-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JfAVFi2dEz6LWPNPLsJEIJ8awmFcCZw6x4qQPwJ4JWcZrPCW0Zka0c4mIZ8VtQsW Cq4QAQoxMHw/6ZvIIRhCnA== 0000774624-98-000046.txt : 19980504 0000774624-98-000046.hdr.sgml : 19980504 ACCESSION NUMBER: 0000774624-98-000046 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980501 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED GROUP INC CENTRAL INDEX KEY: 0000774624 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 420958655 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12663 FILM NUMBER: 98607703 BUSINESS ADDRESS: STREET 1: 701 FIFTH AVE CITY: DES MOINES STATE: IA ZIP: 50309 BUSINESS PHONE: 5152804211 MAIL ADDRESS: STREET 1: 701 5TH AVENUE CITY: DES MOINES STATE: IA ZIP: 50391-2000 FORMER COMPANY: FORMER CONFORMED NAME: AID CORP DATE OF NAME CHANGE: 19870519 10-Q 1 FIRST QTR REPORT - 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 Commission File Number 0-14243 ALLIED Group, Inc. (Exact name of registrant as specified in its charter) Iowa (State or other jurisdiction of incorporation or organization) 42-0958655 (I.R.S. Employer Identification No.) 701 Fifth Avenue, Des Moines, Iowa (Address of principal executive offices) 50391-2000 (Zip Code) 515-280-4211 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of April 29, 1998: 30,634,052 shares of Common Stock. 2 PART I Item 1. Financial Statements ALLIED Group, Inc. and Subsidiaries Consolidated Balance Sheets
March 31, December 31, 1998 1997 -------------- -------------- (in thousands) Assets Investments Fixed maturities at fair value (amortized cost $805,315 in 1998 and $791,945 in 1997) $ 830,624 $ 818,216 Equity securities at fair value (cost $71,432 in 1998 and $69,452 in 1997) 86,174 79,182 Short-term investments at cost (note 2) 15,353 10,846 -------------- ------------- Total investments 932,151 908,244 Cash 4,899 2,168 Accrued investment income 12,032 11,634 Indebtness from affiliates (note 2) 1,425 3,035 Accounts receivable 100,340 91,596 Current income taxes recoverable --- 3,005 Reinsurance receivables for losses and loss adjusting expenses 25,211 23,906 Mortgage loans held for sale (note 3) 80,416 29,521 Deferred policy acquisition costs 52,740 50,695 Prepaid reinsurance premiums 4,465 8,866 Mortgage servicing rights 37,963 35,931 Other assets 35,421 32,632 -------------- ------------- Total assets $ 1,287,063 $ 1,201,233 ============== ============= .
See accompanying Notes to Interim Consolidated Financial Statements. 3 ALLIED Group, Inc. and Subsidiaries Consolidated Balance Sheets
March 31, December 31, 1998 1997 -------------- ------------- (in thousands) Liabilities Losses and loss adjusting expenses $ 382,641 $ 378,026 Unearned premiums 242,366 239,763 Current income taxes payable 2,041 --- Notes payable to nonaffiliates (note 3) 108,046 51,038 Notes payable to affiliates (note 2) 9,260 5,900 Guarantee of ESOP obligations 22,380 22,380 Deferred income taxes 7,061 5,515 Other liabilities 65,853 68,527 -------------- ------------- Total liabilities 839,648 771,149 -------------- ------------- Stockholders' equity Preferred stock, no par value, issuable in series, authorized 7,500 shares 6-3/4% Series, 1,827 shares issued and outstanding 37,812 37,812 Common stock, no par value, $1 stated value, authorized 80,000 shares, issued and outstanding 30,574 shares in 1998 and 30,532 shares in 1997 30,574 30,532 Additional paid-in capital 113,311 112,490 Retained earnings 257,382 244,079 Accumulated other comprehensive income 25,912 23,314 Unearned compensation related to ESOP (17,576) (18,143) -------------- ------------- Total stockholders' equity 447,415 430,084 -------------- ------------- Total liabilities and stockholders' equity $ 1,287,063 $ 1,201,233 ============== =============
See accompanying Notes to Interim Consolidated Financial Statements. 4 ALLIED Group, Inc. and Subsidiaries Consolidated Statements of Income and Comprehensive Income
Three Months Ended March 31, ----------------------------------- 1998 1997 ---------------- --------------- (in thousands, except per share data) Revenues Earned premiums $ 143,059 $ 131,867 Investment income 13,263 12,652 Realized investment gains (losses) 59 (7) Income from affiliates (note 2) 1,366 1,141 Other income 15,978 13,092 ---------------- --------------- 173,725 158,745 ---------------- --------------- Losses and expenses Losses and loss adjusting expenses 95,243 87,891 Amortization of deferred policy acquisition costs 31,657 28,938 Other underwriting expenses 6,859 5,518 Other expenses 14,423 13,426 Interest expense 639 395 ---------------- --------------- 148,821 136,168 ---------------- --------------- Income before income taxes and minority interest 24,904 22,577 ---------------- --------------- Income taxes Current 6,769 7,614 Deferred 95 (1,081) ---------------- --------------- 6,864 6,533 ---------------- --------------- Income before minority interest 18,040 16,044 Minority interest in net income of consolidated subsidiary 117 102 ---------------- --------------- Net income 17,923 15,942 Other comprehensive income (net of deferred taxes of $1,452 in 1998 and $3,934 in 1997) 2,598 (7,318) ---------------- --------------- Comprehensive Income $ 20,521 $ 8,624 ================ =============== Net income applicable to common stock (note 5) $ 17,044 $ 15,063 ================ =============== Earnings per share (note 5) Basic $ 0.56 $ 0.49 ================ =============== Diluted $ 0.55 $ 0.49 ================ ===============
