-----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, GO6NYsbWGXSMPSJMNFhr4YvCGw8xwJhGCesCNmjAXvdby37F6htCuqsXUGXCxq+t UTzzH81zgDkwl8r8ZzNlGA== 0000774624-96-000005.txt : 19960314 0000774624-96-000005.hdr.sgml : 19960314 ACCESSION NUMBER: 0000774624-96-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960312 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14243 FILM NUMBER: 96533708 BUSINESS ADDRESS: STREET 1: 701 FIFTH AVE CITY: DES MOINES STATE: IA ZIP: 50309 BUSINESS PHONE: 5152804211 MAIL ADDRESS: STREET 1: 701 5TH AVENUE CITY: DES MOINES STATE: IA ZIP: 50391-2000 FORMER COMPANY: FORMER CONFORMED NAME: AID CORP DATE OF NAME CHANGE: 19870519 10-K 1 1995 ANNUAL REPORT ON FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 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 50391-2000 (Address of principal executive offices) (Zip Code) 515-280-4211 (Registrant's telephone number including area code) Securities registered pursuant to Section 12(b) of the Act: None (Title of Class) Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 29, 1996 the number of Registrant's Common Stock, no par value, outstanding was 9,496,465. The aggregate market value of the Common Stock of the Registrant (based on the average bid and asked prices at closing) held by nonaffiliates at February 29, 1996 was $392,458,345. Documents Incorporated By Reference The Registrant's definitive proxy statement (1996 Proxy Statement), which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1995, is incorporated by reference under Part III. The index to the exhibits is located on page 78. This document contains 211 pages. 2 TABLE OF CONTENTS Part I Item 1. Business......................................................... 3 Item 2. Properties........................................................18 Item 3. Legal Proceedings.................................................19 Item 4. Submission of Matters to a Vote of Security Holders...............19 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............................................20 Item 6. Selected Financial Data...........................................21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................22 Item 8. Financial Statements and Supplementary Data.......................30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................59 Part III Item 10. Directors and Executive Officers of the Registrant................60 Item 11. Executive Compensation............................................60 Item 12. Security Ownership of Certain Beneficial Owners and Management....60 Item 13. Certain Relationships and Related Transactions....................60 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..61 Index to Financial Statement Schedules........................................61 Signatures....................................................................77 Index to Exhibits.............................................................78 3 Part I Item 1. Business ALLIED Group, Inc. (the Company) was incorporated in 1971 as an Iowa corporation and operates as a regional insurance holding company headquartered in Des Moines, Iowa. At year-end 1995, The ALLIED Group Employee Stock Ownership Trust owned 26.9% of the outstanding voting stock of the Company. ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company, controlled 18% of the voting stock of the Company. The Company has two reportable business segments: property-casualty insurance and excess & surplus lines insurance. Property-casualty insurance was the most significant segment in 1995, accounting for 85.4% of consolidated revenues. The Company's segment information is contained in note 18 of Notes to Consolidated Financial Statements. Property-casualty Insurance The Company's property-casualty segment operates through three subsidiaries: AMCO Insurance Company (AMCO), ALLIED Property and Casualty Insurance Company (ALLIED Property and Casualty), and Depositors Insurance Company (Depositors), which underwrite personal lines (primarily automobile and homeowners) and small commercial lines. The property-casualty segment operates exclusively in the United States; primarily in the central and western states. The segment and ALLIED Mutual pool their property-casualty business. See notes 4 and 6 of Notes to Consolidated Financial Statements and "Business-Relationship with ALLIED Mutual-Pooling Agreement." A.M. Best has assigned a rating of A+ (superior) to each of the Company's property-casualty subsidiaries and to ALLIED Mutual for 1995 with respect to their financial strength and their ability to meet policyholder and other contractual obligations based on the review of the pool's 1994 statutory results and operating performance. The profitability of the property-casualty segment is affected by many factors, including industry price competition, the severity and frequency of weather-related claims, the adequacy of prior-year estimates of loss and loss settlement expense reserves, court decisions that define the extent of coverage and the compensation awarded for injuries and losses, insurance laws and regulations, fluctuations in the financial markets, interest rates, reinsurance costs, and general business and economic conditions. The Company pursues a strategy of growth in personal lines of insurance, which it sells predominantly in central and western United States, primarily through a system of more than 2,100 independent agencies, a growing number of which represent the property-casualty subsidiaries of the Company on an exclusive basis for their personal lines of insurance. For the year ended December 31, 1995, 65.7% of the property-casualty subsidiaries' net earned premiums were attributable to personal lines of insurance. While the majority of the Company's revenues are attributable to personal lines, the Company also writes commercial lines of insurance for small businesses through such agents. Because the Company's primary focus, and primary market served by its independent agency force, is personal lines of insurance and because the Company perceives the risks to be greater in commercial lines, the Company has been conservative in the types of commercial risks it underwrites and in the pricing therefor. Historically, this has resulted in the Company writing less commercial business than it might otherwise have if it adopted a more aggressive strategy in commercial lines. It has also resulted in a lower combined ratio for the commercial lines compared with its core personal lines business. The property-casualty segment markets its products through three distribution systems: independent agencies, exclusive agencies, and direct response marketing. Generally, AMCO writes, through independent agencies, personal and commercial property-casualty insurance lines, consisting primarily of private passenger automobile and homeowners, with lesser emphasis on special multiple peril, workers' compensation, inland marine, and other miscellaneous lines of business. ALLIED Property and Casualty generally writes personal lines insurance products through agents who sell ALLIED Property and Casualty personal lines exclusively, and Depositors generally writes personal lines through a direct mail and telemarketing agency, ALLIED Group Insurance Marketing Company, an affiliate of ALLIED Mutual. 4 Neither the insurance subsidiaries in the property-casualty segment nor ALLIED Mutual appoint managing general agents, and each retains all underwriting, claims, and reinsurance authority. While the insurers provide contractual binding authority to most agents, such authority is subject to express limitations on the nature, type, and extent of each risk. With respect to the ability of the agents to bind the insurers, the insurers have no right to reject any contracts entered into by the agents even if the agent exceeds the express limitations; however, such instances occur infrequently, and constitute no material financial risk to the Company. The pooling agreement provides that ALLIED Mutual, ALLIED Property and Casualty, and Depositors cede to AMCO (pool administrator) premiums, losses, allocated loss settlement expenses, commissions, premium taxes, service charge income, and dividends to policyholders and assume from AMCO an amount of this pooled property-casualty business equal to their participation in the pooling agreement. ALLIED Mutual's crop hail business is not pooled. AMCO pays certain underwriting expenses, unallocated loss settlement expenses, and premium collection expenses for all of the pool participants and receives a fee equal to a specified percentage of premiums as well as a contingent fee based on the attainment of certain combined ratios from each of the pool participants. The pooling arrangement provides ALLIED Mutual, ALLIED Property and Casualty, and Depositors more predictable expense levels by limiting such expenses to a specified percentage of their premiums. AMCO has opportunities to profit from the efficient administration of such underwriting, loss settlement, and premium collection activities and to provide similar services to nonaffiliated insurance companies in the future. The property-casualty segment's participation in the pool in 1995, 1994, and 1993 was 64%. As of December 31, 1995, the statutory capital and surplus of ALLIED Mutual and AMCO was $229,848,488 and $196,568,115, respectively. The following table sets forth statutory basis and generally accepted accounting principles (GAAP) basis information for the Company's property-casualty subsidiaries for the years indicated.
At or for the year ended December 31, -------------------------------------------- 1995 1994 1993 ----------- ----------- ---------- (dollars in thousands) Reinsurance pool percentage 64% 64% 64% Net written premiums $ 440,838 $ 403,066 $ 370,218 =========== =========== ========== Earned premiums $ 425,838 $ 386,732 $ 344,322 Losses and loss settlement expenses 295,583 268,302 242,208 Underwriting expenses 114,511 110,259 105,707 ----------- ----------- ---------- Statutory underwriting gain (loss) 15,744 8,171 (3,593) GAAP adjustments 1,943 1,637 4,204 ----------- ----------- ---------- GAAP underwriting gain 17,687 9,808 611 Investment income excluding realized gains 39,110 35,279 33,471 Realized investment gains 236 2,956 1,293 Other income 6,850 6,143 5,527 ----------- ----------- ---------- Income before income taxes $ 63,883 $ 54,186 $ 40,902 =========== =========== ========== GAAP combined ratio 95.8 97.5 99.8 Wind and hail losses $ 28,664 $ 24,383 $ 18,737 Impact of wind and hail losses on combined ratio 6.7 6.3 5.4 Invested assets $ 658,044 $ 565,490 $ 511,464 Statutory loss and loss settlement expense reserves $ 277,819 $ 252,608 $ 229,649 Statutory capital and surplus $ 257,845 $ 233,407 $ 208,273
5 The underwriting experience of the pool is indicated by the statutory combined ratio, a measure of underwriting profitability which excludes investment income and income taxes. Generally, a ratio below 100 indicates underwriting profitability and a ratio exceeding 100 indicates an underwriting loss. The following table sets forth the net earned premiums and the statutory combined ratios (after policyholder dividends) by line of insurance business for the property-casualty segment for the years indicated.
Year ended December 31, --------------------------------------------------------------------------------- 1995 1994 1993 ------------------------- ------------------------- ------------------------- Net Statutory Net Statutory Net Statutory earned combined earned combined earned combined premiums ratio premiums ratio premiums ratio ----------- ---------- ---------- --------- ---------- --------- Line of business (dollars in thousands) Personal automobile $ 208,873 96.5 $ 192,712 97.4 $ 174,243 98.3 Homeowners 71,035 99.2 60,204 107.4 51,351 109.1 ----------- ---------- ---------- Personal lines 279,908 97.2 252,916 99.8 225,594 100.8 ----------- ---------- ---------- Commercial automobile 23,873 95.2 22,384 98.4 20,526 90.5 Workers' compensation 29,443 70.2 28,251 83.3 24,291 96.3 Other property and liability 90,302 100.2 80,908 94.0 71,723 99.5 Other lines 2,312 50.2 2,273 66.6 2,188 47.6 ----------- ---------- ---------- Commercial lines 145,930 92.7 133,816 92.0 118,728 96.3 ----------- ---------- ---------- Total $ 425,838 95.7 $ 386,732 97.1 $ 344,322 99.3 =========== ========== ==========
The following table sets forth the components of the statutory combined ratio and wind and hail loss information for the Company's property-casualty segment for the years indicated.
Year ended December 31, ----------------------------------- 1995 1994 1993 ------ ------ ------ Statutory combined ratio Loss ratio 60.1 60.1 59.4 Loss adjustment expense ratio 9.3 9.3 10.9 Underwriting expense ratio 26.0 27.3 28.6 Dividend ratio 0.3 0.4 0.4 ------ ------ ------ Total 95.7 97.1 99.3 ======= ======= ======= Impact of wind and hail losses on the statutory combined ratio Personal automobile 1.8 2.1 2.1 Homeowners 21.7 21.5 17.9 Personal lines 6.8 6.7 5.7 Commercial lines 6.5 5.5 4.9 Total 6.7 6.3 5.4
Wind and hail losses are calculated by adding together all claims with a cause of loss from wind or hail and then deducting the related reinsurance recoveries. The information provides an indication of how weather-related losses impact the property-casualty segment's operating results for the years presented. Losses not resulting from either wind or hail are excluded from these calculations. 6 The following table sets forth premium information and agency counts for the property-casualty pool (including ALLIED Mutual) for the years indicated.
At or for the year ended December 31, ------------------------------------------- 1995 1994 1993 ---------- ----------- ---------- (dollars in thousands) Direct written premiums by distribution system Independent agency system $ 503,922 $ 479,351 $ 444,453 Exclusive agency system 180,799 148,777 121,026 Direct response marketing system 22,136 18,418 15,144 ---------- ----------- ---------- Total direct written premiums, excluding crop hail premiums 706,857 646,546 580,623 Crop hail premiums (non-pooled) 7,781 6,024 4,660 ---------- ----------- ---------- Total direct written premiums $ 714,638 $ 652,570 $ 585,283 ========== =========== ========== Agency counts Independent agencies 1,968 1,910 1,833 Exclusive agencies 192 164 126 Net written premiums $ 699,608 $ 638,301 $ 572,129 Net premiums earned $ 676,169 $ 612,799 $ 544,099
The following table sets forth the geographic percentage distribution of property-casualty pool (including ALLIED Mutual) direct written premiums for the years indicated.
1995 1994 1993 ------- ------- ------ California 24.0% 24.0% 24.0% Iowa 23.3 24.6 26.0 Kansas 8.4 8.4 8.2 Nebraska 7.9 8.1 8.2 Minnesota 7.6 7.9 8.4 Missouri 4.8 4.8 5.1 Colorado 3.6 3.5 3.7 Illinois 3.1 2.8 2.5 Utah 2.5 2.2 2.2 Tennessee 2.4 2.2 1.7 Washington 2.1 1.7 1.2 South Dakota 2.0 2.1 2.0 Other * 8.3 7.7 6.8 ------- ------- ------ 100.0% 100.0% 100.0% ======= ======= ======
*Includes all other states, none of which accounted for more than 2% in 1995. Excess & Surplus Lines Western Heritage Insurance Company (Western Heritage) is an excess & surplus lines insurance subsidiary, which primarily underwrites commercial lines. A.M. Best has assigned a rating of A- (excellent) to Western Heritage for 1995 based on the review of their 1994 statutory results and operating performance. For 1995, Western Heritage's net earned premiums were 74.3% specialty commercial casualty, 9% commercial property, 14.3% commercial transportation, and 2.4% personal lines coverages. Specialty commercial casualty lines include general liability, multiple peril, and product liability coverages for special events, such as concerts, fairs, exhibitions, and parades as well as coverages for merchants and artisan contractors. Specialty commercial property lines include 7 coverages for buildings that are older, in higher risk locations, or vacant; agricultural and contractor equipment; and protection against vandalism. Commercial transportation coverages include liability, physical damage, and garagekeepers insurance written for used car dealers and repair shops. The personal lines consist primarily of basic property coverages for dwellings. Western Heritage agents are accorded contractual binding authority for risks which meet the insurer's written underwriting guidelines and rules. Western Heritage appoints no managing general agents, however, and retains all underwriting, claims, and reinsurance authority. With respect to the ability of the agents to bind Western Heritage, Western Heritage has no right to reject any contracts entered into by the agents. The following table sets forth statutory and GAAP basis information for the excess & surplus lines segment for the years indicated.
At or for the year ended December 31, ---------------------------------------------- 1995 1994 1993 ----------- ------------ ----------- (dollars in thousands) Net written premiums $ 30,606 $ 27,026 $ 24,892 =========== ============ =========== Earned premiums $ 29,661 $ 25,786 $ 24,014 Losses and loss settlement expenses 22,357 18,568 16,696 Underwriting expenses 8,202 7,536 6,605 ----------- ------------ ----------- Statutory underwriting (loss) gain (898) (318) 713 GAAP adjustments 43 100 (66) ----------- ------------ ----------- GAAP underwriting (loss) gain (855) (218) 647 Investment income excluding realized gains 5,830 5,241 4,868 Realized investment (losses) gains (135) (24) 103 ----------- ------------ ----------- Income before income taxes $ 4,840 $ 4,999 $ 5,618 =========== ============ =========== GAAP combined ratio 102.9 100.8 97.3 Invested assets $ 96,435 $ 79,588 $ 75,111 Loss and loss settlement expense reserves $ 47,120 $ 40,066 $ 38,401 Statutory capital and surplus $ 27,770 $ 23,896 $ 21,942
The following table sets forth the net earned premiums and statutory combined ratios of the commercial casualty, commercial property, commercial transportation, and personal lines written by Western Heritage for the years indicated.
