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, 1997
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, 1998 the number of Registrant's Common Stock, no par value,
outstanding was 4,411,310. 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, 1998 was $63,044,756.
Documents Incorporated By Reference
TheRegistrant's definitive proxy statement (1998 Proxy Statement), which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997, is incorporated by reference under Part III.
The index to the exhibits is located on page 77.
This document contains 97 pages.
<PAGE>
TABLE OF CONTENTS
Part I
Item 1. Business...........................................................1
Item 2. Properties........................................................17
Item 3. Legal Proceedings.................................................18
Item 4. Submission of Matters to a Vote of Security Holders...............18
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholders Matters..................................19
Item 6. Selected Financial Data.................... ......................20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................21
Item 8. Financial Statements and Supplementary Data.......................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 ..................................................................76
Index to Exhibits............................................................77
<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 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. 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, 1997, ALLIED Mutual owned 56% of the outstanding voting
stock of the Company and the ALLIED Life Employee Stock Ownership Trust owned
2%. 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 18.2% owned subsidiary of ALLIED Mutual.
There are approximately 2,300 independent ALLIED Agencies which provide the
Company with access to numerous agency customers in addition to over 600,000
households having one or more ALLIED Property-casualty policies. 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 21 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
which includes financial institutions and a number of independent life insurance
marketing organizations. In 1997, the Company sold 68% of its new life insurance
face amount and 41% of its collected annuity premium through the ALLIED Agencies
and the remainder of its products were sold through traditional distribution
channels. Each distribution system is headed by a marketing vice president.
Property-Casualty Distribution System
The property-casualty distribution system encompasses approximately 2,300
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; 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 distribution system is led by a marketing vice president, who works
with the following personnel.
Regional Directors/Life Marketing Directors. The 12 ALLIED Life Regional
Directors and 7 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 life insurance planning for small commercial property-casualty
accounts. Most of the Regional Directors are responsible for approximately 150
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 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).
Life Marketing Directors have responsibilities similar to those of the
Regional Directors. The Life Marketing Directors are employees of the Company
and are 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 could depend on the level of life insurance sales
achieved by the ALLIED Agencies under their supervision.
2
<PAGE>
Independent Property-Casualty Agencies. The ALLIED Agencies either sell
life insurance and annuity products themselves, with the support of their
Regional Director/Life Marketing 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 insurance specialists may be recruited and introduced to an
ALLIED Agency by its Regional Director/Life Marketing 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 insurance specialists
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 and 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.
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 1997 produced approximately 32% of the total
face amount of life insurance sold and 59% of the total annuity premium
collected. A marketing vice president 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 sell the Company's
life insurance and annuity products. Contracted agents associated with marketing
organizations generated over 48% of the Company's total annuity premium and over
17% of the total life insurance face amount sold in 1997. The Company hopes to
form alliances with more marketing organizations. These alliances give the
Company access to the organizations' licensed agents in a manner that is more
efficient than if the Company tried to recruit these agents one at a time.
Admission into 5 states during the year helped align the Company's territories
more closely to these marketing organizations. This brings to 41 the number of
states where the Company is admitted and pursuing business. In 1998, the Company
will apply for admission in 4 more states. 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 to a lesser degree, 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. 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>
1997 1996 1995
(dollars in thousands)
<S> <C> <C> <C>
Life insurance face amount in force
Directly produced by agents
Property-casualty agencies
Universal Life $ 2,867,625 $ 2,809,270 $ 2,627,447
Term life 3,530,113 3,200,793 2,506,890
Whole Life 35,501 34,521 34,402
6,433,239 6,044,584 5,168,739
Traditional agencies
Universal life 1,708,199 1,531,331 1,588,116
Term life 1,081,686 997,711 908,647
Whole life 15,617 14,558 15,778
2,805,502 2,543,600 2,512,541
9,238,741 8,588,184 7,681,280
Other 390,899 371,130 433,236
Total $ 9,629,640 $ 8,959,314 $ 8,114,516
Life insurance face amount sold
Directly produced by agents
Property-casualty agencies
Universal life $ 311,600 $ 282,388 $ 384,763
Term life 946,842 1,127,060 889,624
Whole life 4,888 3,115 2,775
1,263,330 1,412,563 1,277,162
Traditional agencies
Universal life 263,320 128,247 224,937
Term life 338,528 348,917 333,920
Whole life 2,310 1,124 1,736
604,158 478,288 560,593
Other 1,867,488 1,890,851 1,837,755
Total 8,266 9,431 21,549
$ 1,875,754 $ 1,900,282 $ 1,859,304
Annuity Premiums
Deferred annuities
Property-casualty agencies $ 30,212 $ 30,816 $ 30,321
Traditional agencies 42,872 40,188 45,956
73,084 71,004 76,277
Immediate annuities 1,782 1,227 2,362
Total $ 74,866 $ 72,231 $ 78,639
</TABLE>
5
<PAGE>
The total face amount of life insurance in force grew at an average annual
rate of 9.3% beginning at year end 1995 through year end 1997 and is up 7.5% at
December 31, 1997 as compared to the prior year end. Annuity account balance
grew at an average annual rate of 12.5% beginning at year end 1995 through year
end 1997 and is up 10.1% at December 31, 1997 compared to the prior year end.
The face amount of new term life insurance sold totaled $1.3 billion
accounting for 69% of 1997 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 decreased 12.9% in 1997. The Company continues to
sell mainly 10- and 20-year guaranteed rate term life insurance policies within
this product line. For further information on this product line see Term Life
Insurance on page 9.
The face amount of new universal life insurance sold totaled $574.9 million
representing 31% of 1997 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 face
amount of universal life insurance sold increased 40% in 1997. For further
information on this product line see Universal Life Insurance on page 8.
During 1997, first-year deferred annuity premiums increased 5.1% to $71.5
million. The Company offers two types of deferred annuities, fixed interest and
equity indexed. Fixed interest annuities are tax-deferred cash accumulation
contracts that pay a fixed interest rate established by the Company. Equity
indexed annuities credit interest, which is also tax deferred, to the
policyholders' account based on a percentage of the gain of the S&P 500
Index(R). The Company issues single and flexible premium annuities. Flexible
premium annuities permit additional deposits by policyholders after initial
premiums are paid. Sales of fixed interest annuities were slowed in the fourth
quarter 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. Sales of equity indexed annuities reached expected levels during
the latter part of the year fueled by more product offerings and expectations of
gains in the equity markets. 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>
<CAPTION>
1997 1996 1995
Life
Insurance Annuity Percentage Percentage Percentage
Premiums Considerations Total (1) of Total of Total of Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Iowa $ 9,727 $ 14,025 $ 24,517 19.5 % 21.5% 26.1%
California 11,534 5,408 17,040 13.5 10.8 10.0
Illinois 1,265 13,496 15,466 12.3 10.6 5.5
Wisconsin 2,162 12,126 14,334 11.4 11.3 7.0
Utah 1,469 8,591 10,062 8.0 8.3 5.8
Kansas 3,967 3,119 7,437 5.9 5.0 5.6
Nebraska 4,474 1,975 6,911 5.5 6.2 6.2
Missouri 2,107 1,918 4,214 3.3 3.4 6.6
Colorado 1,232 2,395 3,668 2.9 1.9 1.7
Minnesota 2,335 729 3,112 2.5 2.6 4.8
Idaho 1,264 1,622 2,927 2.3 4.5 1.3
Other (2) 6,037 9,462 16,285 12.9 13.9 19.4
$ 47,573 $ 74,866 $ 125,973 100.0% 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 1997.
</FN>
</TABLE>
For more information regarding the states where ALLIED Life is admitted for
insurance business by distribution system, see the 1997 Annual Report, pages 6
and 8.
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 $1,000,000 in 1997, $681,000 in 1996, and $496,000 in 1995. 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 1997, 1996, and 1995 were $579,000, $389,000,
and $203,000.
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 insured age at date of issue for the Company's universal life products
(excludes riders):
<TABLE>
<CAPTION>
Average Average Number Average
Account Face of Issue
Value Amount Policies Age
Policies sold in 1997:
Policies with a minimum face amount in excess of
<S> <C> <C> <C> <C>
$150,000 $ 6,758 $ 376,442 499 43
All other policies 1,559 69,564 3,290 39
Total policies in force as of December 31, 1997:
Policies with a minimum face amount in excess of
$150,000 $ 11,799 $ 328,320 5,247 40
All other policies 3,923 59,107 33,905 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, 1997:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
1997 182,727 34,271 10,127 (17,322) (4,604) (8,490) 196,709 60,427 5.3
</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
upon the receipt of 5 to 10 years of annual premiums, depending on the product.
The Company imposes surrender charges in order to recover its upfront
acquisition costs upon an early lapse or 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
A significant amount of the Company's current term life insurance sales are
10- and 20-year guaranteed rate 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 insured
age at date of issue for the Company's term life products (excludes riders):
<TABLE>
<CAPTION>
Number Average Average
of Face Issue
Policies Amount Age
Policies sold in 1997:
<S> <C> <C> <C>
Policies with a minimum face amount in excess of $150,000 2,188 $ 377,782 41
All other policies 4,026 91,648 40
Total policies in force as of December 31, 1997:
Policies with a minimum face amount in excess of $150,000 7,988 $ 368,168 40
All other policies 16,823 89,925 39
</TABLE>
The Company encourages the conversion of term life insurance to universal
life insurance, and as an incentive it credits an amount equal to 50% of the
current 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 5.4% of 1997 universal life face amount sold. Universal life
insurance face amount sold resulting from conversions from ALLIED Life term
products were $30.9 million in 1997, $35 million in 1996, and $30.5 million in
1995.
Group Life and Other In Force Life Policies
As of December 31, 1997, the Company had $297.9 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, 1997, the Company had $51.1 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 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 age of
annuitant at date of issue for the Company's deferred annuity products :
<TABLE>
<CAPTION>
Number Average Average
of Account Issue
Policies Value Age
<S> <C> <C> <C>
Annuities sold in 1997: 3,384 $ 23,722 66
Total policies in force as of December 31, 1997: 24,027 21,330 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, 1997:
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C>
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
1997 467,505 74,328 25,692 (52,617) 514,908 27,669 5.3
</TABLE>
The Company's deferred annuities are sold as an alternative to bank
certificates of deposit and other taxable savings vehicles. Annuity premiums are
generally invested in intermediate term investment grade securities, the
investment terms typically matching the underlying product surrender charge
periods of three to nine years.
For most fixed interest plans, the initial interest rate is guaranteed for
one to three years with renewal crediting rates based on portfolio earnings and
market conditions. Several of the Company's annuity plans 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. Liquidity benefits are provided in the form of no-penalty partial
withdrawal allowances, interest income payments, a nursing home waiver, a
terminal illness waiver, and bonus annuitization options.
10
<PAGE>
The Company's equity indexed annuity products guarantee the return of
principal to the customer if held for the whole term and credit interest 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 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 by the Company to purchase S&P 500 call options to hedge the
interest credited to the customer if there are increases in the S&P 500
Index(R). See Note 3 of Notes to Consolidated Financial Statements for
additional information regarding call options.
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 generally reduce the statutory reserve applicable to the policy.
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 1998 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. On larger cases the Company
employs blood and urine testing to provide additional information on nicotine
and drug usage. 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.
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 human
immunodeficiency virus (HIV).
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.
11
<PAGE>
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, 1997, the Company had ceded to reinsurers
$2.4 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 1997
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 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 the 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
The investment policy for ALLIED Life requires at least 95% of the
portfolio consist of investment grade securities. At December 31, 1997, 84% of
the Company's fixed maturity investments were rated "A" or higher, and less than
1% were rated less than investment grade.
Effective May 13, 1997, the Company transferred its remaining securities
classified as held to maturity ($196 million) to available for sale and recorded
an increase to stockholders' equity of $1.2 million in accordance with Statement
of Financial Accounting Standards (SFAS) 115. The Company now carries all of its
securities at fair value and has more flexibility in managing its investment
portfolio. The Company has no intent to classify future purchases of securities
as held to maturity.
12
<PAGE>
The table below shows the composition of the Company's investments:
<TABLE>
<CAPTION>
Estimated 1997 1996
Fair Carrying Percent Percent
Investment Category Value Value Of Total Of Total
(dollars in thousands)
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury obligations (1) $ 26,462 $ 26,462 3.4 4.8%
Foreign governments 5,408 5,408 0.7 1.5
Public utilities 106,924 106,924 13.6 12.5
Asset-backed securities (other than first lien mortgages) 49,990 49,990 6.3 3.1
Mortgage-backed securities:
Pools 112,135 112,135 14.2 16.8
Collateralized mortgage obligations 55,426 55,426 7.0 12.8
Total mortgage-backed securities 167,561 167,561 21.2 29.6
Corporate debt securities:
Investment grade (BBB - or greater) (2) 409,433 409,433 52.0 45.3
Non-investment grade (BB + or below) (2) 250 250 ----- -----
Total corporate debt securities 409,683 409,683 52.0 45.3
Total fixed maturities 766,028 766,028 97.2 96.8
Equity securities 3,201 3,201 0.4 0.9
Mortgage loans on real estate (3) 984 984 0.1 0.2
Policy loans 11,164 11,164 1.4 1.4
Other invested assets (4) 3,014 3,014 0.4 0.5
Short-term investments 3,594 3,594 0.5 0.2
Total investments $ 787,985 $ 787,985 100.0% 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 mortgages and farm mortgages.
(4) Consists of instruments purchased for hedging purposes.