See accompanying Notes to Interim Consolidated Financial Statements. 5 ALLIED Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Three Months Ended March 31, ----------------------------------- 1998 1997 ---------------- --------------- (in thousands) Cash flows from operating activities Net income $ 17,923 $ 15,942 Adjustments to reconcile net income to net cash provided by operating activities Realized investment gains (59) 7 Depreciation and amortization 2,795 2,449 Indebtedness with affiliates 1,610 (862) Accounts receivable, net (10,050) (10,025) Accrued investment income (398) 123 Deferred policy acquisition costs (2,045) (660) Mortgage loans held for sale, net 3,094 (2,738) Other assets (4,728) 2,927 Losses and loss adjusting expenses 4,615 5,697 Unearned premiums, net 7,004 2,973 Cost of ESOP shares allocated 567 647 Current income taxes 5,046 5,935 Deferred income taxes 95 (1,081) Other, net (5,676) (3,193) ---------------- --------------- Net cash provided by operating activities 19,793 18,141 ---------------- --------------- Cash flows from investing activities Purchase of fixed maturities (24,880) (29,641) Purchase of equity securities (7,315) (14,901) Purchase of equipment (2,887) (1,837) Sale of fixed maturities --- 5,069 Maturities, calls, and principal reductions of fixed maturities 14,567 24,895 Sale of equity securities 5,337 52 Short-term investments, net (4,507) (689) Sale of equipment --- 35 ---------------- --------------- Net cash used in investing activities (19,685) (17,017) ---------------- --------------- Cash flows from financing activities Notes payable to nonaffiliates, net 3,020 8,160 Notes payable to affiliates, net 3,360 3,150 Issuance of common stock 863 636 Repurchase of common stock --- (7,012) Dividends paid to stockholders, net of income tax benefit (4,620) (4,087) ---------------- --------------- Net cash provided by financing activities 2,623 847 ---------------- --------------- Net increase in cash 2,731 1,971 Cash at beginning of year 2,168 1,067 ---------------- --------------- Cash at end of quarter $ 4,899 $ 3,038 ================ ===============
See accompanying Notes to Interim Consolidated Financial Statements. 6 ALLIED Group, Inc. and Subsidiaries Notes to Interim Consolidated Financial Statements (1) Summary of Significant Accounting Policies The accompanying interim consolidated financial statements include the accounts of ALLIED Group, Inc. (the Company) and its subsidiaries. The interim consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) and include all adjustments which are, in the opinion of management, necessary for fair presentation of the results for the interim periods. All such adjustments are of a normal and recurring nature. All significant intercompany balances and transactions have been eliminated. The accompanying interim consolidated financial statements should be read in conjunction with the following notes and with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. At March 31, 1998, The ALLIED Group Employee Stock Ownership Trust (ESOP Trust) owned 24.6% and ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company, controlled 18.2% of the outstanding voting stock of the Company. (2) Transactions with Affiliates Pursuant to the terms of the Intercompany Operating Agreement, the Company leases employees to ALLIED Mutual and certain of its subsidiaries. Each company that leases employees is charged a fee based upon costs incurred for salaries, related benefits, taxes, and expenses associated with the employees it leases. For the three months ended March 31, 1998 and 1997, the Company received revenues of $729,000 and $651,000 for employees leased to affiliates, respectively, which are included in income from affiliates. Certain subsidiaries of the Company provide data processing and other services for ALLIED Mutual and its subsidiaries. Included in income from affiliates are revenues of $637,000 million and $490,000 relating to services performed for ALLIED Mutual and its subsidiaries for the first three months of 1998 and 1997, respectively. The Company and its affiliates deposit their excess cash into a short-term investment fund. The fund was established to concentrate short-term cash in a single account to maximize yield. AID Finance Services, Inc., a wholly-owned subsidiary of ALLIED Mutual, is the fund administrator. At March 31, 1998, the Company and its subsidiaries had $13.5 million invested in the fund and had several short-term unsecured notes payable to the fund totaling $9.3 million. The interest rates on the borrowings ranged from 5.8% to 8.8%. The Company had interest income from affiliates of $180,000 and $125,000 in the first three months of 1998 and 1997, respectively. Interest paid to affiliates was $168,000 and $74,000 in