreement effective January 1, 1997 by and among ALLIED Life Financial
Corporation ("Parent") and each of its undersigned subsidiaries.
WHEREAS, the parties hereto are members of an affiliated group ("Affiliated
Group") as defined in Section 1504(a) of the Internal Revenue Code of 1986
as amended; and
WHEREAS, some of the parties hereto may be members of a unitary group
("Unitary Group") as defined by various state laws; and
WHEREAS, the parties hereto may elect or be required to file their federal
income tax returns on a consolidated basis and file their various state
income tax returns on a consolidated, unitary or separate basis and desire
to properly account for the economic consequences of this arrangement,
WHEREAS, it is the intent and desire of the parties hereto that a method be
established for reimbursing the Parent for payment of tax liability, for
compensating any party for use of its losses or tax credits, and to provide
for the allocation and payment of any refund arising from a carryback of
losses or tax credits from subsequent taxable years,
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1. Parent to Prepare and File Returns. A consolidated federal income
tax return and consolidated, unitary, or separate state tax income tax
returns shall be prepared and filed by the Parent for the taxable year
ended December 31, 1997 and for each subsequent taxable period in
respect of which this agreement is in effect. Each subsidiary shall
execute and file such consent, elections, and other documents that may
be required or appropriate for the proper filing of such returns.
2. Federal Tax Allocation. For each taxable period, each member of the
Affiliated Group shall compute its separate tax liability as if it had
filed a separate tax return and shall pay such amount to the Parent.
The separate return tax liability of each member shall be computed
pursuant to the provision of Regulations Section 1.1502-33(d)(3) in a
manner provided by Regulations Section 1.1502-33(d)(2)(ii) in
conjunction with the method described in Regulations Section
1.1552-1(a)(2).
3. State Tax Allocation.
(a) Separate Returns.
The Parent and each subsidiary shall be
allocated its own separately computed state income tax
liability from those states requiring tax to be computed on a
separate return basis.
(b) Unitary Group and Affiliated Group Returns.
The Unitary or Affiliated Group shall
allocate to each member the total state income tax liability
from those states requiring a consolidated or unitary return
filing based on the following formula:
[each members separate company state taxable income
or loss before apportionment and net operating loss
deduction] divided by [total sum of all members
separate state taxable income or loss before
apportionment and net operating loss deduction]
multiplyed by [total affiliated or unitary state
income tax on taxable income before net operating
deduction and tax credits]
All prior tax year carryover tax credits and tax
benefits of net operating loss deductions shall be
specifically allocated to those members based on the
allocation used in the tax year in which the net
operating loss or tax credit was originally created.
All tax credits except prior tax year carryover
credits shall be specifically allocated to the
unitary members computed on a separate return basis.
All tax credits and net operating losses carried
forward from years prior to a member joining the
Affiliated or Unitary Group shall be specially
allocated to that member.
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<PAGE>
4. Payments. Each subsidiary shall pay to the Parent its allocation of
quarterly estimated, final or amended return taxes payable to the
Internal Revenue Service and any other state taxing authority within
five days of receiving notice of such payment from the Parent.
5. Refund of Overpayment. If for any taxable period the separate return
liability of each member of the Affiliated Group, including the Parent
or Unitary Group, exceeds the consolidated or unitary tax liability for
such period as a result of any excess losses or tax credits of one or
more members, then the Parent shall pay to each such member its
allocable portion of such excess amount within sixty days after the
date of filing of the consolidated or unitary return for such period.
The excess federal tax amount to be reimbursed to such member shall be
computed in a manner consistent with the provisions of Regulation
Section 1.1502- 33(d)(2)(ii). In utilization of this Regulation
Section, the percentage referred to in Regulation Section
1.1502-33(d)(2)(ii)(b) shall be 100 percent.
6. Carryback or Forward of Unused Federal Loss or Tax Credit.
If part of all of an unused loss or tax credit is allocated to a member
of the Affiliated Group pursuant to Regulation Section 1.1502-79, and
it is carried back or forward to a year in which such member filed a
separate return or a consolidated return with another affiliated group,
any refund or reduction in tax liability arising from the carryback or
carryover shall be retained by such member. Notwithstanding the above,
the Parent shall determine whether an election shall be made not to
carryback part or all of the consolidated net operating loss for any
taxable year in accordance with Section 172(b)(3)(c) of the Internal
Revenue Code of 1986 as amended.
7. Adjustment of Taxable Period. If the consolidated or unitary tax
liability is adjusted for any taxable period, whether by means of an
amended return, claim for refund or after a tax audit by the Internal
Revenue Service or respective states, the liability of each member
shall be recomputed to give effect to such adjustments, and in the case
of a refund, the Parent shall make payment to each member for its share
of the refund, determined in the same manner as in paragraph (5) above,
within thirty days after the refund is received by the Parent, and in
the case of an increase in tax liability, each member shall pay to the
parent its allocable share of such increased tax liability within five
days after receiving notice of such liability from the Parent. In the
event that the taxing authority levies upon a member's assets in excess
of its adjusted portion of the consolidated tax liability, the member
will be adequately indemnified by the other members.
8. Acquisition through Organization or Additional Corporation. If
during a consolidated return period the Parent or any subsidiary
acquires or organizes another corporation that is required to be
included in the consolidated return, then such corporation shall join
in and be bound by this agreement.