Year ended December 31, -------------------------------------------------------------------------------- 1995 1994 1993 ------------------------- ------------------------- ------------------------ Net Statutory Net Statutory Net Statutory earned combined earned combined earned combined premiums ratio premiums ratio premiums ratio ----------- --------- ----------- --------- ----------- --------- (dollars in thousands) Commercial casualty $ 22,031 103.9 $ 20,800 103.5 $ 20,002 99.3 Commercial property 2,676 91.2 2,579 80.5 2,530 57.9 Commercial transportation 4,254 98.6 1,682 101.8 636 162.2 Personal lines 700 115.1 725 60.4 846 81.6 ----------- ----------- ----------- Total $ 29,661 102.2 $ 25,786 99.9 $ 24,014 96.1 =========== =========== ===========
8 The following table sets forth the geographic percentage distribution of excess & surplus lines direct written premiums for the years indicated.
1995 1994 1993 ------ ------ ------ Texas 23.3% 23.9% 27.6% Illinois 9.9 10.9 11.2 California 8.8 11.9 14.1 Florida 7.2 8.4 5.2 Oklahoma 4.3 4.0 3.8 Hawaii 3.7 3.7 4.1 Alabama 3.1 1.5 0.9 Missouri 3.0 1.2 1.0 Louisiana 3.0 3.6 3.4 Ohio 2.9 2.4 2.3 Colorado 2.8 2.5 2.6 Mississippi 2.6 1.2 0.8 Arkansas 2.5 1.6 1.2 New Mexico 2.0 1.9 1.4 Other* 20.9 21.3 20.4 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ======
*Includes all other states, none of which accounted for more than 2% in 1995. Reinsurance The Company's insurance subsidiaries follow the industry practice of reinsuring a portion of their insured risks, paying to the reinsurer a portion of the premiums received on all policies. Insurance is ceded principally to reduce the net liability on individual risks and to protect against catastrophic losses. The basic reinsurance treaties benefiting the parties to the pooling agreement insure risks in excess of specific amounts. Except for crop-hail reinsurance, all reinsurance is obtained by the pool participants directly and the pool administrator does not have any additional or special reinsurance arrangements other than as a pool participant. The financial stability of each participating reinsurer is independently monitored by the pool participants and by their reinsurance intermediaries. The property-casualty pool participants and Western Heritage purchase coverage from nonaffiliated reinsurers in the ordinary course of their businesses. See "Business-Relationship with ALLIED Mutual-Other Relationships" for the ALLIED Mutual and American Re-Insurance Company property catastrophe reinsurance agreement. The insurers monitor the availability of replacement coverages in the reinsurance market, and the Company believes that replacement coverages from financially responsible reinsurers are available and accordingly does not deem its existing reinsurance arrangements to be material. With the exception of Western Heritage, all retentions discussed in this section are for the entire pool. The property-casualty subsidiaries of the Company are allocated a portion of the stated pool retentions based upon their respective pool participation percentage. The parties to the pooling agreement are covered by a property treaty which provides per risk property reinsurance in excess of a retention of $500,000 to a maximum limit of $5,000,000 per risk. Such parties are also covered by a property treaty that provides coverage on a facultative basis in excess of a retention of $5,000,000 to a maximum limit of $15,000,000. The pool participants purchase property catastrophe reinsurance from a large number of reinsurers each of which provides a relatively small percentage of the total cover. For 1995, the pool liability limit of the cover is 90% of $100,000,000 with retention of $10,000,000. A reinstatement agreement exists allowing purchases of reinsurance for an additional catastrophe occurring in the same year. See "Business-Relationship with ALLIED Mutual for affiliated reinsurance relationships." In 1996 the pool increased its maximum property catastrophe coverage to 90% of $120,000,000. 9 The pool's retention for most casualty risks is $375,000, with a reinsurance limit of $1,000,000 per occurrence. Other treaties provide reinsurance for each workers' compensation loss over $375,000 and up to $5,000,000. Catastrophe workers' compensation treaties increase the reinsurance to $35,000,000. Western Heritage, which is not a participant in the property-casualty pool, purchases reinsurance on property risks covering 75% of the risk in excess of $50,000 to a maximum of $1,000,000, which is the largest property risk insured. Western Heritage also purchases casualty reinsurance in excess of $200,000 to a maximum of $1,000,000, the largest casualty risk insured. Western Heritage does not write workers' compensation or primary auto coverage. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. As of December 31, 1995, there were no past due amounts from reinsurers. Historically, the Company has had no adverse collection experience with its reinsurers. Losses and Loss Settlement Expense Reserves In many cases, several years may elapse between the occurrence of an insured loss, the reporting of the loss to the insurer, and the insurer's payment of that loss. To recognize liabilities for unpaid losses, the insurance subsidiaries establish reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. The insurance subsidiaries do not discount loss reserves for financial statement purposes. When a claim is reported, a case reserve for the estimated amount of the ultimate payment is established. The estimate reflects an informed judgment based on general corporate reserving practices and the Company's experience and knowledge regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not yet reported to the insurer and the overall adequacy of case reserves. The insurance subsidiaries also establish reserves representing the estimated expenses of settling claims, including legal and other fees and general expenses of administering the claims adjustment process. As part of the reserving process, historical data is reviewed and consideration is given to the anticipated impact of various factors such as known and anticipated legal developments, changes in social attitudes, inflation, and economic conditions. This process relies on the basic assumption that past experience, adjusted for the effect of current developments and likely trends, is an appropriate basis for predicting future events. Reserve amounts are necessarily based on management's informed estimates, and as other data becomes available and is reviewed, these estimates and judgments are revised, resulting in increases or decreases to existing reserves. While the methods for setting the reserve structure are well tested, some assumptions about loss patterns have changed. In particular, recent higher jury verdicts and judicial decisions which expand coverage to new theories of liability have increased the demands against the loss and loss settlement expense reserves of the insurance subsidiaries. Not only have anticipated claims increased in severity, but unanticipated claims have arisen. In establishing reserves, management considers exposure the Company may have to environmental claims. Because reported claim activity levels are minimal and the emphasis of the Company's property-casualty business is primarily on personal lines and small commercial business, management believes exposure to material liability on environmental claims to be remote as of December 31, 1995. The Company continues to monitor legal developments as they relate to the Company's exposure to environmental claims. The following table presents the development of losses and loss settlement expense reserves for 1985 to 1994 for the pool (which includes ALLIED Mutual) and Western Heritage. The top line of the table shows the estimated reserve for losses and loss settlement expenses at the balance sheet date for each of the indicated years. These figures represent the estimated amount of losses and loss settlement expenses, net of reinsurance recoverables, for claims arising in the current and all prior years that were unpaid at the balance sheet date, including losses that had been incurred but not yet reported. The lower portion of the table shows the re-estimated amount of net reserves as a percentage of the previously recorded net reserves based on experience as of the end of each succeeding year. The re-estimated reserves change as more information becomes known about the frequency and severity of claims for individual years. 10
At or for the year ended December 31, ------------------------------------------------------------------------------------------------------------ 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (dollars in thousands) Reserves for losses and loss settlement expenses, net $110,145 $126,150 $160,152 $210,746 $248,870 $280,443 $312,089 $355,092 $386,936 $424,595 $471,247 Paid (cumulative) as of (1) 1 year later 44.8% 42.7% 47.5% 41.7% 43.6% 44.2% 43.6% 40.1% 40.8% 39.9% 2 years later 65.5 68.8 70.8 64.0 65.8 67.2 66.3 61.9 60.7 3 years later 81.3 84.0 85.8 77.2 79.3 80.4 79.8 72.6 4 years later 91.1 93.3 93.6 84.1 86.3 88.5 86.0 5 years later 96.0 98.2 97.9 87.7 91.5 92.5 6 years later 99.4 100.7 101.0 90.2 94.1 7 years later 101.3 103.3 102.8 92.1 8 years later 103.2 104.8 104.3 9 years later 104.6 106.7 10 years later 106.2 Net reserves re- estimated as of end of year (1) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 1 year later 100.7 102.7 103.6 98.3 100.4 101.0 100.2 97.7 98.3 100.1 2 years later 102.3 104.2 106.3 97.6 99.6 101.1 101.1 96.8 98.9 3 years later 102.9 106.9 106.8 97.3 99.6 102.6 102.4 97.2 4 years later 105.5 107.9 107.1 97.5 101.5 104.6 103.1 5 years later 106.4 107.8 107.8 98.1 103.4 105.7 6 years later 106.8 108.7 108.9 99.3 104.5 7 years later 107.3 109.9 110.5 100.4 8 years later 108.6 111.7 111.8 9 years later 110.3 113.2 10 years later 111.3 Net cumulative redundancy (deficiency) Dollars $(12,494) $(16,633) $(18,906) $ (911) $(11,157) $(15,958) $ (9,734) $ 10,037 $ 4,378 $ (292) Percentage (11.3)% (13.2)% (11.8)% 0.4% (4.5)% (5.7)% (3.1)% 2.8% 1.1% (0.1)% Gross reserves - end of year $373,958 $400,912 $447,311 $492,304 Reinsurance recoverables 18,866 13,976 22,716 21,057 -------- -------- -------- -------- Net reserves - end of year $355,092 $386,936 $424,595 $471,247 ======== ======== ======== ======== Gross re-estimated reserves - latest (2) 98.7% 100.5% 100.6% Re-estimated recoverables - latest (2) 127.6% 145.0% 109.7% Net re-estimated reserves - latest (2) 97.2% 98.9% 100.1% Gross cumulative redundancy (deficiency) Dollars $ 4,825 $ (1,907) $ (2,497) Percentage 1.4% (0.5)% (0.6)%
(1) Shown as a percentage of reserves for losses and loss settlement expenses. (2) Shown as a percentage of gross reserves, reinsurance recoverables and net reserves. The cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years. It should be emphasized that the table presents a run-off of balance sheet reserves rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. The following table reconciles the reserves for losses and loss settlement expenses from the previous table to the amount shown on the Company's consolidated balance sheets.
Year ended December 31, ------------------------------- 1995 1994 ----------- ----------- (in thousands) Loss and loss settlement expense reserves for the property-casualty pool and Western Heritage $ 471,247 $ 424,595 Less: Loss and loss settlement expense reserves of ALLIED Mutual 146,308 131,921 ----------- ----------- 324,939 292,674 Add: Reinsurance recoverables 16,925 18,322 ----------- ----------- Loss and loss settlement expense reserves (GAAP) $ 341,864 $ 310,996 =========== ===========
11 The next table sets forth a reconciliation of beginning and ending GAAP reserves for losses and loss settlement expenses for the years indicated, net of reinsurance recoverables. The table includes property-casualty and excess & surplus lines insurance loss and loss settlement expense reserves. Developments for losses and loss settlement expenses on prior years is immaterial to the Company's consolidated financial statements taken as a whole.
Year ended December 31, ------------------------------------------- 1995 1994 1993 ---------- ----------- ----------- (in thousands) Net reserves for losses and loss settlement expenses at beginning of year $ 292,674 $ 268,050 $ 227,971 ---------- ----------- ----------- Incurred losses and loss settlement expenses Provision for insured events of current year 315,956 288,574 262,772 Increase (decrease) in provision for insured events of prior years 1,984 (1,630) (3,854) ---------- ----------- ----------- Total incurred losses and loss settlement expenses 317,940 286,944 258,918 ---------- ----------- ----------- Payments Losses and loss settlement expenses attributable to insured events of current year 169,254 151,479 138,926 Losses and loss settlement expenses attributable to insured events of prior years 116,421 110,841 91,848 Adjustment to beginning of the year reserves resulting from the change in the reinsurance pool participation percentage * --- --- (11,935) Total payments 285,675 262,320 218,839 ---------- ----------- ----------- Net reserves for losses and loss settlement expenses at end of year $ 324,939 $ 292,674 $ 268,050 ========== =========== ===========
* As of January 1, 1993, the property-casualty subsidiaries' underwriting accounts were adjusted to reflect their increased participation in the pool. The property-casualty subsidiaries received cash and securities for the transfer of reserves from ALLIED Mutual as of January 1, 1993. There was no income statement effect from this transaction as the amount received was offset by the increase in the reserves. However, since the reserves transferred were necessarily based upon estimates, subsequent changes in the estimates are reflected in current operating results. Noninsurance Operations The investment services segment of the Company is comprised of ALLIED Group Mortgage Company (ALLIED Mortgage) and, through October 29, 1993, Dougherty Dawkins, Inc. and subsidiaries (Dougherty Dawkins). Dougherty Dawkins was sold October 29, 1993 and the results of operations through the closing date are reflected in the Company's consolidated financial statements. See note 7 of Notes to Consolidated Financial Statements. ALLIED Mortgage purchases, originates, and services single-family residential mortgages. It acquires mortgage servicing rights from savings and loan associations, banks, other mortgage companies, the Resolution Trust Corporation, and other financial institutions. The market in which ALLIED Mortgage originates mortgages is primarily Polk County, Iowa, which includes the Des Moines area. ALLIED Mortgage purchases and services mortgages on a nationwide basis. See "Business--Competition." 12 ALLIED Mortgage began operations in 1987, and by year-end 1995, its servicing portfolio included 54,533 mortgages for a total value of $3 billion. ALLIED Mortgage is an approved seller-servicer of mortgages guaranteed by Government National Mortgage Association, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation. See "Business--Regulation." Working capital requirements are managed through short-term financing with commercial banks. See note 8 of Notes to Consolidated Financial Statements. The Company's data processing services segment is comprised of ALLIED Group Information Systems, Inc. (AGIS) and The Freedom Group, Inc. (Freedom), which have a line of property-casualty and life insurance software products and data processing services which are marketed under the name "Freedom Group" to affiliated and nonaffiliated insurance companies. AGIS provides management information services to the property-casualty subsidiaries, ALLIED Mutual, ALLIED Life Insurance Company (ALLIED Life), the Company, and other company subsidiaries. See "Business--Relationship with ALLIED Mutual." These services include the processing of policies and claims, billing, rating, statistical and regulatory reporting, and recordkeeping. AGIS also provides automated systems to the property-casualty segment's agency force. The majority of the segment's revenues and operating profits came from affiliated companies. Through its direct sales force, AGIS licenses property-casualty insurance software to property-casualty insurance companies generally on a national basis. AGIS also provides certain consulting services and software maintenance services. On a nationwide basis, Freedom licenses statutory accounting insurance software to property-casualty and life insurance companies on primarily a direct sales basis. Investments The Company uses its investments to generate the majority of its operating profit and provide liquidity. Investments in fixed maturities are classified as available for sale. See note 1--"Investments" of Notes to Consolidated Financial Statements. The Company's invested assets are managed by Conning & Company, subject to restrictions on permissible investments under applicable state insurance codes and the Company's investment policies. Those policies require that the fixed maturity portfolio be invested primarily in debt obligations rated "BBB" (investment grade) or higher by Standard & Poor's Corporation (Standard & Poor's) or a recognized equivalent at the time the security is acquired by the Company. 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 stock is to be comprised primarily of issues rated at least A3/A- by Standard & Poor's Corporation or Moody's. The Company monitors the investment quality of the fixed maturity portfolio subsequent to acquisition by reviewing on a quarterly basis the current debt ratings assigned to each of the securities in the fixed maturity portfolio. Fixed income securities comprised 97.7% of the Company's invested assets, 98.1% of those had an "BBB" rating from Standard & Poor's (or the equivalent from Moody's) at December 31, 1995. The portfolio contain no real estate or mortgage loans. At December 31, 1995, less than $300,000 of the Company's fixed maturities were rated less than investment grade securities. At year-end 1995, the Company held $14,439,351 of nonrated securities. Evaluation of the issuers' rating and ratings for the issuers' other securities supports management's view that the nonrated securities are investment grade. At December 31, 1995, the fair value of the Company's fixed maturity portfolio was $27.8 million over amortized cost. As of December 31, 1995, the Company held collateralized mortgage obligation (CMO) investments with a carrying and fair value of $77,671,819. Substantially all of the Company's CMO investments are in planned amortization class bonds or sequential pay bonds with anticipated durations of approximately 3.8 years at December 31, 1995. The Company has not invested in the more volatile types of CMO products such as companion or accrual (Z-bond) tranches. All of the Company's CMO investments have an active secondary market; accordingly, their effect on the Company's liquidity does not differ from that of other fixed income investments. The carrying values of all the Company's investments in fixed maturities are reviewed on an ongoing basis. If this review indicates a decline in fair value below cost is other than temporary, the Company's carrying value in the investment is reduced to its estimated realizable value and a specific write-down is taken. Such reductions in carrying value are recognized as realized losses and charged to income. 13 The table below shows the classifications of the Company's investments at December 31, 1995.
