-----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, JzDMA6LBENBvdS/yUr/s+bJtQRq9M+/dDGrrRMWUlPMhyElhakVX1xuvQoGOjoxt icGRKwNMhmFzk7aPLrDAxg== 0000774624-98-000129.txt : 19981118 0000774624-98-000129.hdr.sgml : 19981118 ACCESSION NUMBER: 0000774624-98-000129 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98750090 BUSINESS ADDRESS: STREET 1: 701 FIFTH AVE CITY: DES MOINES STATE: IA ZIP: 50391-2000 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 THIRD 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 September 30, 1998 Commission File Number 0-14243 ALLIED Group, Inc. (Exact name of registrant as specified in its charter) Iowa (State or other jurisdiction of incorporation or organization) 42-0958655 (I.R.S. Employer Identification No.) 701 Fifth Avenue, Des Moines, Iowa (Address of principal executive offices) 50391-2000 (Zip Code) 515-280-4211 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 1998: 30,367,484 shares of Common Stock. 2 PART I Item 1. Financial Statements ALLIED Group, Inc. and Subsidiaries Consolidated Balance Sheets
September 30, December 31, 1998 1997 ---------------- --------------- (in thousands) Assets Investments Fixed maturities at fair value (amortized cost $826,173 in 1998 and $791,945 in 1997) $ 864,764 $ 818,216 Equity securities at fair value (cost $75,349 in 1998 and $69,452 in 1997) 86,696 79,182 Short-term investments at cost (note 2) 11,387 10,846 ---------------- --------------- Total investments 962,847 908,244 Cash 4,597 2,168 Accrued investment income 12,346 11,634 Indebtedness from affiliates (note 2) --- 3,035 Accounts receivable 105,837 91,596 Current income taxes recoverable 25,831 3,005 Reinsurance receivables for losses and loss adjusting expenses 35,850 23,906 Mortgage loans held for sale (note 4) 71,770 29,521 Deferred policy acquisition costs 56,858 50,695 Prepaid reinsurance premiums 4,710 8,866 Mortgage servicing rights 44,151 35,931 Other assets 35,059 32,632 ---------------- --------------- Total assets $ 1,359,856 $ 1,201,233 ================ ===============
See accompanying Notes to Interim Consolidated Financial Statements. 3 ALLIED Group, Inc. and Subsidiaries Consolidated Balance Sheets
September 30, December 31, 1998 1997 ---------------- --------------- (in thousands) Liabilities Losses and loss adjusting expenses (note 3) $ 400,320 $ 378,026 Unearned premiums 261,175 239,763 Indebtedness due to affiliates 3,482 --- Notes payable to nonaffiliates (note 4) 102,193 51,038 Notes payable to affiliates (note 2) 15,600 5,900 Guarantee of ESOP obligations 20,530 22,380 Deferred income taxes 7,658 5,515 Other liabilities (note 6) 149,661 68,527 ---------------- --------------- Total liabilities 960,619 771,149 ---------------- --------------- Stockholders' equity Preferred stock, no par value, issuable in series, authorized 7,500 shares 6-3/4% Series, 1,827 shares issued and outstanding 37,812 37,812 Common stock, no par value, $1 stated value, authorized 80,000 shares, issued and outstanding 30,175 shares in 1998 and 30,532 shares in 1997 (note 5) 30,175 30,532 Additional paid-in capital 103,392 112,490 Retained earnings 211,940 244,079 Accumulated other comprehensive income 32,359 23,314 Unearned compensation related to ESOP (16,441) (18,143) ---------------- --------------- Total stockholders' equity 399,237 430,084 ---------------- --------------- Total liabilities and stockholders' equity $ 1,359,856 $ 1,201,233 ================ ===============
See accompanying Notes to Interim Consolidated Financial Statements. 4 ALLIED Group, Inc. and Subsidiaries Consolidated Statements of Income and Comprehensive Income
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- (in thousands, except per share data) Revenues Earned premiums $ 147,116 $ 137,816 $ 437,716 $ 405,559 Investment income 13,034 12,968 39,903 38,494 Realized investment gains 12 17 340 17 Income from affiliates (note 2) 1,393 1,783 4,037 3,800 Other income 16,463 13,582 49,025 40,747 ----------- ----------- ----------- ----------- 178,018 166,166 531,021 488,617 ----------- ----------- ----------- ----------- Losses and expenses Losses and loss adjusting expenses (note 3) 114,847 94,725 321,654 277,414 Amortization of deferred policy acquisition costs 32,593 30,298 96,880 89,005 Other underwriting expenses (note 6) 80,207 5,151 89,530 15,033 Other expenses (note 6) 19,039 12,801 50,178 38,749 Interest expense 505 454 1,578 1,217 ----------- ----------- ----------- ----------- 247,191 143,429 559,820 421,418 ----------- ----------- ----------- ----------- Income (loss) before income taxes and minority interest (69,173) 22,737 (28,799) 67,199 ----------- ----------- ----------- ----------- Income taxes Current (20,183) 6,182 (8,117) 20,791 Deferred (2,047) 341 (2,749) (1,630) ----------- ----------- ----------- ----------- (22,230) 6,523 (10,866) 19,161 ----------- ----------- ----------- ----------- Income (loss) before minority interest (46,943) 16,214 (17,933) 48,038 Minority interest in net income of consolidated subsidiary 164 147 425 374 ----------- ----------- ----------- ----------- Net income (loss) (47,107) 16,067 (18,358) 47,664 Other comprehensive income (net of income taxes) 7,002 5,648 9,045 7,155 ----------- ----------- ----------- ----------- Comprehensive income (loss) $ (40,105) $ 21,715 $ (9,313) $ 54,819 =========== =========== =========== =========== Net income applicable to common stock (note 7) $ (47,986) $ 15,188 $ (20,994) $ 45,028 =========== =========== =========== =========== Earnings per share (note 7) Basic $ (1.59) $ 0.50 $ (0.69) $ 1.48 =========== =========== =========== =========== Diluted $ (1.57) $ 0.49 $ (0.68) $ 1.46 =========== =========== =========== ===========
See accompanying Notes to Interim Consolidated Financial Statements. 5 ALLIED Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Nine Months Ended September 30, ----------------------------------- 1998 1997 ---------------- --------------- (in thousands) Cash flows from operating activities Net income $ (18,358) $ 47,664 Adjustments to reconcile net income to net cash provided by operating activities Realized investment gains (340) (17) Depreciation and amortization 9,391 9,586 Indebtedness with affiliates 6,517 (303) Accounts receivable, net (26,186) (16,561) Accrued investment income (712) 115 Deferred policy acquisition costs (6,163) (4,385) Mortgage loans held for sale, net (2,814) (1,826) Other assets (5,042) 1,467 Losses and loss adjusting expenses 22,294 11,147 Unearned premiums, net 25,568 19,935 Cost of ESOP shares allocated 1,702 2,385 Current income taxes (22,826) 279 Deferred income taxes (2,749) (1,630) Other, net 81,777 (3,512) ---------------- --------------- Net cash provided by operating activities 62,059 64,344 ---------------- --------------- Cash flows from investing activities Purchase of fixed maturities (121,640) (114,061) Purchase of equity securities (15,598) (38,696) Purchase of equipment (7,272) (5,023) Sale of fixed maturities 21,334 45,087 Maturities, calls, and principal reductions of fixed maturities 63,820 64,017 Sale of equity securities 9,806 354 Short-term investments, net (541) (3,108) Sale of equipment 497 284 ---------------- --------------- Net cash used in investing activities (49,594) (51,146) ---------------- --------------- Cash flows from financing activities Notes payable to nonaffiliates, net 3,500 310 Notes payable to affiliates, net 9,700 2,125 Issuance of common stock 5,443 4,500 Repurchase of common stock (14,898) (7,354) Dividends paid to stockholders, net of income tax benefit (13,781) (12,331) ---------------- --------------- Net cash used in financing activities (10,036) (12,750) ---------------- --------------- Net increase in cash 2,429 448 Cash at beginning of year 2,168 1,067 ---------------- --------------- Cash at end of quarter $ 4,597 $ 1,515 ================ ===============
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. (2) Transactions with Affiliates Pursuant to the terms of the Intercompany Operating Agreement, the Company leases employees to ALLIED Mutual Insurance Company (ALLIED Mutual) and certain of its subsidiaries. Each company that leases employees is charged a fee based upon costs incurred for salaries, related benefits, taxes, and expenses associated with the employees it leases. For the nine months ended September 30, 1998 and 1997, the Company received revenues of $2.2 million and $1.9 million for employees leased to affiliates, respectively, which are included in income from affiliates. Certain subsidiaries of the Company provide data processing and other services for ALLIED Mutual and its subsidiaries. Included in income from affiliates are revenues of $1.8 million and $1.9 million relating to services performed for ALLIED Mutual and its subsidiaries for the first nine months of 1998 and 1997, respectively. The Company and its affiliates deposit their excess cash into a short-term investment fund. The fund was established to concentrate short-term cash in a single account to maximize yield. AID Finance Services, Inc., a wholly-owned subsidiary of ALLIED Mutual, is the fund administrator. At September 30, 1998, the Company and its subsidiaries had $6.1 million invested in the fund and had several short-term unsecured notes payable to the fund totaling $15.6 million. The interest rate on the borrowings ranged from 5.8% to 8.8%. The Company and its subsidiaries had interest income from affiliates of $649,000 and $372,000 in the first nine months of 1998 and 1997, respectively. Interest paid to affiliates was $532,000 and $281,000 in the first nine months of 1998 and 1997, respectively. (3) Reinsurance The Company's property-casualty subsidiaries purchase property catastrophe reinsurance from a large number of reinsurers each of which provides a relatively small percentage of the total cover. For 1998, the pool liability of the cover is 90% of $120 million with a retention of $11 million. A reinstatement agreement exists allowing purchases of reinsurance for an additional catastrophe occurring in the same year. In the second and third quarter of 1998, the property-casualty segment exceeded the retention level and recovered $16.2 million under the property catastrophe reinsurance. Additional reinsurance was purchased in the second quarter under the reinstatement agreement. Effective January 1, 1998, the Company's property-casualty subsidiaries and ALLIED Mutual entered into a property catastrophe reinsurance agreement with a nonaffiliated reinsurer. The agreement is an aggregate catastrophe excess of loss reinsurance program that covers the property-casualty segment's share of pooled losses up to $25 million in excess of $25 million in the aggregate for any one quarter or in excess of $60 million in the aggregate for any one year. In the second quarter of 1998, the property-casualty segment received the maximum recovery of $16 million under the excess of loss reinsurance program. (4) Notes Payable to Nonaffiliates At September 30, 1998, the mortgage banking subsidiary had borrowed $88.2 million under the terms of three separate mortgage loan warehousing agreements with different commercial banks. These notes payable are not guaranteed by the Company. Under the terms of the agreements, the subsidiary can borrow up to the lesser of $95 million or 98% of the mortgage credit