9. Term. This agreement shall apply to the taxable year ending December
31, 1997 and all subsequent taxable periods unless the Parent and the
subsidiaries agree to terminate the agreement. Notwithstanding such
termination, this agreement shall continue in effect with respect to
any payment or refund for all taxable periods prior to termination.
10. Application to Successors in Interest. This agreement shall be
binding upon and inure to the benefit of any successor, whether by
statutory merger, acquisition of assets or otherwise, to any parties
hereto, to the same extent as if the successor had been an original
party to the agreement.
11. Arbitration. Any dispute arising out of or relating to this Tax
Sharing Agreement("Agreement") or the breach thereof between Parent and
any of the subsidiaries signatory hereto shall be settled by
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. Arbitration may be initiated by any
party to a dispute, giving notice to each other party two copies of
such notice with the American Arbitration Association and by complying
with other applicable provisions of the Association's Rules.
12. Modification of Agreement. No party has the authority to change any
provisions of this Agreement or waive any of its provisions. No change
in this Agreement shall be binding, unless first expressed in writing
and signed by each party hereto.
13. Superseding Agreement. The parties hereto acknowledge that this
agreement shall supersede all other agreements, oral or written,
between the parties.
90
<PAGE>
14. Exchange of Information. The parties hereto acknowledge that the
exchange and flow of information is critical to the operation of this
agreement. Having acknowledged this fact, the parties hereby agree to
grant free and unrestricted access, at reasonable times, to those books
and records necessary for the operation of this agreement.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their duly authorized representatives.
ALLIED Life Financial Corporation
By /s/ Wendell Crosser Date February 25, 1997
Wendell P. Crosser
Vice President/Treasurer
ALLIED Life Brokerage Agency
By /s/ Wendell P. Crosser Date February 25, 1997
Wendell P. Crosser
Assistant Vice President
ALLIED Group Merchant Banking Corporation
By /s/ Jeffery A. Roling Date February 25, 1997
Jeffery A. Roling
Secretary/Treasurer
91
AMENDED AND RESTATED
MANAGEMENT INFORMATION SERVICES AGREEMENT
Effective March 1, 1996
TABLE OF CONTENTS
Page
I. Definitions........................................................1
Section 1.1 AGI and Its Subsidiaries........................1
Section 1.2 ALFC and Its Subsidiaries.......................1
Section 1.3 Coordinating Committee..........................1
Section 1.4 Licensee........................................1
Section 1.5 Management Information Services.................1
Section 1.6 Methods/Procedures..............................2
Section 1.7 Mutual and Its Subsidiaries.....................2
Section 1.8 PC..............................................2
Section 1.9 PC Support......................................2
Section 1.10 Pooling Agreement...............................2
Section 1.11 Pool Participants...............................2
Section 1.12 Programming/Development.........................2
Section 1.13 Software........................................2
II. Services To Be Performed...........................................3
Section 2.1 General MIS.....................................3
Section 2.2 PC Support......................................3
Section 2.3 PC Maintenance..................................3
Section 2.4 PC Rating Disc Updates..........................3
Section 2.5 Agency Automation...............................3
Section 2.6 Flexible Premium Payment Plans..................3
Section 2.7 Printing........................................4
Section 2.8 Policy Assembly.................................4
Section 2.9 Postage/Mail Processing.........................4
Section 2.10 Supply Services.................................4
Section 2.11 Telephone/Communications........................4
Section 2.12 Equipment Leasing...............................4
Section 2.13 License of Software.............................5
Section 2.14 Other Services..................................5
Section 2.15 ALIC Rights.....................................6
III. Payment For Services...............................................6
Section 3.1 General.........................................6
Section 3.2 Fees............................................6
IV. Term, Termination, and Change of Control...........................6
Section 4.1 Term and Termination............................6
Section 4.2 Change of Control of ALFC.......................6
Section 4.3 Change of Control of AGI........................7
V. Dispute Resolution.................................................7
Section 5.1 AGI and Its Subsidiaries........................7
Section 5.2 Mutual and Its Subsidiaries.....................8
Section 5.3 ALFC and Its Subsidiaries.......................8
Section 5.4 All Other Disputes..............................8
Section 5.5 Arbitration.....................................8
VI. Confidential Information and Trade Secrets.........................9
Section 6.1 Obligation to Keep Confidential ................9
VII. Miscellaneous.....................................................10
Section 7.1 Assignment.....................................10
Section 7.2 Waiver; Remedies...............................10
Section 7.3 Permissive Release of Confidential Information.10
Section 7.4 Notices........................................11
Section 7.5 Governing Law..................................11
Section 7.6 Enforceability.................................11
Section 7.7 Survival of Representations, Warranties,
and Covenants..................................11
Section 7.8 Counterparts ..................................11
Section 7.9 Headings.......................................11
Section 7.10 Entire Agreement...............................11
Section 7.11 Amendments.....................................12
Signature Page.............................................................13
Addendum A
Addendum B
92
<PAGE>
AMENDED AND RESTATED
MANAGEMENT INFORMATION SERVICES AGREEMENT
This Agreement ("Agreement") is made as of this ____ day of January,
1997, to be effective March 1, 1996, (unless a different effective date is
indicated) by and among AMCO Insurance Company ("AMCO"), ALLIED Group
Information Systems, Inc. ("AGIS"), ALLIED Mutual Insurance Company ("Mutual"),
ALLIED Group, Inc. ("AGI"), ALLIED General Agency Company ("AGA"), ALLIED Group
Mortgage Company ("AGMC"), ALLIED Group Leasing Corporation ("AGLC"), ALLIED
Life Financial Corporation ("ALFC"), ALLIED Life Insurance Company ("ALLIED
Life"), ALLIED Life Brokerage Agency ("ALBA"), ALLIED Group Merchant Banking
Corporation ("AGMBC"), ALLIED Group Insurance Marketing Company ("AGIMC"), The
Freedom Group, Inc. ("TFG"), and Midwest Printing Services, Ltd. ("Midwest
Printing"). AGIS, AGI, AGA, AGMC, AGLC, ALFC, ALLIED Life, ALBA, AGMBC, AGIMC,
TFG, and Midwest Printing shall be hereinafter referred to collectively as the
"Companies".