Fair Amount reflected Percent value on balance sheet of total ----------- ---------------- -------- (dollars in thousands) Fixed maturities U.S. Government obligations (1) $ 109,329 $ 109,329 14.2% U.S. Government corporations and agencies 145,008 145,008 18.8 State municipalities and political subdivisions 284,640 284,640 36.8 Foreign governments 2,161 2,161 0.3 Public utilities 11,773 11,773 1.5 All other corporate bonds 201,636 201,636 26.1 ----------- ----------- ------ Total fixed maturities 754,547 754,547 97.7 Equity securities 7,948 7,948 1.0 Other investments 2 2 Short-term investments at cost 9,802 9,802 1.3 ----------- ----------- ------ $ 772,299 $ 772,299 100.0 % =========== =========== ======
(1) All such securities are backed by the full faith and credit of the United States Government. The following table sets forth the composition of the Company's fixed maturity investments by rating at December 31, 1995.
Percent of Amount portfolio ---------- ---------- Rating (1) (dollars in thousands) ---------- AAA $ 538,757 71.4% AA 79,883 10.6 A 114,146 15.1 BBB 7,041 1.0 Below BBB 281 Nonrated 14,439 1.9 ---------- ----- Total $ 754,547 100.0% ========== =====
(1) Ratings are assigned primarily by Standard & Poor's with remaining ratings assigned by Moody's and converted to the equivalent Standard & Poor's ratings. The following table sets forth contractual maturities in the fixed maturity and short-term investment portfolios at December 31, 1995. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Percent of Amount portfolio ---------- ---------- Maturity (dollars in thousands) -------- One year or less $ 40,813 5.4% Over 1 year through 5 years 218,052 28.9 Over 5 years through 10 years 275,699 36.5 Over 10 years 16,615 2.2 ---------- ------ 551,179 73.0 Mortgaged-backed securities 203,368 27.0 ---------- ------ Total $ 754,547 100.0% ========== ======
14 Investment results of the Company for each year in the three years ended December 31, 1995 are shown in the following table.
1995 1994 1993 ------------ ----------- ---------- (dollars in thousands) Average invested assets (1) $ 714,720 $ 627,677 $ 549,621 Investment income (2) 47,242 41,070 39,030 Average annual yield on total investments 6.6% 6.5% 7.1% Tax equivalent yield on total investments (3) 7.8% 7.9% 8.2% Realized investment gains $ 505 $ 2,888 $ 1,396
(1) Represents total invested assets on an average quarterly basis. The beginning of the period balance for 1993 has been adjusted to reflect the effects of the changes in the pooling agreement. (2) Investment income is net of investment expenses and does not include realized investment gains or losses or provision for income taxes. (3) Assuming an effective tax rate of 35%. Competition The insurance industry is highly competitive. The Company's insurance subsidiaries compete with numerous insurance companies, many of which are substantially larger and have considerably greater financial resources. Because the Company's insurance subsidiaries operate through independent agents and such agents represent more than one company, they face competition within each agency. The Company's insurance subsidiaries compete by underwriting criteria, pricing, automation, service, and product design. The Company believes that its management information systems and procedures for selecting and rating risks accord it a competitive advantage. Competition in the excess & surplus lines market stiffened in recent years as standard market capacity increased and prices decreased. Western Heritage competes in its chosen market (approximately 40 states in the Midwest, West, and South) with numerous insurers on the basis of service, price, and financial strength. ALLIED Mortgage, in originating residential mortgages in central Iowa and servicing residential mortgages nationally, competes through competitive pricing and service. Nationally, ALLIED Mortgage is a small-sized company servicing mortgages with remaining principal balances aggregating $3 billion at December 31, 1995. The largest competitors service in excess of $126 billion of mortgages. With greater capital and greater efficiencies, the larger companies have an advantage in originating and purchasing mortgages to obtain the servicing rights. ALLIED Mortgage has access to capital due to its association with the Company and competes in the purchase of servicing on the basis of price and in mortgage originations on the basis of price and quality of service. Regulation The Company's insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they transact business under statutes which delegate regulatory, supervisory, and administrative powers to state insurance commissioners. Such regulation is designed generally to protect policyholders rather than investors and relates to such matters as the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of and examination of the affairs of insurance companies, which includes periodic market conduct and financial examinations by the regulatory authorities; annual and other reports, prepared on a statutory accounting basis, required to be filed on the financial condition of insurers or for other purposes; establishment and maintenance of reserves for unearned premiums and losses and loss settlement expenses; and requirements regarding numerous other matters. In general, the Company's insurance subsidiaries must file all rates for insurance directly underwritten with the insurance department of each state in which they operate; reinsurance generally is not subject to rate regulation. Further, state insurance statutes typically place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect their solvency. Iowa, the jurisdiction of incorporation of all of the Company's insurance subsidiaries (except Western Heritage), requires that dividends be paid only out of statutory unassigned 15 surplus and requires prior regulatory approval for the payment of any dividend which exceeds the greater of either 10% of the insurer's policyholders' surplus as of the preceding December 31 or statutory net income of the preceding calendar year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Regulations" and note 13 of Notes to Consolidated Financial Statements for additional discussion of dividend limitations. AMCO and ALLIED Property and Casualty are also commercially domiciled insurers within the State of California and subject to regulation (including limitations on dividend payments) as California domiciled insurers by the California Insurance Commissioner. The amounts available for distributions as dividends from Western Heritage are limited by Arizona law, state of jurisdiction, to statutory unassigned surplus and requires prior regulatory approval for the payment of any dividends which exceed the lesser of 10% of the policyholders' surplus as of the preceding December 31 or net investment income of the preceding calendar year. California was 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 exceeded 10%. Since it was passed, Proposition 103 has been the subject of a number of legal and regulatory proceedings for the purpose of clarifying the scope and extent of insurers' rollback obligations. Management of the Company continues to believe that the insurance subsidiaries will not be liable for any material rollback of premiums. The Company is also subject to statutes governing insurance holding company systems in various jurisdictions. Typically, such statutes require the Company periodically to file information with the state insurance regulatory authority, including information concerning its capital structure, ownership, financial condition and general business operations. Under the terms of applicable state statutes, any person or entity desiring to acquire more than a specified percentage (commonly 10%) of the Company's outstanding voting securities is required first to obtain approval from the applicable state insurance regulators. Chapter 521A of the Iowa Code relating to holding companies, to which the Company is subject, requires disclosure of transactions between the Company and its insurance subsidiaries or between an insurer and another subsidiary, that such transactions satisfy certain standards, including that they be fair, equitable, and reasonable and that certain material transactions be specifically non-disapproved by the Iowa Insurance Division. Further, prior approval by the Iowa Insurance Division is required of affiliated sales, purchases, exchanges, loans or extensions of credit, guarantees, or investments, any of which involve 5% or more of the insurer's admitted assets as of the preceding December 31st. Under insolvency or guaranty fund laws in most states in which the Company's insurance subsidiaries and ALLIED Mutual operate, insurers doing business in those states can be assessed, up to prescribed limits, for losses incurred by policyholders as a result of the insolvency of other insurance companies. The amounts and timing of such assessments are beyond the control of the Company and generally have an adverse impact on the Company's earnings. Additionally, the Company is required to participate in various mandatory pools or underwriting associations in amounts related to the amount of the Company's direct writings in the applicable state. Recently, the insurance regulatory framework has been placed under increased scrutiny by various states, the federal government, and the National Association of Insurance Commissioners (NAIC). Various states have considered or enacted legislation which changes, and in many cases increases, the state's authority to regulate insurance companies. The NAIC has recommended to the states for adoption and implementation several regulatory initiatives designed to reduce the risk of insurance company insolvencies. Two of these initiatives include risk based capital standards and a model investment law. The NAIC's risk based capital (RBC) requirements were adopted by the NAIC in 1993 and require property-casualty insurance companies to calculate and report information under the RBC formula. It is anticipated that the Iowa legislature will enact the NAIC's proposal into law in 1996. The RBC formula uses the statutory financial statements to calculate the minimum indicated capital level to support asset (investment and credit) risk and underwriting (loss reserves, premiums, and unearned premium) risk. Based on the subsidiaries' statutory financial statements and interpretation of the RBC formula, management believes capital levels are sufficient to support the level of risk inherent in Company operations and are in excess of any amount which would require regulator action. The NAIC's model legislation to govern insurance company investments is in development. An exposure draft was released in December of 1995 and a model law may be adopted by the NAIC in 1996. The effect of adoption by the Iowa legislature is not expected to be a significant to the Company. 16 The mortgage banking subsidiary is subject to the rules and regulations of, and examination by, the United States Department of Housing and Urban Development, Federal National Mortgage Association (FNMA), and Government National Mortgage Association (GNMA) with respect to originating, processing, selling, and servicing mortgage loans. These rules and regulations, among other things, prohibit discrimination, provide for inspection and appraisals of properties, require credit reports on prospective borrowers, and sometimes fix maximum interest rates, fees, and loan amounts. GNMA requires the maintenance of specified amounts of net worth that vary with the amount of GNMA mortgage-backed securities issued by ALLIED Mortgage. There are also various state laws affecting mortgage banking operations. Relationship with ALLIED Mutual The Company is operated as a part of the ALLIED Group of insurance companies. ALLIED Mutual has operated as a mutual property-casualty insurance company since 1929. In 1971, it organized the Company as a wholly owned subsidiary and transferred to it certain assets, including the stock of AMCO, which had operated as a subsidiary of ALLIED Mutual since 1959. In 1985, the Company effected an initial public offering which then resulted in public ownership of approximately 22% of its common stock. As of December 31, 1995, ALLIED Mutual controlled 18% of the voting stock of the Company. The operations of the Company and its subsidiaries are interrelated with the operations of ALLIED Mutual. The Company and ALLIED Mutual share common executive officers, and three directors of the Company are also directors of ALLIED Mutual. For the year ended December 31, 1995, ALLIED Mutual reported, in accordance with Statutory Accounting Principles, net income of $12,162,049, a statutory combined ratio of 104.5, and assets and surplus at December 31, 1995 of $498,568,711 and $229,848,488, respectively. As of December 31, 1995, ALLIED Mutual's invested assets were $453,311,143. Invested assets included a fixed maturity portfolio of $338,971,484 (at amortized cost), of which over 95.3% was rated "BBB" or higher by Standard & Poor's or a recognized equivalent rating agency. Invested assets also included $72,071,431 in equity investments in affiliates (which includes the Company, ALLIED Life Financial Corporation (ALFC), which is a 52% owned subsidiary of ALLIED Mutual, and AID Finance Services, Inc.). ALLIED Mutual files its statutory-basis financial reports with the state insurance departments in the territories in which it operates. The Company and ALLIED Mutual formalized their relationship by entering into an Intercompany Operating Agreement, a Stock Rights Agreement, and a Pooling Agreement. Intercompany Operating Agreement The Company, ALLIED Mutual, ALFC, and each of their respective subsidiaries are parties to an Intercompany Operating Agreement providing for the sharing of employees, office space, agency forces, data processing, and other services and facilities. The Company and its subsidiaries receive from and pay to ALLIED Mutual and its subsidiaries fees and cost reimbursements for the employees, services, and facilities provided. In determining the allocated costs to the companies, each provider of the various services (e.g., ALLIED Mutual leases office facilities, AGIS provides data processing, etc.) attempts to set fees on a basis consistent with that which would apply in an arm's length transaction with nonaffiliates. However, there can be no assurance that the actual rates charged reflect those which would be obtained if the Company and ALLIED Mutual were not affiliated and had agreed upon rates following arm's length negotiation. See "Relationship with ALLIED Mutual-Pooling Agreement" for a discussion of changes that impact expense sharing arrangements between ALLIED Mutual and the Company. The Company leases to ALLIED Mutual and certain of its subsidiaries all of the employees utilized in their operations for a fee and reimbursement of personnel costs based on certain allocation methods. The Company is obligated to provide the entire requirements for employees of ALLIED Mutual and certain of its subsidiaries, but ALLIED Mutual reserves the right to hire employees independently rather than leasing them from the Company. In 1995, 1994, and 1993, ALLIED Mutual and its subsidiaries paid the Company approximately $2,489,390, $2,414,504, and $3,204,386, respectively, for leased employees, substantially all of which represented cost reimbursement. 17 The Intercompany Operating Agreement also provides for the leasing by ALLIED Mutual to the Company of substantially all of the office space utilized by the Company. ALLIED Mutual and the Company share agency forces as well as other services and facilities. The Intercompany Operating Agreement contains a covenant not to compete that binds each of the Company, ALLIED Mutual, and ALFC not to engage in a business that competes with the products or markets of any other party or such party's subsidiaries for the term of the Intercompany Operating Agreement and five years thereafter. The Intercompany Operating Agreement can be terminated by ALLIED Mutual, ALFC, or the Company after December 31, 2004 upon two years prior notice. In addition, ALLIED Mutual, the Company, and ALFC have certain rights under the Intercompany Operating Agreement, the Pooling Agreement, and the Management Information Services Agreement in the event a nonaffiliated party acquires the ownership of 50% or more of the voting stock of the Company or ALFC. If such an event were to occur, ALLIED Mutual, the Company, or ALFC, as the case may be, has the right to (i) terminate all three of the Intercompany Operating Agreement, the Pooling Agreement, and the Management Information Services Agreement upon six months notice (ii) extend the term of all three such agreements for up to ten additional years beyond December 31, 2004, upon six months notice, or (iii) allow such agreements to continue in effect. Stock Rights Agreement The Company and ALLIED Mutual are parties to a Stock Rights Agreement, which grants certain rights to, and imposes certain restrictions on, ALLIED Mutual in respect of its holdings of the Company's common and preferred stock. This Agreement expires in 2005. Pursuant to the Stock Rights Agreement, ALLIED Mutual is entitled to nominate, and the Company is required to use its best efforts to cause the election or retention of, a number of members of the Company's Board of Directors in proportion to ALLIED Mutual's percentage ownership of the total number of shares of the Company's voting stock outstanding at the time of nomination. In addition, the Company is required to elect to its Executive Committee at least one Company director who has been nominated by ALLIED Mutual but who is not an officer or employee of ALLIED Mutual. The Stock Rights Agreement also restricts the ability of ALLIED Mutual to grant proxies and solicit other shareholders of the Company. Under the Stock Rights Agreement, ALLIED Mutual is prohibited from initiating or accepting a tender offer for shares of the Company's common stock except under certain conditions. The Company has a right of first refusal with respect to any sale by ALLIED Mutual of the Company's common stock, subject to certain exceptions, including a distribution of such stock to the public in a registered public offering or sale pursuant to Rule 144. ALLIED Mutual has incidental registration rights and three demand registration rights with respect to the Company's common and 6-3/4% Series preferred stock it owns. The limitations on ALLIED Mutual's ability to initiate, or tender shares, in a tender offer as well as the limitations on its ability to grant proxies and solicit other shareholders of the Company terminate upon a consolidation or merger of the Company with another corporation in which the Company is not the surviving corporation, a sale of substantially all of its assets, or the holding, by any person other than ALLIED Mutual, of 50% or more of the voting securities of the Company then outstanding. The Agreement will be suspended for so long as ALLIED Mutual holds less than 10% of the outstanding common stock and 6-3/4% Series preferred stock of the Company. Pooling Agreement The Pooling Agreement provides that ALLIED Mutual, ALLIED Property and Casualty, and Depositors cede to AMCO premiums, losses, allocated loss settlement expenses, commissions, premium taxes, service charge income, and dividends to policyholders and assume from AMCO an amount of this pooled property-casualty business equal to their participation in the Pooling Agreement. ALLIED Mutual's crop hail business is not pooled. AMCO pays certain underwriting expenses, unallocated loss settlement expenses, and premium collection expenses for all of the pool participants and receives a fee equal to a specified percentage of premiums as well as a contingent fee based on the attainment of certain combined ratios from each of the pool participants. AMCO charges each of the other pool participants 12.85% of written premiums for underwriting services, 7.25% of earned premiums for unallocated loss settlement expenses, and 0.75% of earned premiums for premium collection services. AMCO received pool administrative fees 18 of $55,721,043, $50,449,437, and $44,920,376 from ALLIED Mutual in 1995, 1994, and 1993, respectively. The administrative fees are subject to renegotiation during the term of the pooling agreement upon five years notice. The pooling agreement provides ALLIED Mutual, ALLIED Property and Casualty, and Depositors more predictable expense levels by limiting such expenses to a specified percentage of their premiums in lieu of the prior arrangement, where such expenses were allocated based on the pool participation percentages. These arrangements give AMCO opportunities to profit from the efficient administration of such underwriting, loss settlement, and premium collection activities and to provide similar services to nonaffiliated insurance companies in the future. Changes to the Pooling Agreement must be approved by the Coordinating Committee. The term of the Pooling Agreement extends to 2004 after which time it can be terminated by either party on five years' notice. The Pooling Agreement may also be terminated or extended by ALLIED Mutual upon the occurrence of certain events. See "Relationship with ALLIED Mutual-Intercompany Operating Agreement." The Coordinating Committee Under the Intercompany Operating Agreement, the Company, ALLIED Mutual, and ALFC have formed a Coordinating Committee comprised of two independent directors of the Company, two directors of ALLIED Mutual, and two independent directors of ALFC, none of whom serve on other ALLIED boards. All disputes arising under the Intercompany Operating Agreement as well as other intercompany agreements are to be submitted to the Coordinating Committee for resolution. Decisions of this Coordinating Committee must be unanimous and are binding on the parties. Historically, all issues that have been submitted to the Coordinating Committee have been resolved by the Committee. The Company anticipates that any future issues would be similarly resolved. If an issue is not resolved by the Coordinating Committee, it will be submitted to arbitration. In such arbitration, each party to the dispute selects one arbitrator, and if such dispute involves only two parties, such arbitrators select a third arbitrator. Other Relationships ALLIED Mutual has participated with American Re-Insurance Company in a property catastrophe reinsurance agreement to cover the property-casualty segment's share of pooled losses. In 1995, 1994, and 1993, ALLIED Mutual's and American Re-Insurance Company's respective participation in the reinsurance agreement were 90% and 10% and covered the property-casualty segment's share of pooled losses up to $5,000,000 in excess of $5,000,000. See notes 4 and 6 of Notes to Consolidated Financial Statements for additional information concerning transactions between the Company and ALLIED Mutual. Employees At December 31, 1995, the Company was the direct employer of personnel for all subsidiaries of the Company and of ALLIED Mutual and its subsidiaries other than ALFC, employing 2,243 persons. None of the Company's employees are members of a collective bargaining unit. Management believes that its employee relations are good. Item 2. Properties The majority of the real property occupied by the Company and its subsidiaries are owned or leased by ALLIED Mutual. A portion of the costs of the properties is paid by the Company and its subsidiaries. See "Relationship with ALLIED Mutual-Intercompany Operating Agreement." Management considers the properties to be adequate for its needs. The primary properties owned by ALLIED Mutual are the home office in Des Moines, Iowa, a data processing facility and claims center in Urbandale, Iowa, and regional offices in Denver, Colorado and Lincoln, Nebraska. The Santa Rosa, California regional office building is leased by ALLIED Mutual. The Company and its subsidiaries lease office space in Des Moines and Cedar Rapids, Iowa, Minneapolis, Minnesota, Lincoln, Nebraska, and Scottsdale, Arizona. 19 Item 3. Legal Proceedings The Company and its subsidiaries are party to various lawsuits arising in the normal course of business. The Company and its subsidiaries believe the resolution of these lawsuits will not have a material adverse effect on their financial condition or results of operations. Item 4. Submission of Matters to a Vote of Securities Holders No matters were submitted during the fourth quarter of 1995 to a vote of holders of ALLIED Group, Inc. stock. 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders' Matters The Company's common stock trades on The Nasdaq Stock Market under the symbol ALGR. As of December 31, 1995, there were 1,026 stockholders of record. The following table shows the high and low market prices and dividends paid per share for each calendar quarter for the two most recent years.