borrowing base. The outstanding borrowings were secured by $71.8 million of pledged mortgage loans 7 held for sale, mortgage servicing rights on loans with a principal balance of $3.1 billion, and foreclosure loans. Interest rates applicable to the mortgage loan warehousing agreements vary with the level of investable deposits maintained at the respective commercial banks. The mortgage banking subsidiary also had $9 million of 8.4% senior secured notes outstanding as of September 30, 1998. The notes are payable to a nonaffiliated life insurance company and are secured by pledged mortgage servicing rights. The notes are payable in equal annual installments of $1.5 million each September 1, with interest payable semi-annually. The final installment and interest is due September 1, 2004. The Federal Home Loan Bank of Des Moines provides a $5 million committed credit facility through a line of credit agreement with AMCO Insurance Company (AMCO). Interest on any outstanding borrowings is payable at an annual rate equal to the federal funds unsecured rate for Federal Reserve member banks, which was 5.7% at September 30, 1998. The Company had an outstanding balance under this line of credit of $5 million at September 30, 1998. The borrowings were secured by United States Government securities with a carrying value of $16.6 million. The line of credit agreement was terminated on October 1, 1998. (5) Common Stock During the first nine months of 1998, the Company canceled 557,600 shares of its common stock purchased on the open market at an average price per share of $26.72. The program to repurchase up to 2 million shares of Company common stock over the next twelve months was approved by the Board of Directors on May 5, 1998. The program can be terminated at any time and is pursuant to Rule 10b-18 of the Securities Exchange Act of 1934. As of September 30, 1998, 1.4 million shares remain available under the program for repurchase. (6) Merger Agreement with Nationwide On June 3, 1998, the Company entered into a Merger Agreement with Nationwide Mutual Insurance Company (Nationwide) that provides for the acquisition of all of the outstanding common stock of the Company pursuant to a tender offer price of $48.25 in cash per share. The expiration date of the tender offer was September 30, 1998 (note 9). For the nine months ended September 30, 1998, the Company and AMCO incurred $13.8 million in legal expenses associated with the merger, which are included in other expenses. Included in other liabilities was $8.7 million in accrued merger expenses Included in other underwriting expenses is dividends to policyholders, which increased due to a $110 million extraordinary dividend ALLIED Mutual paid to its policyholders. Dividends to policyholders are a pooled expense and the property-casualty segment's share of the dividends to policyholders was $70.4 million. As of September 30, 1998, the extraordinary dividend was declared but unpaid and included in other liabilities. 8 (7) Earnings per Share The following table presents a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation for the three and nine months ended September 30, 1998 and 1997:
Three months ended Nine months ended September 30, September 30, 1998 1997 1998 1997 ------------- -------------- ------------- -------------- (in thousands, except per share data) Numerator Net income $ (47,107) $ 16,067 $ (18,358) $ 47,664 Preferred stock dividends (879) (879) (2,636) (2,636) ------------- -------------- ------------- -------------- Net income applicable to common stock $ (47,986) $ 15,188 $ (20,994) $ 45,028 ============= ============== ============= ============== Denominator (weighted average shares) Basic shares outstanding 30,148 30,471 30,338 30,474 Dilutive potential common shares 443 369 373 317 ------------- -------------- ------------- -------------- Diluted shares outstanding 30,591 30,840 30,711 30,791 ============= ============== ============= ============== Basic earnings per share $ (1.59) $ 0.50 $ (0.69) $ 1.48 ============= ============== ============= ============== Diluted earnings per share $ (1.57) $ 0.49 $ (0.68) $ 1.46 ============= ============== ============= ==============
All outstanding options were included in the dilutive computation per share for the three and nine months ended September 30, 1998. The exercise prices on the outstanding options were less than the average market price per share . (8) Segment Information The Company has two reportable operating segments: property-casualty and excess & surplus lines. For the nine months ended September 30, 1998 and 1997, the property-casualty and excess & surplus lines accounted for 85.5% and 5.8% of consolidated revenues, respectively. Included in all other are mortgage banking, data processing operations, and employee leasing services to affiliated companies. All segments operated exclusively in the United States. The following table presents a summary of the Company's operating segments for the nine months ended September 30, 1998 and 1997:
Revenues Income (loss) ------------------------------------------------------------------ before income Revenues Revenues Realized taxes and from from investment Total minority nonaffiliates affiliates gains (losses) revenues interest * ------------- ------------- -------------- ------------- ------------- (in thousands) Nine months ended September 30, 1998 Property-casualty $ 452,693 $ 851 $ 325 $ 453,869 $ (32,531) Excess & surplus lines 30,619 --- 11 30,630 8,966 All other 43,332 96,198 4 139,534 (5,234) Eliminations --- (93,012) --- (93,012) --- ------------- ------------- -------------- ------------- ------------- Total $ 526,644 $ 4,037 $ 340 $ 531,021 $ (28,799) ============= ============= ============== ============= =============
9
Revenues Income (loss) ----------------------------------------------------------------- before income Revenues Revenues Realized taxes and from from investment Total minority nonaffiliates affiliates gains (losses) revenues interest * ------------- ------------- -------------- ------------- ------------- (in thousands) Nine months ended September 30, 1997 Property-casualty $ 417,731 $ 759 $ 16 $ 418,506 $ 59,543 Excess & surplus lines 29,905 --- (4) 29,901 7,359 All other 37,164 84,210 5 121,379 297 Eliminations --- (81,169) --- (81,169) --- ------------- ------------- ------------- ------------- ------------- Total $ 484,800 $ 3,800 $ 17 $ 488,617 $ 67,199 ============= ============= ============= ============= =============
Assets ------------------------------------ September 30, December 31, 1998 1997 ---------------- ---------------- Property-casualty $ 1,131,216 $ 1,012,926 Excess & surplus lines 152,273 141,814 All other 596,217 560,270 Eliminations (519,850) (513,777) ---------------- ---------------- Total $ 1,359,856 $ 1,201,233 ================ ================
* includes realized investment gains or losses. (9) Subsequent Events On October 1, 1998, Nationwide announced that ALLIED Mutual merged into Nationwide and that it had accepted for purchase all shares of the Company stock validly tendered. A total of 27,756,419 shares of the Company's common stock had been tendered; representing 92.3% of the total shares outstanding. The second step of the acquisition was to merge the Company into Nationwide Group Acquisition Corporation, a wholly-owned subsidiary of Nationwide. All shares not previously purchased in the tender offer will be converted into the right to receive $48.25 in cash (subject to dissenter appraisal rights). On November 12, 1998, pursuant to the short-term merger statute under Iowa corporate law, the Company merged with Nationwide Group Acquisition Corporation. The Company is the surviving corporation. On November 12, 1998, the Company also requested that the New York Stock Exchange delist and deregister the Company's common stock. On October 13, 1998, the Company entered into a definitive agreement to sell its data processing subsidiaries for $25.8 million to Fiserv, Inc. The Company will realize a pretax gain of approximately $22 million from the sale. The sale is expected to close November 30, 1998. As a result of the tender offer by Nationwide Group Acquisition Corporation on September 30, 1998, as of October 1, 1998, the Company took, and caused certain of its subsidiaries to take, certain actions with respect to various intercompany agreements. The Company entered into an amendment to the Intercompany Operating Agreement between the Company, ALLIED Life Financial Corporation, and ALLIED Mutual (the successor in interest was Nationwide by virtue of the merger). The amendment provided that the agreement will terminate as of December 31, 1998. 10 On October 1, 1998, the Company's property-casualty subsidiaries entered into an amendment to the Second Amended and Restated Reinsurance Pooling Agreement between the Company's property-casualty subsidiaries and ALLIED Mutual (the successor in interest was Nationwide by virtue of the merger) whereby all of the business generated by the Nationwide Reinsurance Pool, of which Nationwide is a participant, would be kept separate from ALLIED's reinsurance pool for the calendar year 1998. The amendment also provided for the termination of the Second Amended and Restated Reinsurance Pooling Agreement as of January 1, 1999. As of November 4, 1998, the board of directors of the Company's property-casualty subsidiaries authorized the execution of quota-share reinsurance agreements, whereby the business written by such subsidiaries and Nationwide Insurance Company of America, a subsidiary of Nationwide, would be 100% reinsured by AMCO commencing as of January 1, 1999. AMCO in turn will enter into a quota-share reinsurance agreement with Nationwide, whereby the business written and reinsured by AMCO will be 100% reinsured by Nationwide commencing as of January 1, 1999. Also as of November 4, 1998, the board of directors of the Company's excess & surplus lines subsidiary authorized the execution of a quota-share reinsurance agreement with Scottsdale Insurance Company, a subsidiary of Nationwide, whereby the business written by the Company's excess & surplus lines subsidiary will be 100% reinsured by Scottsdale Insurance Company commencing as of January 1, 1999. On October 1, 1998, the Company's property-casualty subsidiaries entered into an amendment to the ALLIED Group Joint Marketing Agreement between the Company's property-casualty subsidiaries and ALLIED Mutual (the successor in interest was Nationwide by virtue of the merger), whereby certain change in control and non-compete provisions were waived by the parties. On October 1, 1998, the Company's property-casualty subsidiaries amended the Intercompany Cash Concentration Fund Agreement and the ALLIED Management Information Services Agreement whereby certain change in control provisions were waived by the parties. On October 1, 1998, the Company terminated the Stock Rights Agreement with ALLIED Mutual (the successor in interest was Nationwide by virtue of the merger). As of November 12, 1998, the board of directors of the Company terminated the ALLIED Group, Inc. Employee Stock Purchase Plan, the ALLIED Life Employee Stock Purchase Plan, and the ALLIED Group, Inc. Dividend Reinvestment and Stock Purchase Plan. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking Information The Private Securities Litigation Reform Act of 1995 provides a safe harbor to encourage companies to provide prospective information so long as it is identified as forward-looking and accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. Forward-looking statements are related to the plans and objectives of management for the future operations, economic performance, or projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items. In the following discussion and elsewhere in this report, statements containing words such as expect, anticipate, believe, estimates, goal, objective, or similar words are intended to identify forward-looking statements. ALLIED Group, Inc. (the Company) undertakes no obligation to update such forward-looking statements, and it wishes to identify important factors that could cause actual results to differ materially from those projected in the forward-looking statements contained in the following discussion and elsewhere in this report. The risks and uncertainties that may affect the operations, performance, development, and results of the Company's business include but are not limited to the following: (1) heightened competition, particularly intensified price competition; (2) adverse state and federal legislation and regulations; (3) changes in interest rates causing a reduction of investment income; (4) general economic and business conditions which are less favorable than expected; (5) unanticipated changes in industry trends; (6) adequacy of loss reserves; (7) catastrophic events or the occurrence of a significant number of storms and wind and hail losses; and (8) other risks detailed herein and from time to time in the Company's other reports. Overview The following analysis of the consolidated results of operations and financial condition of the Company should be read in conjunction with the Interim Consolidated Financial Statements and related footnotes included elsewhere herein, and with the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The Company, a regional insurance holding company, and its subsidiaries operate exclusively in the United States; primarily in the central and western states. The largest segment includes three property-casualty insurance companies that write personal lines (primarily automobile and homeowners) and small commercial lines of insurance. The other reportable segment is excess & surplus lines insurance. The property-casualty insurance segment accounted for 85.5% and 85.7% of consolidated revenues for each of the nine months ended September 30, 1998 and 1997, respectively. The property-casualty segment participates in a reinsurance pooling agreement with ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company. The agreement generally provides that the property-casualty insurance business is assumed by the pool administrator, AMCO Insurance Company (AMCO), and then ceded back to the pool participants according to predetermined percentages. Participation percentages are based on certain factors such as capitalization and business produced by the respective companies. The segment's participation in the reinsurance pool has been 64% since January 1, 1993. Merger with Nationwide Mutual Insurance Company On June 3, 1998, the Company entered into a Merger Agreement with Nationwide Mutual Insurance Company (Nationwide) that provides for the acquisition of all of the outstanding stock of the Company by Nationwide pursuant to a revised tender offer price of $48.25 in cash per share (the "Offer") to be followed by the merger of an acquisition subsidiary of Nationwide with and into the Company, in which shareholders (other than Nationwide, its acquisition subsidiary, and shareholders validly exercising dissenters' rights of appraisal) would receive $48.25 in cash per share (the "Merger"). The Board of Directors (Board) unanimously approved the Offer and determined that the terms of the Offer and the Merger are fair to and in the best interests of the Company's stockholders. The Board unanimously recommended that the Company's stockholders accept the Offer and tender their shares. Nationwide's obligations to consummate the Offer and the Merger and to purchase and pay for the shares are subject to a number of conditions, including, without limitation, the condition that all insurance regulatory approvals necessary for Nationwide's acquisition of control of the Company and its insurance subsidiaries are obtained on terms and conditions reasonably satisfactory to Nationwide. 12 On July 20, 1998 and September 11, 1998, Nationwide received the Ohio Department's and the Iowa Insurance Commissioner's approval, respectively, to acquire control of the property-casualty subsidiaries of the Company. In addition, on August 24, 1998, the Arizona Department of Insurance approved the acquisition of control of the Company's excess & surplus subsidiary domiciled in Arizona. On October 1, 1998, Nationwide announced that ALLIED Mutual had merged into Nationwide and that it had accepted for purchase all shares of the Company stock validly tendered. A total of 27,756,419 shares of the Company's common stock had been tendered; representing 92.3% of the total shares outstanding. The second step of the acquisition was to merge the Company into Nationwide Group Acquisition Corporation , a wholly-owned Subsidiary of Nationwide. All shares not previously purchased in the tender offer will be converted into the right to receive $48.25 in cash (subject to dissenters rights). On November 12, 1998, pursuant to the short-form merger statute under Iowa corporate law, the Company merged with Nationwide Group Acquisition Corporation. The Company is the surviving corporation. On November 12, 1998, the Company also requested that the New York Stock Exchange delist and deregister the Company's common stock. As a result of the tender offer by Nationwide Group Acquisition Corporation on September 30, 1998, as of October 1, 1998, the Company took, and caused certain of its subsidiaries to take, certain actions with respect to various intercompany agreements. The Company entered into an amendment to the Intercompany Operating Agreement between the Company, ALLIED Life Financial Corporation, and ALLIED Mutual (the successor in interest was Nationwide by virtue of the merger). The amendment provided that the agreement will terminate as of December 31, 1998. On October 1, 1998, the Company's property-casualty subsidiaries entered into an amendment to the Second Amended and Restated Reinsurance Pooling Agreement between the Company's property-casualty subsidiaries and ALLIED Mutual (the successor in interest was Nationwide by virtue of the merger) whereby all of the business generated by the Nationwide Reinsurance Pool, of which Nationwide is a participant, would be kept separate from ALLIED's reinsurance pool for the calendar year 1998. The amendment also provided for the termination of the Second Amended and Restated Reinsurance Pooling Agreement as of January 1, 1999. As of November 4, 1998, the board of directors of the Company's property-casualty subsidiaries authorized the execution of quota-share reinsurance agreements, whereby the business written by such subsidiaries and Nationwide Insurance Company of America, a subsidiary of Nationwide, would be 100% reinsured by AMCO commencing as of January 1, 1999. AMCO in turn will enter into a quota-share reinsurance agreement with Nationwide, whereby the business written and reinsured by AMCO will be 100% reinsured by Nationwide commencing as of January 1, 1999. Also as of November 4, 1998, the board of directors of the Company's excess & surplus lines subsidiary authorized the execution of a quota-share reinsurance agreement with Scottsdale Insurance Company, a subsidiary of Nationwide, whereby the business written by the Company's excess & surplus lines subsidiary will be 100% reinsured by Scottsdale Insurance Company commencing as of January 1, 1999. On October 1, 1998, the Company's property-casualty subsidiaries entered into an amendment to the ALLIED Group Joint Marketing Agreement between the Company's property-casualty subsidiaries and ALLIED Mutual (the successor in interest was Nationwide by virtue of the merger), whereby certain change in control and non-compete provisions were waived by the parties. On October 1, 1998, the Company's property-casualty subsidiaries amended the Intercompany Cash Concentration Fund Agreement and the ALLIED Management Information Services Agreement whereby certain change in control provisions were waived by the parties. On October 1, 1998, the Company terminated the Stock Rights Agreement with ALLIED Mutual (the successor in interest was Nationwide by virtue of the merger). As of November 12, 1998, the board of directors of the Company terminated the ALLIED Group, Inc. Employee Stock Purchase Plan, the ALLIED Life Employee Stock Purchase Plan, and the ALLIED Group, Inc. Dividend Reinvestment and Stock Purchase Plan. 13 Results of Operations Consolidated revenues for the first nine months of 1998 were $531 million, up 8.7% over the $488.6 million reported for the same period of 1997. For the third quarter only, consolidated revenues increased 7.1% to $178 million over the same period in 1997. The increase occurred primarily because of the growth in earned premiums for the nine and three months ended September 30, 1998. The Company had a loss before income taxes and minority interest of $28.8 million and $69.2 million for the first nine and three months of 1998, respectively. The loss was due to merger related expenses with Nationwide which are included in other underwriting expenses. The loss was a result of $13.8 million in merger related expenses, the $110 million dividend paid to policyholders of ALLIED Mutual, and adverse wind and hail experience. Dividends to policyholders are a pooled expense and the property-casualty segment's share of the dividends to policyholders was $70.4 million. For the nine and three months ended September 30, 1997, income before income taxes and minority interest was $67.2 million and $22.7 million, respectively. Wind and hail losses increased 73.4% to $45.5 million for the nine months ended September 30, 1998 compared to $26.2 million for the same period in 1997. For the third quarter wind and hail losses were up 20.9% to $12.9 million. The Company's year-to-date effective income tax rate was (37.7)% and 28.5% at September 30, 1998 and 1997, respectively. The decrease is due to operating expenses exceeding revenues. The income tax benefit for the first nine months of 1998 was $10.9 million compared to an income tax expense of $19.2 million for the same period in 1997. A net loss of $18.4 million was recognized for the nine months ended September 30, 1998, bringing diluted earnings per share to $(0.68). For the same period in 1997, net income was $47.7 million and diluted earnings were $1.46 per share. Diluted earnings per share before realized investment gains and losses were $(0.69) for the first nine months of 1998 compared with $1.46 for the same period of 1997. For the three months ended September 30, 1998 and 1997, diluted earnings per share before realized gains were $(1.57) and $0.49, respectively. The impact of the wind and hail losses on diluted earnings per share was $0.96 and $0.55 for the nine months ended September 30, 1998 