</FN>
</TABLE>
13
<PAGE>
The following table sets forth the composition of the Company's portfolio
of fixed maturity investments by rating at December 31, 1997:
<TABLE>
<CAPTION>
Estimated 1997 1996
Fair Carrying Percent Percent
Rating (1) Value Value Of Total Of Total
(dollars in thousands)
<S> <C> <C> <C> <C>
AAA .......................................... $238,937 $238,937 31.2% 38.3%
AA ........................................... 103,664 103,664 13.5 11.7
A ............................................ 302,368 302,368 39.5 39.0
BBB .......................................... 119,546 119,546 15.6 10.7
Total investment grade fixed maturities 764,515 764,515 99.8 99.7
Non investment grade 1,513 1,513 0.2 0.3
Total fixed maturities ................ $766,028 $766,028 100.0% 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, 1997. Expected maturities at December 31,
1997 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 1997 Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
1997 1996
Amortized Percent Percent
Cost Of Total Of Total
(dollars in thousands)
<S> <C> <C> <C>
One year or less $ 36,460 5.0% 5.6%
Over 1 year through 5 years 192,151 26.2 24.8
Over 5 years through 10 years 334,636 45.6 49.7
Over 10 years through 20 years 111,493 15.2 14.9
Over 20 years 59,023 8.0 5.0
Total $ 733,763 100.0% 100.0%
</TABLE>
14
<PAGE>
Investment results of the Company for each year in the three years ended
December 31, 1997 are shown on the following table.
<TABLE>
<CAPTION>
1997 1996 1995
(dollars in thousands)
<S> <C> <C> <C>
Average invested assets, net (1) $ 719,053 $ 653,908 $ 584,223
Investment income (2) 52,197 48,182 45,411
Average annual yield on total investments 7.3% 7.4% 7.8%
Realized investment gains (losses) $ 2,354 $ 122 $ (722)
<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 21.9% of the Company's total fixed maturity portfolio at
December 31, 1997. The mortgage-backed securities are backed primarily by first
lien single family residential mortgages. The majority 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, 1997, ALLIED Life held CMO investments with a fair value of $55.4
million. As of December 31, 1997, 88.3% (86.8% in 1996) 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 are rated "AAA", 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, 1997 estimated fair value and
carrying value of the CMO portfolio by type:
<TABLE>
<CAPTION>
Estimated 1997 1996
Fair Carrying Percent Percent
Type of CMO Value Value Of Total Of Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Planned amortization class $ 37,147 $ 37,147 67.0% 60.2%
Sequential pay 11,810 11,810 21.3 26.6
Other 6,469 6,469 11.7 13.2
Total investments in CMOs $ 55,426 $ 55,426 100.0% 100.0%
</TABLE>
15
<PAGE>
Hedging Activities
In 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. 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, 1997).
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. 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, 1997).
The costs of the interest rate hedging programs have not had 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 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.
For further information on swaptions and floors see Note 3 of Notes to
Consolidated Financial Statements.
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 (upgraded to "A+" during 1997).
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.
16
<PAGE>
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.
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, none of
which are expected to have a material impact on ALLIED Life.
Employees
At December 31, 1997, ALLIED Life employed 126 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 1998 Proxy Statement for additional information. Management considers the
leased space to be adequate for its needs.
17
<PAGE>
Item 3. Legal Proceedings
For a description of certain lawsuits pending against the Company, see Item
7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this report which is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted during the fourth quarter of 1997 to a vote of
holders of ALLIED Life Financial Corporation stock.
18
<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, 1997, there were 122 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>
High Low Last Dividends
<S> <C> <C> <C> <C>
1997
First qtr. $ 19 $ 17 $ 17 $ .06
Second qtr. 20 15 3/4 19 3/4 .06
Third qtr. 23 3/4 18 3/4 23 3/4 .06
Fourth qtr. 24 19 3/4 21 .07
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
</TABLE>
There are certain regulatory restrictions relating to the payment of
dividends (see Note 10 of the 1997 Notes to Consolidated Financial Statements).
It is the present intention of the Board of Directors to declare quarterly cash
dividends.
19
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
At or for the year ended December 31,
1997 1996 1995 1994 1993
Income Statement Data (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues
Total insurance revenues $ 34,142 $ 31,350 $ 29,934 $ 25,393 $ 20,822
Investment income 52,197 48,182 45,411 38,136 33,243
Realized investment gains
(losses) 2,354 122 (722) (724) 2,154
Other income 1,559 1,056 688 648 277
Total revenues 90,252 80,710 75,311 63,453 56,496
Benefits and expenses
Policyholder benefits 51,392 47,988 46,063 37,359 32,870
Amortization of deferred policy
acquisition costs (1) 11,097 10,595 5,941 5,136 5,347
Commissions 4,232 3,316 2,725 2,627 2,390
Operating expenses 7,832 6,801 6,313 5,715 4,966
Total benefits and expenses 74,553 68,700 61,042 50,837 45,573
Income before income taxes 15,699 12,010 14,269 12,616 10,923
Income taxes 5,226 3,937 4,557 4,059 3,739
Net income (1) $ 10,473 $ 8,073 $ 9,712 $ 8,557 $ 7,184
Net income applicable to
common stock (1) $ 8,862 $ 6,567 $ 8,304 $ 7,239 $ 5,930
Diluted earnings per share (1) 1.94 1.39 1.75 1.57 1.67
Dividends paid per common share $ 0.25 $ 0.21 $ 0.17 $ 0.13 $ 0.03
Weighted average number of
shares outstanding
(in thousands) 4,572 4,712 4,732 4,612 3,546
Balance Sheet Data
Investments at cost $ 755,615 $ 714,483 $ 637,245 $ 554,889 $ 451,982
Assets 904,457 835,600 759,947 643,340 532,588
Preferred stock 26,336 24,586 22,871 21,341 19,028
Stockholders' equity $ 114,157 $ 99,942 $ 101,682 $ 76,027 $ 74,368
Preferred shares outstanding
(in thousands) 2,393 2,238 2,087 1,948 1,754
Common shares outstanding
(in thousands) 4,398 4,497 4,633 4,586 4,572
Other Data
Death benefits per share $ 0.91 $ 0.81 $ 0.81 $ 0.68 $ 0.72
Book value per share 17.84 16.16 15.01 13.42 11.98
Statutory capital and surplus 51,275 46,544 45,504 47,413 42,403
Life insurance in force 9,629,640 8,959,314 8,114,516 7,242,737 5,915,558
Annuity account balances $ 514,908 $ 467,505 $ 412,216 $ 343,390 $ 271,385
<FN>
(1) The 1996 amounts include an additional $2.8 million ($1.9 million or $0.40
per share net of income taxes) charge relating to unlocking adjustments to
deferred policy acquisitions costs.
</FN>
</TABLE>
20
<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 cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed. Forward-looking statements relate to the
plans and objectives of management for future operations, future economic
performance, or projections of revenues, income, earnings per share, capital
expenditures, dividends, capital structure, or other financial items. In the
following discussion and elsewhere in this report, statements containing words
such as expect, anticipate, believe, goal, objective, or similar words are
intended to identify forward-looking statements. ALLIED Life Financial
Corporation (ALFC or the Company) undertakes no obligation to update such
forward-looking statements, and it wishes to identify important factors that
could cause actual results to differ materially from those projected in the
forward-looking statements contained in the following discussion and elsewhere
in this report.
The risks and uncertainties that may affect the operations, performance,
development, and results of the Company's business include, but are not limited
to, the following: (1) heightened competition, particularly intensified price
competition, 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 the 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; (6) inaccuracies in assumptions regarding future
morbidity, persistency, mortality, and interest rates; and (7) other risks
detailed herein and from time to time in the Company's other reports.
Overview
The following analysis of the consolidated results of operations and
financial condition of the Company should be read in conjunction with Selected
Financial Data and Financial Statements and related footnotes included elsewhere
herein.
ALLIED Life Financial Corporation is an insurance holding company with 56%
of its outstanding voting stock owned by ALLIED Mutual Insurance Company (ALLIED
Mutual). 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.
Annuity contracts are products that 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.
21
<PAGE>
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.
A significant source of revenue 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.
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 adjustments related to prior amortization as well as changes to ongoing
amortizations rates.
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 following table 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.
Life insurance operations included in the following analysis should be read
with reference to the table on page 23.
22
<PAGE>
Results of Operations
1997 Compared with 1996
Consolidated revenues for the year ended December 31, 1997 were $90.3
million, an 11.8% increase over the $80.7 million reported for 1996. Life
insurance premiums and other insurance income net of reinsurance premiums ceded
rose 12.6% to $9.5 million from $8.4 million. Investment income grew 8.3% to
$52.2 million from $48.2 million. In 1997 the Company had realized gains on
investments of $2.4 million as compared with realized gains of $122,000 in 1996.
<TABLE>
<CAPTION>
Life Insurance Operations
Year Ended December 31,
1997 1996 1995
(Dollars in thousands)
Production information
Life insurance
<S> <C> <C> <C>
Life insurance face amount in force
directly produced by agents
Universal Life $ 4,575,824 $ 4,340,601 $ 4,215,564
Term life 4,611,799 4,198,504 3,415,536
Whole life 51,118 49,079 50,180
9,238,741 8,588,184 7,681,280
Other 390,899 371,130 433,236
$ 9,629,640 $ 8,959,314 $ 8,114,516
Face amount of new life insurance sold
directly produced by agents
Universal Life $ 574,920 $ 410,635 $ 609,700
Term life 1,285,370 1,475,977 1,223,544
Whole life 7,198 4,239 4,511
1,867,488 1,890,851 1,837,755
Other 8,266 9,431 21,549
$ 1,875,754 $ 1,900,282 $1,859,304
Life insurance termination rate
Universal Life 7.1% 6.1% 6.7%
Term life 19.7% 18.2% 18.9%
Annuities
Account balance $ 514,908 $ 467,505 $ 412,216
First-year annuity premiums $ 71,509 $ 68,063 $ 75,944
</TABLE>
23
<PAGE>
Life Insurance Operations (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Profitability
Investment income $ 52,131 $ 48,145 $ 45,215
Interest credited on
Annuities 26,452 24,732 22,613
Universal life 10,126 9,490 9,530
Other 479 464 324
Total interest expense 37,057 34,686 32,467
Investment spread 15,074 13,459 12,748
Fee income
Universal life charges 23,898 22,410 21,586
Annuity surrender charges 739 495 662
Total fee income 24,637 22,905 22,248
Other insurance income 9,505 8,445 7,686
Adjusted insurance revenues 49,216 44,809 42,682
Other expenses
Amortization of deferred policy
acquisition costs (1) 9,578 10,730 6,036
Renewal commissions 3,258 2,675 2,437
Other insurance operating expenses 4,875 4,505 3,973
Premium and other taxes 1,830 1,343 1,528
Administrative fees 520 508 309
Total acquisition and operating expenses 20,061 19,761 14,283
Death benefits, net 8,192 6,945 6,894
Other policyholder benefits, net 6,141 6,357 6,702
Total other expenses 34,394 33,063 27,879
Insurance operating income before income
taxes and realized investment gains (losses) $ 14,822 $ 11,746 $ 14,803
<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 of deferred policy
acquisition costs.
</FN>
</TABLE>
Operating income before taxes (which excludes realized investment gains and
losses net of related amortization of deferred policy acquisition costs) was
$14.9 million for 1997 compared with $11.8 million in 1996. Operating earnings
per share were $1.82 compared with $1.35. Net income totaled $10.5 million
($1.94 per share) compared with $8.1 million ($1.39 per share). Operating income
before taxes for 1996 included an adjustment 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. The effect of the
adjustment was to decrease operating earnings per share by $0.40.
24
<PAGE>
Life Insurance Operations
Total life insurance in force grew 7.5% to $9.6 billion at December 31,
1997 from $9 billion at December 31, 1996. Growth was slowed by lower term life
insurance sales.
The face amount of new life insurance sold directly by agents in 1997
remained even at $1.9 billion. The face amount of new universal life insurance
sold increased 40% to $574.9 million from $410.6 million. Universal life account
balances increased 7.7% at year-end 1997 from year-end 1996. Fee income
increased 7.6% in 1997 to $24.6 million from $22.9 million in 1996.
The face amount of new term life insurance sold directly by agents
decreased 12.9% to $1.3 billion from $1.5 billion. ALLIED Life continues to sell
mainly 10- and 20-year guaranteed rate term life policies within this product
line.
First-year annuity premiums increased 5.1% to $71.5 million from $68.1
million in 1996. Sales of fixed interest annuities were slowed in the fourth
quarter 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. The total annuity account balance increased 10.1% to $514.9
million at year-end 1997 from $467.5 million at year-end 1996.
Adjusted insurance revenues increased 9.5% to $49.2 million in 1997 from
$44.9 million in 1996. The increase was primarily attributable to increased
investment spread, which grew 11% to $15.1 million from $13.6 million. Invested
assets at cost increased 5.8% to $755.6 million at December 31, 1997 from $714.1
million at December 31, 1996; in 1997, investment income increased 8.3%. ALLIED
Life's return on invested assets decreased to 7.3% in 1997 from 7.4% in 1996.
Annual average interest-credited rates on universal life contracts
decreased to 5.3% from 5.4% and on annuities decreased to 5.4% from 5.6%. The
ratio of investment spread to investment income increased to 28.9% from 28.2%
despite the volatile interest rate environment during 1997. This ratio 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 increased 18% to $8.2 million from $6.9
million. Other policyholder benefits decreased 3.4% to $6.1 million from $6.4
million. Other insurance operating expenses increased 9% to $4.4 million from $4
million.
Amortization of deferred policy acquisition costs (DPAC) decreased 10.7%
in 1997 to $9.6 million from $10.7 million in 1996. Included in the 1996 amount
was an adjustment of $2.8 million taken by the Company as the result of its
annual DPAC study that suggested refinements in assumptions concerning future
annuity policy persistency and interest rate spreads were necessary.