First Second Third Fourth 1995 Quarter Quarter Quarter Quarter --------- --------- --------- --------- --------- High $ 28-3/4 $ 30-1/4 $ 33 $ 36-3/4 Low 23-5/16 27-1/4 27-1/2 31-1/2 Dividends 0.17 0.17 0.17 0.17
First Second Third Fourth 1994 Quarter Quarter Quarter Quarter --------- --------- --------- --------- --------- High $ 27-1/4 $ 26-3/4 $ 30-1/2 $ 31 Low 23 22-3/4 25 22 Dividends 0.15 0.15 0.15 0.15
There are certain regulatory restrictions relating to the payment of dividends (see note 13 of Notes to Consolidated Financial Statements). It is the present intention of the Board of Directors to declare quarterly cash dividends. 21 Item 6. Selected Financial Data
At or for the year ended December 31, ------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 ------------ ----------- ---------- ----------- ----------- (in thousands, except per share data) Income Statement Data Premiums earned Personal $ 279,908 $ 252,916 $ 225,594 $ 191,059 $ 145,029 Commercial 145,930 133,816 118,728 101,364 79,516 ------------ ----------- ---------- ----------- ----------- Total property-casualty 425,838 386,732 344,322 292,423 224,545 Excess & Surplus Lines 29,661 25,786 24,014 27,738 23,612 ------------ ----------- ---------- ----------- ----------- Total 455,499 412,518 368,336 320,161 248,157 Investment income 47,242 41,070 39,030 32,716 27,975 Realized investment gains 505 2,888 1,396 1,975 2,189 Other income 49,519 50,888 73,680 91,739 76,044 ------------ ----------- ---------- ----------- ----------- Total revenues 552,765 507,364 482,442 446,591 354,365 Losses and expenses 478,917 440,665 425,685 407,584 332,242 ------------ ----------- ---------- ----------- ----------- Income from before income taxes 73,848 66,699 56,757 39,007 22,123 Income taxes 21,471 19,074 16,835 10,332 5,114 ------------ ----------- ---------- ----------- ----------- Net income $ 52,377 $ 47,625 $ 39,922 $ 28,675 $ 17,009 ============ =========== ========== =========== =========== Fully diluted earnings per share Net income $ 3.52 $ 3.19 $ 2.61 $ 1.94 $ 1.34 ============ =========== ========== =========== =========== Realized investment gain $ .02 $ .14 $ .06 $ .09 $ .12 ============ =========== ========== =========== =========== Property-casualty wind and hail losses $ 1.35 $ 1.15 $ .89 $ .74 $ 1.04 ============ =========== ========== =========== =========== Dividends paid $ .68 $ .60 $ .51 $ .43 $ .37 ============ =========== ========== =========== =========== Balance Sheet Data Total investments $ 772,299 $ 655,906 $ 606,511 $ 460,038 $ 356,788 Total assets 1,010,598 892,751 855,525 688,488 557,636 Notes payable 39,465 43,541 82,459 66,543 79,124 Guarantee of ESOP obligations 26,270 28,150 29,500 30,590 33,140 Other Data Pool percentage 64% 64% 64% 60% 53% Book value per share $ 24.23 $ 19.68 $ 17.98 $ 14.34 $ 13.18 Closing stock price per share $ 36.00 $ 24.75 $ 26.25 $ 21.17 $ 11.33 Return on average book value per share 16.1% 17.0% 15.9% 14.2% 10.5% Pretax investment yield 6.6% 6.5% 7.1% 7.6% 8.3% Pretax profit on revenues 13.4% 13.1% 11.8% 8.7% 6.2% Cash dividends to closing stock price 1.9% 2.4% 1.9% 2.0% 3.3% Closing stock price to earnings ratio 10.2 7.8 10.1 10.9 8.5 Property-casualty statutory combined ratio 95.7 97.1 99.3 102.5 107.9 Shares outstanding Preferred shares 4,820 4,981 5,070 5,141 3,368 Common shares 9,445 9,000 9,026 4,469 4,281
22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following analysis of the consolidated results of operations and financial condition of the Company should be read in conjunction with the Selected Financial Data and Consolidated Financial Statements and related footnotes included elsewhere herein. ALLIED Group, Inc. (the Company) is a regional insurance holding company. As of December 31, 1995, The ALLIED Group Employee Stock Ownership Trust (ESOP Trust) owned 26.9% of the outstanding stock. ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company, controlled 18% of the voting stock of the Company. The operating results of the property-casualty insurance industry are subject to significant fluctuations from quarter to quarter and from year to year due to the effect of competition on pricing, the frequency and severity of losses incurred in connection with weather-related and catastrophic events, general economic conditions, and other factors such as changes in tax laws and the regulatory environment. 1995 COMPARED TO 1994 Consolidated revenues for 1995 were $552.8 million, up 8.9% over the $507.4 million reported for 1994. Excluding realized in gains, revenues grew 9.5% for 1995. The increase occurred primarily because of the 10.4% growth in earned premiums. Income before income taxes was up 10.7% to $73.8 million from $66.7 million for 1994 primarily because of revenue growth and improved underwriting margins for the property-casualty segment. The property-casualty segment was the dominant contributor to operating income with an increase of $9.7 million. Net income for the year ended December 31, 1995 was up 10% to $52.4 million, raising fully diluted earnings per share to $3.52 from $3.19. Fully diluted earnings per share before net realized investment gains were $3.50 for 1995 compared with $3.05. Book value per share increased to $24.23 from $19.68. Property-casualty Revenues for the property-casualty segment increased to $472 million from $431.1 million for 1994. Direct earned premiums for the segment were $435.2 million for 1995 compared with $383.5 million one year earlier. Earned premiums increased 10.1% to $425.8 million from $386.7 million. The increase resulted primarily from growth in insurance exposure as well as a larger average premium per policy. Pooled net written premiums (including ALLIED Mutual) totaled $692.6 million, a 9.4% increase over 1994 production. The average premium per policy for personal lines was up 3.4% to $586 while the policy count grew 6.5%. The average premium per policy for commercial lines increased 2% to $1,086, and policy count was up 5.3%. Earned premiums for the property-casualty segment were 65.7% personal lines and 34.3% commercial lines. The business mix for 1994 was 65.4% personal and 34.6% commercial lines. Income before income taxes increased to $63.9 million from $54.2 million primarily as a result of lower underwriting expenses in 1995 and an increase in earned premiums. Investment income was $39.1 million compared with $35.3 million. The pretax yield on invested assets was 6.4%, down from 6.6% one year earlier. Realized investment gains were $236,000 compared with $3 million. Realized investment gains for 1994 included $2.6 million from the sale of the segment's 20% interest in a savings and loan holding company. Other income increased to $6.9 million from $6.1 million in 1994. 23 The statutory combined ratio (after policyholder dividends) improved to 95.7 from the 97.1 reported in 1994. Improvement was attributed primarily to a 1.3-point decrease in the underwriting expense ratio. The decrease was the result of the Company's continuing efforts to improve efficiency and productivity. Wind and hail losses for 1995 increased to $28.7 million from $24.4 million in 1994. The impact of wind and hail losses on the statutory combined ratio was 6.7 points for the year ended December 31, 1995 and 6.3 points for 1994. The underwriting gain (on a generally accepted accounting principles basis) was $17.7 million compared with $9.8 million for 1994. On a fully diluted basis, the impact of wind and hail losses on the results of operations was $1.35 per share versus $1.15 in 1994. The personal auto statutory combined ratio improved to 96.5 for 1995 from 97.4 last year. The improvement was due to a 1.4-point decrease in the underwriting expense ratio that more than offset the increase in the loss and loss settlement expense ratio. The statutory combined ratio for the homeowners line was 99.2 compared with 107.4 for 1994. The impact of wind and hail losses on the homeowners combined ratio increased slightly to 21.7 points from 21.5 points. Results for the homeowners line were favorably affected by better pricing in 1995. Overall, the personal lines statutory combined ratio improved to 97.2 in 1995 from 99.8 in 1994. The statutory combined ratio for commercial lines increased to 92.7 from 92.0 for the previous year. Excess & Surplus Lines Earned premiums increased to $29.7 million for 1995 from $25.8 million for 1994. Net written premiums increased 13.2% to $30.6 million from $27 million. Direct earned premiums were $37.2 million compared with $32.3 million. As of December 31, 1995, the segment's book of business was comprised of 2.4% personal lines and 97.6% commercial lines. For 1994, the business mix was 2.8% personal and 97.2% commercial lines. The statutory combined ratio (after policyholder dividends) was 102.2, which produced an underwriting loss (on a generally accepted accounting principles basis) of $855,000. The statutory combined ratio of 99.9 for 1994 resulted in an underwriting loss of $218,000. The 1995 combined ratio increased primarily because of a 20.4% increase in losses and loss settlement expenses (3.4-points on the combined ratio). Income before income taxes for 1995 decreased 3.2% to $4.8 million from $5 million. The decrease was primarily due to poor loss development. Realized investment losses were $136,000 compared with losses of $24,000 for 1994. Investment income increased 11.2% to $5.8 million from $5.2 million. Investment income increased because a larger average balance of invested assets more than offset a 10 basis-point decline in the pretax yield from last year's 6.8%. Invested assets rose 21.2% from the previous year-end to $96.4 million at December 31, 1995. Noninsurance Operations Revenues for ALLIED Group Mortgage Company (ALLIED Mortgage) decreased in 1995 to $17.9 million from $18.3 million in 1994. Growth in revenues was adversely affected by a decrease in interest income due to a decline in the average balance of mortgage loans held for sale in 1995. The mortgage servicing portfolio was $3 billion at year-end 1995 and 1994. Income before income taxes for ALLIED Mortgage was up 13.8% to $4.5 million from $4 million for 1994. The increase was primarily the result of lower operating expenses. Revenues for the data processing operations decreased 6% to $48.6 million from $51.8 million in 1994. The operations reported a pretax loss of $618,000 for 1995 and a pretax profit of $3.9 million the previous year. The 1995 decreases were primarily the result of a reduction in revenues generated from the affiliated property-casualty segment. Fees for processing and product maintenance services were lowered during the year to more closely approximate cost for providing such services to that segment's companies. Investments and Investment Income The investment policy for the Company's insurance segments requires that the fixed maturity portfolio be invested primarily in debt obligations rated investment grade (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 24 established exchanges or publicly traded in the over-the-counter market. Preferred stock is to be comprised primarily of issues rated at least A3/A- by Standard & Poor's Corporation or Moody's. At December 31, 1995 the Company's investment portfolio consisted almost exclusively of fixed income securities; 98.1% were rated investment securities or higher. The portfolios contained no real estate or mortgage loans. Invested assets were up 17.7% to $772.3 million from $655.9 million at year-end 1994. Fixed maturities at amortized cost increased 11.2%. In 1995, the Company reclassified all fixed maturities in held to maturity to available for sale. Therefore, all fixed maturities were marked to market at December 31, 1995. See Investments section in note 1 of Notes to Consolidated Financial Statements. Consolidated investment income increased 15% to $47.2 million from $41.1 million in 1994. The increase was due primarily to a larger average balance of invested assets. The tax-equivalent yield was down in 1995 to 7.8% compared with 7.9% one year earlier. The aftertax yield for 1995 and 1994 was 5.1%. At December 31, 1995, the Company held collateralized mortgage obligation (CMO) investments with a carrying and fair value of $77.7 million. The Company's investments in CMOs as of December 31, 1994 had a carrying value of $59.6 million (fair value of $57 million). Substantially all of the Company's CMO investments are in planned amortization class bonds or sequential pay bonds with anticipated durations of approximately five years at the time of acquisition. The Company has not invested in the more volatile types of CMO products such as companion or accrual (Z-bond) tranches. All of the Company's CMO investments have an active secondary market; accordingly, their effect on the Company's liquidity does not differ from that of other fixed income investments. Income Taxes The Company's effective income tax rate was 29.1% compared with 28.6% for 1994. The income tax expense for 1995 rose to $21.5 million from $19.1 million due to higher operating income and a smaller percentage of tax-exempt investment income. 1994 COMPARED TO 1993 Consolidated revenues for 1994 were $507.4 million, up 5.2% over the $482.4 million reported for 1993. Though earned premiums grew 12% in 1994, the percentage increase in revenues was constrained by the sale of the Company's investment banking and asset management subsidiary in October of 1993. Income before income taxes was up 17.5% to $66.7 million from $56.8 million for 1993 primarily because of improved underwriting results for the property-casualty segment. The segment's operating income increased $13.3 million. Net income for the year ended December 31, 1994 was up 19.3% to $47.6 million, raising fully diluted earnings per share to $3.19 from $2.61. Fully diluted earnings per share before net realized investment gains were $3.05 compared with $2.55. Book value per share increased to $19.68 from $17.98. Property-casualty Revenues for the property-casualty segment increased to $431.1 million from $384.6 million for 1993. Direct earned premiums for the segment were $383.5 million for 1994 compared with $328.5 million one year earlier. Earned premiums increased 12.3% to $386.7 million from $344.3 million. The increase resulted primarily from growth in insurance exposure and a larger average premium per policy. Pooled net written premiums (including ALLIED Mutual) totaled $632.8 million, an 11.3 % increase over 1993 production. The average premium per policy for personal lines was up 3.8% to $567 while the policy count grew 8%. The average premium per policy for commercial lines increased 4.5% to $1,065, and policy count was up 4.8%. Earned premiums for the property-casualty segment were 65.4% personal lines and 34.6% commercial lines. The business mix for 1993 was 65.5% personal and 34.5% commercial. 25 Income before income taxes increased to $54.2 million from $40.9 million as a result of the first statutory underwriting profit in seven years. Investment income was $35.3 million compared with $33.5 million. The pretax yield on invested assets was 6.6%, down from 7% due to a larger investment in tax-exempt securities. Realized investment gains were $3 million compared with $1.3 million; the increase was from the sale of the segment's 20% interest in a savings and loan holding company in 1994 for $9.4 million. The pretax gain of $2.6 million from the sale generated an aftertax gain on a fully diluted basis of $0.13 per share. Other income increased to $6.1 million from $5.5 million in 1993. The statutory combined ratio (after policyholder dividends) improved to 97.1 from the 99.3 reported in 1993. Improvement was attributed to a 1.2-point decrease in the underwriting expense ratio and a 1-point decrease in the loss and loss settlement expense ratio. The decreases were the result of the Company's continuing efforts to improve efficiency and productivity. Wind and hail losses for 1994 increased to $24.4 million from $18.7 million in 1993; their impact on the combined ratio worsened to 6.3 points from 5.4 points for 1993. The underwriting gain (on a generally accepted accounting principles basis) was $9.8 million compared with a gain of $611,000 for 1993. On a fully diluted basis, wind and hail losses increased $0.26 per share to $1.15 in 1994. The personal auto statutory combined ratio improved to 97.4 for 1994 from 98.3. The improvement was due to a 10.6% growth in earned premiums that outpaced the increase in losses and loss settlement expenses. The statutory combined ratio for the homeowners line was 107.4 compared with 109.1 for 1993. The impact of the wind and hail losses on the homeowners combined ratio increased to 21.5 points from 17.9 points, but the increase was offset by lower loss settlement and underwriting expenses. Overall, the personal lines statutory combined ratio improved to 99.8 in 1994 from 100.8 in 1993. The statutory combined ratio for commercial lines improved to 92.0 from 96.3. Excess & Surplus Lines Earned premiums increased 7.4% to $25.8 million for 1994 from $24 million. Net written premiums increased 8.6% to $27 million from $24.9 million. Direct earned premiums were $32.3 million compared with $30 million. As of December 31, 1994, the segment's book of business was comprised of 2.8% personal lines and 97.2% commercial lines. For 1993, the business mix was 3.5% personal and 96.5% commercial. The statutory combined ratio (after policyholder dividends) was 99.9, which produced an underwriting loss (on a generally accepted accounting principles basis) of $218,000. The statutory combined ratio of 96.1 for 1993 resulted in an underwriting gain of $647,000. The 1994 combined ratio worsened primarily because of a 16.4% increase in incurred losses resulting from higher than anticipated one unusually large claim; the loss and loss settlement expense ratio increased 2.5 points. Income before income taxes for 1994 decreased 11% to $5 million from $5.6 million for 1993. Realized investment losses were $24,000 compared with gains of $103,000. Investment income increased 7.7% to $5.2 million from $4.9 million because a larger average balance of invested assets more than offset the decline in the pretax yield to 6.8% from 7.2%. Invested assets rose 6% from the previous year-end to $79.6 million at December 31, 1994. Noninsurance Operations Revenues for ALLIED Mortgage decreased slightly in 1994 to $18.3 million from $18.4 million in 1993, adversely affected by a sharp decrease in marketing revenues in an interest rate environment that experienced rising rates throughout the year. In 1993, falling interest rates provided the market with an abundance of mortgage loans to be purchased or originated at below-market prices and allowed the mortgage loans to be sold on the secondary market at a premium. The stability in revenues in 1994 was attributed primarily to an increase in servicing fees that offset the decline in marketing revenues. The mortgage servicing portfolio grew 19.3% to $3 billion from $2.5 billion at year-end 1993. Income before income taxes for ALLIED Mortgage was up 16.5% to $4 million from $3.4 million for 1993. The increase was primarily the result of fewer servicing rights being written off due to the reduction in refinancing activities in 1994. During 1993, lower interest rates increased the amount of servicing rights being expensed as the underlying mortgages were repaid or refinanced. 