and 1997, respectively. For the third quarter of 1998 and 1997 the impact per share was $0.27 and $0.22, respectively. Book value per share at September 30, 1998 decreased to $12.52 compared to $13.44 at December 31, 1997. The decline in the book value per share was primarily due to the net loss realized for the nine months ended September 30, 1998. The fair value of investments in fixed maturities was $38.6 million above cost at September 30, 1998 compared to $26.3 million above cost at December 31, 1997. If the investments in fixed maturities were reported at amortized cost, the book value would have been $11.69 at September 30, 1998 compared to $12.88 at December 31, 1997. Investments and Investment Income The investment policy for the Company's insurance segments require that the fixed maturity portfolio be invested primarily in debt obligations rated "BBB" or higher by Standard & Poor's Corporation or a recognized equivalent at the time of acquisition. The policy also states that equity securities are to be of United States and Canadian corporations listed on established exchanges or publicly traded in the over-the-counter market. Preferred stocks are to be comprised primarily of issues rated at least A3/A- by Standard and Poor's Corporation or Moody's. The Company's investment portfolio consisted primarily of fixed income securities and equity securities; 89.8% and 9%, respectively. The ratings on 98.7% of the fixed income securities at September 30, 1998 were investment grade or higher. The investment portfolio contained no real estate or mortgage loans at September 30, 1998. Invested assets were up 6% to $962.8 million from $908.2 million at year-end 1997. Nine-month consolidated investment income increased 3.7% to $39.9 million from $38.5 million through September 30, 1997. Investment income for the quarter ended September 30, 1998, was up slightly to $13 million over the second quarter of 1997. The increase was due to a larger average balance of invested assets. The Company's pretax rate of return on invested assets for the nine months ended September 30, 1998, was down to 5.7% from 6.0% for the same period last year. The pretax yield was down as a result of the low interest rate environment and a higher proportional share of investment income from tax-exempt securities. Property-casualty Net written premiums for the pool (including ALLIED Mutual) totaled $679.5 million, an 8.2% increase over production in the first nine months of 1997. Growth was constrained by commercial lines that grew 3.3%, reflecting the highly 14 competitive environment in which the commercial lines are operating. Personal lines increased 10.3% over the same period in 1997. The average premium per policy for personal lines was up 3.7% from the first nine months of 1997 to $638 while the policy count grew 5.2%. The average premium per policy for commercial lines excluding crop-hail increased 1.7% from the first nine months of 1997 to $1,169 and the policy count was up 2.6%. Earned premiums for the property-casualty segment were 69.2% personal lines and 30.8% commercial lines in the first nine months of 1998. The business mix for the first nine months of 1997 was 68.1% personal lines and 31.9% commercial lines. Revenues for the property-casualty segment increased 8.4% to $453.9 million from $418.5 million for the nine months ended September 30, 1998 and 1997, respectively. Revenues for the quarter ended September 30, 1998, increased 6.7% to $152.2 million. Direct earned premiums for the segment were $468.3 million for the first nine months of 1998 compared with $420.1 million one year earlier. Earned premiums increased 8.3% for the first nine months of 1998 to $412.4 million from $380.8 million; for the third quarter only, earned premiums increase 7.2% to $138.7 million from $129.4 million for the same period in 1997. The increase resulted from growth in insurance exposure and increase in average premium per policy. Investment income for the first nine months of 1998 was $34.7 million compared to $33.3 million for the same period in 1997. For the three months ended September 30, 1998, investment income increased 1.3% to $11.4 million compared to $11.2 million for the same quarter in 1997. The increase was the result of a larger average balance in invested assets. The pretax yield on invested assets was 5.7% and 6.1% for the nine months ended September 30, 1998 and 1997, respectively. The segment had realized investment gains of $325,000 and $16,000 in the first nine months of 1998 and 1997, respectively. Other income for the first nine months of 1998 and 1997 was $6.4 million and $4.4 million, respectively. The segment realized a loss before income taxes of $32.5 million compared to net income before income taxes of $59.5 million in the first nine months of 1997. The loss was the combined result of merger related expenses, dividends to policyholders, and higher wind and hail losses. The statutory combined ratio (after policyholder dividends) for the first nine months of 1998 was 117.0 compared to 94.0 reported in the first nine months of 1997. The higher combined ratio was primarily the result of a 17.5-point increase in the underwriting expense ratio. The increase was due to merger related expenses; dividends to policyholders of $70.4 million and legal expenses of $5.8 million. The loss and loss adjusting expense ratio also increased 5.4-points; primarily due to higher wind and hail losses. The impact of wind and hail losses on the combined ratio was 11 points and 6.9 points for the nine months ended September 30, 1998 and 1997, respectively. The 1998 ratio also was unfavorably impacted by an under accrual of contingency commissions for 1997, one-time costs associated with setting up the new Central States Office, and legal expenses. The generally accepted accounting principles (GAAP) underwriting loss was $74 million compared with a gain of $21.8 million for the first nine months of 1997. The following table presents the property-casualty's statutory combined ratio by line of business for the three and nine months ended September 30, 1998 and 1997:
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ---------------------- 1998 1997 1998 1997 ----- ----- ----- ----- Personal automobile 146.2 92.6 112.1 92.9 Homeowners 153.4 98.3 126.6 99.8 Personal lines 148.1 94.2 116.0 94.8 Commercial automobile 160.1 85.6 117.8 89.9 Workers' compensation 175.7 90.8 122.5 89.0 Other property/liability 172.6 99.5 119.8 94.5 Other lines 135.2 61.8 89.0 61.0 Commercial lines 170.4 95.5 119.4 92.5 Total 154.7 94.5 117.0 94.0
15 The personal auto statutory combined ratio deteriorated to 112.1 for the first nine months of 1998 from 92.9 for the same period in 1997. The deterioration was largely due to a 15.7-point increase in the underwriting expense ratio; the loss and loss adjusting expense ratio increased 3.5-points. The impact of wind and hail losses on the combined ratio for personal auto was up to 3.5 points from 2.5 points for the first nine months of 1997. The statutory combined ratio for the homeowners line was 126.6 for the first nine months of 1998 compared with 99.8 for the same period of 1997. The deterioration was due to a 10.4-point increase in the loss and loss adjusting expense ratio and a 16.4-point increase in the underwriting expense ratio. The impact of higher wind and hail losses on the combined ratio for the homeowners line increased to 31.7 points from 19.6 points for the first nine months of 1997. Overall, the personal lines statutory combined ratio increased to 116.0 in the first nine months of 1998 from 94.8 in the same period of 1997. The statutory combined ratio for commercial lines increased to 119.4 in the first nine months of 1998 from 92.5 for the first nine months of 1997. The deterioration of personal and commercial lines combined ratio was primarily attributed to dividends paid to policyholders, expenses associated with the merger, and higher wind and hail losses in the second and third quarters of 1998. Excess & Surplus Lines Earned premiums increased to $25.3 million for the first nine months of 1998 from $24.8 million for the same period in 1997. Earned premiums for the quarter ended September 30, 1998 and 1997 were $8.4 million and $8.5 million, respectively. Net written premiums increased to $29.2 million for the nine months ended September 30, 1998 from $25.8 million in the same period of 1997. The increase is due to a change in reinsurance, effective January 1, 1998, from the ceding of premiums on an written basis to an earned basis. For the nine month period ended September 30, 1998, the segment's book of business was comprised of 4% personal lines and 96% commercial lines. The business mix for the first nine months of 1997 was 3% personal lines and 97% commercial lines. Investment income for the first nine months of 1998 increased 4% to $5.3 million from $5.1 million for the same period in 1997. For the quarter ended September 30, 1998 and 1997, investment income was $1.8 million and $1.7 million, respectively. Investment income increased due to a larger average balance in the investment portfolio. The pretax yield on those assets was 5.9% in the first nine months of 1998 compared to 6.3% for the same period in 1997. The pretax yield on invested assets for the year ended December 31, 1997 was 6.2%. Invested assets increased 13% to $128.3 million at September 30, 1998 from $113.5 million at year-end 1997. The statutory combined ratio (after policyholder dividends) was 87.4, which produced a GAAP underwriting gain of $3.6 million for the first nine months of 1998. The combined ratio for the first nine months of 1997 was 90.6 which resulted in a GAAP underwriting gain of $2.2 million. The combined ratio improved primarily due to a 2.3-point decrease in the underwriting expense ratio in the first nine months of 1998. The loss and loss adjusting expense ratio also improved slightly in the first nine months of 1998 from the same period in 1997. Income before income taxes for the nine months ended September 30, 1998 increased to $9 million from $7.4 million; income before income taxes for the third quarter of 1998 and 1997 were $4.2 million and $2.6 million, respectively. The segment had realized gains of $12,000 in the first nine months of 1998 and had realized losses of $4,000 in the same period of 1997. Noninsurance Operations Revenues for the noninsurance operations (including mortgage banking, data processing operations, and employee leasing to affiliates) after eliminations increased 15.7% to $46.5 million for the first nine months of 1998 from $40.2 million for the same period last year. The increase was primarily due to a $4.7 million increase in data processing revenues from consulting service fees. Noninsurance operations reported a loss before income taxes of $5.2 million for the first nine months of 1998 compared to income before income taxes of $297,000 for the same period in 1997. The decrease was primarily due to $8 million in expenses associated with the Nationwide merger agreement. The mortgage banking servicing portfolio at September 30, 1998 increased slightly to $3.1 billion from $2.9 billion at year-end 1997. New Accounting Pronouncement In February of 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for years beginning after December 31, 1997. SFAS 132 revises the disclosure requirements but does 16 not change the measurement or recognition of those plans. SFAS 132 superseded SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The adoption of SFAS 132 will result in revised and additional disclosures but will have no effect on the financial position, results of operations, or liquidity of the Company. In June of 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal quarters beginning after June 30, 1999. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure the instruments at fair value. Early application is encouraged, but is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. SFAS 133 shall not be applied retroactively. Management has not determined the impact of SFAS 133 on the financial position, results of operations, or liquidity of the Company at this time. Liquidity and Capital Resources Substantial cash inflows are generated from premiums, pool administration fees, investment income, and proceeds from sales and maturities of investments. The principal outflows of cash are payment of claims, commissions, premium taxes, operating expenses, and income taxes and the purchase of fixed income and equity securities. In developing its investment strategy, the Company establishes a level of cash and highly liquid short- and intermediate-term securities that, combined with expected cash flow, is believed adequate to meet anticipated short-term and long-term payment obligations. In the first nine months of 1998 and 1997, operating activities generated cash flows of $62.1 million and $64.3 million, respectively. For both periods, the primary source of funds was premium growth in the Company's property-casualty insurance operations. The funds were used primarily to purchase fixed income and equity securities and to repurchase Company common stock. Included in other liabilities is $71.1 million in dividends declared to policyholders but unpaid and $8.7 million in accrued merger expenses. Operating cash flows were also used to pay $14.4 million of dividends to stockholders in the first nine months of 1998. For the same period in 1997, the Company paid dividends of $13 million to stockholders. Dividend payments to common stockholders totaled $11.8 million for the nine months ended September 30, 1998, up from $10.4 million for the same period in 1997. The increase in dividends to common stock shareholders is primarily due to a higher dividend per share, 14.7% increase from September 30, 1997. In the first nine months of 1998 and 1997, the Company paid dividends of $2.6 million on the 6-3/4% Series preferred stock. The Company relies primarily on dividend payments from its property-casualty subsidiaries to pay preferred and common stock dividends to stockholders. During the first nine months of 1998, the Company received dividend payments of $13.3 million from the property-casualty subsidiaries and $557,000 from noninsurance subsidiaries. During the same period of 1997, the Company received dividend payments of $12.2 million from the property-casualty subsidiaries and $57,000 from noninsurance subsidiaries. During the first nine months of 1998, the Company canceled 557,600 shares of its common stock purchased on the open market at an average price per share of $26.72. The program to repurchase up to 2 million shares of Company common stock over the next twelve months was approved by the Board of Directors on May 5, 1998. The program can be terminated at any time and is pursuant to Rule 10b-18 of the Securities Exchange Act of 1934. As of September 30, 1998, 1.4 million shares remain available under the program for repurchase. On May 5, 1998, the Company announced an amendment to the reinsurance pooling agreement between the Company's property-casualty segment and ALLIED Mutual. Beginning July 1, 1998, the amended pooling agreement phases out the provisions which provide that the pool administrator is reimbursed for such expenses by the other pool participants on a set percentage-of-premiums basis. Once the phase-out is completed by the year 2001, all underwriting expenses, loss adjusting expense and premium collection expenses will be allocated based on each participant's pool participation percentage in the same manner premiums and losses are allocated. The mortgage banking subsidiary has separate credit arrangements to support its operations. Short-term and long-term notes payable to nonaffiliated companies are used to finance its mortgage loans held for sale and to purchase mortgage servicing rights. The level of short-term borrowings fluctuates daily depending on the level of inventory being financed. At September 30, 1998, short-term 17 borrowings amounted to $88.2 million to be repaid through the subsequent sale of mortgage loans held for sale and long-term borrowings amounted to $9 million to be repaid over the next seven years. These notes payable are not guaranteed by the Company. In the normal course of its business, the subsidiary also makes commitments to buy and sell securities that may result in credit and market risk in the event the counterparty is unable to fulfill its obligation. On October 13, 1998, the Company entered into a definitive agreement to sell its data processing subsidiaries for $25.8 million to Fiserv, Inc. The Company will realize a pretax gain of approximately $22 million from the sale. The sale is expected to close November 30, 1998. Management anticipates that short-term and long-term capital expenditures, cash dividends, and operating cash needs will be met from existing capital and internally generated funds. The extraordinary dividend payable to policyholders will be funded through the liquidation of the property-casualty segment's investment portfolio. As of September 30, 1998, the Company and its subsidiaries had no material commitments for capital expenditures. Future debt and stock issuance will be considered as additional capital needs arise. The method of funding will depend upon financial market conditions. Costs associated with the Merger The Company will incur additional merger-related costs until the transaction is completed, but at this time the Company can not estimate what the amount of those costs will be. The Company will expense such costs as they are incurred. In the first nine months of 1998, expenses associated with the Merger Agreement with Nationwide, including dividends to policyholders, lowered earnings for the nine months ended September 30, 1998 by $1.94 per share. Year 2000 In 1996, the Company assembled a full-time team to identify potential year 2000 issues, if any, in its information and departmental systems, as well as administrative devices that might be effected (elevators, security systems, etc.). Upon identifying a year 2000 issue the team determines when the system may malfunction, what needs to be done to modify it, and then, after modification, tests the system to verify that it is year 2000 compliant. The Company has divided its year 2000 activities into three categories: mainframe readiness, client/server readiness, and vendor interfacing readiness. The Company believes it understands its potential exposure and has developed a plan to mitigate those exposures for all three categories. Mainframe Readiness -- The Company believes it has identified when each application may malfunction and what needs to be modified to be compliant. By the end of October 1998, all applications that may malfunction in 1998 will have been modified and tested at least once. The Company believes it is on schedule to having all mainframe applications modified and tested by year-end 1998. In addition to modifying applications, the Company is in the process of upgrading all system software on the mainframe to be compliant. The target date for completion is December 31, 1998. Client/Server Readiness -- The Company believes it has identified when each internally developed client/server application may malfunction and what needs to be modified to be compliant. By the end of October 1998, all internally developed applications that may malfunction in 1998 will have been modified and tested at least once. The Company believes it is on schedule to having all internally developed client/server applications modified and tested by year-end 1998. The Company has also identified client/server shrink wrap packages that are used for critical business functions. The Company has developed a lab to test the many different versions of these shrink wrap packages that are in use. Testing of these packages has begun and is scheduled to be completed by midyear 1999. Client/Server hardware has been verified as year 2000 compliant and the Company has tested at least one of each of the various configurations that supports the workstations. In addition, the Company tested the ability of the workstations to handle the date roll over to the year 2000 as well as the personal computer's ability to maintain a date change in the year 2000. Vendor Interfacing Readiness -- The Company has identified all vendors with whom it conducts electronic interfaces with and has contacted them to request a copy of their year 2000 readiness plans. In addition, the Company plans to test all interfaces prior to potential malfunction dates and have all testing completed by midyear 1999. 18 The Company actively monitors its progress towards being compliant and has had two internal audits conducted on its process and progress. A third audit by an outside auditing firm is currently in process. Management of the Company does not expect year 2000 remediation costs to have a material impact on its future financial position or results of operations. The costs are expensed as they are incurred and the Company estimates that the total cost of the year 2000 remediation to be approximately $2.9 million. As of September 30, 1998, the Company has incurred a total cost of $2 million since the project was initiated in 1996. Management believes the worst case scenario, based on the Company's efforts to mitigate any exposure, is that a non-mission critical application would not perform properly, a supplier not being able to meet a scheduled delivery, or some workstations would not work properly. While recognizing that some uncertainty exists, the Company is in the process of developing a contingency plan and has already assembled a team to address any year 2000 problems that may have been missed during the mitigation efforts. The team will be put on alert the day prior to an application's malfunction date to monitor the application's performance and be ready to correct any problems. The Company believes most significant year 2000 insurance claims are likely to occur under error and omissions (E&O) insurance coverage, directors and officers (D&O) liability insurance coverage, and commercial general liability. Management believes exposure to material liability to be remote as of September 30, 1998, because the emphasis of the Company's property-casualty business is primarily on personal lines and small commercial business and does not write E&O and D&O coverage types. However, the Company does anticipate that there may be year 2000 claims by its insureds resulting from malfunctioning technology, which cannot be quantified at this time. The Company's data processing segment has a line of property-casualty and life insurance software products which it markets