the first three months of 1998 and 1997, respectively. (3) Reinsurance Effective January 1, 1998, the Company's property-casualty subsidiaries entered into a property catastrophe reinsurance agreement with a nonaffiliated reinsurer. The agreement is an aggregate catastrophe excess of loss reinsurance program that covers the property-casualty segment's share of pooled losses up to $25 million in excess of $25 million in the aggregate for any one quarter or in excess of $60 million in the aggregate for any one year. (4) Notes Payable to Nonaffiliates At March 31, 1998, the mortgage banking subsidiary had borrowed $93 million under the terms of three separate mortgage loan warehousing agreements with different commercial banks. These notes payable are not guaranteed by the Company. Under the terms of the agreements, the subsidiary can borrow up to the lesser of $95 million or 98% of the mortgage credit borrowing base. The outstanding borrowings were secured by $80 million of pledged mortgage loans held for sale, mortgage servicing rights on loans with a principal balance of $3 billion, and foreclosure loans. Interest rates applicable to the mortgage loan warehousing agreements vary with the level of investable deposits maintained at the respective commercial banks. 7 The mortgage banking subsidiary also had $10.5 million of 8.4% senior secured notes outstanding as of March 31, 1998. The notes are payable to a nonaffiliated life insurance company and are secured by pledged mortgage servicing rights. The notes are payable in equal annual installments of $1.5 million each September 1, with interest payable semi-annually. The final installment and interest is due September 1, 2004. The Federal Home Loan Bank of Des Moines provided a $5 million committed credit facility through a line of credit agreement with AMCO Insurance Company (AMCO) that expires February 26, 1999. Interest on any outstanding borrowings is payable at an annual rate equal to the federal funds unsecured rate for Federal Reserve member banks, which was 5.9% at March 31, 1998. AMCO had an outstanding balance under this line of credit of $4.5 million at March 31, 1998. The borrowings were secured by United States Government securities with a carrying value of $16.3 million. (5) Earnings per Share The following table presents a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation for the three months ended March 31, 1998 and 1997:
Basic earnings per share Diluted earnings per share ------------------------------------------------- ----------------------------------- Income available to Income Dilutive common available to potential stockholders Net Preferred common common and assumed income dividends stockholders shares conversion ------------- ------------ -------------- ---------------- -------------- (in thousands, except per share data) March 31, 1998 Income $ 17,923 $ (879) $ 17,044 $ --- $ 17,044 Weighted average shares outstanding 30,542 --- 30,542 315 30,857 -------------- -------------- Earnings per share $ 0.56 $ 0.55 ============== ============== March 31, 1997 Income $ 15,942 $ (879) $ 15,063 $ --- $ 15,063 Weighted average shares outstanding 30,540 --- 30,540 273 30,813 -------------- -------------- Earnings per share $ 0.49 $ 0.49 ============== ==============
Options to purchase 265,500 shares of common stock at a weighted average price of $31.93 per share were outstanding at March 31, 1998, but not included in the computation of diluted earnings per share. The options were excluded because the exercise price was greater than the average market price per share for the first quarter of 1998. 8 (6) Segment Information The Company has two reportable operating segments: property-casualty and excess & surplus lines. For the three months ended March 31, 1998 and 1997, the property-casualty and excess & surplus lines accounted for 85.6% and 5.8% of consolidated revenues, respectively. Included in all other are mortgage banking, data processing operations, and employee leasing services to affiliated companies. All segments operated exclusively in the United States. The following table presents a summary of the Company's operating segments for the three months ended March 31, 1998 and 1997:
Three months ended March 31, ------------ ------------ 1998 1997 ------------ ------------ (in thousands) Revenues from nonaffiliates * Property-casualty $ 148,355 $ 135,595 Surplus & excess lines 10,130 9,615 All other 13,874 12,394 ------------ ------------ Total $ 172,359 $ 157,604 ============ ============ Revenues from affiliates Property-casualty $ 319 $ 243 All other 30,537 26,842 Intersegment eliminations (29,490) (25,944) ------------ ------------ Total $ 1,366 $ 1,141 ============ ============ Income before income taxes and minority interest * Property-casualty $ 22,281 $ 21,041 Surplus & excess lines 2,445 2,065 All other 178 (529) ------------ ------------ Total $ 24,904 $ 22,577 ============ ============ March 31, December 31, 1998 1997 ------------ ------------ Segment assets Property-casualty $ 1,041,277 $ 1,012,926 Surplus & excess lines 142,807 141,814 All other 634,881 560,270 Intersegment eliminations (531,902) (513,777) ------------ ------------ Total $ 1,287,063 $ 1,201,233 ============ ============