26 Revenues increased 6.8% for the data processing operations to $51.8 million from $48.4 million in 1993. Income before income taxes decreased 16.8% to $3.9 million in 1994 from $4.6 million. The decrease occurred because the growth in operating expenses outpaced the increase in revenues. Higher operating expenses were the result of expensing direct development costs. Investments and Investment Income Invested assets were up 8.1% to $655.9 million from $606.5 million at year-end 1993. The investment portfolios consisted of 99.6% investment grade securities at December 31, 1994. The fair value of the Company's investment in fixed maturities held to maturity was $13.2 million below amortized cost compared with an excess of $18.8 million at December 31, 1993. Consolidated investment income increased 5.2% to $41.1 million from $39 million for 1993. The Company's pretax rate of return on invested assets was down to 6.5% from the previous year's 7.1%. The aftertax yield for 1994 was 5.1% compared with 5.4%. As of December 31, 1994, the Company held collateralized mortgage obligation (CMO) investments with a carrying value of $59.6 million (fair value of $57 million). The Company's investments in CMOs as of December 31, 1993 had a carrying value of $104 million (fair value of $105.6 million). Income Taxes The Company's effective income tax rate was 28.6% compared with 29.7% for 1993. The increased tax-exempt income in 1994 was primarily responsible for the change in the effective tax rate. The income tax expense for 1994 rose to $19.1 million from $16.8 million due to higher operating income. REGULATIONS The NAIC's risk based capital (RBC) requirements were adopted by the NAIC in 1993 and call for property-casualty insurance companies to calculate and report information under the RBC formula. It is anticipated the Iowa legislature will enact the NAIC's proposal into law in 1996. The RBC formula uses the statutory financial statements to calculate the minimum indicated capital level to support asset (investment and credit) risk and underwriting (loss reserves, premiums, and unearned premiums) risk. The subsidiaries' statutory financial statements and counsel's interpretation of the RBC formula lead management to believe capital levels are sufficient to support the level of risk inherent in Company operations and are in excess of the minimums required. The NAIC's model legislation to govern insurance company investments is in development. An exposure draft was released in December of 1995, and the model investment law may be adopted by the NAIC in 1996. The effect of the adoption by the Iowa legislature is not expected to be significant to the Company. 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 exceeded 10%. Since it was passed, Proposition 103 has been the subject of a number of legal and regulatory proceedings for the purpose of clarifying the scope and extent of insurers' rollback obligations. Management of the Company continues to believe that the insurance subsidiaries will not be liable for any material rollback of premiums. LIQUIDITY AND CAPITAL RESOURCES Substantial cash inflows are generated from premiums, pool administration fees, investment income, and proceeds from maturities of portfolio investments. The principal outflows of cash are payments of claims, commissions, premiums taxes, operating expenses, income taxes, and the purchase of fixed maturities and equity securities. In developing its strategy, the Company establishes a level 27 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 1995, operating activities generated cash flows of $97.9 million; in 1994, the total was $85.5 million; in 1993, the total was $91.6 million (including $25.8 million from the 1993 change in the pool participation percentage and pool administration). For each year, the primary source of funds was premium growth in the Company's property-casualty insurance operations. Proceeds from the sale of 1.6 million shares of common stock in the first quarter of 1993 accounted for the majority of the $38.1 million generated from financing activities during 1993. In each of the years, funds generated from operating activities were used primarily to purchase investment grade fixed securities, accounting for the majority of cash used in investing activities. The net cash used in investing activities in 1995, 1994, and 1993 was $88.8 million, $69.5 million, and $128.8 million, respectively. In 1993, additional funds were generated from financing activities and were used primarily to purchase investment grade fixed maturities. In 1995, 1994, and 1993, the Company paid dividends of $13.5 million, $12.7 million, and $11.8 million, respectively. In 1994, the Company also used funds to repurchase $6.4 million of common stock. On February 11, 1994, the Company's Board of Directors approved a plan to repurchase up to 250,000 shares of the Company's common stock on the open market. The 250,000 shares were repurchased at an average cost of $25.44 per share. The repurchase program was completed during November of 1994. On December 14, 1994, the Company's Board of Directors approved the repurchase of an additional 250,000 shares of the Company's common stock on the open market. Through December 31, 1995, the Company had not repurchased any shares under this program. 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. In 1994, additional funds of $9.4 million were generated from the sale of the 20% interest in a savings and loan holding company. As of December 31, 1995, 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. The Company's mortgage banking subsidiary, ALLIED Mortgage, has separate credit agreements to support its operations. Short-term and long-term notes payable to nonaffiliated companies are used by ALLIED Mortgage to finance its mortgage loans held for sale, to purchase servicing rights, and to purchase short-term investments. These notes payable are not guaranteed by the Company. At December 31, 1995, ALLIED Mortgage had short-term borrowings of $22.5 million, which are to be repaid through the subsequent sale of securities inventory. The amount of short-term borrowings fluctuates daily depending on the level of inventory being financed. Long-term borrowings amounted to $13.5 million to be repaid over the next nine years. See note 8 of Notes to Consolidated Financial Statements. In the normal course of its business, ALLIED Mortgage 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. See note 14 of Notes to Consolidated Financial Statements. Historically, the Company's insurance subsidiaries have generated sufficient funds from operations to pay their claims. While the property-casualty and excess & surplus lines insurance companies have maintained adequate investment liquidity, they have in the past required additional capital contributions to support premium growth. Industry and regulatory guidelines suggest that a property-casualty insurer's annual net written premiums should not exceed approximately 300% of statutory surplus. At December 31, 1995, the property-casualty and excess & surplus lines segments' net written premiums were 171% and 110% of their statutory surplus, respectively. On February 18, 1993, 1.6 million shares of common stock were sold to the public at $24.67 per share; the Company used the net proceeds to contribute $36.1 million to the property-casualty subsidiaries and improve overall liquidity. The Company relies primarily on dividends from its insurance subsidiaries to pay preferred and common stock dividends to Company stockholders. State insurance regulations restrict the maximum amount of dividends the property-casualty subsidiaries can pay without prior regulatory approval. The maximum dividend that the subsidiaries may pay without prior approval of the insurance authorities is the greater of either 10% of the subsidiary's statutory capital 28 stock and surplus as of the preceding December 31 or net income of the preceding calendar year. In 1996 the maximum amount legally available for distribution to the Company without prior approval is $44.1 million. The excess & surplus lines subsidiary is domiciled in Arizona and operates under Arizona state laws. The maximum amount available for distribution as dividends from the excess & surplus lines subsidiary is limited to the lesser of 10% of stockholders' surplus as of the preceding December 31 or net investment income of the pre year. The excess & surplus lines segment could pay $2.8 million in 1996 without prior notice to the insurance commissioner. The Company anticipates that the excess & surplus lines segment will not pay dividends in 1996. During 1995, the Company received dividend payments of $12 million from the property-casualty subsidiaries and $974,000 from noninsurance subsidiaries. During 1994 and 1993, the property-casualty subsidiaries made dividend payments of $7.8 million and $7.7 million, respectively, to the Company; noninsurance subsidiaries paid dividends of $1.1 million and $440,000, respectively. Dividend payments to common stockholders totaled $6.3 million for the year ended December 31, 1995, up from $5.4 million and $4.4 million in 1994 and 1993, respectively. In 1995, 1994, and 1993, the Company paid dividends of $3.7 million, $3.8 million, and $3.9 million, respectively, on the ESOP Series. In each year, the Company paid dividends of $3.5 million on the 6-3/4% Series preferred stock. At its March 5, 1996 meeting, the Board of Directors approved a first-quarter 1996 common stock dividend of $0.22 per share for payment to holders of record on March 26. The dividend is $0.05 (29.4%) higher than the amount paid in the fourth quarter of 1995. On March 7, 1996, the ESOP Trust converted its shares of the ESOP Series to approximately 4.4 million shares of common stock. The conversion increased the number of shares outstanding to 13.9 million. Paying the first-quarter 1996 common stock dividends on the new shares of common stock held by the ESOP Trust will increase the Company's dividend payments in the first quarter by $675,000. If the $0.22 rate is approved by the Board each quarter of 1996, the annual dividend payments will rise $939,000 as a result of the conversion of the ESOP Series share to common stock. The impact is greatest in the first quarter because the ESOP Trust will receive the full first-quarter dividend in addition to the ESOP Series dividend for the two months prior to the conversion. In 1990, the ESOP Trust issued notes totaling $35 million (ESOP obligations) to acquire ESOP Series preferred stock for the Company's Employee Stock Ownership Plan (ESOP). In March 1995, the ESOP Trust refinanced its notes with a Term Credit Agreement and Guaranty (Agreement) with two separate commercial banks. The Company guaranteed the ESOP Trust's obligations under the Agreement. See note 9 of Notes to Consolidated Financial Statements. At December 31, 1995, the balance of the obligations was $26.3 million. Company contributions plus dividends on the ESOP Series preferred stock are used by the ESOP Trust to service the ESOP obligations. Dividends and payments for the employee lease fees from its subsidiaries are used by the Company to fund the amounts paid to the ESOP Trust. The Company made contributions to the ESOP Trust of $733,000 in 1995, $35,000 in 1994, and $54,000 in 1993. The Company paid dividends of $2.8 million in 1995, 1994, and 1993, which were used for such debt service. In connection with its ESOP guarantee of ESOP obligations, the Company is required to maintain minimum stockholders' equity and to comply with certain other financial covenants. See notes 9 and 15 of Notes to Consolidated Financial Statements. Insurance premiums are established before the amount of losses and loss settlement expenses, or the extent to which inflation may affect such expenses, is known. Consequently, the Company attempts to anticipate the impact of inflation in establishing premiums. Inflation is implicitly considered in the determination of reserves for losses and loss settlement expenses since portions of the reserves are expected to be paid over extended periods of time. The importance of continually reviewing reserves is even more pronounced in periods of extreme inflation. 29 THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 30 Item 8. Financial Statements and Supplementary Data Management's Representation The management of ALLIED Group, Inc. is responsible for the integrity and fair presentation of the consolidated financial statements, related notes, and all other information presented herein. The statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management's best estimates and judgements. Management maintains a system of internal control designed to provide reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, the prevention and detection of fraudulent financial reporting, and the appropriate division of responsibility. In addition, the Company's internal audit department systematically reviews these controls, evaluates their adequacy and effectiveness, and reports thereon. Management has considered internal audit recommendations and those of KPMG Peat Marwick LLP and has in its opinion responded appropriately to those recommendations. Management believes that as of December 31,1995 the Company's system of internal control is adequate to accomplish the objectives discussed herein. The Company's financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The audit was conducted in accordance with generally accepted auditing standards, which included a consideration of the Company's system of internal control to the extent necessary to form an independent opinion on the financial statements prepared by management. The audit committee of the Board of Directors, composed solely of outside directors, oversees management's discharge of its financial reporting responsibilities. The committee meets periodically with management, internal auditors, and representatives of KPMG Peat Marwick LLP to discuss auditing, financial reporting and internal control matters. Both internal and independent auditors have access to the audit committee without management's presence. Jamie H. Shaffer President (Financial) 31 Independent Auditors' Report The Board of Directors and Stockholders ALLIED Group, Inc. We have audited the accompanying consolidated balance sheets of ALLIED Group, Inc. and subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis. evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ALLIED Group, Inc. and subsidiaries as of December 31, 1995 and 1994 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in note 1 of Notes to Consolidated Financial Statements, the Company changed its method of accounting for investments in fixed maturities in 1993. KPMG Peat Marwick LLP Des Moines, Iowa February 2, 1996 except for note 20, which is as of March 7, 1996 32 ALLIED Group, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands)
December 31, --------------------------------- 1995 1994 -------------- -------------- Assets Investments (note 2) Fixed maturities (note 3) Available for sale at fair value $ 754,547 $ 243,568 Held to maturity at amortized cost --- 401,717 Equity securities at fair value (note 3) 7,948 4,507 Short-term investments at cost (notes 3 and 4) 9,802 5,656 Other investments at equity 2 458 -------------- -------------- Total investments 772,299 655,906 Cash 1,465 1,541 Indebtedness from affiliates (note 4) --- 572 Accrued investment income 10,467 10,349 Accounts receivable 76,118 68,466 Current income taxes recoverable (note 17) 1,330 2,594 Reinsurance receivables for losses and loss settlement expenses 19,293 20,936 Mortgage loans held for sale (notes 2 and 8) 13,673 15,540 Deferred policy acquisition costs 41,688 38,269 Prepaid reinsurance premiums 6,784 6,381 Mortgage servicing rights (note 8) 35,705 36,981 Deferred income taxes (note 17) --- 9,100 Other assets 31,776 26,116 -------------- -------------- Total assets $ 1,010,598 $ 892,751 ============== ==============
See accompanying Notes to Consolidated Financial Statements. 33
December 31, --------------------------------- 1995 1994 -------------- -------------- Liabilities Losses and loss settlement expenses (notes 5 and 6) $ 341,864 $ 310,996 Unearned premiums 196,461 180,113 Outstanding drafts 3,708 13,309 Indebtedness to affiliates (note 4) 1,019 --- Notes payable to nonaffiliates (notes 2 and 8) 35,965 41,541 Notes payable to affiliates (notes 2 and 4) 3,500 2,000 Guarantee of ESOP obligations (notes 2 and 9) 26,270 28,150 Deferred income taxes (note 17) 2,854 --- Other liabilities (notes 14 and 16) 37,371 34,761 -------------- -------------- Total liabilities 659,012 610,870 -------------- -------------- Stockholders' equity Preferred stock, no par value, issuable in series, authorized 7,500 shares (note 10) 6-3/4% Series, 1,827 shares issued and outstanding 37,813 37,813 ESOP Series, issued and outstanding 2,993 shares in 1995 and 3,154 shares in 1994 45,835 47,753 Common stock, no par value, $1 stated value, authorized 40,000 shares, issued and outstanding 9,445 shares in 1995 and 9,000 shares in 1994 (notes 11 and 12) 9,445 9,000 Additional paid-in capital 104,596 98,926 Retained earnings (note 13) 159,470 119,752 Unrealized appreciation (depreciation) of investments (net of deferred income tax (expense) benefit of ($9,907) and $2,869) 18,335 (5,241) Unearned compensation related to ESOP (note 9) (23,908) (26,122) -------------- -------------- Total stockholders' equity 351,586 281,881 -------------- -------------- Commitments and contingent liabilities (notes 6 and 14) Total liabilities and stockholders' equity $ 1,010,598 $ 892,751 ============== ==============