to affiliated and nonaffiliated insurance companies. Management believes the segment's products are year 2000 compliant while operating in the Company's environment and will continue to retest the products throughout 1998. The segment's customers have been advised to test the software products in their operating environment for year 2000 compliance. Management believes any exposure to material liability was remote as of September 30, 1998. Contingencies California has been the source of approximately 25% of the pool's direct written premiums for the past ten years. Proposition 103, approved by California voters in 1988, provides for a rollback of rates on premiums collected in calendar year 1989 to the extent that the insurer's return on equity for each Proposition 103 line of business exceeded 10%. The rollback liability, if any, has not been determined. Management of the Company continues to believe that the insurance subsidiaries will not be liable for any material rollback of premiums. On December 31, 1997, a complaint was filed by Mary M. Rieff, a policyholder of ALLIED Mutual, in the Iowa District Court in and for Polk County Iowa, against the Company and certain other individuals who are or were officers and/or directors of ALLIED Mutual and the Company. The complaint, an alleged policyholder derivative action brought on behalf of ALLIED Mutual, asserts, among other things, (a) that the defendants were responsible for the inappropriate transfer of ALLIED Mutual's corporate assets, the seizure of certain corporate opportunities, and the implementation of an improper de facto demutualization without informing or compensating policyholders or receiving the appropriate approval from regulatory authorities; (b) that this allegedly wrongful demutualization began on or about January 1, 1985 and was accomplished through transfers of ALLIED Mutual's assets to the Company and to the individual defendants for inadequate consideration; (c) that the individual defendants breached fiduciary duties owed to ALLIED Mutual, wasted its corporate assets, and intentionally interfered with its contracts, prospective business advantage, and business relationships; and (d) that the defendants improperly transferred substantial ownership of and control over the Company and ALLIED Mutual's insurance business. The complaint further asserts that as a result of the foregoing, ALLIED Mutual and its policyholders have suffered damages in excess of $500 million. The complaint requests an accounting of the assets allegedly wrongfully transferred to the Company and compensation to ALLIED Mutual for the value of such assets, for the seizure of corporate opportunities, and for the de facto demutualization of ALLIED Mutual. The complaint also asks for certain other relief, including attorneys' fees and costs, equitable relief and interest, and restitution for any assets wrongfully transferred or conveyed. On June 1, 1998, the plaintiff filed a motion to enjoin the defendant directors of ALLIED Mutual from considering, negotiating or approving any transaction on behalf of ALLIED Mutual with Nationwide or any third party because of alleged 19 conflicts of interest of the members of the Board of Directors of ALLIED Mutual. On June 4, 1998, the complaint was amended to include a class action component. On July 17, 1998, the Iowa District Court in and for Polk County, Iowa, ordered that the plaintiff's motion for temporary and permanent injunctive relief be denied. A motion to dismiss plaintiff's action has been filed and a hearing is scheduled for November 20, 1998. On May 21, 1998, a class action on behalf of all shareholders of the Company was filed in Iowa District Court in and for Polk County, Iowa. Plaintiff seeks to compel the Company to consider Nationwide's Offer or, in the alternative, to recover damages caused by an alleged breach of fiduciary duty owed by the Board to its shareholders. The Company believes these suits are without merit and intends to defend them vigorously. As is the case in all pending actions, the ultimate outcome is uncertain. 20 PART II Item 6. Exhibits and Reports on Form 8-K (a) 2.4 Termination of Stock Rights Agreement between ALLIED Mutual Insurance Company and ALLIED Group, Inc. 10.09 Second Amendment to the Amended and Restated Management Information Services Agreement 10.69 Termination of Consulting Agreement 10.70 Fourth Amendment to the Second Amended and Restated Reinsurance Pooling Agreement 10.71 Fourth Amendment to the Amended and Restated ALLIED Group Intercompany Operating Agreement 10.72 Second Amendment to the ALLIED Group Joint Marketing Agreement 10.73 First Amendment to Intercompany Cash Concentration Fund Agreement 27 Financial Data Schedule for September 30, 1998 (b) The Company filed no reports on Form 8-K during the third quarter ended September 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLIED Group, Inc. (Registrant) Date: November 13, 1998 /s/ Robert A. Oakley ------------------------- Robert A. Oakley Chief Financial Officer 21 ALLIED Group, Inc. and Subsidiaries INDEX TO EXHIBITS EXHIBIT NUMBER ITEM PAGE 2.4 Termination of Stock Rights Agreement between ALLIED Mutual Insurance Company and ALLIED Group, Inc. 22 10.09 Second Amendment to the Amended and Restated Management Information Services Agreement 23 10.69 Termination of Consulting Agreement 27 10.70 Fourth Amendment to the Second Amended and Restated Reinsurance Pooling Agreement 28 10.71 Fourth Amendment to the Amended and Restated ALLIED Group Intercompany Operating Agreement 30 10.72 Second Amendment to the ALLIED Group Joint Marketing Agreement 32 10.73 First Amendment to Intercompany Cash Concentration Fund Agreement 34 27 Financial Data Schedule for September 30, 1998 41 EX-2 2 TERMINATION OF STOCK RIGHTS AGREEMENT 22 Exhibit 2.4 TERMINATION OF STOCK RIGHTS AGREEMENT For valuable consideration, the sufficiency of which is hereby acknowledged, Nationwide Mutual Insurance Company, successor to ALLIED Mutual Insurance Company, and ALLIED Group, Inc. hereby agree to terminate that certain Stock Rights Agreement, that was entered between the parties and dated as of July 5, 1990. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers as of the October 1, 1998. NATIONWIDE MUTUAL INSURANCE ALLIED GROUP, INC. COMPANY By: ______________________________ By: ______________________________ Print name: ______________________ Print name: ______________________ Title: ___________________________ Title: ___________________________ EX-10 3 2ND AMENDMENT TO AMENDED & RESTATED MGMT INFO 23 Exhibit 10.09 SECOND AMENDMENT TO AMENDED AND RESTATED MANAGEMENT INFORMATION SERVICES AGREEMENT THIS SECOND AMENDMENT dated as of October 1, 1998 ("Amendment") is entered into by and between AMCO Insurance Company ("AMCO"), ALLIED Group Information Systems, Inc. ("AGIS"), Nationwide Mutual Insurance Company ("Nationwide"), successor in interest to ALLIED Mutual Insurance Company, ALLIED Group, Inc. ("AGI"), ALLIED General Agency Company ("AGA"), ALLIED Group Life Financial Corporation ("ALFC"), ALLIED Life Insurance Company ("ALLIED Life"), ALLIED Life Brokerage Agency ("ALBA"), ALLIED Group Merchant Banking Corporation ("AGMBC"), ALLIED Group Insurance Marketing Company ("AGIMC"), The Freedom Group, Inc. ("TFG"), and Midwest Printing Services, Ltd. ("Midwest Printing") to amend the Amended and Restated Management Information Services Agreement entered into on January 24, 1997 ("Agreement") and the First Amendment to Amended and Restated Management Information Services Agreement entered into on the 24th day of February, 1997. AGIS, AGI, AGA, AGMC, AGLC, ALFC, ALLIED Life, ALBA, AGMBC, AGIMC, TFG, and Midwest printing shall be hereinafter referred to collectively as the "Companies." 1. This Amendment shall be effective as of October 1, 1998. 2. Article VI of the Agreement is hereby amended by deleting all of the words in Article VI with the exception of the heading and replacing them with the following words: "6.1 TERM AND TERMINATION. This Agreement shall be effective on March 1, 1996 and shall continue in effect through December 31, 2004, unless earlier terminated per the terms of Sections 6.2 and/or 6.3 of this Agreement as to one or more of the parties. This Agreement shall continue after December 31, 2004 unless, a party to this Agreement delivers to the other parties a written notice that such party intends to cease participation and terminate the Agreement as to it on or before December 31, 2004 or a specified date thereafter. The terminating party must give the other parties written notice of termination at least thirty (30) days prior to the proposed termination date. 6.2 CHANGE OF CONTROL OF ALFC. In the event of a Change of Control (as hereinafter defined in this section) of ALFC, Nationwide and AGI shall permit this Agreement to continue in effect, subject to the terms of Section 6.4. "Change of Control" for the purposes of this section shall mean an event whereby a person, group, or entity that is not affiliated with Nationwide or ALFC acquires the ownership of 50% or more of the voting stock of ALFC. A person, group or entity "affiliated" with Nationwide, or ALFC shall mean a person, group or entity that directly or indirectly through one or more intermediary controls, is controlled by, or is under common control with Nationwide or ALFC. 24 6.3 CHANGE OF CONTROL OF AGI. In the event of a Change of control of AGI (as hereinafter defined in this section) Nationwide and ALFC shall permit this Agreement to continue in effect, subject to the terms of Section 6.4. "Change of Control" for the purposes of this section shall mean an event whereby a person, group, or entity that is not affiliated with Nationwide, or AGI acquires 50% or more of the voting stock of AGI. A person, group or entity "affiliated" with Nationwide or AGI shall mean a person, group or entity that directly or indirectly through one or more intermediary controls, is controlled by, or is under common control with Nationwide or AGI. 6.4 TERMINATION OF PARTICIPATION. In the event of a Change of Control, as defined in section 6.2 and/or 6.3 of the Agreement, the acquired company's participation, and the company's subsidiaries' participation, in the Agreement shall be immediately terminated. 