WITNESSETH:
WHEREAS, AGIS and Mutual, AGI, AMCO, AGA, AGMC, AGLC, ALFC, ALLIED
Life, ALBA, AGMBC, and AGIMC entered into an Amended and Restated Management
Information Services Agreement effective January 1, 1995 (the "January 1995
Agreement") on December 14, 1995; and
WHEREAS, effective March 1, 1996, AGIS was restructured, with AGIS
declaring and paying a dividend to AMCO consisting of all assets and related
liabilities of TFG-ALLIED Operations; and
WHEREAS, effective March 1, 1996, AMCO began providing the services
previously provided by AGIS under the January 1995 Agreement;
WHEREAS, effective May 13, 1996, the AMCO programmers working on ALIC
data were transferred to ALIC as employees;
NOW, THEREFORE, in consideration of the foregoing premises, and for and
in consideration of the mutual covenants and agreements contained herein, the
parties agree as follows:
I. DEFINITIONS
1.1 "AGI and Its Subsidiaries" shall mean the following
companies which are parties to this Agreement: AGI, AMCO, AGA,
AGMC, AGLC, TFG, AGIS, and Midwest Printing.
1.2 "ALFC and Its Subsidiaries" shall mean the following
companies which are parties to this Agreement: ALFC, ALLIED
Life, ALBA, and AGMBC.
1.3 "Coordinating Committee" shall mean the joint meeting of the
coordinating committees established by Mutual, AGI, and ALFC in accordance with
their respective bylaws or pursuant to resolution for the purpose, among others,
of resolving issues under this Agreement.
1.4 "Management Information Services" or "MIS" shall mean the
Methods/Procedures, the processing, and support of information and data
functions. MIS does not include: (a) third-party data processing services
provided to any of the Companies by contract; (b) processing flexible premium
payment plans; or (c) printing services, unless otherwise provided herein.
1.5 "Methods/Procedures" shall mean studies or work flow analysis,
training on software systems, and other computer support.
1.6 "Mutual and Its Subsidiaries" shall mean the
following companies which are parties to this Agreement: Mutual
and AGIMC.
1.7 "PC" shall mean personal computer.
1.8 "PC Support" shall mean PC installation, training, and assistance,
but shall not include PC maintenance.
1.9 "Programming/Development" shall mean the analysis, design,
programming, and development of PC and mainframe Software and shall include
mainframe Software consulting and maintenance services. The maintenance services
shall include, but not be limited to, error corrections, enhancements, and
updates. Unless specifically provided for herein, Programming/Development shall
not include those programming functions performed by any of the Companies on
personal computers.
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<PAGE>
1.10 "Software" shall mean any and all computer programs, models,
plans, outlines, packages, or systems thereof and related documentation or
manuals as developed, or which may be developed in the future by AMCO and used
by the Companies for MIS, but does not include those computer programs which are
used by any of the Companies pursuant to license agreements with third parties.
II. POOLING AGREEMENT
2.1 AMCO, Mutual, ALLIED Property and Casualty Insurance Company, and
Depositors Insurance Company are parties to the Second Amended and Restated
Reinsurance Pooling Agreement dated December 14, 1992, as amended February 18,
1993 and February 10, 1995 ("Pooling Agreement"), pursuant to which AMCO, as the
pool administrator, conducts insurance operations and provides certain
administrative services to the other parties. Included in these administrative
services are the provision of data processing services for the jointly conducted
insurance operations. The Pooling Agreement shall control as to matters
regarding data processing services provided by AMCO to Mutual, ALLIED Property
and Casualty Insurance Company, and Depositors Insurance Company and the payment
for any services provided thereto.
III. SERVICES
3.1 General MIS. AMCO shall provide all MIS required by ALLIED Life,
AGI's human resources department, and AGIMC. The MIS to be provided during the
term of this Agreement shall be substantially the same as those services
presently provided to or utilized by ALLIED Life, AGI's human resources
department, and AGIMC as of the effective date of this Agreement. In addition,
AMCO shall provide MIS to any of the Companies if requested. The scope and
extent of MIS provided under this Agreement may be amended or modified from time
to time by written agreement between AMCO and the party receiving the MIS.
3.2 PC Support. AMCO shall provide PC Support to ALLIED Life, ALBA,
AGI's human resources department, AGA, AGMC, AGLC, AGMBC, AGIMC, and AGIS. AMCO
shall also provide AGIMC with PC Support for its phone system.