See accompanying Notes to Consolidated Financial Statements. 34 ALLIED Group, Inc. and Subsidiaries Consolidated Statements of Income (in thousands, except per share data)
Year ended December 31, ---------------------------------------------------- 1995 1994 1993 -------------- -------------- -------------- Revenues Earned premiums (notes 4 and 6) $ 455,499 $ 412,518 $ 368,336 Investment income (note 3) 47,242 41,070 39,030 Realized investment gains (notes 3 and 7) 505 2,888 1,396 Income from affiliates (note 4) 5,285 4,737 5,478 Other income 44,234 46,151 68,202 -------------- -------------- -------------- 552,765 507,364 482,442 -------------- -------------- -------------- Losses and expenses (note 4) Losses and loss settlement expenses (notes 5 and 6) 317,940 286,944 258,918 Amortization of deferred policy acquisition costs 100,120 90,858 81,154 Other underwriting expenses 20,583 25,090 27,006 Other expenses 38,713 35,419 55,486 Interest expense (note 8) 1,561 2,354 3,121 -------------- -------------- -------------- 478,917 440,665 425,685 -------------- -------------- -------------- Income before income taxes 73,848 66,699 56,757 -------------- -------------- -------------- Income taxes (note 17) Current 22,293 17,499 18,421 Deferred (822) 1,575 (1,586) -------------- -------------- -------------- 21,471 19,074 16,835 -------------- -------------- -------------- Net income $ 52,377 $ 47,625 $ 39,922 ============== ============== ============== Net income applicable to common stock $ 45,160 $ 40,319 $ 32,502 ============== ============== ============== Earnings per share Primary $ 4.91 $ 4.48 $ 3.68 ============== ============== ============== Fully diluted $ 3.52 $ 3.19 $ 2.61 ============== ============== ==============
See accompanying Notes to Consolidated Financial Statements. 35 ALLIED Group, Inc. and Subsidiaries Statements of Stockholders' Equity (in thousands)
Year ended December 31, ---------------------------------------------------- 1995 1994 1993 -------------- -------------- -------------- Preferred stock, beginning of year $ 85,566 $ 87,125 $ 88,055 Issuance of shares of ESOP Series (note 10) 699 794 889 ESOP Series shares converted to common shares (note 11) (2,617) (2,353) (1,819) -------------- -------------- -------------- Preferred stock, end of year 83,648 85,566 87,125 -------------- -------------- -------------- Common stock, beginning of year 9,000 9,026 4,469 Issuance of shares of common stock (notes 11 and 12) 445 224 1,719 Repurchase of shares of common stock (note 11) --- (250) --- Effect of 3-for-2 stock split --- --- 2,838 -------------- -------------- -------------- Common stock, end of year 9,445 9,000 9,026 -------------- -------------- -------------- Additional paid-in capital, beginning of year 98,926 101,541 57,810 Issuance of shares of common stock (notes 11 and 12) 5,670 3,258 46,569 Repurchase of shares of common stock (note 11) --- (6,110) --- Effect of 3-for-2 stock split --- --- (2,838) Other, net --- 237 --- -------------- -------------- -------------- Additional paid-in capital, end of year 104,596 98,926 101,541 -------------- -------------- -------------- Retained earnings, beginning of year 119,752 83,922 54,902 Net income 52,377 47,625 39,922 Dividends paid on preferred stock (note 10) (7,217) (7,306) (7,421) Dividends paid on common stock (note 11) (6,291) (5,396) (4,423) Tax benefits attributable to tax deductible dividends on unallocated shares of the ESOP 849 907 942 -------------- -------------- -------------- Retained earnings, end of year 159,470 119,752 83,922 -------------- -------------- -------------- Unrealized (depreciation) appreciation of investments, beginning of year (5,241) 5,900 --- Change in unrealized appreciation (depreciation), net 23,576 (11,141) 17 Cumulative effect of accounting change for investments (note 1) --- --- 5,883 -------------- -------------- -------------- Unrealized appreciation (depreciation) of investments, end of year 18,335 (5,241) 5,900 -------------- -------------- -------------- Unearned compensation related to ESOP, beginning of year (26,122) (27,874) (29,221) Cost of ESOP Series shares allocated 2,214 1,752 1,347 -------------- -------------- -------------- Unearned compensation related to ESOP, end of year (23,908) (26,122) (27,874) -------------- -------------- -------------- Total stockholders' equity $ 351,586 $ 281,881 $ 259,640 ============== ============== ==============
See accompanying Notes to Consolidated Financial Statements. 36 ALLIED Group, Inc. and Subsidiaries Statements of Cash Flows (in thousands)
Year ended December 31, ---------------------------------------------------- 1995 1994 1993 -------------- -------------- -------------- Cash flows from operating activities Net income $ 52,377 $ 47,625 $ 39,922 Adjustments to reconcile net income to net cash provided by operating activities Losses and loss settlement expenses 30,868 31,140 32,508 Unearned premiums, net 15,945 17,575 18,817 Deferred policy acquisition costs (3,419) (3,861) (4,080) Accounts receivable, net (6,009) (13,151) (20,873) Depreciation and amortization 9,583 6,576 10,463 Realized investment gains (505) (2,888) (1,396) Mortgage loans held for sale, net (1,529) 9,944 15,005 Indebtedness with affiliates 1,591 1,815 (1,118) Accrued investment income (118) (992) (1,236) Other assets (6,644) (15,386) (15,796) Cost of ESOP Series shares allocated 2,214 1,752 1,347 Income taxes Current 1,264 (81) (1,001) Deferred (822) 1,575 (1,586) Other, net 3,109 3,902 (5,157) -------------- -------------- -------------- 97,905 85,545 65,819 Cash provided from the change in the reinsurance pooling agreement (note 4) --- --- 25,778 -------------- -------------- -------------- Net cash provided by operating activities 97,905 85,545 91,597 -------------- -------------- -------------- Cash flows from investing activities Purchase of fixed maturities Available for sale (184,600) (91,722) (18,473) Held to maturity --- (104,233) (219,912) Purchase of equity securities (4,819) (814) (3,778) Purchase of equipment (7,794) (5,653) (4,942) Sale of fixed maturities Available for sale 48,012 26,606 20,142 Held to maturity (note 3) --- 5,733 --- Maturities, calls, and principal reductions of fixed maturities Available for sale 36,456 34,532 --- Held to maturity 25,510 54,825 79,548 Sale of equity securities 2,072 215 --- Short-term investments, net (4,146) 1,263 3,215 Sale of subsidiary (note 7) --- --- 14,304 Sale of other investment (note 7) --- 9,395 --- Sale of equipment 470 358 1,094 -------------- -------------- -------------- Net cash used in investing activities (88,839) (69,495) (128,802) -------------- -------------- -------------- Cash flows from financing activities Notes payable to nonaffiliates, net (2,180) 380 1,800 Notes payable to affiliates, net 1,500 (1,500) (153) Issuance of preferred stock 699 794 889 Issuance of common stock 3,498 1,129 46,469 Repurchase of common stock --- (6,360) --- Dividends paid to stockholders, net of income tax benefit (12,659) (11,795) (10,902) -------------- -------------- -------------- Net cash (used in) provided by financing activities (9,142) (17,352) 38,103 -------------- -------------- -------------- Net (decrease) increase in cash (76) (1,302) 898 Cash at beginning of year 1,541 2,843 1,945 -------------- -------------- -------------- Cash at end of year $ 1,465 $ 1,541 $ 2,843 ============== ============== ==============
See accompanying Notes to Consolidated Financial Statements. 37 ALLIED Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (dollars in thousands, except per share data) (1) Summary Of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements include the accounts of ALLIED Group, Inc. (the Company) and its property-casualty, excess & surplus lines, and noninsurance subsidiaries on a consolidated basis. The Company's property-casualty segment operates through three subsidiaries: AMCO Insurance Company (AMCO), ALLIED Property and Casualty Insurance Company (ALLIED Property and Casualty), and Depositors Insurance Company (Depositors), which underwrite personal lines (primarily automobile and homeowners) and small commercial lines. The property-casualty segment operates exclusively in the United States and primarily in central and western states. Iowa and California accounted for 23.3% and 24%, respectively, of 1995 direct written premiums. The property-casualty segment markets its products through three distribution systems: independent agencies, exclusive agencies, and direct response. The property-casualty segment accounted for 85.4% of 1995 consolidated revenues. Western Heritage Insurance Company (Western Heritage) is the excess & surplus lines subsidiary, which primarily underwrites commercial lines. The excess & surplus lines segment operates exclusively in the United States. In 1995 the segment accounted for 6.4% of consolidated revenues. The noninsurance subsidiaries are ALLIED Group Mortgage Company (ALLIED Mortgage), Dougherty Dawkins, Inc. and subsidiaries (Dougherty Dawkins) through October 29, 1993, ALLIED Group Information Systems, Inc. (AGIS), The Freedom Group, Inc. (Freedom Group), Midwest Printing Services, Ltd., ALLIED Group Leasing Corporation, and ALLIED General Agency Company. At year-end 1995 the ALLIED Group Employee Stock Ownership Trust (ESOP Trust) owned 26.9% of the outstanding voting stock of the Company. ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company, controlled 18% of the voting stock of the Company. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP), which differ in some respects from those followed in reports to insurance regulatory authorities. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated. Certain amounts in the financial statements for prior years have been reclassified to conform to the current year's presentation. Investments In compliance with Statement of Financial Accounting Standards (SFAS) 115, "Accounting for Certain Investments in Debt and Equity Securities," investments in fixed maturities where there is the positive intent and ability to hold to maturity are classified as held to maturity and carried at cost adjusted for amortization of premium or discount. Amortization of premiums and discounts on mortgage-backed securities incorporates a prepayment assumption to estimate the securities' expected lives. Except for declines that are other than temporary, changes in fair value are not reflected in the financial statements. Investments in fixed maturities that may be sold prior to maturity and are not bought and 38 held principally for the purpose of selling in the near term are segregated into an available for sale portfolio and are carried at fair value. Unrealized appreciation and depreciation of securities classified as available for sale are excluded from income and reported as a separate component of stockholders' equity net of deferred income taxes. In conjunction with the adoption of SFAS 115 on December 31, 1993, the Company reclassified certain securities totaling $199,618 to securities available for sale from securities held to maturity. The reclassification increased stockholders' equity by $5,883 net of deferred income taxes. In November of 1995, the Financial Accounting Standards Board (FASB) issued an implementation guide entitled, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," which included transition guidelines that permitted the Company to reassess the appropriateness of its classification of all securities held at November 30, 1995; reassessment was to be completed no later than December 31, 1995. Prior to the deadline, the Company reclassified $359,409 of securities held to maturity to securities available for sale. The reclassification increased unrealized appreciation of investments by $7,727 net of deferred income taxes. The carrying values of all investments in fixed maturities are reviewed on an ongoing basis. If this review indicates that a decline in fair value below cost is other than temporary, the Company's carrying value in the investment is reduced to its estimated realizable value and a specific write-down is taken. Such reductions in carrying value are recognized as realized losses and charged to income. Realized gains and losses on disposition of investments are based on specific identification of the investments sold. Equity securities are carried at fair value with any unrealized appreciation and depreciation reported net of deferred income taxes as a separate component of stockholders' equity. All short-term investments are recorded at cost, which approximates fair value. Other investments are reported using the equity method. Other investments at December 31, 1995 and 1994 included a 20% ownership in Black Hawk Holding Company (Black Hawk), an abstract and title holding company. The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. Derivatives are used to hedge against well defined market and interest rate risks. The Company has entered into an interest rate swap agreement to reduce its exposure to interest rate risk associated with its guarantee of ESOP obligations. ALLIED Mortgage enters into futures, options, and cash markets to limit its exposure to market risk on mortgage loans held for sale. Property-casualty and Excess & Surplus Lines Premiums are recognized as revenue ratably over the terms of the respective policies. Unearned premiums are calculated on the monthly pro rata basis. Amounts paid for ceded reinsurance premiums are reported as prepaid reinsurance premiums and amortized over the remaining contract period in proportion to the amount of insurance protection provided. Premiums receivable from policyholders and agents are recorded at cost less an allowance for doubtful accounts. Policy acquisition costs such as commissions, premium taxes, and certain other underwriting and agency expenses that vary with and are directly related to the production of business have been deferred. Such deferred policy acquisition costs are being amortized as premium revenue is recognized. The method followed in computing deferred policy acquisitions costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss settlement expenses, and certain other costs expected to be incurred as the premium is earned. Liabilities for losses are based upon case-basis estimates of reported losses, estimates of unreported losses based upon prior experience adjusted for current trends, and estimates of losses expected to be paid under assumed reinsurance 39 contracts. Liabilities for loss settlement expenses are provided by estimating expenses expected to be incurred in settling the claims provided for in the loss reserve. Changes in estimates are reflected in current operating results (note 5). Ceded reinsurance amounts with unaffiliated reinsurers relating to reinsurance receivables for paid and unpaid losses and loss settlement expenses and prepaid reinsurance are reported on the balance sheets on a gross basis. Amounts ceded to ALLIED Mutual relating to the affiliated reinsurance pooling agreement and the property catastrophe reinsurance agreement have not been grossed up because the contracts provide that receivables and payables may be offset upon settlement. The liabilities for losses and loss settlement expenses are considered adequate to cover the ultimate cost of losses and claims incurred to date net of estimated salvage and subrogation recoverable. Since the provisions are necessarily based on estimates, the ultimate liability may be more or less than such provisions. Noninsurance Operations Mortgage loans held for sale by ALLIED Mortage are reported at the lower of cost or fair value on an aggregate basis. The fair value calculation includes consideration of all open positions, outstanding commitments from investors, related fees paid, and unrealized gains and losses from open options and financial futures contracts. Loan origination fees and certain direct costs related to loan origination are deferred and recognized at the time the related loans are sold. In the normal course of business, ALLIED Mortgage protects its position in mortgages by taking positions in options, futures, and cash markets. Market risk exists in the event of fluctuations in market prices on the unhedged portions of mortgage loans held for sale and outstanding commitments. Effective January 1, 1995, ALLIED Mortgage adopted SFAS 122, "Accounting for Mortgage Servicing Rights, an Amendment of FASB Statement No. 65." Accordingly, ALLIED Mortgage recognizes as separate assets the rights to service mortgage loans for others, whether acquired through purchases or loan originations. Capitalized mortgage servicing rights are assessed periodically for impairment based on the fair value of those rights. ALLIED Mortgage stratifies its mortgage servicing portfolio on the basis of certain risk characteristics, including loan type and note rate, and determines fair value based upon the present value of estimated future cash flows. Impairment is recognized through a valuation allowance for each impaired stratum. The total valuation allowance for capitalized mortgage servicing rights was $1,368 as of December 31, 1995. The fair value of capitalized mortgage servicing rights as of December 31, 1995 was approximately $40,186. Capitalized mortgage servicing rights are amoritzed over twelve years using the straight-line method, which management believes approximates the realization of the related net servicing income. Amortization of servicing rights for the years ended December 31, 1995, 1994, and 1993 was $4,728, $3,507, and $6,033, respectively. The adoption