While the Company continues 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.
Primarily due to the DPAC adjustment taken in 1996, ALLIED Life's operating
income in 1997 grew 26.2% to $14.8 million from $11.7 million.
25
<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 in 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. Investment income increased 6.1% to $48.2 million from $45.4 million.
In 1996 the Company had realized investment gains of $122,000 compared with
realized losses of $722,000 in 1995.
Operating income before taxes (which excludes realized investment gains and
losses net of related amortization of deferred policy acquisition costs) for the
year included an adjustment 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. Including the adjustment of $2.8 million,
operating income before taxes was $11.8 million compared with $14.9 million
reported in 1995. Operating earnings per share including the adjustment of $0.40
per share were $1.35 compared with $1.85. Net income totaled $8.1 million ($1.39
per share) in 1996 and was $9.7 million ($1.75 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.
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 in
1995.
The face amount of new term life insurance sold directly by agents
increased 20.6% to $1.5 billion in 1996 from $1.2 billion in 1995. Sales of term
insurance with 10- and 20-year guaranteed rates were strong during 1996.
First-year annuity premiums decreased 10.4% to $68.1 million from $75.9
million in 1995. 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. 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 in 1996 from
$42.7 million in 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 remained even at 28.2%.
26
<PAGE>
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 9.1% to $4 million from $3.7
million.
Amortization of DPAC was $10.7 million in 1996. Included in that amount was
an adjustment taken by the Company of $2.8 million as the result of its annual
DPAC study. DPAC amortization was $6 million in 1995.
Primarily due to the increase in DPAC amortization, operating income before
taxes decreased to $11.7 million in 1996 from $14.8 million in 1995.
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. 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, 1997 was $21.3 million. In addition, ALLIED Life may not pay
an extraordinary dividend with-out 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 as of December 31 of the
preceding year
(ii)the statutory net gain from operations of the insurer for the
twelve-month period ending December 31 of the preceding year.
During 1998, the maximum amount available for distribution to the Company
from ALLIED Life is approximately $9 million. During 1997, the Company paid cash
dividends of $1.2 million to common and preferred stockholders. ALLIED Life paid
to the Company dividends of $1.8 million primarily to fund the Company's
dividend requirement and its note payments on indebtedness to affiliates.
Annual dividends payable on the currently outstanding 6.75% Series
preferred stock are approximately $1.6 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 1997, the Company paid dividends in the form of 148,402
shares of 6.75% Series preferred stock.
Effective May 13, 1997, the Board of Directors approved a stock repurchase
program to acquire shares of Company common stock on the open market. The
Company completed the program during the second quarter of 1997, repurchasing
and cancelling 150,000 shares at an average cost of $16.52 per share.
27
<PAGE>
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 1997, 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 $9.4 million in 1997, $16.6
million in 1996, and $11.7 million in 1995. Cash inflows from financing
activities amounted to $32.5 million, $62.4 million, and $73.3 million during
1997, 1996, and 1995, 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, 1997, 97.2% of the Company's investments were in fixed
maturities. The investment policy for the Company 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 1997, 84.2% were rated "A" or better; less than 1% were rated below
investment grade (below "BBB").
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.
At year-end 1997, all of the Company's CMOs were investment-grade
securities. They were carried at a fair value of $55.4 million; 88.3% 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.
Effective May 13, 1997, the Company transferred its remaining securities
classified as held to maturity ($196 million) to available for sale. In
accordance with Statement of Financial Accounting Standards (SFAS) 115, the
Company now carries all of its securities at fair value; as a result, a $1.2
million increase to stockholders' equity was recognized. The Company now has
more flexibility in selling securities from its investment portfolio. The
Company has no intent to classify future purchases of securities as held to
maturity.
28
<PAGE>
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, 1998. At December 31, 1997, the Company had an outstanding
borrowing of $6.4 million under the line of credit agreement. Interest is
payable at the current rate upon issuance. From time to time, the Company has
borrowed funds from its affiliates on an arm's-length basis. The Company has
entered various note-payable agreements with ALLIED Mutual, an affiliate. The
outstanding borrowing at December 31, 1997 was $3.6 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,
1997, 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 frequently.
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. They entitle the Company to receive payments from
the instruments' counterparties 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, 1997).
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. They
entitle the Company to receive payments from the instruments' counterparties 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, 1997).
29
<PAGE>
Premiums paid to purchase these instruments are capitalized and included in
other invested assets. No swaptions or floors were purchased in 1997. For the
year ended December 31, 1996, the Company paid $4.1 million in premiums. All
such 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. For more information on swaptions and
floors see Note 3 of Notes to Consolidated Financial Statements.
The Company's equity indexed annuity products guarantee 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 is used to purchase S&P 500 call
options (call options) to hedge the growth in interest credited to the customer
if there are advances in the S&P 500 Index(R).
Premiums paid to purchase call options are capitalized and included in
other assets. For the years ended December 31, 1997 and 1996, the Company paid
$6.4 million and $2.3 million, respectively, 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. For more information on call options see Note 3 of Notes
to Consolidated Financial Statements.
The Company is exposed to the risk of extreme declines in the market value
of its call options if there is a sharp and prolonged decrease in the stock
market. The Company currently is purchasing puts to reduce the negative effect
of such a decline. The put agreements allow the Company to receive payments on
future exercise dates if the S&P 500 Index(R) is below specified levels.
The costs of the interest rate hedging programs are not expected to have a
material impact on the interest rate margin. The Company does not anticipate
making any further purchases of interest rate hedges in the near future. For
swaptions, floors, call, and puts the Company pays only the original premium and
is not at risk of further payments regardless of market conditions.
The Financial Accounting Standards Board (FASB) is evaluating the
accounting and disclosure requirements for hedging activities and derivative
financial instruments. It is likely the resulting accounting standards will
require that these instruments be carried at fair value. The impact of such
standards on the Company is not expected to be material to its financial
position or results of operations.
The Company is exposed to the risk of losses in the event of nonperformance
of the counter-parties of the previously described swaptions, floors, and
options. Losses recorded in the Company's financial statements in the event of
nonperformance are limited to the unamortized premium paid to purchase 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 counterparties with appropriate credit ratings.
Contingencies
On January 20, 1998, a complaint was filed by Sharlotte G. Harbott, a
policyholder of ALLIED Life, in Superior Court of the State of California for
the County of Los Angeles, against the Company, ALLIED Life, ALLIED Mutual, and
unnamed persons. The complaint, an alleged class action suit, asserts that
ALLIED Life fraudulently increased the cost of insurance rates charged to
policyholders in breach of the terms of its universal life policies, its
fiduciary obligations, and its obligations of good faith and fair dealing toward
its policyholders and without adequate notice. The plaintiff, an insured under a
universal life policy issued by ALLIED Life, seeks actual, consequential, and
punitive damages in unspecified amounts as well as interest, attorney's fees, an
accounting for moneys allegedly improperly charged to policyholders, and
injunctive relief on behalf of herself and all policyholders of ALLIED Life with
similar universal life policies.
30
<PAGE>
The Company believes the allegations relate to a claim that ALLIED Life
collected a federal tax, known as the deferred acquisition cost tax (DAC tax),
as well as other increased costs of doing business from its policyholders. The
Company believes the amount of DAC tax and other costs claimed to have been
collected from each policyholder is minimal, but the plaintiff in the case has
asked the California court to treat the case as a class action representing all
ALLIED Life policyholders from whom the claimed costs were collected. Similar
class actions have been filed against other life insurance companies since the
federal DAC tax law was enacted in 1990. The Company believes the action will
raise the issue of whether the DAC tax may be included in the cost of insurance
charged to policyholders under the terms of the universal life contracts.
Management believes the increased costs charged to policyholders never violated
the contracts.
The Company believes that the increased costs complained of relate to
universal life policies issued during and prior to 1991 and that ALLIED Life
charged the increased costs to universal life policyholders primarily during the
1992 through 1995 accounting periods. The Company, ALLIED Life, and ALLIED
Mutual do not expect the lawsuit to materially affect their claims-paying
ratings or daily business operations. The Company, ALLIED Life, and ALLIED
Mutual disagree with the allegations, believe the claims presented in this case
are without merit, and believe the resolution of this matter will not materially
affect the Company's financial position.
Year 2000 Issue
The Company is aware of the problems associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The year
2000 problem is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two-digit year value to 00.
Computer systems must properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
The Company has assessed all computer systems as they relate to the year 2000
issue. The Company has formulated a plan to resolve the issue. Appropriate
internal and external resources have been acquired and dedicated to implement
the plan. The Company believes that testing of the systems will be finalized
before the year 2000 and will not have a significant effect on the Company's
ability to conduct business in a reasonable fashion. Anticipated expenditures
for year 2000 compliance are not expected to be material to fiscal year 1998
and 1999 operations.
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, none of which are
expected to have a material impact on ALLIED Life.
31
<PAGE>
New Accounting Standards
In 1997, the Company adopted SFAS 128, "Earnings Per Share." SFAS 128
supersedes Opinion 15, "Earnings Per Share," and specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS). It
replaces the presentation of primary EPS and fully diluted EPS with basic EPS
and diluted EPS, respectively. Basic EPS includes the weighted average number of
common shares outstanding and excludes all dilutive securities. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stocks were exercised or converted to common stock.
Prior year amounts have been restated to conform to the new standard.
In 1997, the Company adopted 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. This
adoption had no impact on the Company's financial position, results of
operations, or liquidity.
In June of 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income." This statement establishes new rules for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The new rules require that all items that are recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. Earlier application of this statement is permitted. The
Company will adopt SFAS 130 on January 1, 1998. This statement will require
revised and additional disclosures but will have no effect on the results of
operations or the financial position of the Company.
In June of 1997, the FASB issued SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information." Under this statement, public companies will
report financial and descriptive information about their operating segments.
SFAS 131 is effective for fiscal years beginning after December 15, 1997.
Earlier application of this statement is permitted. The Company will adopt SFAS
131 on January 1, 1998. This statement will require revised and additional
disclosures but will have no effect on the results of operations or the
financial position of the Company.
In December of 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments." This statement provides
guidance on when an insurance or other enterprise should recognize a liability
for guaranty fund and other assessments and on how to measure such liability.
SOP 97-3 is effective for fiscal years beginning after December 15, 1998.
Earlier application of this statement is permitted. The Company will adopt SOP
97-3 on January 1, 1999. Management expects that such adoption will not have a
material impact on the financial position or results of operations of the
Company since the majority of guaranty fund assessments are expected to be
recovered through future premium tax offsets.
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, 1997 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, 1997,
1996, and 1995 have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The audits were conducted 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, 1997 and 1996 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, 1995.