3.3 PC Maintenance. AMCO will assist in coordinating
with each of the Companies for third-party vendor maintenance on the personal
computers, and each of the Companies shall be responsible for payment to
such third-party vendors.
3.4 AGMC Scanline Processing. AMCO shall use its scanline equipment to
process AGMC payment forms on a daily basis, Monday through Friday, during the
term of this Agreement. AMCO shall provide its own personnel, program disk, and
tapes to process such forms.
3.5 Flexible Premium Payment Plans. AMCO shall perform the processing,
billing, scanline, and remittance services with regard to the flexible premium
payment plan offered by ALLIED Life to its insureds on ALLIED Life policies. All
service charges and reinstatement fees assessed to insureds pursuant to the
flexible premium payment plan shall be retained by ALLIED Life.
3.6 AGIS Customers. AGIS sells to its insurance customers data
processing services which are presently provided using AMCO's mainframe and
other equipment. AMCO agrees to continue to provide insurance processing
services subject to AGIS obtaining AMCO's written consent prior to entering into
future data processing agreements and limiting annual growth so it does not
exceed 10%.
3.7 Printing.
(a) Forms and Reports. AMCO shall generate the
following data and record output for ALLIED Life and AGIS customers: (i) policy
forms, (ii) claim forms, (iii) billing forms, and (iv) internal reports not
generated by personal computers. AMCO shall generate internal reports for AGI's
human resources department which cannot be generated by personal computers.
(b) Typesetting and Other Printing. AMCO shall
provide typesetting services to Companies requesting typesetting services. Any
other printing services including, but not limited to, specialty printing or
brochures, shall be provided by AMCO to the Companies, or any of them, if
requested.
3.8 Policy Assembly. AMCO shall provide policy assembly
for AGIS customers. The policy assembly shall include the
preparing, handling, and mailing of insurance policies.
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3.9 Postage and Mail Processing. AMCO shall provide mail processing for
the Companies which are located in Polk County, Iowa. This mail processing shall
include internal and external distribution of mail among such Companies, to and
from the proper post office facilities and may include inserting and sorting
mail services.
3.10 Supply Services. For those Companies which desire to use the
supply service, AMCO shall administer and manage the storage, warehousing, and
distribution of the inventory of office supplies owned by such Companies. The
supply service provided by AMCO shall include, but not be limited to, the
ordering of paper used in processing forms for ALLIED Life and AGIS customers.
3.11 Telephone and Communications. AMCO shall provide telephone
equipment, long-distance communication services, or both, for such Companies
requesting equipment and/or service upon mutually agreeable terms and
conditions. AMCO shall also provide computer and telephone port access to those
Companies which office at 701 Fifth Avenue, Des Moines, Iowa.
3.12 Other Services. Any other services provided by AMCO
to the Companies, or any of them, shall be negotiated between
AMCO and such company on such terms and conditions as are
mutually agreeable.
IV. WARRANTIES
4.1 License of Software. AMCO shall own or license any Software
necessary to provide the services described in this Agreement. AMCO shall be
responsible for resolving any licensing conflicts that may result from its use
of such Software.
4.2 No Warranties. AMCO makes no warranties, express or implied as to
performance of the machines, equipment, or Software provided under the terms of
this Agreement. AMCO will not be liable for any damages, of any kind, as a
result of the unavailability or malfunction of the machines, equipment or
Software.
V. PAYMENT FOR SERVICES
5.1 General. The fees described in this Article III may
be renegotiated in the future at the agreement of the affected parties. The
amount of the renegotiated fee to be paid by any of the Companies shall be
renegotiated on an arm's length basis.
5.2 Fees. The Companies shall pay the fees set forth in
Addendum A to this Agreement.
VI. TERM, TERMINATION, AND CHANGE OF CONTROL
6.1 Term and Termination. This Agreement shall be effective on March 1,
1996 and shall continue in effect until December 31, 2004, and shall continue
thereafter unless prior to December 31, 2002, a party to this Agreement delivers
to the other parties a written notice that such party intends to cease
participation and terminate the Agreement as to it on December 31, 2004 or as of
a specified date thereafter. This Agreement may be terminated by a party to this
Agreement, as to such party's participation in the Agreement, effective after
December 31, 2004, provided that such party has given written notice of
termination to the others at least two (2) years prior to the proposed
termination date.
6.2 Change of Control of ALFC. In the event of a Change of Control (as
hereinafter defined in this section) of ALFC, either Mutual or AGI may, in its
sole discretion, at any time after such Change of Control: (i) terminate the
Intercompany Operating Agreement ("IOA Agreement") and this Agreement upon six
(6) months notice to ALFC; (ii) extend the term of the IOA Agreement and this
Agreement for up to ten (10) additional years beyond December 31, 2004 upon six
(6) months notice to ALFC; or (iii) allow such agreements to continue in effect.
"Change of Control" for purposes of this section shall mean an event whereby a
person, group, or entity that is not affiliated with ALFC or Mutual acquires the
ownership of 50% or more of the voting stock of ALFC. A person, group, or entity
"affiliated" with ALFC or Mutual shall mean a person, group, or entity that
directly or indirectly through one or more intermediaries controls, is
controlled by, or is under common control with ALFC or Mutual.