6.5 WAIVER. Any exercise of the options granted to Nationwide, AGI, or ALFC by the previous sections 6.2 or 6.3 of the Agreement, that have been deleted pursuant to the terms of this Amendment, shall be waived by Nationwide, AGI, and ALFC and shall be deemed null and void as if never made. 3. Counterparts. This Amendment may be executed simultaneously in one or more counterparts, each of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers as of the day and year first written above. Nationwide Mutual Insurance Company By: __________________________________ Print name: __________________________ Title: _______________________________ ALLIED Group, Inc. By: __________________________________ Print name: __________________________ Title: _______________________________ AMCO Insurance Company By: __________________________________ Print name: __________________________ Title: _______________________________ 25 ALLIED General Agency Company By: __________________________________ Print name: __________________________ Title: _______________________________ ALLIED Life Financial Corporation By: __________________________________ Print name: __________________________ Title: _______________________________ ALLIED Group Mortgage Company By: __________________________________ Print name: __________________________ Title: _______________________________ ALLIED Life Insurance Company By: __________________________________ Print name: __________________________ Title: _______________________________ ALLIED Group Merchant Banking Corporation By: __________________________________ Print name: __________________________ Title: _______________________________ ALLIED Group Insurance Marketing Company By: __________________________________ Print name: __________________________ Title: _______________________________ ALLIED Group Information Systems, Inc. By: __________________________________ Print name: __________________________ Title: _______________________________ 26 ALLIED Life Brokerage Agency, Inc. By: __________________________________ Print name: __________________________ Title: _______________________________ Midwest Printing Services, Ltd. By: __________________________________ Print name: __________________________ Title: _______________________________ The Freedom Group, Inc. By: __________________________________ Print name: __________________________ Title: _______________________________ EX-10 4 TERMINATION OF CONSULTING AGREEMENT 27 EXHIBIT 10.69 TERMINATION OF CONSULTING AGREEMENT THIS AGREEMENT is made as of October 1, 1998, by and between John E. Evans ("Evans") and ALLIED Group, Inc. ("AGI"), ALLIED Life Financial Corporation ("ALFC"), and Nationwide Mutual Insurance Company, a successor company to ALLIED Mutual Insurance Company ("Mutual"). WHEREAS, Evans and AGI, ALFC and Mutual entered into a Consulting Agreement dated December 14, 1994, as amended December 18, 1994 and May 13, 1997 (the "Consulting Agreement") setting forth the services Evans was to render to AGI, ALFC and Mutual following his retirement; and WHEREAS, the parties desire to waive the termination provision set forth in the Agreement and desire to mutually terminate said Agreement; NOW, THEREFORE, in consideration of the foregoing, and of the mutual covenants set forth below and other valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: Effective October 1, 1998, Evans, AGI, ALFC, and Mutual agree to terminate the Consulting Agreement and hereby release the others from all claims, obligations and rights any may have or may have in the future against any other party to the Consulting Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year above first written. ___________________________________ Date:____________ John E. Evans Nationwide Mutual Insurance Company By:________________________________ Date:____________ ALLIED Group, Inc. By:________________________________ Date:____________ Douglas L. Andersen, President ALLIED Life Financial Corporation By:________________________________ Date:____________ Samuel J. Wells, President EX-10 5 4TH AMENDMENT TO 2ND AMENDED RESTATED REINSURANCE 28 Exhibit 10.70 FOURTH AMENDMENT TO SECOND AMENDED AND RESTATED REINSURANCE POOLING AGREEMENT THIS AGREEMENT made as of the 1st day of October, 1998 by and between Nationwide Mutual Insurance Company ("Nationwide"), successor to ALLIED Mutual Insurance Company ("Mutual"), AMCO Insurance Company ("AMCO"), ALLIED Property and Casualty Insurance Company ("APC"), Depositors Insurance Company ("DIC"), for and in consideration of their mutual promises and agreements herein and for their mutual benefits. Nationwide, AMCO, APC and DIC are referred to as "Affiliated Companies," Nationwide, AMCO, APC and DIC are hereinafter collectively referred to as "Participants." WITNESSETH: WHEREAS, the Participants entered into a Second Amended and Restated Reinsurance Pooling Agreement on December 14, 1992, as amended February 18, 1993, February 10, 1995 and May 5, 1998 (the "Agreement"); WHEREAS, the Participants desire to amend the Agreement to reflect the merger of Nationwide and Mutual; NOW, THEREFORE, in consideration of the foregoing premises and for the mutual covenants contained herein and other good and valuable consideration, the Participants agree as follows: 1. The Agreement is amended by adding Section 1.17: "Section 1.17. The term "Merger Effective Date" shall mean the date of the Effective Time as that term is defined in the Agreement and Plan of Merger dated as of June 3, 1998, as amended on June 24, 1998 by and between Mutual and Nationwide." 2. Effective 12:00 a.m. on the Merger Effective Date, this Agreement is amended to provide that any and all references to "ALLIED Mutual Insurance Company" are hereby changed to "Nationwide Mutual Insurance Company." 3. Section 2.1 of the Agreement is amended by deleting all of the words in Section 2.1 and replacing them with the following words: "This Agreement shall be terminated as of 12:01 a.m. on January 1, 1999." 4. Effective 12:00 a.m. on the Merger Effective Date, this Agreement is amended to provide that Exhibit B - Non-Pooled Insurance Business be deleted and replaced with the following: 29 "EXHIBIT B - NON-POOLED INSURANCE BUSINESS The Non-Pooled Insurance Business as of 12:00 a.m. on the Merger Effective Date shall be: A) All premiums written by the Square Deal Division of Nationwide (fka Mutual), B) Any premiums ceded or assumed pursuant to the Property Special Catastrophe Excess Contract, dated 01-01-93, C) Nationwide's net retained share of the Reinsurance Pooling Agreement dated January 1, 1994 between Nationwide, Nationwide Mutual Fire Insurance Company, Nationwide General Insurance Company, Nationwide Property and Casualty Insurance Company, Colonial Insurance Company of Wisconsin, Scottsdale Insurance Company, Employers Insurance Company of Wausau A Mutual Company, Wausau Underwriters Insurance Company Wausau General Insurance Company, Wausau Business Insurance Company, Farmland Mutual Insurance Company, Nationwide Agribusiness Insurance Company, and Scottsdale Indemnity Company. IN WITNESS WHEREOF, the undersigned parties hereto have executed this Amendment as of the date and year above first written. Nationwide Mutual Insurance Company Depositors Insurance Company By: _____________________________ By: _________________________ Name: ___________________________ Name: _______________________ Title: __________________________ Title: ______________________ ALLIED Property and Casualty Insurance Company AMCO Insurance Company By: _____________________________ By: _________________________ Name: ___________________________ Name: _______________________ Title: __________________________ Title: ______________________ EX-10 6 4TH AMENDMENT TO AMENDED RESTATED OPERATING AGREE 30 Exhibit 10.71 FOURTH AMENDMENT TO AMENDED AND RESTATED ALLIED GROUP INTERCOMPANY OPERATING AGREEMENT THIS AMENDMENT dated as of October 1, 1998 ("Amendment") is entered into by and between Nationwide Mutual Insurance Company ("Nationwide"), successor in interest to ALLIED Mutual Insurance Company ("Mutual"), ALLIED Group, Inc. ("AGI"), and ALLIED Life Financial Corporation ("ALFC") to amend the Amended and Restated ALLIED Group Intercompany Operating Agreement made as of August 25, 1993, as amended as of November 1, 1993, May 16, 1994, and December 15, 1994 (the "Agreement"). 1. This Amendment shall be effective as of October 1, 1998. 2. Section 10.1(a) of the Agreement is hereby amended, by deleting all of Section 10.1(a) following the heading and by replacing the deleted words with the following words: "10.1(a) Term. This Agreement shall continue from January 1, 1990 through December 31, 1998." 3. Section 10.1(b) of the Agreement is hereby amended by replacing the words "(A)t the time any notice of termination is given under this Agreement," with "(U)pon termination of this Agreement,". 4. Section 10.3 of the Agreement is hereby amended, by deleting all of the words in Section 10.3 and replacing them with the following words: "Section 10.3. Waiver of Null and Void Options. Any exercise of the options granted to Mutual, AGI and/or ALFC pursuant to the terms of Sections 10.3 and 10.4 of the Agreement, as they were written prior to this Amendment are hereby waived by Nationwide, AGI and ALFC and shall be deemed null and void as if never made." 5. Section 10.4 of the Agreement is hereby amended by deleting all of the words in Section 10.4 and replacing them with the following words: "Section 10.4. End of Affiliation. A party to the Agreement shall cease to be a party to the Agreement when the party ceases to be a person, group or entity that is affiliated with Nationwide or any of the parties to the Agreement. A party ceases to be a party to the Agreement, when a person, group or entity that is not affiliated with a party to the Agreement acquires 50% or more of the voting stock of the party. A person, group or entity "affiliated with a party to the Agreement" shall mean a person, group or entity that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with the parties to the Agreement." 31 6. Counterparts. This Amendment may be executed simultaneously in one or more counterparts, each of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers as of the day and year first written above. Nationwide Mutual Insurance Company By: __________________________________ Print name: ____________________________ Title: ________________________________ ALLIED Group, Inc. By: __________________________________ Print name: __________________________ Title: _______________________________ ALLIED Life Financial Corporation By: __________________________________ Print name: __________________________ Title: _______________________________ EX-10 7 2ND AMENDMENT TO ALLIED GRP JOINT MRKTG AGREEMENT 32 Exhibit 10.72 SECOND AMENDMENT TO THE ALLIED GROUP JOINT MARKETING AGREEMENT THIS SECOND AMENDMENT dated as of October 1, 1998 ("Amendment") is entered into by and between ALLIED Life Insurance Company ("ALIC"), AMCO Insurance Company ("AMCO"), Nationwide Mutual Insurance Company ("Nationwide"), successor in interest to ALLIED Mutual Insurance Company, ALLIED Property and Casualty Insurance Company ("APC"), and Depositors Insurance Company ("DIC") to amend the ALLIED Group Joint Marketing Agreement made as of August 30, 1993 and amended on November 1, 1993 ("Agreement"). 1. This Amendment shall be effective as of October 1, 1998. 2. Section 8.0 of the Agreement shall be hereby amended by adding Sections 8.3, 8.4, 8.5 and 8.6, as follows and any term that is defined in the Agreement, but not defined in this Amendment, shall have the definition given to the term in the Agreement: " 8.3 Nationwide Acquisition. The P/C Segment shall allow the Agreement to continue in effect, following a Change of Control (as defined in Section 8.1 of the Agreement), whereby Nationwide or an affiliate or subsidiary of Nationwide has acquired the ownership of 50% or more of the voting stock of ALIC or ALLIED Life Financial Corporation ("ALFC"). 