* includes realized investment gains or losses. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking Information The Private Securities Litigation Reform Act of 1995 provides a safe harbor to encourage companies to provide prospective information so long as it is identified as forward-looking and accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. Forward-looking statements are related to the plans and objectives of management for the future operations, economic performance, or projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items. In the following discussion and elsewhere in this report, statements containing words such as expect, anticipate, believe, goal, objective, or similar words are intended to identify forward-looking statements. ALLIED Group, Inc. (the Company) undertakes no obligation to update such forward-looking statements, and it wishes to identify important factors that could cause actual results to differ materially from those projected in the forward-looking statements contained in the following discussion and elsewhere in this report. The risks and uncertainties that may affect the operations, performance, development, and results of the Company's business include but are not limited to the following: (1) heightened competition, particularly intensified price competition; (2) adverse state and federal legislation and regulations; (3) changes in interest rates causing a reduction of investment income; (4) general economic and business conditions which are less favorable than expected; (5) unanticipated changes in industry trends; (6) adequacy of loss reserves; (7) catastrophic events or the occurrence of a significant number of storms and wind and hail losses; and (8) other risks detailed herein and from time to time in the Company's other reports. Overview The following analysis of the consolidated results of operations and financial condition of ALLIED Group, Inc. (the Company) should be read in conjunction with the Interim Consolidated Financial Statements and related footnotes included elsewhere herein, and with the Company's Annual Report on Form 10-K for the year ended December 31, 1997 . The Company, a regional insurance holding company, and its subsidiaries operate exclusively in the United States and primarily in the central and western states. The largest segment includes three property-casualty insurance companies that write personal lines (primarily automobile and homeowners) and small commercial lines of insurance. The other reportable segment is excess & surplus lines insurance. The property-casualty insurance segment accounted for 85.6% of consolidated revenues for each of the three months ended March 31, 1998 and 1997. The property-casualty segment participates in a reinsurance pooling agreement with ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company. The agreement generally provides that the property-casualty insurance business is combined and then prorated among the participants according to predetermined percentages. Participation percentages are based on certain factors such as capitalization and business produced by the respective companies. The segment's participation in the reinsurance pool has been 64% since January 1, 1993. The operating results of the property-casualty insurance industry are subject to significant fluctuations from quarter to quarter and from year to year due to, but not limited to, the effect of competition on pricing, the frequency and severity of losses incurred in connection with weather-related and other catastrophic events, adequacy of reserves, general economic and business conditions, and other factors such as changes in tax laws and the regulatory environment. Results of Operations Consolidated revenues for the first three months of 1998 were $173.7 million, up 9.4% over the $158.7 million reported for the same period of 1997. The increase occurred primarily because of the growth in earned premiums for the three months ended March 31, 1998. Income before income taxes and minority interest for the first three months of 1998 was up 10.3% to $24.9 million from $22.6 million for the same period in 1997. The increase was due to higher revenues, that outpaced the increase in expenses for the three months ending March 31, 1998. 