6.3 Change of Control of AGI.
(a) In the event of a Change of Control (as hereinafter
defined in this section) of AGI, Mutual may, in its sole
discretion, at any time after such Change of Control: (i)
terminate all three of the Pooling Agreement, IOA Agreement, and
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<PAGE>
this Agreement upon six (6) months notice to AGI; (ii) extend the term of the
Pooling Agreement, IOA Agreement, and this Agreement for up to ten (10)
additional years beyond December 31, 2004 upon six (6) months notice to AGI; or
(iii) allow such agreements to continue in effect. "Change of Control" for
purposes of this section shall mean an event whereby a person, group, or entity
that is not affiliated with AGI or Mutual acquires the ownership of 50% or more
of the voting stock of AGI. A person, group, or entity "affiliated" with AGI or
Mutual shall mean a person, group, or entity that directly or indirectly through
one or more intermediaries controls, is controlled by, or is under common
control with AGI or Mutual.
(b) In the event of a Change of Control (as hereinafter defined in this
section) of AGI, ALFC may, in its sole discretion, at any time after such Change
of Control: (i) terminate both the IOA Agreement and this Agreement upon six (6)
months notice to AGI; (ii) extend the term of the IOA Agreement and this
Agreement for up to ten (10) additional years beyond December 31, 2004 upon six
(6) months notice to AGI; or (iii) allow such agreements to continue in effect.
"Change of Control" for purposes of this section shall mean an event whereby a
person, group, or entity that is not affiliated with AGI or Mutual acquires the
ownership of 50% or more of the voting stock of AGI. A person, group, or entity
"affiliated" with AGI or Mutual shall mean a person, group, or entity that
directly or indirectly through one or more intermediaries controls, is
controlled by, or is under common control with AGI or Mutual.
VII. DISPUTE RESOLUTION
7.1 AGI and Its Subsidiaries. Any controversy, claim, or dispute
arising out of or relating to this Agreement, or breach thereof, among or
between AGI and Its Subsidiaries shall be resolved by AGI's Board of Directors,
the decision of which shall be binding.
7.2 Mutual and Its Subsidiaries. Any controversy, claim, or dispute
arising out of or relating to this Agreement, or breach thereof, among or
between Mutual and Its Subsidiaries shall be resolved by Mutual's Board of
Directors, the decision of which shall be binding.
7.3 ALFC and Its Subsidiaries. Any controversy, claim, or dispute
arising out of or relating to this Agreement, or breach thereof, among or
between ALFC and Its Subsidiaries shall be resolved by ALFC's Board of
Directors, the decision of which shall be binding.
7.4 All Other Disputes. All other disputes under this Agreement shall
be referred for resolution to the Coordinating Committee. Each of the
coordinating committees of Mutual, AGI, and ALFC (a) has the right to
participate in each and every Coordinating Committee deliberation unless it
elects to abstain therefrom and (b) has one vote which shall be cast for or
against any such decision unless it elects to abstain. Each such coordinating
committee shall be comprised of two persons, one of whom shall constitute a
quorum for the transaction of any business. All decisions of the Coordinating
Committee must be unanimous, except for abstentions. All decisions of the
Coordinating Committee are binding on the parties hereto.
7.5 Arbitration. If a controversy, claim, or dispute cannot be resolved
by the Coordinating Committee pursuant to Section 7.4, then it will be submitted
to arbitration as set forth hereafter.
(a) Consent to Arbitration. Each party to this
Agreement hereby consents and agrees that any dispute between the parties hereto
with respect to the interpretation, performance, or breach of any of the terms
of this Agreement or the transactions contemplated hereby which cannot be
resolved by the Coordinating Committee shall be referred to arbitration
conducted in accordance with the rules and procedures of the American
Arbitration Association ("AAA"), upon written request of the disputing party
hereto delivered to the party with which it has a dispute. Within thirty (30)
days of the delivery of such written notice, each party involved shall nominate
an AAA-licensed arbitrator (the "Party Arbitrators"). Within thirty (30) days of
their nomination, if there are two Party Arbitrators, the Party Arbitrators
shall select a third AAA-licensed arbitrator (the "Third-Arbitrator") and shall
give the parties hereto written notice of such choice. If there are three
parties to the dispute and each party selects a Party Arbitrator, the three
Party Arbitrators selected shall constitute the Arbitrators without further
selection. If there are more than three parties to the dispute, the parties to
this Agreement agree that Mutual shall
96
<PAGE>
represent Mutual and Its Subsidiaries, ALFC shall represent ALFC and Its
Subsidiaries, and AGI shall represent AGI and Its Subsidiaries.
(b) Authority of Arbitrators. The arbitrators shall
be empowered to decide all issues submitted to arbitration using principles of
law and equity and, if required, by application of any customary practices in
the insurance and reinsurance industries. The arbitrators shall be relieved of
all judicial formalities and shall not be required to follow any rules of
evidence except as such rules may be imposed on arbitration proceedings
conducted in accordance with the laws of the State of Iowa, but the arbitrators
shall attempt to enforce the intents and purposes of this Agreement to the
extent practicable and in accordance with Iowa law. The decision of a majority
of the arbitrators shall be final and binding on each of the parties to the
arbitration proceeding.