of SFAS 122 did not have a material effect on the financial statements. Prior to adoption of SFAS 122, the Company capitalized only the costs related to purchased mortgage servicing rights. Depreciation and Amortization Equipment and software are included in other assets at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation and amortization are provided primarily on the straight-line basis over the estimated useful lives of the assets, ranging from two to seven years. Accelerated depreciation methods are utilized for income tax purposes. Retirement Plan Costs The amount of compensation cost related to The ALLIED Group Employee Stock Ownership Plan (ESOP) is based on the cost of the shares allocated to participants plus interest expense incurred related to the debt of the ESOP reduced by dividends paid used to service the ESOP's debt (the shares allocated 40 method). The income tax benefit for the tax deductibility of dividends paid on unallocated shares of the ESOP available for debt service is included as a direct addition to retained earnings. Stock-based Compensation The FASB issued SFAS 123, "Accounting for Stock-Based Compensation," in October of 1995. SFAS 123 specifies a fair value method of accounting for stock-based compensation plans and recognizes compensation cost over the vesting period of the option granted. An entity is permitted to determine its net income by continuing to apply Opinion 25, "Accounting for Stock Issued to Employees," but must comply with the disclosure requirements of SFAS 123. SFAS 123 is required to be adopted for fiscal years beginning after December 15, 1995. The Company will adopt the disclosure requirements of SFAS 123 for the year ended December 31, 1996 but will continue to account for stock-based compensation plans under Opinion 25. Income Taxes Deferred income taxes reflect the impact of temporary differences between the tax basis of assets and liabilities and the reported amounts of those assets and liabilities for financial reporting purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income tax expense provisions increase or decrease in the same period in which a change in tax rates is enacted. Earnings per Share Primary earnings per share calculations are computed after net income is reduced by the amount of dividends paid on the Company's preferred stock and divided by the weighted average of common stock and common stock equivalents outstanding during the period. Securities that are in substance equivalent to common stock (primarily stock options) are referred to as common stock equivalents. Fully diluted earnings per share calculations are based on the weighted average number of shares of common stock and common stock equivalents outstanding for a period and the assumed conversion of the ESOP Series convertible preferred stock into common stock. Net income is reduced by dividends on the 6-3/4% Series preferred stock and by the additional costs for the ESOP resulting from the assumed replacement of the convertible preferred stock dividends with common stock dividends net of the related income taxes. Cash Flows For purposes of reporting cash flows, changes in notes payable issued by ALLIED Mortgage to purchase mortgage loans held for sale are included in cash flows from operating activities. 41 (2) Fair Value of Financial Instruments The estimated fair value amounts have been determined by using available market information and appropriate valuation methods. The estimates presented herein are not necessarily indicative of the amounts that would be realized in a current market exchange, and the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The following methods and assumptions were used in estimating the fair value disclosures for financial instruments: Fixed maturities (available for sale and held to maturity)--The estimated fair value is based upon the quoted market prices for the same or similar issues or from independent pricing services (note 3). Equity securities--The estimated fair value is based upon the quoted market prices where available or from independent pricing services (note 3). Short-term investments--Due to their short-term nature, their carrying amount approximates fair value. Mortgage loans held for sale--The fair value is estimated using quoted market prices and includes commitments to extend credit and forward sales commitments (note 14). Excess servicing rights--The fair value represents the present value of estimated future servicing revenues in excess of normal servicing revenues over the assumed life of the servicing portfolio. Notes payable to affiliates and nonaffiliates--Due to the short maturity of the short-term notes payable, carrying value approximates fair value. The fair value of the long-term notes payable is estimated using current rates available for similar issues (notes 4 and 8). Guarantee of ESOP obligations--Due to its floating interest rate, the guarantee approximates its fair value (note 9). Interest rate swap agreement (derivative)--The fair value reflects the estimated amount the Company would pay to terminate the contract at year-end, thereby taking into account the current unrealized gains or losses of the open contract. Dealer quotes are available for the Company's derivative (note 9). Other financial instruments--Due to their short-term nature, their carrying amount approximates fair value. 42 The following table presents the carrying value and estimated fair value of the financial instruments at December 31, 1995 and 1994.
1995 1994 ---------------------------- ---------------------------- Estimated Estimated Carrying fair Carrying fair value value value value ------------ ------------ ----------- ------------ Fixed maturities - available for sale $ 754,547 $ 754,547 $ 243,568 $ 243,568 Fixed maturities - held to maturity --- --- 401,717 388,486 Equity securities 7,948 7,948 4,507 4,507 Short-term investments 9,802 9,802 5,656 5,656 Mortgage loans held for sale 13,673 13,673 15,540 15,540 Excess servicing rights 538 538 559 559 Notes payable to nonaffiliates (35,965) (36,364) (41,541) (39,145) Notes payable to affiliates (3,500) (3,500) (2,000) (2,000) Guarantee of ESOP obligations (26,270) (26,270) (28,150) (28,150) Interest rate swap agreement --- (1,052) --- (405)
The estimated fair values presented herein are based on pertinent information available to management as of December 31, 1995 and 1994. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates; current estimates of fair value may differ significantly from the amounts presented herein. 43 (3) Investments Following is a schedule of amortized costs and estimated fair values of investments in fixed maturities and equity securities as of December 31, 1995 and 1994. The estimated fair values for fixed maturities and equity securities are based on quoted market prices for the same or similar issues or from independent pricing services.
Gross Gross Estimated Amortized unrealized unrealized fair 1995 cost gains losses value ------------ ------------ ------------ ------------ Fixed maturities Available for sale U.S. Treasury securities $ 79,653 $ 2,493 $ 1 $ 82,145 U.S. Government corporations and agencies 8,186 440 --- 8,626 Obligations of states and political subdivisions 273,822 11,098 280 284,640 Foreign governments 2,091 70 --- 2,161 Corporate securities and public utilities 167,540 6,089 22 173,607 Mortgage-backed securities 195,434 8,017 83 203,368 ------------ ------------ ------------ ------------ Totals $ 726,726 $ 28,207 $ 386 $ 754,547 ============ ============ ============ ============ Equity securities $ 7,527 $ 486 $ 65 $ 7,948 ============ ============ ============ ============ 1994 Fixed maturities Available for sale U.S. Treasury securities $ 92,540 $ 12 $ 3,935 $ 88,617 U.S. Government corporations and agencies 3,936 114 --- 4,050 Obligations of states and political subdivisions 40,219 227 1,252 39,194 Corporate securities and public utilities 46,919 136 1,198 45,857 Mortgage-backed securities 68,196 208 2,554 65,850 ------------ ------------ ------------ ------------ 251,810 697 8,939 243,568 ------------ ------------ ------------ ------------ Held to maturity U.S. Treasury securities $ 19,258 $ 117 $ 323 $ 19,052 U.S. Government corporations and agencies 1,581 26 --- 1,607 Obligations of states and political subdivisions 245,779 1,617 11,107 236,289 Foreign governments 2,115 --- 149 1,966 Corporate securities and public utilities 75,733 521 1,483 74,771 Mortgage-backed securities 57,251 19 2,469 54,801 ------------ ------------ ------------ ------------ 401,717 2,300 15,531 388,486 ------------ ------------ ------------ ------------ Totals $ 653,527 $ 2,997 $ 24,470 $ 632,054 ============ ============ ============ ============ Equity securities $ 4,375 $ 198 $ 66 $ 4,507 ============ ============ ============ ============
44 The table below presents the amortized cost and estimated fair value of fixed maturities at December 31, 1995 by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized fair cost value -------------- -------------- Due in 1 year or less $ 40,527 $ 40,813 Due after 1 year through 5 years 210,295 218,052 Due after 5 years through 10 years 264,377 275,699 Due after 10 years 16,093 16,615 -------------- -------------- 531,292 551,179 Mortgage-backed securities 195,434 203,368 -------------- -------------- Totals $ 726,726 $ 754,547 ============== ==============
The following table presents for the years ended December 31, 1995, 1994, and 1993 the gross realized gains and losses by portfolio included in the proceeds from calls, principal reductions, and sales of fixed maturities.
1995 1994 1993 ---------- ------------ ----------- Available for sale Gross realized gains $ 957 $ 621 $ 507 Gross realized losses (910) (138) --- ---------- ------------ ----------- 47 483 507 ---------- ------------ ----------- Held to maturity Gross realized gains 54 8 1,050 Gross realized losses (1) (246) (161) ---------- ------------ ----------- 53 (238) 889 ---------- ------------ ----------- Net realized gains $ 100 $ 245 $ 1,396 ========== ============ ===========
There were no sales or transfers from the held to maturity portfolio in 1995 and 1993. For the year ended December 31, 1994, gross realized losses of the held to maturity portfolio included a realized loss of $195 on the sale of an investment. The investment had an amortized cost of $4,937 and was disposed of due to the significant downgrade of the issuer's credit rating in 1994. Additionally, the Company sold from the held to maturity portfolio an investment with an amortized cost of $1,001 for a realized loss of $10. There were no transfers in 1994. As required by law, fixed maturities and short-term investments were on deposit with various insurance regulatory authorities at December 31, 1995 and 1994 amounting to $10,487 and $10,583, respectively. As of December 31, 1995 and 1994, there were no investments that were non-income producing for the previous twelve months. 45 A summary of net investment income for the years ended December 31, 1995, 1994, and 1993 follows:
1995 1994 1993 ------------ ------------ ----------- Interest on fixed maturities $ 47,160 $ 40,760 $ 37,646 Dividends on equity securities 167 220 99 Interest on short-term investments 665 367 548 Equity earnings in unconsolidated subsidiaries 11 555 2,027 Other, net 20 54 104 ------------ ------------ ----------- Total investment income 48,023 41,956 40,424 Investment expense 584 703 1,161 Interest expense 197 183 233 ------------ ------------ ----------- Net investment income $ 47,242 $ 41,070 $ 39,030 ============ ============ ===========
A summary of net realized investment gains (losses) and net changes in unrealized appreciation (depreciation) of investments for the years ended December 31, 1995, 1994, and 1993 follows:
1995 1994 1993 ------------ ------------ ----------- Net realized investment gains (losses) Fixed maturities Available for sale $ 47 $ 483 $ 507 Held to maturity 53 (238) 889 Equity securities 405 (3) --- Other investments (note 7) --- 2,646 --- ------------ ------------ ----------- 505 2,888 1,396 ------------ ------------ ----------- Net changes in unrealized appreciation (depreciation) of investments Fixed maturities Available for sale 36,063 (17,293) 9,026 Held to maturity 13,231 (32,016) (493) Equity securities 289 104 29 ------------ ------------ ----------- 49,583 (49,205) 8,562 ------------ ------------ ----------- Net realized investment gains (losses) and changes in unrealized appreciation (depreciation) of investments $ 50,088 $ (46,317) $ 9,958 ============ ============ ===========
46 (4) Transactions With Affiliates The property-casualty segment and ALLIED Mutual participate in a reinsurance pooling agreement. The pooling agreement provides that AMCO (pool administrator) assumes from the pool participants premiums, losses, allocated loss settlement expenses, commissions, premium taxes, service charge income, and dividends to policyholders. Then the pool participants assume from AMCO an amount of this pooled property-casualty business equal to their participation in the pooling agreement. AMCO pays certain underwriting expenses, unallocated loss settlement expenses, and premium collection expenses for all of the pool participants and receives a fee equal to a specified percentage of premiums as well as a contingent fee based on the attainment of certain combined ratios from each of the pool participants. AMCO charges each of the participants 12.85% of written premiums for underwriting services, 7.25% of earned premiums for unallocated loss settlement expenses, and 0.75% of earned premiums for premium collection services. The administrative fees are subject to renegotiation during the term of the agreement upon at least five years' notice. AMCO received pool administrative fees of $55,721, $50,449, and $44,920 from ALLIED Mutual in 1995, 1994, and 1993, respectively. The term of the pooling agreement extends to December 31, 2004, after which it can be terminated by participating parties upon five years' notice. All changes to the pooling agreement must be approved by the coordinating committee of the Board of Directors. The reinsurance pooling agreement was amended January 1, 1993 to increase the property-casualty segment's participation to 64% from 60% in 1992. ALLIED Mutual transferred cash of $16,240 to the property-casualty segment to fund the additional net underwriting liabilities assumed. The pooling agreement was also amended January 1, 1993 to change the pool administrator from ALLIED Mutual to AMCO. As a result of becoming pool administrator, AMCO assumed $9,538 in certain underwriting liabilities and received a corresponding amount of cash from ALLIED Mutual. See note 6 for discussion of reinsurance transactions between the Company's property-casualty subsidiaries and ALLIED Mutual. Pursuant to the terms of the Intercompany Operating Agreement, the Company leases employees to its subsidiaries and 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. The Company received revenues of $2,490, $2,415, and $3,204 for employees leased to affiliates for the years ended December 31, 1995, 1994, and 1993, respectively, which are included in income from affiliates and in eliminations and other under segment information. The Intercompany Operating Agreement between the Company and ALLIED Mutual also provides for the continued availability of office space, marketing services, agency forces, and computer and other facilities. Expenses are charged to the Company based on specific identification or, if undeterminable, the expenses are allocated on the basis of cost and time studies that are updated annually. The agreement extends through December 31, 2004, after which it may be terminated on two years' notice given after December 31, 2002 by either ALLIED Mutual or the Company. Included in income from affiliates are revenues of $2,795, $2,322, and $2,274 relating to data processing services provided by AGIS to ALLIED Mutual and its subsidiaries for the years ended December 31, 1995, 1994, and 1993, respectively. ALLIED Mutual participates with a nonaffiliated reinsurance company in a property catastrophe reinsurance agreement to cover the property-casualty segment's share of pooled losses. In 1995, 1994, and 1993, the coverage was $5,000 in excess of $5,000. ALLIED Mutual's and the reinsurance company's respective participation in such agreement was 90% and 10% in 1995, 1994, and 1993. Related premiums paid by the property-casualty segment to ALLIED Mutual were $2,330 in 1995, $1,866 in 1994, and $1,478 in 1993. There were recoveries of $2,586, $2,217, and $1,400 from ALLIED Mutual in 1995, 1994, and 1993, respectively. All expenses incurred on the Company's behalf by its affiliates have been reflected in the accompanying financial statements. Management believes the costs incurred by its affiliates and allocated to the Company are reasonable and would not be materially different than if they had been incurred from a nonaffiliated third party. The aforementioned transactions result in intercompany balances that are created during the normal course of business and are settled on a monthly basis. 47 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 administrator of the fund. At December 31, 1995 and 1994, the Company had $7,773 and $4,021, respectively, invested in the fund. The Company also had several unsecured notes payable to the fund at December 31, 1995 totaling $3,500. Interest rates ranged from 5.9% to 8.8%, and the notes mature in January of 1996. At December 31, 1994 the Company had two unsecured notes payable to the investment fund totaling $2,000. The Company paid interest to affiliates of $127, $123, and $484 in 1995, 1994, and 1993, respectively. (5) Losses and Loss Settlement Expenses The following table sets forth the reconciliation of beginning and ending reserves for losses and loss settlement expenses for the years indicated. Reinsurance recoverables on unpaid losses and loss settlement expenses are included on the consolidated balance sheets within reinsurance receivables for losses and loss settlement expenses. The following table includes property-casualty and excess & surplus lines losses and loss settlement expense reserves.