10 The Company's year-to-date effective income tax rate was 27.6% and 28.9% at March 31, 1998 and 1997, respectively. The decrease is due to the tax benefit attributed to the larger percentage of investment income generated from tax-exempt securities and equity securities. The income tax expense for the first three months of 1998 rose slightly on higher operating income up to $6.9 million from $6.5 million for the same period in 1997. Net income was up 12.4% to $17.9 million, bringing diluted earnings per share to $0.55 for the three months ended March 31, 1998, from $15.9 million ($0.49 per share) for the corresponding period in 1997. Diluted earnings per share before realized investment gains and losses were $0.55 for the first three months of 1998 compared with $0.49 for the same period of 1997. Book value per share at March 31, 1998 increased to $13.97 compared to $13.44 at December 31, 1997. Growth in the book value per share was primarily the result of higher net income for the first three months of 1998. The fair value of investments in fixed maturities was $25.3 million above cost at March 31, 1998 compared to $26.3 million above cost at December 31, 1997. If the investments in fixed maturities were reported at amortized cost, the book value would have been $13.43 at March 31, 1998 compared to $12.88 at December 31, 1997. Investments and Investment Income The investment policy for the Company's insurance segments require that the fixed maturity portfolio be invested primarily in debt obligations rated "BBB" or higher by Standard & Poor's Corporation or a recognized equivalent at the time of acquisition. The policy also states that equity securities are to be of United States and Canadian corporations listed on established exchanges or publicly traded in the over-the-counter market. Preferred stocks are to be comprised primarily of issues rated at least A3/A- by Standard and Poor's Corporation or Moody's. The Company's investment portfolio consisted primarily of fixed income securities and equity securities; 89.1% and 9.2%, respectively. The ratings on 99.6% of the fixed income securities at March 31, 1998 were investment grade or higher. The investment portfolio contained no real estate or mortgage loans at March 31, 1998. Invested assets were up 2.6% to $932.2 million from $908.2 million at year-end 1997. Three-month consolidated investment income increased 4.8% to $13.3 million from $12.7 million through March 31, 1997. The increase was due to a larger average balance of invested assets. The Company's pretax rate of return on invested assets was down to 5.8% from last year's 6.0%. The pretax yield was down as a result of the low interest rate environment and due to a higher proportional share of investment income from tax-exempt securities. Property-casualty Net written premiums for the pool (including ALLIED Mutual) totaled $216.4 million, an 8.5% increase over production in the first quarter months of 1997. Growth was constrained by commercial lines that grew 3.3%, reflecting the highly competitive environment in which the commercial lines are operating. The average premium per policy for personal lines was up 3.2% from the first three months of 1997 to $623 while the policy count grew 6.2%. The average premium per policy for commercial lines excluding crop-hail increased 2.7% from the first three months of 1997 to $1,158 and the policy count was up 2.5%. Earned premiums for the property-casualty segment were 69.6% personal lines and 30.4% commercial lines in the first three months of 1998. The business mix for the first quarter of 1997 was 67.9% personal lines and 32.1% commercial lines. Revenues for the property-casualty segment increased 9.2% to $148.4 million from $135.8 million for the three months ended March 31, 1998 and 1997, respectively. Direct earned premiums for the segment were $151.1 million for the first three months of 1998 compared with $135.2 million one year earlier. Earned premiums increased 8.7% for the first three months of 1998 to $134.7 million from $123.9 million. The increase resulted from growth in insurance exposure and increase in average premium per policy. Investment income for the first three months of 1998 was $11.5 million compared to $10.9 million for the same period in 1997. The increase was the result of a larger average balance in invested assets. The pretax yield on invested assets was 5.8% and 6.1% for the three months ended March 31, 1998 and 1997, respectively. The segment had realized investment gains of $57,000 in the first three months of 1998 compared with realized losses of $6,000 in the same period of 1997. Other income for the first three months of 1998 and 1997 was $2.1 million and $1 million, respectively. Income before income taxes increased 5.9% to $22.3 million from $21 million in the first quarter of 1997. Growth was slowed by higher wind and hail losses and an increase in underwriting expenses. Wind and hail losses for the first three months of 1998 were up to $5.9 million compared to $2.7 million for the same period in 1997. 11 The statutory combined ratio (after policyholder dividends) for the first three months of 1998 was 94.1 compared to 92.5 reported in the first three months of 1997. The higher combined ratio was a result of the 1.7-point increase in the three month underwriting expense ratio. The ratio was unfavorably impacted by higher than expected contingency commissions for 1997, one-time costs associated with setting up the new Central States Office, and legal expenses. The loss and loss adjusting expense ratio also increased slightly (0.1-point). The impact of wind and hail losses on the combined ratio was 4.4 points and 2.2 points for the three months ended March 31, 1998 and 1997, respectively. The generally accepted accounting principles (GAAP) underwriting gain was $8.6 million compared with a gain of $9.1 million for the first three months of 1997. On a diluted basis, the impact of wind and hail losses on the results of operations was $0.12 per share versus $0.06 per share in the first three months of 1997. The following table presents the property-casualty's statutory combined ratio by line of business for the three and nine months ended March 31, 1998 and 1997:
Three Months Ended March 31, ------------------- 1998 1997 ------ ------ Personal automobile 94.8 95.4 Homeowners 94.4 90.1 Personal lines 94.6 93.9 Commercial automobile 101.9 105.3 Workers' compensation 98.9 85.8 Other property/liability 90.1 87.1 Other lines 70.1 61.3 Commercial lines 92.7 89.4 Total 94.1 92.5
The personal auto statutory combined ratio improved to 94.8 for the first quarter of 1998 from 95.4 for the same period in 1997. The improvement was largely due to a 1.8-point decrease in the loss and loss adjusting expense ratio; the underwriting expense ratio deteriorated 1.2-points. The impact of wind and hail losses on the combined ratio for personal auto was down to 0.4 from 0.7 for the first quarter of 1997. The statutory combined ratio for the homeowners line was 94.4 for the first three months of 1998 compared with 90.1 for the same period of 1997. The deterioration was primarily due to a 3.3-point increase in the loss and loss adjusting expense ratio; the underwriting expense ratio also increased 1 point. The impact of higher wind and hail losses on the combined ratio for the homeowners line increased to 14.4-points from 5.7-points for the first three months of 1997. Overall, the personal lines statutory combined ratio increased to 94.6 in the first three months of 1998 from 93.9 in the same period of 1997. The statutory combined ratio for commercial lines increased to 92.7 in the first three months of 1998 from 89.4 for the first three months of 1997. The deterioration of personal and commercial lines combined ratio was primarily attributable to higher underwriting expenses in the first quarter of 1998. Excess & Surplus Lines Earned premiums increased to $8.4 million for the first three months of 1998 from $7.9 million for the same period in 1997. Net written premiums increased to $11.8 million for the three months ended March 31, 1998 from $7.9 million in the same period of 1997. The increase is due to a change in reinsurance, effective January 1, 1998, from the ceding of premiums on an unearned basis to an earned basis. On January 1, 1998, the segment had $4.5 million of prepaid reinsurance premiums that were retro-ceded back. For the three month period ended March 31, 1998, the segment's book of business was comprised of 3.9% personal lines and 96.1% commercial lines. The business mix for the first three months of 1997 was 2.7% personal lines and 97.3% commercial lines. Investment income for the first three months of 1998 increased 3.1% to $1.7 million from the same period in 1997. Investment income increased due to a larger average balance in the investment portfolio. The pretax yield on those assets was 6% in the first quarter of 1998 compared to 6.3% for the same period in 1997. Invested assets increased 3.4% to $117.4 million at March 31, 1998 from $113.5 million at year-end 1997. 12 The statutory combined ratio (after policyholder dividends) was 94.3, which produced a GAAP underwriting gain of $722,000 million for the first quarter of 1998. The combined ratio for the first three months of 1997 was 95.0 which resulted in a GAAP underwriting gain of $396,000. The combined ratio improved primarily because of a 2.8-point improvement in the loss and loss adjusting expense ratio in the first three months of 1998, due to the growth in earned premiums that outpaced losses and loss adjusting expenses. The underwriting expense ratio deteriorated 2.1-points in the first three months of 1998 over the same period in 1997. The deterioration was due to an increase in commission expense as a result of the commission provision on the premiums retro-ceded back to the segment. Income before income taxes for the three months ended March 31, 1998 increased to $2.4 million from $2.1 million. The segment had no realized gains or losses for the first three months of 1998 and had realized losses of $2,000 in the same period of 1997. Noninsurance Operations Revenues for the noninsurance operations (including mortgage banking, data processing operations, and employee leasing to affiliates) after eliminations increased 12.3% to $14.9 million for the first three months of 1998 from $13.3 million for the same period last year. The increase was primarily due to a $2.2 million increase in data processing revenues from outside consulting fees. Income before income taxes was $178,000 for the first three months of 1998 compared to a loss before taxes of $529,000 for the same period in 1997. The increase was due to revenue growth that outpaced the increase in operating expenses in 1998. The mortgage banking servicing portfolio at March 31, 1998 increased slightly to $3 billion from $2.9 billion at year-end 1997. New Accounting Pronouncement In February of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Statement (SFAS) 