(c) Expenses; Location. Each party to the dispute
shall bear the expenses of its respective Party Arbitrator. If only two parties
are involved in the arbitration, the involved parties shall jointly share all
other expenses of the arbitration proceeding and the expenses of the Third
Arbitrator. The arbitration proceeding shall take place at Des Moines, Iowa
unless another location is mutually agreed upon by the parties. The arbitration
proceeding shall be governed by the laws of the State of Iowa. The parties
hereto hereby agree that any information respecting any matters submitted to
arbitration in accordance with the foregoing or any aspect of the arbitration
proceeding itself shall be treated as confidential and will not be disclosed to
anyone not employed or acting on behalf of a party hereto in connection with
such arbitration or used at any time in any manner that is adverse to the
interests of either party hereto but, in any such case, such information may be
disclosed if such disclosure is made in connection with either party's
prosecution or defense of any legal proceedings or if such disclosure is
required pursuant to a subpoena or other legal order issued by any judicial or
regulatory body or is otherwise required by law.
(d) Restriction. Anything set forth herein to the
contrary notwithstanding, with respect to any issue to be determined by
arbitration, each of the parties to the arbitration proceeding shall submit in
writing to the arbitrators the party's proposed resolution of such issue.
The arbitrators shall be constrained in their decision relating to such issue to
select only between the proposed resolutions of the parties, and the
arbitrators shall have no discretion to fashion any compromise or other
resolution of the issue submitted for arbitration.
VIII. CONFIDENTIAL INFORMATION AND TRADE SECRETS
8.1 Obligation to Keep Confidential.
(a) Each party to this Agreement shall keep
confidential, except as the other party or parties may otherwise consent in
writing, and, except for the other parties' benefit, not disclose or make any
use of at any time and for any purpose whatsoever, any trade secrets,
confidential information, knowledge, data, trademarks or trade names, or other
information of any of the Companies to their products, know-how, designs,
customer lists, business plans, marketing plans and strategies, pricing
strategies, or other subject matter pertaining to any business of the Companies
or any of their clients, customers, consultants, licensees, or affiliates, which
the party has obtained or may obtain, or otherwise acquire during the course of
contacts, discussions, negotiation, or agreement with any of the other parties,
except as herein provided (hereafter, collectively, "Confidential Information").
No party shall deliver, reproduce, or in any way allow any Confidential
Information of the other parties or any documentation relating thereto, to be
delivered to or used by any third parties without specific written direction or
consent of a duly authorized officer of the other party.
(b) Upon termination of this Agreement for any
reason whatsoever each party shall promptly surrender and deliver to each other
party all records, materials, equipment, drawings, documents, data, and all
Confidential Information of the other parties and shall not retain any
description containing or pertaining to any Confidential Information of the
other parties, unless otherwise consented to in writing by a duly authorized
officer of the other party.
8.2 Permissive Release of Confidential Information.
Notwithstanding the provisions of this section, any Confidential Information may
be used in connection with any arbitration relating to the transactions
contemplated by this Agreement and such information may be disclosed if such
disclosure is made in connection with the parties' prosecution or defense of
any legal proceedings or if such disclosure is required pursuant to a subpoena
or other legal order issued by any judicial or regulatory body or is otherwise
required by law.
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IX. MISCELLANEOUS
9.1 Assignment. This Agreement, including any or all rights and
obligations hereunder, shall not be assigned by any of the parties to any third
party without the prior written consent of all of the other parties. Except as
otherwise provided in this Agreement, the obligations and rights of the parties
shall be binding upon and inure to the benefit of any assignee, transferee,
successor, or receiver of each of the parties.
9.2 Waiver; Remedies. No delay or omission of any party to this
Agreement to exercise any right or power hereunder shall impair such right or
power or be a waiver of any default or an acquiescence therein; and any single
or partial exercise of any such right or power shall not preclude other or
further exercise thereof or the exercise of any other right. In addition to any
rights granted herein, the parties hereto shall have and may exercise any and
all rights and remedies now or hereafter provided by law except as may be
limited by Section 7 of this Agreement.
9.3 Notices. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally or if mailed by certified or registered mail (return
receipt requested) to the party at its address as set forth on the signature
page of this Agreement. Any notice given as provided in this section, if given
personally, shall be effective upon delivery, or if given by certified or
registered mail, shall be effective three days after deposit in the mail. Any
party hereto may change the address at which it is to be given notice by giving
notice to the other party as provided in this section.
9.4 Governing Law. This Agreement shall be deemed to be a contract made
under the laws of the State of Iowa and shall be construed and interpreted under
the laws of such state applicable to contracts made and to be performed entirely
within such state.
9.5 Enforceability. If any one or more of the covenants, agreements,
provisions, or other terms of this Agreement shall be for any reason whatsoever
determined to be invalid, then such terms shall be deemed severable from the
remaining terms of this Agreement and shall in no way affect the validity or
enforceability of the other terms of this Agreement and such invalid terms shall
be replaced by valid terms bearing the closest possible similarity in substance
so that the intentions and purposes being the basis of this Agreement could be
enforced to the greatest extent permitted by law.
9.6 Survival of Representations, Warranties, and Covenants. All
covenants, agreements, representations, and warranties made in this Agreement by
any of the parties hereto, including but not limited to, the indemnification
provisions set forth herein, shall be effective on the effective date hereof and
thereafter.