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, 1997 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Des Moines, Iowa
February 12, 1998
34
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues
Insurance revenues
Policyholder assessments on
universal life contracts $ 21,926 $ 20,727 $ 20,011
Surrender charges 2,711 2,177 2,237
Life insurance premiums 14,201 13,005 12,568
Other insurance income 5,946 3,948 2,878
Reinsurance premiums ceded (10,641) (8,507) (7,760)
Total insurance revenues 34,143 31,350 29,934
Investment income (notes 2 and 4) 52,197 48,182 45,411
Realized investment gains (losses) (note 2) 2,354 122 (722)
Other income 1,558 1,056 688
90,252 80,710 75,311
Benefits and Expenses
Policyholder benefits
Interest credited to policyholder
account balances
Annuity contracts 26,452 24,732 22,613
Universal life contracts 10,127 9,490 9,530
Other 479 463 324
Death benefits 12,041 10,046 13,035
Other policyholder benefits 5,856 7,388 6,702
Reinsurance recoveries (3,563) (4,131) (6,141)
Total policyholder benefits 51,392 47,988 46,063
Amortization of deferred policy
acquisition costs 11,097 10,595 5,941
Commissions 4,232 3,316 2,725
Affiliated operating expenses (note 4) 640 839 1,411
Other insurance operating expenses 7,192 5,962 4,902
74,553 68,700 61,042
Income before income taxes 15,699 12,010 14,269
Income Taxes (note 13)
Current 6,206 5,797 4,673
Deferred (980) (1,860) (116)
5,226 3,937 4,557
Net Income $ 10,473 $ 8,073 $ 9,712
Net income applicable to
common stock (diluted basis) $ 8,862 $ 6,567 $ 8,304
Earnings per Share
Basic earnings per share $ 1.98 $ 1.41 $ 1.78
Diluted earnings per share $ 1.94 $ 1.39 $ 1.75
</TABLE>
See accompanying Notes to Consolidated Financial Statements
35
<PAGE>
<TABLE>
Consolidated Balance Sheets
<CAPTION>
December 31,
1997 1996
(In thousands)
<S> <C> <C>
Assets
Investments
Fixed maturities (notes 2 and 5)
Held to maturity, at amortized cost $ ----- $ 199,209
Available for sale, at fair value 766,028 500,289
Equity securities, at fair value (notes 2 and 5) 3,201 6,407
Mortgage loans on real estate 984 1,457
Policy loans 11,164 10,307
Other invested assets (notes 3 and 5) 3,014 3,751
Short-term investments, at cost (notes 2, 4, and 5) 3,594 919
Total investments 787,985 722,339
Accrued investment income 10,988 9,738
Accounts receivable 912 608
Reinsurance ceded receivables 7,168 5,786
Deferred policy acquisition costs 84,188 92,418
Other assets (notes 3 and 5) 13,216 4,711
Total assets $ 904,457 $ 835,600
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
December 31,
1997 1996
(In thousands)
<S> <C> <C>
Liabilities
Policy liabilities
Policyholder account balances
Annuity contracts (note 5) $ 514,908 $ 467,505
Universal life contracts (note 5) 196,709 182,727
Other 7,732 8,846
Future policy benefits 38,124 33,474
Policy and contract claims 4,102 3,735
Other policyholder funds 1,778 1,576
763,353 697,863
Checks drawn in excess of bank balances 2,066 3,163
Current income taxes 23 941
Deferred income taxes (note 13) 10,552 8,009
Indebtedness to affiliates (note 4) 3,638 2,188
Note payable (notes 5 and 12) 6,360 20,470
Other liabilities 4,308 3,024
Total liabilities 790,300 735,658
Stockholders' Equity
Preferred stock, no par value, issuable in series, authorized 7,500 shares (note 7)
6.75% Series, authorized 2,440 shares, issued and
outstanding of 2,292 in 1997 and 2,144 in 1996 24,869 23,259
ESOP Series, authorized 300 shares, issued and
outstanding of 101 in 1997 and 94 in 1996 1,467 1,327
Common stock, no par value, $1 stated value,
authorized 25,000 shares, issued and outstanding
of 4,398 in 1997 and 4,497 in 1996 (notes 8 and 9) 4,398 4,497
Additional paid-in capital 44,964 46,596
Retained earnings (note 10) 29,404 21,751
Unrealized appreciation of investments, net (notes 6 and 14) 9,055 2,512
Total stockholders' equity 114,157 99,942
Contingent liabilities (notes 6 and 14)
Total liabilities and stockholders' equity $ 904,457 $ 835,600
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE>
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Preferred Stock at beginning of year $ 24,586 $ 22,871 $ 21,341
Issuance of shares of 6.75% Series for
stock dividends (note 7) 1,610 1,506 1,408
Issuance of shares of ESOP Series, net of
redemptions and issuance costs (note 7) 317 249 194
ESOP Series converted to common stock (note 7) (177) (40) (72)
Preferred stock at end of year 26,336 24,586 22,871
Common Stock at beginning of year 4,497 4,633 4,586
Issuance of shares of common stock
(notes 7, 8, and 9) 51 14 47
Repurchase of shares of common stock (note 8) (150) (150) -----
Common stock at end of year 4,398 4,497 4,633
Additional Paid-in Capital at beginning of year 46,596 48,774 48,159
Issuance of shares of common stock,
net of issuance costs 696 214 615
Repurchase of shares of common stock (note 8) (2,328) (2,392) -----
Additional paid-in capital at end of year 44,964 46,596 48,774
Retained Earnings at beginning of year 21,751 16,238 8,804
Net income 10,473 8,073 9,712
Dividends paid on preferred stock (notes 7 and 10) (1,717) (1,601) (1,493)
Dividends paid on common stock (notes 8 and 10) (1,103) (959) (785)
Retained earnings at end of year 29,404 21,751 16,238
Unrealized Appreciation (Depreciation)
of Investments at beginning of year 2,512 9,166 (6,864)
Unrealized appreciation (depreciation), net (note 1) 6,543 (6,654) 16,030
Unrealized appreciation (depreciation)
of investments at end of year 9,055 2,512 9,166
Total Stockholders' Equity $ 114,157 $ 99,942 $ 101,682
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
38
<PAGE>
Conslidated Statements of Cash Flows
<TABLE>
Year ended December 31,
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 10,473 $ 8,073 $ 9,712
Adjustments to reconcile net income to
net cash provided by operating activities
Policyholder assessments on
universal life contracts (21,926) (20,727) (20,011)
Surrender charges (2,711) (2,177) (2,238)
Interest credited to policyholder
account balances 37,058 34,686 32,467
Realized investment (gains) losses (2,354) (122) 722
Change in
Accrued investment income (1,250) (1,040) (1,070)
Reinsurance ceded receivables (1,382) 1,840 (1,904)
Deferred policy acquisition costs (6,216) (7,115) (11,298)
Liabilities for future policy benefits 4,650 5,324 5,228
Policy and contract claims and other
policyholder funds 568 (383) (87)
Current income taxes (919) 1,810 509
Deferred income taxes (980) (1,860) (116)
Other, net (5,646) (1,695) (194)
Net cash provided by operating activities 9,365 16,614 11,720
Cash Flows from Investing Activities
Purchase of fixed maturities held to maturity (7,594) (22,174) (15,582)
Maturities, calls, and principal reductions of
fixed maturities held to maturity 8,022 42,276 32,832
Purchase of fixed maturities available for sale (224,767) (140,828) (188,898)
Proceeds from sale of fixed maturities available
for sale 144,951 38,649 79,185
Maturities, calls, and principal reductions
of fixed maturities available for sale 38,535 10,847 6,964
Purchase of equity securities (4,763) (1,908) (2,165)
Proceeds from sale of equity securities 9,384 21 457
Proceeds from repayment and sale of mortgage loans 473 372 248
Purchase of other invested assets ----- (4,145) -----
Change in policy loans, net (857) (780) (616)
Purchase of property, plant, and equipment (2,622) (1,156) (178)
Net cash used in investing activities (39,238) (78,826) (87,753)
Cash Flows from Financing Activities
Change in checks drawn in excess of bank balances (1,097) 1,126 (67)
Deposits to policyholder account balances 114,847 111,878 116,886
Withdrawals from policyholder account balances (66,236) (52,921) (44,048)
Change in note payable, net (14,110) 3,865 605
Changes in notes payable to affiliate 1,946 1,617 -----
Proceeds from issuance of common stock, net 569 188 589
Proceeds from issuance of preferred stock, net 317 249 194
Repurchase of common stock (2,478) (2,541) -----
Dividends paid to stockholders (1,210) (1,052) (869)
Net cash provided by financing activities 32,548 62,409 73,290
Net Increase (Decrease) in Cash and
Short-term Investments 2,675 197 (2,743)
Cash and short-term investments at beginning of year 919 722 3,465
Cash and short-term investments at end of year $ 3,594 $ 919 $ 722
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
39
<PAGE>
Notes to Consolidated Financial Statements
(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, which as of December 31, 1997 consisted of
ALLIED Life Insurance Company (ALLIED Life), ALLIED Life Brokerage Agency, Inc.
(ALBA), and ALLIED Group Merchant Banking Corporation (AGMB). At December 31,
1997, ALLIED Mutual Insurance Company (ALLIED Mutual) owned 56% of the
outstanding voting stock of the Company and The ALLIED Life Employee Stock
Ownership Trust (ESOP Trust) owned 2%. 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 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 1997 the ALLIED Agencies
generated 68% of life insurance face amount sold and 41% of annuity premiums
collected.
Investments
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 stockholders'
equity net of a provision for related deferred policy acquisition costs and
deferred income taxes.
Effective May 13, 1997, the Company transferred its remaining securities
classified as held to maturity ($196 million) to available for sale and recorded
an increase to stockholders' equity of $1.2 million in accordance with Statement
of Financial Accounting Standards (SFAS) 115. The Company now carries all of its
securities at fair value and has more flexibility in managing its investment
portfolio. The Company has no intent to classify future purchases of securities
as held to maturity.
40
<PAGE>
Equity securities are carried at fair value with their unrealized
appreciation or depreciation, net of taxes, reported 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, 1997 and 1996. 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), call
options, and puts 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 and puts 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 and puts 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 Financial Accounting Standards Board (FASB) is evaluating the accounting and
disclosure requirements for these instruments, and, as a result, this accounting
treatment will change in the future. It is likely the resulting accounting
standards will require that these instruments be carried at fair value. The
impact of such standards on the Company is not expected to be material to its
financial position or results of operation.
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.
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 is 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.
41
<PAGE>
Costs deferred were $17.3 million, $17.7 million, and $17.2 million for the
years ended December 31, 1997, 1996, and 1995, respectively. Amortization of
deferred policy acquisition costs net of interest accretion included in the
consolidated statements of income were $11.1 million, $10.6 million, and $5.9
million for the years ended December 31, 1997, 1996, and 1995, respectively. In
1996 the amortization included an adjustment of approximately $2.8 million the
Company recorded as a result of 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 further material adjustments in the foreseeable future. At December 31,
1997, unamortized deferred policy acquisition costs were decreased by
approximately $18.4 million (by $4 million in 1996 and $9.6 million in 1995) to
recognize the impact of unrealized appreciation of investments on such deferred
costs. The decreases net of deferred income taxes were charged to stockholders'
equity.
Policy Liabilities
Policyholder account balances for universal life and annuity contracts
consist of deposits received plus accumulated credited interest less withdrawals
and accumulated policy-holder assessments. Interest credited to policyholder
account balances for universal life contracts averaged 5.3%, 5.4%, and 5.9% in
1997, 1996, and 1995, respectively. Interest credited to policyholder account
balances for annuity contracts averaged 5.4%, 5.6%, and 5.9% in 1997, 1996, and
1995, 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 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, which take 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.
42
<PAGE>
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
The Company accounts 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 is recorded on the date of grant only if the current market
price of the underlying stock exceeds 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 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.
Income 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
In 1997, the Company adopted SFAS 128, "Earnings Per Share." SFAS 128
supersedes APB Opinion 15, "Earnings Per Share," and specifies the computation,
presentation, and disclosure requirements for earnings per common share (EPS).
It replaces the presentation of primary EPS and fully diluted EPS with basic EPS
and diluted EPS, respectively. Basic EPS includes the weighted average number of
common shares outstanding and excludes all dilutive securities. Diluted EPS
reflects the dilution that could occur if securities or other contracts to issue
common stocks were exercised or converted into common stock. Diluted EPS is
computed similarly to fully diluted EPS under APB 15. All prior periods have
been restated to conform to the new standard.
43
<PAGE>
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands, except per share data)
<S> <C> <C> <C>
Numerator
Net income $ 10,473 $ 8,073 $ 9,712
Preferred stock dividends (1,717) (1,601) (1,493)
Numerator for basic earnings per
share-income available to
common stockholders 8,756 6,472 8,219
Effect of diluted securities
Convertible preferred stock dividends 107 95 85
Numerator for diluted earnings per
share-income available to common
stockholders after assumed conversions $ 8,863 $ 6,567 $ 8,304
Denominator
Denominator for basic earnings per
share-weighted average shares 4,430 4,580 4,613
Effect of dilutive securities
Stock options 35 36 34
Convertible preferred stock 107 96 85
Dilutive potential common shares 142 132 119
Denominator for diluted earnings
per share-adjusted weighted average
shares and assumed conversions 4,572 4,712 4,732
Basic earnings per share $ 1.98 $ 1.41 $ 1.78
Diluted earnings per share $ 1.94 $ 1.39 $ 1.75
</TABLE>
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, 1997
and 1996. The estimated fair value of fixed maturities and equity securities is
based on quoted market prices where available or on values obtained from
independent pricing services.
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
1997
Fixed Maturities
Available for Sale
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 25,466 $ 1,018 $ (22) $ 26,462
Foreign governments 5,144 264 ----- 5,408
Corporate securities and
public utilities 543,788 23,915 (1,105) 566,598
Mortgage-backed securities 159,365 8,254 (59) 167,560
$ 733,763 $ 33,451 $ (1,186) $ 766,028
Equity Securities $ 3,094 $ 107 $ ----- $ 3,201
</TABLE>
<TABLE>
<CAPTION>
1996
Fixed Maturities
Held to Maturity
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 1,007 $ 26 $ (64) $ 969
Foreign governments 4,482 230 ----- 4,712
Corporate securities and
public utilities 128,885 5,220 (502) 133,603
Mortgage-backed securities 64,835 1,655 (426) 66,064
$ 199,209 $ 7,131 $ (992) $ 205,348
Available for Sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 34,378 $ ----- $ (443) $ 33,935
Foreign governments 6,189 226 (8) 6,407
Corporate securities and
public utilities 306,416 8,598 (4,030) 310,984
Mortgage-backed securities 145,703 3,706 (446) 148,963
$ 492,686 $ 12,530 $ (4,927) $ 500,289
Equity Securities $ 6,153 $ 254 $ ----- $ 6,407
</TABLE>
45
<PAGE>
The table below presents the amortized cost and estimated fair value of
investments in fixed maturities at December 31, 1997 by contractual maturity.
Expected maturities at December 31, 1997 will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost fair value
(In thousands)
Available for Sale
<S> <C> <C>
Due in one year or less $ 13,149 $ 13,308
Due in one through five years 138,590 143,397
Due in five through ten years 287,026 298,451
Due after ten years 135,633 143,312
Mortgage-backed securities 159,365 167,560
Total fixed maturities $ 733,763 $ 766,028
</TABLE>
As of December 31, 1997 and 1996, there were no investments that were
non-income producing for the preceding twelve months.
For the years ended December 31, 1997, 1996, and 1995, the Company realized
gross gains of $1.7 million, $237,000, and $2.1 million and gross losses of
$971,000, $454,000, and $2.8 million, respectively, from the call, prepayment,
or sale of investments from the available for sale portfolio. There were no
sales from the held to maturity portfolio in 1997, 1996, and 1995.