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for years beginning after December 31, 1997. SFAS 132 revises the disclosure requirements but does not change the measurement or recognition of those plans. SFAS 132 superseded SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The adoption of SFAS 132 will result in revised and additional disclosures but will have no effect on the financial position, results of operations, or liquidity of the Company. Liquidity and Capital Resources Substantial cash inflows are generated from premiums, pool administration fees, investment income, and proceeds from sales and maturities of investments. The principal outflows of cash are payment of claims, commissions, premium taxes, operating expenses, and income taxes and the purchase of fixed income and equity securities. In developing its investment strategy, the Company establishes a level of cash and highly liquid short- and intermediate-term securities that, combined with expected cash flow, is believed adequate to meet anticipated short-term and long-term payment obligations. In the first three months of 1998 and 1997, operating activities generated cash flows of $19.8 million and $18.1 million, respectively. For both quarters, the primary source of funds was premium growth in the Company's property-casualty insurance operations. The funds were used primarily to purchase fixed income and equity securities. In the first quarter of 1997, funds were also used to repurchase the Company's common stock. Operating cash flows were also used to pay $4.9 million of dividends to stockholders in the first three months of 1998. For the same period in 1997, the Company paid dividends of $4.3 million to stockholders. Dividend payments to common stockholders totaled $4 million for the three months ended March 31, 1998, up from $3.5 million for the same period in 1997. The increase in dividends to common stock shareholders is due to a greater number of common shares outstanding and from a higher dividend per share, 14.7% increase from March 31, 1997. In the first three months of 1998 and 1997, the Company paid dividends of $879,000 on the 6-3/4% Series preferred stock. The Company relies primarily on dividend payments from its property-casualty subsidiaries to pay preferred and common stock dividends to stockholders. During the first three months of 1998, the Company received dividend payments of $4.2 million from the property-casualty subsidiaries and $19,000 from noninsurance subsidiaries. During the same period of 1997, the Company received dividend payments of $4.1 million from the property-casualty subsidiaries and $19,000 from noninsurance subsidiaries. 13 During the first three months of 1997, the Company canceled 295,800 shares of its common stock purchased on the open market at an average price per share of $23.71. The first 85,500 shares were repurchased under a program approved by the Board of Directors (Board) on July 16, 1996 and completed on March 13, 1997. An additional 210,300 shares were repurchased under a program approved by the Board on March 4, 1997, whereby an additional 375,000 shares of common stock were authorized to be repurchased pursuant to SEC Rule 10b-18. The mortgage banking subsidiary has separate credit arrangements to support its operations. Short-term and long-term notes payable to nonaffiliated companies are used to finance its mortgage loans held for sale and to purchase mortgage servicing rights. The level of short-term borrowings fluctuates daily depending on the level of inventory being financed. At March 31, 1998, short-term borrowings amounted to $93 million to be repaid through the subsequent sale of mortgage loans held for sale and long-term borrowings amounted to $10.5 million to be repaid over the next seven years. These notes payable are not guaranteed by the Company. In the normal course of its business, the subsidiary also makes commitments to buy and sell securities that may result in credit and market risk in the event the counterparty is unable to fulfill its obligation. Management anticipates that short-term and long-term capital expenditures, cash dividends, and operating cash needs will be met from existing capital and internally generated funds. As of March 31, 1998, the Company and its subsidiaries had no material commitments for capital expenditures. Future debt and stock issuance will be considered as additional capital needs arise. The method of funding will depend upon financial market conditions. Contingencies California has been the source of approximately 25% of the pool's direct written premiums for the past ten years. Proposition 103, approved by California voters in 1988, provides for a rollback of rates on premiums collected in calendar year 1989 to the extent that the insurer's return on equity for each Proposition 103 line of business exceeded 10%. The rollback liability, if any, has not been determined. Management of the Company continues to believe that the insurance subsidiaries will not be liable for any material rollback of premiums. On December 31, 1997, a complaint was filed by Mary M. Rieff, a policyholder of ALLIED