8.3 Acquisition by Nationwide. ALIC shall allow the Agreement to continue in effect following a Change of Control (as defined in Section 8.2 of the Agreement), whereby Nationwide has acquired the ownership of 50% or more of the voting stock of any company in the P/C Segment or ALLIED Group, Inc. 8.5 Termination At Will. Nationwide may terminate this Agreement or the participation of any one or more of the parties to this Agreement at any time. 8.6 Waiver. Any exercise of options granted to the P/C Segment and/or ALIC pursuant to Sections 8.1 and/or 8.2 of the Agreement, that was made on or before October 1, 1998 shall be waived by ALIC and the P/C Segment and shall be deemed null and void as if never made." 3. Section 13 of the Agreement shall be amended by deleting all of the words in section 13.0 with the exception of the heading, and by adding the following words: "This Agreement may be amended, modified, or altered only by a writing signed by the parties hereto." 33 4. This Amendment may be executed simultaneously in one or more counterparts, each of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers as of the day and year first above written. Nationwide Mutual Insurance Company By: __________________________________ Print name: __________________________ Title: _______________________________ ALLIED Life Insurance Company By: __________________________________ Print name: __________________________ Title: _______________________________ Depositors Insurance Company By: __________________________________ Print name: __________________________ Title: _______________________________ ALLIED Property and Casualty Insurance Company By: __________________________________ Print name: __________________________ Title: _______________________________ AMCO Insurance Company By: __________________________________ Print name: __________________________ Title: _______________________________ EX-10 8 1ST AMENDMENT TO INTERCOMPANY CCF 34 Exhibit 10.73 FIRST AMENDMENT TO INTERCOMPANY CASH CONCENTRATION FUND AGREEMENT THIS FIRST AMENDMENT dated as of October 1, 1998 ("Amendment") is entered into by and among AID Finance Services, Inc. ("AID"), Nationwide Mutual Insurance Company ("Nationwide"), as successor in interest to ALLIED Mutual Insurance Company, ALLIED Group, Inc. ("AGI"), AMCO Insurance Company ("AMCO"), ALLIED Property and Casualty Insurance Company ("APC"), Depositors Insurance Company ("Depositors"), Western Heritage Insurance company ("WHIC"), ALLIED Group Information Systems, Inc. ("AGIS"), Midwest Printing Services, Ltd. ("MWP"), The Freedom Group, Inc. ("TFG"), ALLIED General Agency Company ("AGA"), ALLIED Life Financial Corporation ("ALFC"), ALLIED Life Insurance Company ("Life"), ALLIED Group Insurance Marketing Company ("AGIMC"), ALLIED Group Merchant Banking Corporation ("AGMBC"), and ALLIED Life Brokerage Agency, Inc. ("ALBA") to amend the Intercompany Cash Concentration Fund Agreement effective the 24th day of April, 1995 ("Agreement"). AID, NATIONWIDE, AGI, AMCO, APC, Depositors, WHIC, AGLC, AGIS, MWP, TFG, AGA, ALFC, Life, AGMBC, ALBA, and AGIMC shall be referred to collectively as the "Companies." AMCO, APC, Depositors, WHIC, AGLC, AGIS, MWP, TFG, and AGA are referred to collectively as the "AGI Subsidiaries." Life, AGMBC and ALBA are referred to collectively as the "ALFC Subsidiaries." AID and AGIMC are referred to collectively as the "Mutual Subsidiaries." 1. This Amendment shall be effective as of October 1, 1998. 2. Section 6.2 of the Agreement is hereby amended, by deleting all of the words in Section 6.2 except for the heading and replacing them with the following words: "(a) Nationwide acquisition. A change of control in any of the Companies, AGI Subsidiaries, ALFC Subsidiaries or Mutual Subsidiaries which results in a majority interest being held by NATIONWIDE or an affiliate of NATIONWIDE, shall not be considered a change of control for the purposes of Section 6.2 of the Agreement. (b) Control Change. A change of control in any of the Companies, AGI Subsidiaries, ALFC Subsidiaries, or Mutual Subsidiaries which results in a majority interest being held by a person or entity other than one of the Companies, AGI Subsidiaries, ALFC Subsidiaries, or Mutual Subsidiaries, shall automatically terminate that company's participation in this Agreement and all funds invested in the Cash Concentration Fund ("CCF") by that company will be immediately returned to any company terminated by this paragraph. (c ) Waiver. Any exercise of the options that were granted to the Companies by Section 6.2 of the Agreement, as it was written prior to this Amendment are hereby waived by the Companies and shall be deemed null and void as if never made." 35 (d) Termination at will. Nationwide may terminate this Agreement or the participation of any one or more of the parties to this Agreement at any time. 3. Section 9.3 of the Agreement shall be hereby amended to delete the first sentence of the section and to replace that sentence with the following sentence: "All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or if mailed by certified or registered mail (return receipt requested) to the party at the address of the party's Vice President - Finance, an Executive Vice President, President or Chief Executive Officer at its address as set forth on Exhibit I of this Amendment." 4. Section 5.1 of the Agreement shall be hereby amended by deleting all of the words and headings written therein and replacing the deleted words with the following: "5.1. Loan from the CCF Fund. From and after October 1, 1998, there shall be no borrowing from the CCF Fund by the Companies (as defined in the Agreement). Any of the Companies that has borrowed money from the CCF Fund but, has not as of October 1, 1998, fully repaid all principal balances, accrued interest and other charges or penalties as required by the loan document shall be required to repay the debt in full according to the terms of the loan document." 5. Section 5.2 of the Agreement shall be hereby amended by deleting all of the words and headings written therein and replacing the deleted words with the following: "5.2. CCF Funds may be Invested. The CCF Fund may be invested in those classes or types of investments listed on Schedule 1 attached hereto and made a part hereof as if fully reprinted herein." 6. Section 2.1 of the Agreement shall be amended by deleting the words, "(T)ermination of any parties Participation in this Agreement prior to December 31, 2004 shall require Coordinating Committee approval, provided, however, that..." and by capitalizing the letter "t" in the next word. 7. This Amendment may be executed simultaneously in one or more counterparts, each of which shall constitute one and the same instrument. 36 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers as of the day and year first above written. AID Finance Services. Inc. By: _________________________________ Print name: __________________________ Title:_________________________________ ALLIED Group, Inc. By: _________________________________ Print name: __________________________ Title: _______________________________ ALLIED Property and Casualty Insurance Company By: _________________________________ Print name: __________________________ Title: _______________________________ Nationwide Mutual Insurance Company By: __________________________________ Print name: __________________________ Title:_________________________________ Western Heritage Insurance Company By: __________________________________ Print name: ___________________________ Title: ________________________________ ALLIED Group Information Systems, Inc. By: __________________________________ Print name: __________________________ Title: ________________________________ The Freedom Group, Inc. By: __________________________________ Print name: ___________________________ Title: ________________________________ AMCO Insurance Company By:__________________________________ Print name: __________________________ Title: _______________________________ 37 Depositors Insurance Company By: _________________________________ Print name: __________________________ Title: _______________________________ Midwest Printing Services, Ltd. By: ________________________________ Print name: _________________________ Title: ______________________________ ALLIED General Agency Company By: ________________________________ Print name: _________________________ Title: ______________________________ ALLIED Life Financial Corporation By: ________________________________ Print name: _________________________ Title: ______________________________ ALLIED Group Merchant Banking Corporation By: _________________________________ Print name: __________________________ Title: _______________________________ ALLIED Group Insurance Marketing Company By: _________________________________ Print name: __________________________ Title: _______________________________ ALLIED Life Insurance Company By: _________________________________ Print name: __________________________ Title: _______________________________ ALLIED Life Brokerage Agency, Inc. By: ___________________________________ Print name: ____________________________ Title: _________________________________ 38 SCHEDULE 1 SCHEDULE OF PERMITTED INVESTMENTS SEI DAILY INCOME TRUST - PRIME OBLIGATION FUND TEMPORARY INVESTMENT FUND 39 EXHIBIT I NOTICES SHALL BE SENT TO THE ADDRESSES LISTED BELOW AID Finance Services, Inc. 701 Fifth Avenue Des Moines, Iowa 50391 Attn: Vice President - Finance ALLIED Group, Inc. 701 Fifth Avenue Des Moines, Iowa 50391 Attn: Vice President - Finance ALLIED Property and Casualty Insurance Company 701 Fifth Avenue Des Moines, Iowa 50391 Attn: Vice President - Finance Nationwide Mutual Insurance Company One Nationwide Plaza Columbus, Ohio 43215 Attn: Executive Vice President - Chief Financial Officer Western Heritage Insurance Company 6263 North Scottsdale Road, Suite 240 Scottsdale, Arizona 85261 Attn: Vice President - Finance ALLIED Group Information Systems, Inc. 701 Fifth Avenue Des Moines, Iowa 50391 Attn: Vice President - Finance The Freedom Group, Inc. 1425 60th Street NE Cedar Rapids, Iowa 52410 Attn: Vice President - Finance AMCO Insurance Company 701 Fifth Avenue Des Moines, Iowa 50391 Attn: Vice President - Finance 40 Depositors Insurance Company 701 Fifth Avenue Des Moines, Iowa 50391 Attn: Vice President - Finance Midwest Printing Services, Ltd. 3101 104th Street, Suite 7 Urbandale, Iowa 5091 Attn: Vice President - Finance ALLIED General Agency Company 701 Fifth Avenue Des Moines, Iowa 50391 Attn: Vice President - Finance ALLIED Life Financial Corporation 701 Fifth Avenue Des Moines, Iowa 50391 Attn: Vice President - Finance ALLIED Group Merchant Banking Corporation 701 Fifth Avenue Des Moines, Iowa 50391 Attn: Vice President - Finance ALLIED Group Insurance Marketing Company 701 Fifth Avenue Des Moines, Iowa 50391 Attn: Vice President - Finance ALLIED Life Insurance Company 701 Fifth Avenue Des Moines, Iowa 50391 Attn: Vice President - Finance ALLIED Life Brokerage Agency, Inc. 701 Fifth Avenue Des Moines, Iowa 50391 Attn: Vice President - Finance EX-27 9 SEPT. 30, 1998 -- FDS
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED GROUP, INC.'S SEPT. 30, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FINANCIAL STATEMENTS 0000774624 ALLIED GROUP, INC 1,000 US DOLLARS 9-MOS DEC-31-1998 JAN-1-1998 SEP-30-1998 1 864,764 0 0 86,696 0 0 962,847 4,597 35,850 56,858 1,359,856 400,320 261,175 0 0 117,793 0 37,812 30,175 331,250 1,359,856 437,717 39,903 340 53,061 321,654 96,880 89,530 (28,799) (10,866) (18,358) 0 0 0 (18,358) (0.690) (0.680) 0 0 0 0 0 0 0
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