46
<PAGE>
A summary of net realized investment gains (losses) and net changes in
unrealized appreciation (depreciation) of invest-ments is as follows:
<TABLE>
Year ended December 31,
<CAPTION>
1997 1996 1995
(In thousands)
Net realized investment gains (losses)
<S> <C> <C> <C>
Fixed maturities
Held to maturity $ ----- $ 3 $ 24
Available for sale 792 (217) (746)
Equity securities 1,562 334 -----
Other ----- 2 -----
2,354 122 (722)
Net changes in unrealized (depreciation)
appreciation of investments
Fixed maturities
Held to maturity (6,139) (6,695) 29,973
Available for sale 24,662 (16,003) 31,430
Equity securities (146) 178 (31)
18,377 (22,520) 61,372
Net realized investment gains
(losses) and changes in unrealized
appreciation (depreciation)
of investments $ 20,731 $ (22,398) $ 60,650
</TABLE>
A summary of net investment income follows:
<TABLE>
Year ended December 31,
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Interest on fixed maturities $ 53,469 $ 48,899 $ 45,535
Interest on mortgage loans 110 160 88
Interest on policy loans 760 713 632
Dividends on equity securities 343 274 347
Interest on short-term investments 88 84 60
Other, net 27 17 31
Total investment income 54,797 50,147 46,693
Investment expenses 945 872 574
Interest expense 919 700 708
Amortization expense, hedges 736 393 -----
Net investment income $ 52,197 $ 48,182 $ 45,411
</TABLE>
47
<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, 1997 and 1996, with carrying values of $754.5 million and $681.1
million, respectively. As of December 31, 1997 and 1996, bonds with a carrying
value of $29.1 million and $30.2 million, 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, 1997 consisted of fixed maturity securities issued by Hydro
Quebec at a carrying value of $11.5 million.
(3) Hedging Activities
In 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 Index(R) call options
and S&P 500 Index(R) puts as a result of the sale of equity indexed annuity
products.
Swaptions are being purchased to reduce the negative effect on the Company's
fixed maturity investments and annuity liabilities of increased withdrawal
activity that may result from extreme rises in interest rates. As of December
31, 1997, 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 instruments' counterparties 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, 1997). As of December 31,
1997, the notional amounts range from $3 million to $9 million (total of $244
million) and the swaptions were carried at an amortized cost of $2.1 million.
Amortized cost was $2.6 million at December 31, 1996.
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, 1997 expire quarterly
from June 1999 through March 2006. The agreements entitle the Company to
receive payments from the instruments' counterparties 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, 1997). As of December 31,
1997, the notional amounts for each quarter ranged from $140 million to $270
million and the floors were carried at an amortized cost of $945,000.
Amortized cost was $1.1 million at December 31, 1996.
The Company offers equity indexed annuity products that guarantee 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). 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, 1997, the Company had purchased 113 call options with
notional amounts ranging from $70,000 to $1.1 million (total of $36.3 million)
and the call options were carried at an amortized cost of $7.9 million. At
December 31, 1996, the Company had 40 call options with notional amounts
totaling $11.2 million and amortized cost of $2.2 million.
48
<PAGE>
The Company is exposed to the risk of extreme declines in the market value of
its call options if there is a sharp and prolonged decrease in the stock
market. The Company currently is purchasing puts to reduce the negative effect
of such a decline. The put agreements allow the Company to receive payments on
future exercise dates if the S&P 500 Index(R) is below specified index levels.
The costs of the interest rate hedging programs are not expected to have a
material impact on the interest rate margin. For swaptions, floors, calls, and
puts the Company pays only the original premium and is not at risk of further
payments regardless of market conditions.
The Company is exposed to the risk of losses in the event of nonperformance
of the counterparties of the previously described swaptions, floors, and call
options. Losses recorded in the Company's financial statements in the event of
nonperformance are limited to the unamortized premium paid to purchase 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 counterparties 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 18.2% 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. 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 $226,000, $253,000, and
$234,000 for the years ended December 31, 1997, 1996, and 1995, 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 $162,000, $156,000, and $132,000 for the years ended December 31,
1997, 1996, and 1995, 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
$645,000, $863,000, and $1.4 million for the years ended December 31, 1997,
1996, and 1995, respectively.
49
<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. 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, 1997, 1996, and 1995 were approximately $100,000,
$165,000, and $121,000, respectively.
ALLIED Life received premium income from ALLIED Group, Inc. for term life
insurance on its employee group in the amounts of approximately $468,000,
$452,000, and $418,000 for the years ended December 31, 1997, 1996, and 1995,
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, 1997 and 1996, the Company had approximately $3.5 million and $795,000,
respectively, invested in the fund, which is carried as a short-term investment.
Interest earned from the fund during 1997, 1996, and 1995 was approximately
$78,000, $74,000, and $77,000, respectively.
The Company and its subsidiaries have from time to time borrowed funds from
affiliates as needed on an arms length basis. The Company has various
notes-payable agreements with ALLIED Mutual. As of December 31, 1997 and 1996
the outstanding borrowings were approximately $3.6 million and $1.6 million,
respectively. The Company incurred interest expense to affiliates of
approximately $241,000, $61,000, and $51,000 in 1997, 1996, and 1995,
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.
50
<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, 1997, and 1996:
<TABLE>
<CAPTION>
1997 1996
Estimated Estimated
Carrying fair Carrying fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Fixed maturity
investments $ 766,028 $ 766,028 $ 699,498 $ 705,637
Equity securities 3,201 3,201 6,407 6,407
Cash settle put
swaptions 2,070 638 2,615 2,202
Interest rate floors 945 3,621 1,137 2,075
Short-term
investments 3,594 3,594 919 919
Call options 7,924 11,641 2,175 2,814
Annuity contracts (514,908) (483,208) (467,505) (437,623)
Universal life
contracts (196,709) (143,866) (182,727) (132,977)
Note payable (6,360) (6,360) (20,470) (20,470)
</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. 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 1997, 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 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.
51
<PAGE>
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 7.5 million 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. At its option, the Company 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 148,402, 138,793, and 129,808 shares of such stock in
1997, 1996, and 1995, respectively.
ESOP Series
During 1997, 1996, and 1995 the Company sold 19,143, 14,787, and 14,650
shares of Series A ESOP Convertible Preferred Stock (ESOP Series) to the ESOP
Trust for $17.50, $18.13, and $15.00 per share, respectively. At December 31,
1997, a commercial bank, acting on behalf of the ESOP participants as the
trustee for the ESOP, was the holder of 100,732 shares of the ESOP Series. The
ESOP Trust purchased an additional 13,163 shares on January 2, 1998 for $21.88
per share funded by a $183,000 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 1997, 1996,
and 1995, respectively, 12,393, 2,834, and 5,263 shares of the ESOP Series were
converted to common stock.
52
<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; 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) that 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 1997, 1,571 shares were issued at prices ranging from $13.82 to
$20.40. During 1996 and 1995, 1,934 and 6,963 shares, respectively, were issued
at prices ranging from $13.18 to $17.37 for 1996 and $12.33 to $19.13 for 1995.
At December 31, 1997, 326,959 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, participants pay 85% of the fair value of the shares
issued. The 15% discount is recognized as expense on the date of issue. During
1997, 2,958 shares were issued at prices ranging from $19.13 to $21.50. During
1996 and 1995, 2,677 and 4,737 shares were issued at prices ranging from $17.37
to $17.38 and $17.06 to $17.13, respectively. At December 31, 1997, 335,213
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 1997, 535 shares were issued
at prices ranging from $16 to $23.88. 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, 1997, 348,525 shares were
available for issuance.
53
<PAGE>
During 1997, pursuant to rule 10b-18 under the Securities Exchange Act of
1934, the Company repurchased and canceled 150,000 shares of Company common
stock on the open market at an average cost of $16.52 per share. During 1996,
the Company repurchased and canceled 150,000 shares of Company common stock on
the open market at an average cost of $16.94 per share.
The dividend per common share for 1997, 1996, and 1995 was $0.25, $0.21, and
$0.17, respectively.
(9) Stock Option Plans
At December 31, 1997, the Company had four stock-based compensation plans,
two described in note 8 (the ESPP and DSPP) and two described here: the ALLIED
Life Financial Corporation Long-Term Management Incentive Plan (Incentive Plan)
and the ALLIED Life Financial Corporation Executive Stock Option Plan (Option
Plan). The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for the following stock option plans 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 in the table:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands, except per share data)
Net income
<S> <C> <C> <C>
As reported $ 10,473 $ 8,073 $ 9,712
Pro forma $ 10,384 $ 8,018 $ 9,688
Diluted earnings per share
As reported $ 1.94 $ 1.39 $ 1.75
Pro forma $ 1.92 $ 1.38 $ 1.75
</TABLE>
Pro forma net income reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation 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.
54
<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 1997, 1996, and 1995, dividend yield of 1.25%,
expected volatility of 45%, and expected life of 6 years and a risk- free
interest rate of 6% for 1997 and 7% for 1996 and 1995.
The Company reserved 186,800 shares of common stock for issuance to key
employees of the Company and its affiliates under the 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 or three years after the
grant date at a rate of 25% or 33.3% 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, 1997, the 64,467
outstanding Options and SARs had exercise prices ranging from $12.88 to $23.13
and had a weighted-average remaining contractual life of 8.6 years. At December
31, 1997, 108,282 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 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% vest three years from
the date of grant, 66.7% vest four years from the date of grant, and 100% 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, 1997, the 124,293 outstanding options had exercise prices ranging from
$12.00 to $17.63 and had a weighted average remaining contractual life of 6.2
years. At December 31, 1997, 31,167 shares were available for award under the
Option Plan.
A summary of the status of the Company's stock options as of December 31,
1997, 1996 and 1995 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted Weighted Weighted
average average average
Shares exercise price Shares exercise price Shares exercise price
(In thousands, except price data)
Outstanding at
<S> <C> <C> <C> <C> <C> <C>
beginning of year 205 $ 12.99 183 $ 12.27 227 $ 12.06
Granted 38 19.35 27 17.63 14 15.30
Exercised (33) 12.36 (5) 12.13 (27) 12.00
Cancelled (25) 13.03 ----- ----- (31) 12.33
Outstanding at
end of year 185 $ 14.40 205 $ 12.99 183 $ 12.27
Options exercisable
at end of year 69 12.15 54 12.05 ----- -----
Weighted-average fair
value of options granted
during the year $ 9.54 $ 8.71 $ 7.08
</TABLE>
55
<PAGE>
The issuance of SARs and restricted stock under the Incentive Plan reduces
the number of options available for future issuance. No restricted shares were
awarded in 1997. During 1996 and 1995, 1,355 and 3,458 shares of restricted
stock were awarded at $17.25 and $15.50 per share, re-spectively. At December
31, 1997, 3,167 restricted shares were outstanding. The following table shows
SAR activity for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted Weighted Weighted
No. of average No. of average No. of average
SARs exercise price SARs exercise price SARs exercise price
Outstanding at
<S> <C> <C> <C> <C> <C> <C>
beginning of year 5,182 $ 15.49 3,300 $ 14.10 2,000 $ 12.88
Granted ----- ----- 2,000 17.63 2,000 15.30
Exercised (962) 13.74 (118) 12.88 ----- -----
Cancelled (788) 15.78 ----- ----- (700) 14.06
Outstanding at
end of year 3,432 $ 15.91 5,182 $ 15.49 3,300 $ 14.10
SARs exercisable
at end of year 155 14.00 383 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, 1997 was $21.3 million. 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 1997, 1996, and 1995,
the Company paid cash dividends on common stock of $1.1 million, $959,000, and
$785,000, respectively. During 1997, 1996, and 1995, the Company paid cash
dividends of $107,000, $95,000, and $85,000, respectively, on preferred stock.
ALLIED Life paid to the Company dividends of $1.8 million, $1.4 million, and
$800,000 during 1997, 1996, and 1995, respectively, primarily to fund the
Company's cash dividend requirements and its note payments on indebtedness to
affiliates. During 1998, the maximum amount available for distribution to the
Company from ALLIED Life without regulatory approval of the Iowa Insurance
Commissioner is $9 million.
Statutory capital and surplus for ALLIED Life was $51.3 million and $46.5
million at December 31 1997 and 1996, respectively. Statutory net income for
ALLIED Life was $9.7 million, $5.3 million, and $6.7 million for the years ended
December 31, 1997, 1996, and 1995, respectively.
56
<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 are 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 $183,000, $238,000, and $176,000 in 1997,
1996, and 1995, respectively. During 1997, 1996, and 1995, the ESOP Trust
received $106,609, $95,163, and $84,826, respectively, from dividends on the
ESOP Series, which were 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 million. The line expires March 13, 1998.
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, 1997 and 1996, borrowings on this line
of credit agreement were $6.4 million and $20.5 million at an interest rate of
6.3% and 5.7% per annum, respectively. The Company incurred interest expense to
nonaffiliates of $919,000, $690,000, and $656,000 in 1997, 1996, and 1995,
respectively.
(13) Federal Income Taxes
Total income taxes for the years ended December 31, 1997, 1996, and 1995 were
allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Net income $ 5,226 $ 3,937 $ 4,557
Unrealized appreciation
of investments, net 3,524 (3,584) 4,476
$ 8,750 $ 353 $ 9,033
</TABLE>
57
<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, 1997 and 1996 follow:
<TABLE>
December 31,
<CAPTION>
1997 1996
(In thousands)
Deferred income tax assets
<S> <C> <C>
Policy liabilities $ 27,673 $ 24,711
Deferred policy acquisition costs
related to unrealized appreciation 6,454 1,398
Other 897 331
Total gross deferred income tax assets 35,024 26,440
Less valuation allowance ----- -----
Net deferred income tax assets 35,024 26,440
Deferred income tax liabilities
Deferred policy acquisition costs (32,260) (30,363)
Unrealized appreciation (11,330) (2,750)
Market discount on bonds (1,230) (904)
Other (756) (432)
Total gross deferred income tax
liabilities (45,576) (34,449)
Net deferred income tax liability $ (10,552) $ (8,009)
</TABLE>
The valuation allowance for deferred income tax assets at the beginning of
the years ended December 31, 1997 and December 31, 1996 was $0. 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. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the period that those
temporary differences become deductible. Management considers primarily the
scheduled reversal of deferred income tax liabilities, projected future taxable
income, 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, 1997.