Mutual, in the Iowa District Court in and for Polk County Iowa, against the Company and certain other individuals who are or were officers and/or directors of ALLIED Mutual and the Company. The complaint, an alleged policyholder derivative action brought on behalf of ALLIED Mutual, asserts, among other things, (a) that the defendants were responsible for the inappropriate transfer of ALLIED Mutual's corporate assets, the seizure of certain corporate opportunities, and the implementation of an improper de facto demutualization without informing or compensating policyholders or receiving the appropriate approval from regulatory authorities; (b) that this allegedly wrongful demutualization began on or about January 1, 1985 and was accomplished through transfers of ALLIED Mutual's assets to the Company and to the individual defendants for inadequate consideration; (c) that the individual defendants breached fiduciary duties owed to ALLIED Mutual, wasted its corporate assets, and intentionally interfered with its contracts, prospective business advantage, and business relationships; and (d) that the defendants improperly transferred substantial ownership of and control over the Company and ALLIED Mutual's insurance business. The complaint further asserts that as a result of the foregoing, ALLIED Mutual and its policyholders have suffered damages in excess of $500 million. The complaint requests an accounting of the assets allegedly wrongfully transferred to the Company and compensation to ALLIED Mutual for the value of such assets, for the seizure of corporate opportunities, and for the de facto demutualization of ALLIED Mutual. The complaint also asks for certain other relief, including attorneys' fees and costs, equitable relief and interest, and restitution for any assets wrongfully transferred or conveyed. The Company believes the suit is without merit and intends to defend this action vigorously. As is the case in all pending actions, the ultimate outcome is uncertain. 14 PART II Item 6. Exhibits and Reports on Form 8-K (a) 10.64 Third Amendment to Consulting Agreement between John E. Evans, ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED Life Financial Corporation, dated March 24, 1998 27 Financial Data Schedule (b) The Company filed two reports on Form 8-K during the first quarter ended March 31, 1998. Items Financial Date Reported Statements Filed -------- ---------- ----- Item 5 -- Other None January 05, 1998 Item 5 -- Other None January 15, 1998 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLIED Group, Inc. (Registrant) Date: May 1, 1998 /s/ Jamie H. Shaffer ---------------------------------------- Jamie H. Shaffer, Senior Vice President, Chief Financial Officer, and Treasurer 15 ALLIED Group, Inc. and Subsidiaries INDEX TO EXHIBITS EXHIBIT NUMBER ITEM PAGE 10.64 Third Amendment to Consulting Agreement between John E. Evans, ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED Life Financial Corporation, dated March 24, 1998 16 27 Financial Data Schedule 17 EX-10 2 3RD ADMENDMENT TO CONSULTING AGREEMENT 16 EXHIBIT 10.64 THIRD AMENDMENT TO CONSULTING AGREEMENT THIS AMENDMENT is made this 24th day of March, 1998, by and between John E. Evans ("Evans") and ALLIED Group, Inc. ("AGI"), ALLIED Mutual Insurance Company ("Mutual"), and ALLIED Life Financial Corporation ("ALFC"). AGI, Mutual, and ALFC shall be known collectively as "ALLIED". WHEREAS, on December 14, 1994, ALLIED and Evans entered into a Consulting Agreement setting forth the services which Evans was to render to ALLIED following retirement; WHEREAS, on December 18, 1996 and May 13, 1997, ALLIED and Evans amended the Consulting Agreement; WHEREAS, the parties desire to amend the Consulting Agreement as set forth herein; NOW, THEREFORE, in consideration of the foregoing, and of the mutual covenants set forth below and other valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Effective March 1, 1998, Section III of the Consulting Agreement is amended by deleting "$180,000" and replacing it with "$120,000". 2. All other terms and conditions remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed as of the day and year above first written. ALLIED Mutual Insurance Company /s/ John E. Evans By:/s/ Douglas L. Andersen - --------------------------------- ------------------------------ John E. Evans Douglas L. Andersen, President ALLIED Group, Inc. ALLIED Life Financial Corporation By:/s/ Douglas L. Andersen By:/s/ Samuel J. Wells ------------------------------ ------------------------------ Douglas L. Andersen, President Samuel J. Wells, President EX-27 3 MARCH 31, 1998 -- FDS
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED GROUP, INC.'S MARCH 31, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FINANCIAL STATEMENTS 0000774624 ALLIED GROUP, INC 1,000 US DOLLARS 3-MOS DEC-31-1998 JAN-1-1998 MAR-31-1998 1 830,624 0 0 86,174 0 0 932,151 4,899 25,211 52,740 1,287,063 382,641 242,366 0 0 117,306 0 37,812 30,574 379,029 1,287,063 143,059 13,263 59 17,344 95,243 31,657 6,859 24,904 6,864 18,040 0 0 0 17,923 0.560 0.550 0 0 0 0 0 0 0
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