9.7 Counterparts. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
9.8 Headings. The headings in the sections and
subsections of this Agreement are inserted for convenience only
and shall not constitute a part hereof.
9.9 Entire Agreement. This Agreement, including the schedules and
addenda referred to herein and any documents executed by the parties
simultaneously herewith constitute the entire understanding and agreement of the
parties hereto and supersede all other prior agreements and understandings,
written or oral, between the parties with respect to the transactions
contemplated herein. Provided, however, the foregoing shall not operate or be
construed to prohibit proof of prior understandings and agreements between or
among the parties to the extent necessary to properly construe or interpret this
Agreement.
9.10 Amendments. Any changes to this Agreement and any further
obligations of the parties to each other must be in writing and executed by
their respective duly authorized officers.
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IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Management Information Services Agreement to be signed by their
duly-authorized officers all as of the date and year first written above.
ALLIED Mutual Insurance Company ALLIED Group, Inc.
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2000 Des Moines, IA 50391-2000
By:/s/ Douglas Anderson By:/s/ Doug Anderson
Title: President Title: President
AMCO Insurance Company ALLIED General Agency Company
701 5th Avenue 701 5th Ave.
Des Moines, IA 50391-2013 Des Moines, IA 50391-2002
By:/s/ Douglas Anderson By:/s/ Jim Shaffer
Title: President Title: President
ALLIED Life Financial ALLIED Group Leasing Corporation
Corporation
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2003 Des Moines, IA 50391-2015
By:/s/ Samual J. Wells By:/s/ Jim Shaffer
Title: President Title: President
ALLIED Group Mortgage Company ALLIED Life Insurance Company
1701 48th St. 701 5th Ave.
West Des Moines, IA 50391-2009 Des Moines, IA 50391-2003
By:/s/ Jim Shaffer By:/s/ Samual J. Wells
Title:Secretary Title:President
ALLIED Group Merchant Banking ALLIED Group Insurance
Corporation Marketing Company
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2003 Des Moines, IA 50391-2010
By:/s/Paul McGillivray By:/s/ William G. Stevensen
Title:President Title: President
ALLIED Group Information ALLIED Life Brokerage Agency
Systems, Inc. 701 5th Ave.
701 5th Ave. Des Moines, IA 50391-2003
Des Moines, IA 50391-1002
By:/s/ Jim Shaffer By:/s/ Samual J. Wells
Title:President Title:President
The Freedom Group, Inc. Midwest Printing Services, Ltd.
701 5th Ave. 3820 109th St.
Des Moines, IA 50391-1002 Des Moines, IA 50391-1003
By:/s/ Jim Shaffer By:Les Peltz
Title: President Title:Controller
99
FIRST AMENDMENT TO
AMENDED AND RESTATED
MANAGEMENT INFORMATION SERVICES AGREEMENT
Effective March 1, 1996
This First Amendment ("amendment") to the Amended and Restated
Management Information Services Agreement ("Agreement") is made as of this 24th
day of February, 1997, to be effective March 1, 1996, (unless a different
effective date is indicated) by and among AMCO Insurance Company ("AMCO"),
ALLIED Group Information Systems, Inc. ("AGIS"), ALLIED Mutual Insurance Company
("Mutual"), ALLIED Group, Inc. ("AGI"), ALLIED General Agency Company ("AGA"),
ALLIED Group Mortgage Company ("AGMC"), ALLIED Group Leasing Corporation
("AGLC"), ALLIED Life Financial Corporation ("ALFC"), ALLIED Life Insurance
Company ("ALLIED Life"), ALLIED Life Brokerage Agency ("ALBA"), ALLIED Group
Merchant Banking Corporation ("AGMBC"), ALLIED Group Insurance Marketing Company
("AGIMC"), The Freedom Group, Inc. ("TFG"), and Midwest Printing Services, Ltd.
("Midwest Printing"). AGIS, AGI, AGA, AGMC, AGLC, ALFC, ALLIED Life, ALBA,
AGMBC, AGIMC, TFG, and Midwest Printing shall be hereinafter referred to
collectively as the "Companies".
WITNESSETH:
WHEREAS, AGIS, Mutual, AGI, AMCO, AGA, AGMC, AGLC, ALFC, ALLIED Life,
ALBA, AGMBC, TFG, Midwest Printing, and AGIMC entered into an Amended and
Restated Management Information Services Agreement effective March 1, 1996 on
January 24, 1997; and
WHEREAS, Section I of Addendum A to the Agreement was not accurate in
stating certain fees for ALLIED Life;
WHEREAS, Section IX of the Agreement allows amendment of the
Agreement in writing and executed by the parties;
NOW, THEREFORE, in consideration of the foregoing premises, and for and
in consideration of the mutual covenants and agreements contained herein, the
parties agree as follows:
1. The Agreement is hereby amended by deleting Section I(a) of
the Addendum and inserting in place thereof the following:
(a) $37.50 per hour for Programming/Development time and
Methods/Procedures time from March 1, 1996 through May 13,
1996 when the programmers became ALLIED Life employees and no
charge thereafter.