For the years ended December 31, 1997, 1996, and 1995, 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
$7 million, $3.9 million, and $4.1 million in 1997, 1996, and 1995,
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 $3.3 million 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 shareholders' surplus
account cannot be paid without a portion of policyholders' surplus becoming
taxable. The balance of the shareholders' surplus account was approximately
$57.5 million as of December 31, 1997.
58
<PAGE>
(14) Contingencies
On January 20, 1998, a complaint was filed by a policyholder of ALLIED Life,
in Superior Court of the State of California for the County of Los Angeles,
against the Company, ALLIED Life, ALLIED Mutual, and unnamed persons. The
complaint, an alleged class action suit, asserts that ALLIED Life fraudulently
increased the cost of insurance rates charged to policyholders in breach of the
terms of its universal life policies, its fiduciary obligations, and its
obligations of good faith and fair dealing toward its policyholders and without
adequate notice. The plaintiff, an insured under a universal life policy issued
by ALLIED Life seeks actual, consequential, and punitive damages in unspecified
amounts as well as interest, attorney's fees, an accounting for moneys allegedly
improperly charged to policyholders, and injunctive relief, on behalf of herself
and all policyholders of ALLIED Life with similar universal life policies.
The Company believes the allegations relate to a claim that ALLIED Life
collected a federal tax, known as the deferred acquisition cost tax (DAC tax),
as well as other increased costs of doing business from its policyholders. The
Company believes the amount of DAC tax and other costs claimed to have been
collected from each policyholder is minimal, but the plaintiff in the case has
asked the California court to treat the case as a class action representing all
ALLIED Life policyholders from whom the claimed costs were collected. Similar
class actions have been filed against other life insurance companies since the
federal DAC tax law was enacted in 1990. The Company believes the action will
raise the issue of whether the DAC tax may be included in the cost of insurance
charged to policyholders under the terms of the universal life contracts.
Management believes the increased costs charged to policyholders never violated
the contracts.
The Company believes that the increased costs complained of relate to
universal life policies issued during and prior to 1991 and that ALLIED Life
charged the increased costs to universal life policyholders primarily during the
1992 through 1995 accounting periods. The Company, ALLIED Life, and ALLIED
Mutual do not expect the lawsuit to materially affect their claims-paying
ratings or daily business operations. The Company, ALLIED Life, and ALLIED
Mutual disagree with the allegations, believe the claims presented in this case
are without merit, and believe the resolution of this matter will not materially
affect the Company's financial position.
The Company is a party to other 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 position.
59
<PAGE>
(15) Unaudited Interim Financial Information
<TABLE>
Quarter ended
<CAPTION>
March 31 June 30 September 30 December 31
1997 Operating Summary
<S> <C> <C> <C> <C>
Insurance revenues $ 8,175 $ 8,587 $ 8,526 $ 8,854
Net investment income $ 12,683 $ 12,852 $ 13,223 $ 13,439
Realized investment
(losses) gains $ (393) $ 140 $ 857 $ 1,749
Total revenues $ 20,788 $ 21,918 $ 23,086 $ 24,460
Total benefits and expenses $ 17,597 $ 17,901 $ 18,849 $ 20,206
Net income $ 2,127 $ 2,679 $ 2,826 $ 2,841
Earnings per common share $ .37 $ .50 $ .53 $ .54
</TABLE>
<TABLE>
Quarter ended
<CAPTION>
March 31 June 30 September 30 December 31
1996 Operating Summary
<S> <C> <C> <C> <C>
Insurance revenues $ 7,370 $ 7,550 $ 8,619 $ 7,811
Net investment income $ 11,750 $ 11,937 $ 11,827 $ 12,668
Realized investment
(losses) gains $ (84) $ (60) $ (49) $ 315
Total revenues $ 19,324 $ 19,697 $ 20,644 $ 21
Total benefits and expenses $ 15,280 $ 16,056 $ 17,535 $ 19,830
Net income $ 2,697 $ 2,464 $ 2,105 $ 806
Earnings per common share $ .49 $ .44 $ .37 $ .09
</TABLE>
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
1998 Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
The information under the caption "Compensation of Executive Officers" in the
1998 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 1998 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 1998 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>
<CAPTION>
(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, 1997, 1996,
and 1995. 35
Consolidated Balance Sheets as of December 31, 1997 and 1996. 36-37
Statements of Stockholders' Equity for the Years ended December 31, 1997, 1996,
and 1995. 38
Consolidated Statements of Cash Flows for the Years ended December 31, 1997, 1996,
and 1995. 39
Notes to Consolidated Financial Statements. 40-60
</TABLE>
2. Schedules.
<TABLE>
<CAPTION>
Independent Auditors' Report on Schedules.
<S> <C>
I. Summary of Investments-Other Than Investments in Related Parties. 69
II. Condensed Financial Information of Registrant. 70-73
III. Supplementary Insurance Information. 74
IV. Reinsurance. 75
</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.
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.
62
<PAGE>
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), 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 (Incorporate by reference to
Exhibit 10.35 to the Company's December 31, 1996 Form 10-K on file with the
Commission), Exhibit 10.35.
Amendment dated December 16, 1996 to ALLIED Life Financial Corporation
Long-Term Management Incentive Plan (Incorporate by reference to Exhibit
10.36 to the Company's December 31, 1996 Form 10-K on file with the
Commission), Exhibit 10.36.
Amendment dated June 12, 1997 to The ALLIED Life Financial Corporation
Short Term Management Incentive Plan (Incorporate by reference to Exhibit
10.41 to the Company's June 30, 1997 Form 10-Q on file with the
Commission), Exhibit 10.41.
Short Term Management Incentive Plan for 1998, Exhbit 10.45.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the fourth quarter ended
December 31, 1997.
(c) Exhibits.
NOTE: See "Index to Exhibits" on page number 77, 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 October 14, 1993, December 14,
1994, and December 18, 1997 (Incorporated by reference to Exhibit
3.2 to the Company's Form 8-K filed with the Commission on January 5,
1998).
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 (Incorporated by reference to Exhibit
3.4 to the Company's Registration Statement on Form S-1 filed with the
Commission on September 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, 1997 with ALLIED Life Insurance Company, (Incorporated by
reference to Exhibit 10.12 to the Company's March 31, 1997 Form 10-Q on file
with the Commission).
10.15 First Amendment to Amended and Restated ALLIED Group Intercompany
Operating Agree-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).
64
<PAGE>
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).
10.28 First Amendment to the ALLIED Life Financial Corporation Employee Stock
Ownership Plan (Incorporated by reference to Exhibit 10.28 to the Company's June
30, 1995 Form 10-Q on file with the Commission).
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).
65
<PAGE>
10.30 Intercompany Cash Concentration Fund Agreement (Incorporated by reference
to Exhibit 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 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 (Incorporated by
reference to Exhibit 10.34 to the Company's December 31, 1996 10K on file with
the Commission).
10.35 Short Term Management Plan for 1997 (Incorporated by reference to Exhibit
10.35 to the Company's December 31, 1996 10K on file with the Commission).
10.36 Amendment dated December 16, 1996 to ALLIED Life Financial Corporation
Long-Term Management Incentive Plan (Incorporated by reference to Exhibit 10.36
to the Company's December 31, 1996 10K on file with the Commission).
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 (Incorporated by reference to Exhibit 10.37 to the
Company's December 31, 1996 10K on file with the Commission).
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 (Incorporated by reference to Exhibit 10.38 to the
Company's December 31, 1996 10K on file with the Commission).
10.39 Amended and Restated Management Information Services Agreement Effective
March 1, 1996 (Incorporated by reference to Exhibit 10.39 to the Company's
December 31, 1996 10K on file with the Commission).
10.40 First Amendment to Amended and Restated Management Information Services
Agreement Effective March 1, 1996 (Incorporated by reference to Exhibit 10.40 to
the Company's December 31, 1996 10K on file with the Commission).
10.41 Amendment dated June 12, 1997 to The ALLIED Life Financial Corporation
Short Term Management Incentive Plan (Incorporate by reference to Exhibit 10.41
to the Company's June 30, 1997 Form 10-Q on file with the Commission).
10.42 Second Amendment dated May 13, 1997 to Consulting Agreement between John
E. Evans and ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED
Life Financial Corporation (Incorporate by reference to Exhibit 10.42 to the
Company's June 30, 1997 Form 10-Q on file with the Commission).
10.43 Promissory Note dated October 28, 1997 between ALLIED Mutual Insurance
Company and ALLIED Life Financial Corporation (Incorporate by reference to
Exhibit 10.43 to the Company's September 30, 1997 Form 10-Q on file with the
Commission).
66
<PAGE>
10.44 1997 Incentive Plan ALLIED Life Vice President Marketing (Incorporate by
reference to Exhibit 10.44 to the Company's June 30, 1997 Form 10-Q on file with
the Commission).
10.45 Short Term Management Incentive Plan for 1998
10.46 Stock Purchase Agreement dated January 2, 1998 between ALLIED Life
Financial Corporation and State Street Bank and Trust Company.
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.
67
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
The Board of Directors and Stockholders
ALLIED Life Financial Corporation
Under date of February 12, 1998, we reported on the consolidated balance sheets
of ALLIED Life Financial Corporation and subsidiaries as of December 31, 1997
and 1996, 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, 1997, as contained in the 1997 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.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Des Moines, Iowa
February 12, 1998
68
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
SCHEDULE I-SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D
Amount at
which
shown in
Amortized Fair the balance
Type of Investment Cost value sheet
(In thousands)
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S.
<S> <C> <C> <C>
government corporations and agencies $ 25,466 $ 26,462 $ 26,462
Foreign governments 5,144 5,408 5,408
Corporate securities and public utilities 543,788 566,598 566,598
Mortgage-backed securities 159,365 167,560 167,560
Total fixed maturities available for sale 733,763 $ 766,028 766,028
Equity Securities 3,094 $ 3,201 3,201
Mortgage loans on real estate 984 984
Policy loans 11,164 11,164
Other assets 3,014 3,014
Short-term investments 3,594 3,594
Total investments $ 755,613 $ 787,985
</TABLE>
69
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
SCHEDULE II
ALLIED Life Financial Corporation (Holding Company)
CONDENSED BALANCE SHEET
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
(In thosuands)
Assets
<S> <C> <C>
Investments in subsidiaries, at equity $ 116,419 $ 101,327
Short-term investments, at cost 1,205 203
Accounts receivable 1 2
Current income taxes recoverable 135 43
Total assets $ 117,760 $ 101,575
Liabilities
Note payable to affiliates (note 2) $ 3,564 $ 1,617
Other liabilities 39 16
3,603 1,633
Stockholders' Equity
Preferred stock, no par value, issuable in series,
authorized 7,500,000 shares
6.75% Series, authorized 2,440 shares, issued and
outstanding of 2,292 in 1997 and 2,144 in 1996 24,869 23,259
ESOP Series, authorized 300 shares, issued and
outstanding of 101 in 1997 and 94 in 1996 1,467 1,327
Common stock, no par value, $1 stated value,
authorized 25,000 shares, issued and outstanding
of 4,398 in 1997 and 4,497 in 1996 4,398 4,497
Additional paid-in capital 44,964 46,596
Retained earnings 29,404 21,751
Unrealized appreciation of investments, net 9,055 2,512
Total stockholders' equity 114,157 99,942
Total liabilities and stockholders' equity $ 117,760 $ 101,575
</TABLE>
See accompanying Note to Condensed Financial Statements.
70
<PAGE>
ALLIED Life Financial Corporation SubsidiariesSCHEDULE II
ALLIED Life Financial Corporation (Holding Company)
CONDENSED STATEMENT OF INCOME
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Equity in undistributed earnings of subsidiaries $ 8,547 $ 6,698 $ 8,746
Dividends received from subsidiaries 2,100 1,475 925
Investment income 44 25 185
Realized investment gains ----- ----- 65
10,691 8,198 9,921
Operating expenses 157 154 180
Interest expense 181 44 -----
338 198 180
Income before income taxes 10,353 8,000 9,741
Income tax (benefit) expense (120) (73) 29
Net income (note 1) $ 10,473 $ 8,073 $ 9,712
</TABLE>
See accompanying Note to Condensed Financial Statements.
71
<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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net income $ 10,473 $ 8,073 $ 9,712
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed earnings (8,547) (6,698) (8,746)
Realized investment gains ----- ----- (65)
Accrued investment income ----- ----- 21
Income taxes (92) (42) (5)
Other, net 24 13 (94)
Net cash provided by operating activities 1,858 1,346 823
Cash Flows from Investing Activities
Purchase of fixed maturities available for sale ----- ----- (1,635)
Proceeds from sale of fixed maturities
available for sale ----- ----- 4,432
Investments in subsidiaries ----- ----- (3,500)
Net cash used in investing activities ----- ----- (703)
Cash Flows from Financing Activities
Proceeds from note payable to affiliate, net 1,946 1,617 -----
Proceeds from issuance of common stock, net 569 189 588
Proceed from issuance of preferred stock, net 317 249 194
Dividends paid to stockholders (1,210) (1,053) (870 )
Repurchase of common stock (2,478) (2,541) -----
Net cash provided by financing activities (856) (1,539) (88)
Net Increase in Cash and Short-term
investments 1,002 (193) 32
Cash and short-term investments at beginning
of year (period) 203 396 364
Cash and short-term investments at end of year $ 1,205 $ 203 $ 396
</TABLE>
See accompanying Note to Condensed Financial Statements.
72
<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
ALFC has entered into several note payable agreements with ALLIED Mutual.