2. The Agreement is hereby amended by deleting Section I(d) of
the Addendum and inserting in place thereof the following:
(d) ALLIED Life shall reimburse AMCO for the actual costs
AMCO incurs on a monthly basis for providing ALLIED
Life the services provided under Sections 3.1 ("General
MIS"), 3.2 ("PC Support"), 3.7 (a) ("Printing--Forms
and Reports"), and 3.8 ("Policy Assembly"). In order
to reimburse AMCO for the cost of these services,
ALLIED Life will forward $50,000.00 at the end of each
month as an estimation of the costs of providing the
services for that month.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to the Amended and Restated Management Information Services Agreement to be
signed by their duly-authorized officers all as of the date and year first
written
above.
ALLIED Mutual Insurance Company ALLIED Group, Inc.
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2000 Des Moines, IA 50391-2000
By:/s/ Douglas Anderson By:/s/ Jim Shaffer
Title: President Title: President
AMCO Insurance Company ALLIED General Agency Company
701 5th Avenue 701 5th Ave.
Des Moines, IA 50391-2013 Des Moines, IA 50391-2002
By:/s/ Douglas Anderson By:/s/ Jim Shaffer
Title: President Title: President
ALLIED Life Financial ALLIED Group Leasing Corporation
Corporation
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2003 Des Moines, IA 50391-2015
By:/s/ Samual J. Wells By:/s/ Jim Shaffer
Title: President Title: President
ALLIED Group Mortgage Company ALLIED Life Insurance Company
1701 48th St. 701 5th Ave.
West Des Moines, IA 50391-2009 Des Moines, IA 50391-2003
By:/s/ Jim Shaffer By:/s/ Samual J. Wells
Title:Secretary Title:President
ALLIED Group Merchant Banking ALLIED Group Insurance
Corporation Marketing Company
701 5th Ave. 701 5th Ave.
Des Moines, IA 50391-2003 Des Moines, IA 50391-2010
By:/s/Paul McGillivray By:/s/ William G. Stevensen
Title:President Title: President
ALLIED Group Information ALLIED Life Brokerage Agency
Systems, Inc. 701 5th Ave.
701 5th Ave. Des Moines, IA 50391-2003
Des Moines, IA 50391-1002
By:/s/ Jim Shaffer By:/s/ Samual J. Wells
Title:President Title:President
The Freedom Group, Inc. Midwest Printing Services, Ltd.
701 5th Ave. 3820 109th St.
Des Moines, IA 50391-1002 Des Moines, IA 50391-1003
By:/s/ Jim Shaffer By:Les Peltz
Title: President Title:Controller
101
ALLIED Life Financial Corporation and Subsidiaries
COMPUTATION OF PER SHARE EARNINGS For
the years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Primary
Net income $8,072,591 $9,712,482 $8,556,624
Preferred stock dividends (1,601,089) (1,493,249) (1,330,493)
---------- ---------- ----------
Adjusted net income $6,471,502 $8,219,233 $7,226,131
========== ========== ==========
Earnings per share $ 1.41 $ 1.78 $ 1.58
Weighted average number of common
shares outstanding 4,580,148 4,613,207 4,576,950
Fully Diluted
Net income $8,072,591 $9,712,482 $8,556,624
Preferred stock dividends (1,601,089) (1,493,249) (1,330,493)
---------- ---------- ----------
Adjusted net income $6,471,502 $8,219,233 $7,226,131
========== ========== ==========
Earnings per share $ 1.41 $ 1.78 $ 1.58
Weighted average number of common
shares outstanding 4,580,148 4,613,207 4,576,950
</TABLE>
The common stock equivilents are not entered into earnings per share
computations because they would not have a dilutive effect.
102
ALLIED Life Financial Corporation and Subsidiaries
SUBSIDIARIES OF THE REGISTRANT
As of March 1, 1997
ALLIED LIFE
FINANCIAL
CORPORATION
42-1406716
ALLIED Life ALLIED Life ALLIED Group
Insurance Brokerage Merchant Banking
Company Agency, Inc. Corporation
42-0921353 42-1285968 42-1341874
103
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
ALLIED Life Financial Corporation
We consent to incorporation by reference in Registration Statement Nos.
33-71906, 33-71960, 33-71962, 33-76874 and 33-83274 on Form S-8, and 33-92206 on
Form S-3 of ALLIED Life Financial Corporation of our reports dated February 7,
1997 relating to the consolidated balance sheets of ALLIED Life Financial
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, stockholders' equity and cash flows and
related schedules for each of the years in the three-year period ended December
31, 1996, which appears in the December 31, 1996 annual report on Form 10-K of
ALLIED Life Financial Corporation.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Des Moines, Iowa
March 18, 1997
104
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 500,289
<DEBT-CARRYING-VALUE> 699,498
<DEBT-MARKET-VALUE> 705,637
<EQUITIES> 6,407
<MORTGAGE> 1,457
<REAL-ESTATE> 0
<TOTAL-INVEST> 722,339
<CASH> 0
<RECOVER-REINSURE> 5,786
<DEFERRED-ACQUISITION> 92,418
<TOTAL-ASSETS> 835,600
<POLICY-LOSSES> 37,209
<UNEARNED-PREMIUMS> 54
<POLICY-OTHER> 1,522
<POLICY-HOLDER-FUNDS> 659,078
<NOTES-PAYABLE> 20,470
0
24,586
<COMMON> 4,497
<OTHER-SE> 70,858
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6,728
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</TABLE>