At December 31, 1997 and 1996, the outstanding balance of the note-payables were
approximately $3.6 million and $1.6 million. In 1997 and 1996, ALFC incurred
interest expense of approximately $181,000 and $44,000 relating to the
note-payables.
73
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
For the years ended December 31, 1997, 1996 and 1995
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
(In thousands)
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 considerations income expenses costs expense written
Year ended December 31, 1997:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life insurance $84,188 $757,473 $----- $5,879 $34,143 $52,132 $51,392 $11,097 $10,482 $ -----
Other ----- ----- ----- ----- ----- 65 ----- ----- 1,583 -----
Consolidated $84,188 $757,473 $----- $5,879 $34,143 $52,197 $51,392 $11,097 $12,065 $ -----
Year ended December 31, 1996:
Life insurance $92,418 $692,551 $----- $5,312 $31,350 $48,145 $47,988 $10,595 $ 9,030 $ -----
Other ----- ----- ----- ----- ----- 37 ----- ----- 1,087 -----
Consolidated $92,418 $692,551 $----- $5,312 $31,350 $48,182 $47,988 $10,595 $10,117 $ -----
Year ended December 31, 1995:
Life insurance $79,718 $616,654 $----- $5,695 $29,934 $45,215 $46,063 $ 5,941 $ 8,246 $ -----
Other ----- ----- ----- ----- ----- 196 ----- ----- 792 -----
Consolidated $79,718 $616,654 $----- $5,695 $29,934 $45,411 $46,063 $ 5,941 $ 9,038 $ -----
</TABLE>
74
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
SCHEDULE IV - REINSURANCE
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
(In thousands)
Percentage
Assumed of amount
Ceded to other from other assumed to
Gross amount companies companies Net amount net
Year ended December 31, 1997:
<S> <C> <C> <C> <C> <C>
Life insurance in force $ 9,536,681 $ (2,359,213) $ 92,959 $ 7,270,427 1.3%
Premiums:
Life insurance premiums:
and charges (1) $ 35,912 $ (7,003) $ 215 $ 29,124 0.7%
Accident and
health insurance 3,514 (3,638) ----- (124) -----
Total premiums $ 39,426 $ (10,641) $ 215 $ 29,000 0.7%
Year ended December 31, 1996:
Life insurance in force $ 8,855,654 $ (2,633,078) $ 103,660 $ 6,326,236 1.6%
Premiums:
Life insurance premiums:
and charges (1) $ 33,500 $ (6,275) $ 232 $ 27,457 0.8%
Accident and
health insurance 2,230 (2,232) ----- (2) -----
Total premiums $ 35,730 $ (8,507) $ 232 $ 27,455 0.8%
Year ended December 31, 1995:
Life insurance in force $ 7,995,050 $ (2,538,119) $ 119,466 $ 5,576,397 2.1%
Premiums:
Life insurance premiums:
And charges (1) $ 32,350 $ (6,388) $ 228 $ 26,190 0.8%
Accident and
health insurance 1,376 (1,372) ----- 4 -----
Total premiums $ 33,726 $ (7,760) $ 228 $ 26,194 0.9%
<FN>
(1) Includes life insurance premiums and policyholder assessments on universal
life contracts.
</FN>
</TABLE>
75
<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 3, 1998 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.
Signature Title Date
/s/ SAMUEL J. WELLS President (Principal Executive March 3, 1998
Samuel J. Wells Officer)
/s/ WENDELL P. CROSSER Vice President and Treasurer March 3, 1998
Wendell P. Crosser
/s/ JOHN E. EVANS Chairman of the Board and Director March 3, 1998
John E. Evans
/s/ JAMES W. CALLISON Director March 3, 1998
James W. Callison
/s/ HAROLD S. EVANS Director March 3, 1998
Harold S. Evans
/s/ DENNIS H. KELLY, JR. Director March 3, 1998
Dennis H. Kelly, Jr.
/s/ GEORGE D. MILLIGAN Director March 3, 1998
George D. Milligan
76
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Item Page
<S> <C> <C>
10.45 Short Term Management Incentive Plan for 1998 78
10.46 Stock Purchase Agreement dated January 2, 1998
between ALLIED Life Financial Corporation
and State Street Bank and Trust Company 83
11 Statement re Computation of Per Share Earnings 94
21 Subsidiaries of the Registrant 95
23 Consent of KPMG Peat Marwick LLP 96
27 Financial Data Schedule 97
</TABLE>
77
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, 1998.
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 Award" is defined in Paragraph 5(c).
(b) "Base Salary" is the annualized weekly base pay of the
Participant in effect as of the last day in the position for
which the bonus is being calculated, which in no event shall
be later than December 31 of the Plan year.
(c) "Committee" shall mean the Compensation Committee of the
Board of Directors of ALFC.
(d) "Discretionary Award" is defined in Paragraph 5(d).
(e) "Discretionary Tier Award" is defined in Paragraph 5(i).
(f) "Eligible Award Percentage" is defined in Paragraph 5(b).
(g) "Eligible Individual Award" is defined in Paragraph 5(a).
(h) "Eligible Tier Award" is defined in Paragraph 5(g).
(i) "EPS" is defined in Paragraph 4.
(j) "Goal" is the expected level of performance used to
establish targeted awards as approved by the Committee.
(k) "Growth" is defined in Paragraph 4.
(l) "Maximum" is the level of performance at which the maximum
eligible award could be made.
(m) "Participant" is a key employee of ALLIED Life recommended
by the President of ALFC and approved by the Committee to
participate in this Plan.
(n) "Threshold" is the minimum level of performance that will
warrant an award.
(o) "Total Award" is defined in Paragraph 5(e).
78
<PAGE>
3. PARTICIPATION AND TIERS
Participation in the Plan is tiered by responsibility level and the
short-term impact of the management position.
General 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. "EPS"
is defined as the ALFC consolidated 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. "Growth" is
defined as 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. The Threshold for EPS must be
attained before any award will be made based on Growth.
5. AWARDS
Individual Calculations
(a) A Participant may receive an Eligible Individual Award under the
Plan. "Eligible Individual Award" is defined as 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
amount used to determine the Base Award and the Discretionary Award.
(b) "Eligible Award Percentage" is defined as the percentage amount
used to determine the potential Eligible Tier Awards and Eligible Individual
Award. The amount of the Eligible Award Percentage is tied to tier and
performance level attained (Threshold, Goal, or Maximum), as set forth in
Exhibit B.
79
<PAGE>
Example for Eligible Award Percentage for EPS for a Participant
Step 1: Compare actual EPS results for the fiscal year to the
goals specified in Exhibit A. 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.
Step 2: Determine the percent by which the EPS results exceeded
the Threshold value (or the goal value as the case may be). There is no
need for a calculation if the Maximum results were achieved or
exceeded.
Step 3: Identify the Eligible Award Percentage for EPS indicator
in the tier at the Threshold level, as shown in Exhibit B. Multiply the
Eligible Award Percentage by the percent calculated in Step 2. This
will calculate the actual Eligible Award Percentage available based on
the profit results attained.
Repeat Steps 1 through 3 using Growth to compute the Eligible
Award Percentage for Growth.
(c) Upon meeting the Threshold for EPS, a Participant will receive a
Base Award. "Base Award" is defined as the award to a Participant when a
minimum performance level is met. The Base Award is 60% of the
Eligible Individual Award.
(d) Depending on the determination of the Committee, a Participant may or may
not receive a Discretionary Award. "Discretionary Award" is defined as an
amount separate from the Base Award which is awarded to a Participant
based on the discretion of the Committee. The Discretionary Award is
calculated as a percentage of the Eligible Tier Award.
(e) A Participant's "Total Award" is defined as the sum of the Base Award
and the Discretionary Award. The Discretionary Award combined with the
Base Award cannot exceed 150% of the Participant's Eligible Individual
Award.
(f) In the event a Participant does not meet the Threshold 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.
Tier Calculations
(g) "Eligible Tier Award" is defined as the award potential for a tier
based on EPS and Growth results. Eligible Tier Award is the sum of the Eligible
Individual Awards for all of the Participants in a particular tier. 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.
(h) 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.
(i) "Discretionary Tier Award" is defined as the portion of the tier
award potential that is not guaranteed to payout but may be awarded based on
contribution and performance. This portion may equal up to 40% of the Eligible
Tier Award. A Participant may receive a portion, all, or none of the
Discretionary Tier Award.
80
<PAGE>
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
days that a Participant has been eligible for a tier and dividing that number by
the calendar days 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 this Plan, any right to an award under this
Plan is forfeited.
12. PLAN AMENDMENT OR TERMINATION
The Committee may amend or terminate the Plan at any time. Participants
will be notified of such action as soon as it is practical to do so.
In the event of any change in the corporate structure of 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.
81
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
GOALS
Threshold Goal Maximum
<S> <C> <C> <C>
EPS $1.90 $2.00 $2.10
GROWTH 8% 10% 12%
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT B
ELIGIBLE AWARD PERCENTAGES
Threshold Goal Maximum Weight
Tier A - President:
<S> <C> <C> <C> <C>
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%
</TABLE>
82
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of January 2, 1998, 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 122,717 shares were previously issued and
of which it has offered 13,163 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 13,163 shares of Series A Preferred Stock (the "Series A
Preferred Stock") for an aggregate purchase price (the "Purchase Price") of
$287,936.00 (or $21.875 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, 1998 (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.
83
<PAGE>
3. The Company hereby represents, warrants and covenants to the Trustee
as follows:
a. the Company (i) is a corporation duly
organized, validly existing and in good standing under
the laws of the State of Iowa and (ii) has full corporate
power and authority to execute and deliver this
Agreement, to carry out the transactions contemplated
hereby, to own, lease and operate its assets and
properties, and to carry on its business as now being
conducted;
b. this Agreement has been duly authorized,
executed and delivered by the Company and constitutes a
valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject
to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws
affecting creditors' rights generally and to general
principles of equity (regardless of whether considered in
a proceeding at law or in equity);
c. the execution, delivery and performance
of this Agreement by the Company and the consummation of
the transactions contemplated hereby will not violate (i)
the Company's Articles of Incorporation or By-laws, each
as amended 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;
d. except for any necessary applications
with The NASDAQ Stock Market with respect to any newly
issued shares of Common Stock which may be issued upon
conversion of the 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;
e. 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);
f. 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;
g. 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(g) of this Agreement;
84
<PAGE>
h. the Company's annual report on 10-K for
the year ended December 31, 1996 and quarterly reports on
10-Q for the quarterly periods ended March 31, June 30
and September 30, 1997, 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;
i.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;
j. 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
k. the Company has furnished and will
continue to furnish to the Trustee from time to time
copies of all reports and financial statements which the
Company shall send or make available to its public
stockholders generally, all other written communications
from the Company to public shareholders generally and
each regular or periodic report, proxy statement,
registration statement or prospectus, if any, filed by
the Company with the SEC; and
4. The Trustee represents and warrants to the Company as follows:
a. the Trustee (i) is a duly organized and
validly existing Massachusetts trust company in good
standing 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;
b. this Agreement has been duly authorized,
executed and delivered by the Trustee and constitutes a
valid and binding obligation of the Trustee, enforceable
against the Trustee in accordance with its terms, subject
to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws
affecting creditors' rights generally and to general
principles of equity (regardless of whether considered in
a proceeding at law or in equity);
c. the execution, delivery and performance
of this Agreement by the Trustee and the consummation of
the transactions contemplated hereby will not violate (i)
the Trustee's Corporate Charter or By-laws, each as
amended to date, or (ii) any provision of any agreement,
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, 1997;
d. no approval, authorization or other
action by, or filing with, any governmental authority is
required to be obtained or made by the Trustee in
connection with the execution, delivery and performance
by the Trustee of this Agreement and the consummation of
the transactions contemplated hereby;
85
<PAGE>
e. 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 Certificateof
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;
f. 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;
g. 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
h. 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.
5. 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.
6. 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, 1998. The Corporation
will furnish a copy of such agreement to the holder of this
certificate without charge upon written request.
86
<PAGE>
7. 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.
8. 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.
9. The representations, warranties and agreements in this Agreement
shall survive the date hereof and the Delivery Date.
10. 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.
87
<PAGE>
11. 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.
12. 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.
13. 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.
14. 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: Samuel 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/ John Scott Feely
Name _________________________
Title ________________________
88
<PAGE>
Annex A
January 2, 1998
ALLIED Life Financial Corporation
701 Fifth Avenue
Des Moines, Iowa 50391
Re: The ALLIED Life Financial Corporation Employee Stock Ownership Trust
Ladies and Gentlemen:
We have acted as special counsel for State Street Bank and Trust
Company ("State Street"), as trustee (the "Trustee") of The ALLIED Life
Financial Corporation Employee Stock Ownership Trust (the "Trust"), which forms
a part of The ALLIED Life Financial Corporation Employee Stock Ownership Plan
(as amended and restated effective as of January 1, 1996, the "Plan"), and which
is evidenced by the Trust Agreement dated June 20, 1994 (the "ESOP Trust
Agreement") between the Trustee and ALLIED Life Financial Corporation (the
"Company"), in connection with the purchase by the Trustee of _______ shares of
Series A ESOP Convertible Preferred Stock of the Company, no par value (the
"Preferred Stock") pursuant to the Stock Purchase Agreement dated as of January
2, 1998 between the Company and the Trustee (the "Stock Purchase Agreement").
Capitalized terms used herein that are not defined herein have the meanings set
forth in the Stock Purchase Agreement.
In connection therewith, we have reviewed executed copies of: (i) the
ESOP Trust Agreement and the Stock Purchase Agreement; (ii) the Certificate of
Designations of Series A ESOP Convertible Preferred Stock of ALLIED Life
Financial Corporation; (iii) the corporate charter and by-laws of State Street,
both as amended to date; (iv) other records, documents, and instruments relating
to the powers and organization of State Street and to State Street's acceptance
of fiduciary duties, obligations and trusts; and (v) such other certificates and
documents as we have deemed relevant or necessary as a basis for the opinion
expressed below.
In our examination, we have assumed without any investigation (i) the
legal capacity of each natural person, (ii) the full power and authority of each
person other than State Street to execute, deliver and perform its obligations
under each document heretofore executed and delivered or hereafter to be
executed and delivered and to do each other act heretofore done or hereafter to
be done by such person, (iii) the due authorization, execution and delivery by
each person other than State Street of each document heretofore executed and
delivered or hereafter to be executed and delivered by such person, (iv) the
legality, validity, binding effect and enforceability as to each person other
than State Street of each document heretofore executed and delivered or
hereafter to be executed and delivered and of each other act heretofore done or
hereafter to be done by such person, (v) the genuineness of each signature other
than those of officers of State Street and the completeness and authenticity of
each document submitted to us as an original, (vi) the conformity to the
original of each document submitted to us as a copy, (vii) the authenticity of
the original of each document submitted to us as a copy and (viii) no amendment
or modification hereafter of any provision of any document. Insofar as our
opinion relates to, or depends on, any matter of fact, we have relied on
representations as set forth in the Stock Purchase Agreement, and upon written
statements and certificates of officers of State Street and of public officials.
We are members of the Bar of the Commonwealth of Massachusetts and,
accordingly, we express no opinion herein concerning any law other than the laws
of the Commonwealth of Massachusetts and the Federal laws of the United States
of America, to the extent specifically referred to herein.
As used in this opinion with respect to any matter, the qualifying
phrase "to the best of our knowledge" means that, without independent review or
verification, nothing has come to the attention of John J. Cleary or John O.
Newell, the attorneys principally responsible for performing legal services for
the Trustee with respect to said matter.
We express no opinion as to matters governed by the Internal Revenue
Code of 1986 (the "Code") or the Employee Retirement Income Security Act of 1974
("ERISA"), both as amended, or federal or state securities laws.
89
<PAGE>
Based on and subject to the foregoing, we are of the opinion that:
1. State Street, acting solely in its capacity as Trustee, has all
requisite power and authority to execute, deliver and perform its obligations
under the Stock Purchase Agreement.
2. The execution, delivery and performance of the Stock Purchase
Agreement by State Street, as Trustee, will not violate the charter or the
by-laws of State Street or, to the best of our knowledge, any order, judgment or
decree binding on State Street (individually or as trustee).
3. The Stock Purchase Agreement has been duly executed and delivered by
State Street, as Trustee.
4. No authorization, approval or consent of, and no filings or
registrations with, any governmental or regulatory authority or agency are
necessary for the execution, delivery or performance by State Street of the
Stock Purchase Agreement or for the validity or enforceability thereof, except
for filings with the Internal Revenue Service or the Department of Labor which
may from time to time be required by ERISA or the Code.
We express no opinion as to any matter other than as expressly set
forth above, and no other opinion is intended to be implied nor may be inferred
herefrom. The opinions expressed herein are given as of the date hereof and we
undertake no obligation hereby and disclaim any obligation to advise you of any
change after the date hereof pertaining to any matter referred to herein.
Neither this opinion nor any part hereof may be delivered to, used or relied
upon by any person or entity other than you without our prior written consent.
Very truly yours,
GOODWIN, PROCTER & HOAR, LLP
90
<PAGE>
Annex B
January 2, 1998
State Street Bank and Trust Company
Legal Division, Q6N
200 Newport Avenue
North Quincy, MA 02171
Ladies and Gentlemen:
I have acted as legal counsel of ALLIED Life Financial Corporation, an Iowa
corporation (the "Company"), and in such capacity I have advised the Company in
connection with The ALLIED Life Financial Corporation Employee Stock Ownership
Trust (the "ESOP Trust"), a trust established under that certain Trust Agreement
dated June 20, 1994 (the "Trust Agreement"), between the Company and State
Street Bank and Trust Company, as trustee (the "Trustee" or "State Street"),
which implements and forms a part of the ALLIED Life Financial Corporation
Employee Stock Ownership Plan (the "Plan"), and in connection with the purchase
by the Trustee of ______ shares of Series A ESOP Convertible Preferred Stock of
the Company, no par value (the "Preferred Stock" or "Preferred Shares"),
pursuant to the Stock Purchase Agreement between the Company and the Trustee
dated January 2, 1998 (the "Stock Purchase Agreement"). Capitalized terms used
herein without definition shall have the meanings ascribed to them in the Stock
Purchase Agreement.
In connection therewith, I have reviewed executed copies of (i) the Stock
Purchase Agreement, (ii) the Certificate of Designations in respect to the
Series A Preferred Stock (the "Certificate of Designations"), and (iii) such
other certificates and documents as I have deemed relevant or necessary as a
basis for the opinion expressed below.
In such connection, I have assumed the genuineness of all signatures, the
authenticity of all documents submitted to me as originals, the conformity to
original documents of all documents submitted to me as photostatic or certified
copies, and the authenticity of the originals of such copies. I have relied, to
the extent I deem such reliance proper, upon representations made in the
documents and certificates or representations made in writing by duly authorized
representatives of the Company.
In rendering the opinions contained herein, I have assumed that (a) State
Street, as Trustee, has all requisite power and authority to execute, deliver,
and perform its obligations under the Stock Purchase Agreement; (b) that the
execution, delivery, and performance of the Stock Purchase Agreement by State
Street, as Trustee, will not violate the charter or bylaws of State Street; and
(c) that the Stock Purchase Agreement has been executed and delivered by State
Street as Trustee and constitutes the legal, valid, and binding obligation of
the ESOP Trust, enforceable in accordance with its terms, except as enforcement
may be limited by (i) bankruptcy, insolvency, reorganization, or similar laws
affecting the enforcement of creditors' rights generally, or (ii) equitable
principles of general applicability (regardless of whether such enforceability
is considered in a proceeding in equity or law). I express no opinion with
respect to the laws of any jurisdiction other than the State of Iowa and the
United States of America. These opinions are expressed as of the date hereof
and are therefore subject to subsequent interpretive, regulatory,
legislative, and judicial developments.
91
<PAGE>
Based on and subject to the foregoing, I am of the opinion that:
1. The Company is validly existing and in good
standing under the laws of the State of Iowa and has all
requisite corporate power to execute, deliver, and perform the
Stock Purchase Agreement. The Company has taken all necessary
corporate action to authorize the execution, delivery, and
performance of the Stock Purchase Agreement.
2. The Stock Purchase Agreement has been duly
executed and delivered by the Company and is the legal, valid,
and binding agreement of the Company, enforceable against the
Company in accordance with its respective terms, except as the
enforceability thereof may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance,
or similar laws affecting the enforcement of creditors' rights
generally or (ii) equitable principles of general
applicability (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
3. The Preferred Shares have the rights, preferences,
and qualifications set forth in the Certificate of
Designations, have been validly authorized, and upon payment
therefor as provided in the Stock Purchase Agreement, will be
validly issued and outstanding and will constitute fully-paid
and nonassessable shares of Series A ESOP Convertible
Preferred Stock of the Company. The shares of the Company's
common stock, no par value ("Common Stock") initially reserved
for issuance and to be issued upon conversion of the Preferred
Shares in accordance with their terms have been duly and
validly authorized and are sufficient in number for conversion
of all the Preferred Shares, and such Common Stock, when so
issued upon such conversion, will be duly and validly issued,
fully-paid, and nonassessable.
4. Upon payment by the Trust as provided in the Stock
Purchase Agreement, the Company will convey to the Trust good
and valid title to the Preferred Shares free and clear of any
liens, claims, security interests, and encumbrances, except
for beneficial interests accruing to Plan participants and
their beneficiaries.
5. As of the date hereof, the Plan and the ESOP Trust
in form meet in all material respects (a) the applicable
requirements of Section 401(a) of the Internal Revenue Code of
1986, as amended (the "Code"), (b) the requirements applicable
to an employee stock ownership plan for purposes of Section
4975(e)(7) of the Code and the regulations promulgated
thereunder, and (c) the requirements for exemption from tax
under Section 501(a) of the Code.
6. The shares of Preferred Stock to be purchased by
the ESOP Trust constitute "employer securities" within the
meaning of Section 409(1) of the Code and "qualifying employer
securities" within the meaning of Section 407(d)(5) of ERISA.
7. The shares of Preferred Stock to be purchased by
the ESOP Trust have voting rights equivalent to the common
stock into which such shares may be converted, and the Plan
meets the voting rights requirements of Section 409(e)(2) of
the Code with respect to such shares.
92
<PAGE>
In rendering the foregoing opinions and any other opinions expressed in
this letter, I have relied on the following assumptions:
a. Except as to matters expressly
opined on herein, the Plan and ESOP Trust have been,
and will continue to be, administered and operated at
all times strictly in accordance with their terms and
with all requirements of applicable law including,
but not limited to, all of the requirements
applicable to a qualified plan under Section 401(a);
the requirements applicable to an "employee stock
ownership plan" (within the meaning of Section
4975(e)(7)) under Section 4975 and 409 of the Code;
and the requirements applicable to a tax-exempt trust
under Section 501(a); and with the provisions of
ERISA and all regulations thereunder.
b. The conversion price at which the
shares of Preferred Stock may be converted to common
stock of the Company is reasonable as of the date of
acquisition of such Preferred Stock by the ESOP
Trust.
c. No fiduciary of the Plan has
received any consideration of the type described in
Section 4975(c)(1)(F) of the Code and Section
406(b)(3) of ERISA in connection with the
transactions described herein.
d. The fiduciaries of the Plan and
the ESOP Trust have acted prudently and in good
faith, and have given appropriate consideration to
those facts and circumstances that are relevant to
the transactions in accordance with the fiduciary
requirements of part 4 of Title I of ERISA.
In connection with the assumptions made in paragraph (b) above, I understand
that the Trustee has received an opinion from Houlihan Lokey Howard & Zukin to
the effect that (i) the price to be paid by the ESOP Trust per share of
Preferred Stock is not in excess of fair market value or adequate consideration,
as defined under Title I of the Employee Retirement Income Security Act of 1974,
as amended, including the regulations thereunder ("ERISA"); and (ii) the terms
and conditions of the proposed transaction, including the terms governing the
right to convert the Preferred Stock into Common Stock of the Company, are fair
and reasonable to the ESOP Trust from a financial point of view.
These opinions are rendered solely to the Trustee in connection with the
transactions of the Trustee contemplated by the Stock Purchase Agreement. No
other person, firm, or corporation may rely upon these opinions for any purpose
without my prior written consent.
Yours very truly,
Katherine E. Schmidt
Associate Corporate Counsel
93
Exhibit 11
ALLIED Life Financial Corporation and Subsidiaries
COMPUTATION OF PER SHARE EARNINGS
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands, except per share data)
Numerator
<S> <C> <C> <C>
Net income $ 10,473 $ 8,073 $ 9,712
Preferred stock dividends (1,717) (1,601) (1,493)
Numerator for basic earnings
per share - income available to
common stockholders 8,756 6,472 8,219
Effect of diluted securities
Convertible preferred stock
dividends 107 95 85
Numerator for diluted earnings
per share - income available to
common stockholders after
assumed conversion $ 8,863 $ 6,567 $ 8,304
Denominator
Denominator for basic earnings
per share - weighted average
shares 4,430 4,580 4,613
Effect of dilutive securities
Stock options 35 36 34
Convertible preferred stock 107 96 85
Dilutive potential common shares 142 132 119
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 4,572 4,712 4,732
Basic earnings per share $ 1.98 $ 1.41 $ 1.78
Diluted earnings per share $ 1.94 $ 1.39 $ 1.75
</TABLE>
94
Exhibit 21
ALLIED Life Financial Corporation and Subsidiaries
SUBSIDIARIES OF THE REGISTRANT
As of March 1, 1998
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
95
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
ALLIED Life Financial Corporation
We consent to incorporation by reference in the 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 12,
1998 relating to the consolidated balance sheets of ALLIED Life Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, 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, 1997, which appears in the December 31, 1997, annual report on Form 10-K of
ALLIED Life Financial Corporation.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Des Moines, Iowa
March 20, 1998
96
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 766,028
<DEBT-CARRYING-VALUE> 766,028
<DEBT-MARKET-VALUE> 766,028
<EQUITIES> 3,201
<MORTGAGE> 984
<REAL-ESTATE> 0
<TOTAL-INVEST> 787,985
<CASH> 0
<RECOVER-REINSURE> 7,167
<DEFERRED-ACQUISITION> 84,188
<TOTAL-ASSETS> 904,457
<POLICY-LOSSES> 42,227
<UNEARNED-PREMIUMS> 89
<POLICY-OTHER> 1,689
<POLICY-HOLDER-FUNDS> 719,349
<NOTES-PAYABLE> 9,998
0
26,336
<COMMON> 4,398
<OTHER-SE> 84,424
<TOTAL-LIABILITY-AND-EQUITY> 904,457
7,074
<INVESTMENT-INCOME> 52,197
<INVESTMENT-GAINS> 2,354
<OTHER-INCOME> 28,627
<BENEFITS> 51,392
<UNDERWRITING-AMORTIZATION> 11,097
<UNDERWRITING-OTHER> 12,065
<INCOME-PRETAX> 15,699
<INCOME-TAX> 5,226
<INCOME-CONTINUING> 10,473
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,473
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.94
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