Year ended December 31, --------------------------------------------- 1995 1994 1993 ------------ ----------- ------------ Reserves for losses and loss settlement expenses at beginning of year $ 310,996 $ 279,856 $ 243,276 Less reinsurance recoverables 18,322 11,806 15,305 ------------ ----------- ------------ Net reserves for losses and loss settlement expenses at beginning of year 292,674 268,050 227,971 ------------ ----------- ------------ Incurred losses and loss settlement expenses Provision for insured events of current year 315,956 288,574 262,772 Increase (decrease) in provisions for insured events of prior years 1,984 (1,630) (3,854) ------------ ----------- ------------ Total incurred losses and loss settlement expenses 317,940 286,944 258,918 ------------ ----------- ------------ Payments Losses and loss settlement expenses attributable to insured events of current year 169,254 151,479 138,926 Losses and loss settlement expenses attributable to insured events of prior years 116,421 110,841 91,848 Adjustment to beginning of the year reserves resulting from the change in the reinsurance pool participation percentage --- --- (11,935) ------------ ----------- ------------ Total payments 285,675 262,320 218,839 ------------ ----------- ------------ Net reserves for losses and loss settlement expenses at end of year 324,939 292,674 268,050 Plus reinsurance recoverables 16,925 18,322 11,806 ------------ ----------- ------------ Reserves for losses and loss settlement expenses at end of year $ 341,864 $ 310,996 $ 279,856 ============ =========== ============
The reserving process relies on the basic assumption that past experience, adjusted for the effect of current developments and likely trends, is an appropriate basis for predicting future events. Reserve amounts are necessarily based on management's informed estimates; as other data becomes available and is reviewed, these estimates and judgments are revised, resulting in increases and decreases to existing reserves. As a result of changes in estimates of insured 48 events in prior years, the provision for losses and loss settlement expenses increased $1,984 in 1995 and decreased $1,630 and $3,854 in 1994 and 1993, respectively. Development for losses and loss settlement expenses on prior years is immaterial to the financial statements taken as a whole. As of January 1, 1993, the property-casualty subsidiaries' underwriting accounts were adjusted to reflect their increased participation in the pool. The property-casualty subsidiaries received cash and securities for the transfer of reserves from ALLIED Mutual as of January 1, 1993. There was no income statement effect from this transaction as the amount received was offset by the increase in the reserves. Because the reserves transferred were necessarily based upon estimates, subsequent changes in the estimates are reflected in current operating results. In establishing reserves, management considers exposure the Company may have to environmental claims. Because reported claim activity levels are minimal and the emphasis of the Company's property-casualty business is primarily on personal lines and small commercial business, management believes exposure to material liability on such claims to be remote as of December 31, 1995. The Company continues to monitor legal developments as they relate to the Company's exposure to environmental claims. (6) Reinsurance The property-casualty and excess & surplus lines subsidiaries cede insurance to other insurers in the ordinary course of business for the purpose of limiting their maximum loss exposure through diversification of their risks. See note 4 for discussion of reinsurance contracts with ALLIED Mutual. Reinsurance contracts do not relieve the Company from its obligations to policyholders as the primary insurer. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. As of December 31, 1995, reinsurance receivables and prepaid reinsurance premiums associated with three nonaffiliated reinsurers aggregated approximately $14,675, which represented a significant portion of the total prepaid reinsurance premiums and reinsurance receivables for losses and loss settlement expenses. The property-casualty subsidiaries also assume insurance as members of various pools and associations. The effect of reinsurance on premiums written and earned and losses and loss settlement expenses incurred for the years ended December 31, 1995, 1994, and 1993 was as follows:
1995 1994 1993 ------------ ----------- ------------ Direct written premiums $ 494,462 $ 436,988 $ 382,070 Assumed from nonaffiliates 8,572 8,667 8,072 Net (ceded to) assumed from ALLIED Mutual (6,151) 8,793 27,030 Ceded to nonaffiliates (25,439) (24,356) (22,062) ------------ ----------- ------------ Net written premiums $ 471,444 $ 430,092 $ 395,110 ============ =========== ============ Direct earned premiums $ 472,407 $ 415,767 $ 358,492 Assumed from nonaffiliates 8,831 8,536 7,682 Net (ceded to) assumed from ALLIED Mutual (703) 11,863 23,729 Ceded to nonaffiliates (25,036) (23,648) (21,567) ------------ ----------- ------------ Net earned premiums $ 455,499 $ 412,518 $ 368,336 ============ =========== ============ Direct losses and loss settlement expenses $ 335,779 $ 303,318 $ 249,941 Assumed from nonaffiliates 5,889 5,821 7,372 Net (ceded to) assumed from ALLIED Mutual (14,648) (9,450) 6,807 Ceded to nonaffiliates (9,080) (12,745) (5,202) ------------ ----------- ------------ Net losses and loss settlement expenses incurred $ 317,940 $ 286,944 $ 258,918 ============ =========== ============
49 (7) Dispositions On June 1, 1994, the Company completed the sale of its investment in MidAmerica Financial Corporation (MidAmerica) for $9,395. The 20% interest in MidAmerica was acquired for investment purposes and was reported in other investments. The pretax gain of $2,646 is included in realized investment gains for 1994 in the consolidated statements of income. On October 29, 1993, the Company completed the sale of its investment banking and asset management subsidiary, Dougherty Dawkins, for $14,304. The results of operations through the closing date are reflected in the Company's consolidated income statements. The pretax loss on this transaction was $894 and is included in other expenses in the consolidated statements of income. (8) Notes Payable to Nonaffiliates The short-term notes payable to nonaffiliated companies include line of credit agreements used by ALLIED Mortgage primarily to finance its mortgage loans held for sale. At December 31, 1995 and 1994, ALLIED Mortgage had borrowed $22,465 and $24,361, respectively, under the terms of mortgage loan warehousing agreements with three different commercial banks; the agreements expires in April and May of 1996. Under the terms of the agreements, ALLIED Mortgage can borrow up to the lesser of $67,000 or 98% of the mortgage credit borrowing base, which includes related sublines. At December 31, 1995, the outstanding borrowings of ALLIED Mortgage under these line of credit agreements were secured by mortgage loans held for sale of $13,673, mortgage servicing rights on loans with a principal balance of $2,796,696, and foreclosure loans of $3,904. Interest rates applicable to these borrowing arrangements vary with the level of investable deposits maintained at the respective commercial banks. During 1993, ALLIED Mortgage entered into an agreement with a life insurance company for $15,000 of 8.4% senior secured notes due September 1, 2004. The notes are secured by mortgage servicing rights and are payable in equal annual installments of $1,500 every September 1; interest is payable semiannually. At December 31, 1995 and 1994, the outstanding balance was $13,500 and $15,000, respectively. The Federal Home Loan Bank of Des Moines provides a $3,000 committed credit facility through a line of credit agreement with AMCO that expires March 6, 1996. Interest on any outstanding borrowings is payable at an annual rate equal to the federal funds unsecured rate for federal reserve member banks. The Company had no outstanding balance as of December 31, 1995. At December 31, 1994, there was an outstanding balance of $2,180. The Company paid interest to nonaffiliates of $1,569, $2,249, and $2,442 in 1995, 1994, and 1993, respectively. (9) Guarantee of ESOP Obligations On July 12, 1990, the ESOP Trust issued Remarketed Floating Rate Notes (FRN) totaling $35,000 with a final maturity of July 12, 2005. The proceeds from the FRN were used to acquire Series A ESOP Convertible Preferred Stock. Effective March 13, 1995, the ESOP Trust refinanced its $28,150 of FRN under the terms of a Term Credit Agreement and Guaranty (Credit Agreement) with two separate commercial banks. The loans mature July 12, 2005, and interest rates applicable to the borrowings are adjusted at the beginning of each interest period. The interest periods may be one, three, or six months at the discretion of the ESOP Trust. The Company has guaranteed on an unsecured basis the ESOP Trust's reimbursement obligations under the Credit Agreement. The Company's guarantee has been recorded in the consolidated balance sheets as a liability under the caption, "Guarantee of ESOP obligations." At December 31, 1995 and 1994, the Company had an outstanding guarantee of principal of $26,270 and $28,150, respectively. The Company contributions to the ESOP Trust plus dividends on leveraged shares held by the ESOP Trust are used to meet interest and principal payments on the notes. As principal payments are made, the recorded ESOP guarantee is reduced. 50 The interest rate on the Credit Agreement resets at the beginning of each interest period, and the ESOP Trust's interest expense is included as a component of the Company's ESOP expense. The Company is party to an interest rate swap agreement with a broker-dealer to reduce the financial statement impact of fluctuations in the Credit Agreement interest rate. The interest rate swap transactions generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying principal amount. As of December 31, 1995, the amount of principal covered under the swap agreement was $19,760 with a fixed interest rate of 7.4%. The amount of principal covered under the swap agreement reduces over time; the final swap maturity date is December 12, 1997. During 1995, the actual Credit Agreement interest rate ranged from 6% to 6.8%. During 1994 and 1993, the actual FRN interest rates ranged from 2.9% to 6.3% and 2.8% to 3.3%, respectively. Though nonperformance of the broker-dealer is not expected, the Company is exposed to credit loss should such an event occur. The Credit Agreement includes various financial and operating covenants with which the Company must comply. The covenants include the maintenance of certain contractual relationships with ALLIED Mutual, continued ownership of certain subsidiaries, limitations on the issuance of security interests in certain assets, maintenance of various financial ratios, and minimum net equity requirements. (10) Preferred Stock The Company is authorized to issue 7,500,000 shares of preferred stock without par value. The preferred stock may be issued from time to time by the Board of Directors in one or more series with such dividend rights, conversion rights, voting rights, redemption provisions, liquidation preferences, and other rights and restrictions as the Board of Directors may determine. 6-3/4% Series The 6-3/4% Series preferred stock (6-3/4% Series), issued to ALLIED Mutual at a value of $28.50 per share, is perpetual, nonconvertible, voting, and cumulative with respect to dividends. The 6-3/4% Series has no preemptive rights and is not registered or traded. Upon any transfer by ALLIED Mutual, the 6-3/4% Series is callable under certain conditions and becomes nonvoting. It ranks on a parity with the ESOP Series. Each share of the 6-3/4% Series has 1-1/2 votes. The annual dividend rate is 6-3/4% of the liquidation preference of $28.50 ($1.92 per share) and is payable quarterly. The Company entered into a Stock Rights Agreement with ALLIED Mutual to grant both parties certain rights in terms of registration, transfer, voting, board nominations, and other matters. Pursuant to the Stock Rights Agreement executed July 5, 1990, ALLIED Mutual is entitled to nominate for election to the Company's Board of Directors a number of director nominees that most closely approximates the same percentage of the total number of members of the Company's Board of Directors as is equal to ALLIED Mutual's percentage ownership of the total number of shares of Company voting stock. ESOP Series As of December 31, 1995, a commercial bank acting on behalf of the ESOP participants as the trustee for the ESOP Trust (Trustee) was the holder of 2,992,710 shares of ESOP Convertible Preferred Stock that had been issued in series (collectively, ESOP Series). In 1995, the ESOP Trust purchased 13,426 shares of Series D for $54.00 per share. In 1994 the ESOP Trust purchased 22,223 shares of ESOP Series for $37.12 per share: 9,247 shares of Series C and 12,976 shares of Series D. The Trustee is entitled to vote the ESOP Series on all matters submitted to a vote of the holders of the common stock of the Company, voting together with the holders of common stock and the 6-3/4% Series as one class. The ESOP Trust generally provides that each ESOP participant is entitled to direct the Trustee how to vote (or whether to tender or exchange) the shares of ESOP Series allocated to the participant's account. Each share of the ESOP Series is convertible into 1-1/2 shares of common stock and has 1-1/2 votes, subject to antidilution adjustments. 51 The ESOP Series ranks senior to the common stock as to the payment of dividends and has an annual dividend of $1.20 per share paid on a monthly basis. In the event of a liquidation of the Company, the Trustee of the ESOP Series is entitled to receive $15 per share plus accrued dividends prior to any distribution to the holders of common stock. The ESOP Series is redeemable at the option of the Company any time after three years from issuance and under specified circumstances prior thereto. The redemption price is $15 per share plus a premium in the first ten years after issuance that reduces in equal annual increments from 8% in the first year to 0% in the eleventh year. The Company, solely at its discretion, has the option to issue common stock, cash, or a combination thereof for any redemption price. Upon notice of redemption, the Trustee, acting in its fiduciary capacity, may elect to convert the ESOP Series to common stock prior to redemption. The ESOP Series has no preemptive rights and is not registered or traded. Upon any transfer by the Trustee, the ESOP Series is automatically converted into shares of the Company's common stock. See note 20 for discussion of the conversion of ESOP Series to common stock subsequent to year-end 1995. (11) Common Stock The Company has reserved 750,000 shares of common stock for issuance under the ALLIED Group, Inc. Employee Stock Purchase Plan (ESPP). The ESPP is available to full-time employees who meet minimum age and service requirements. The participants in the ESPP purchase Company common stock on a monthly basis and pay 85% of the fair market value of the shares issued under the plan. During 1995, 26,498 shares were issued at a weighted average price per share of $24.59. During 1994 and 1993, 27,603 and 70,203 shares were issued at a weighted average price of $22.36 and $22.62, respectively. At December 31, 1995, 282,490 shares were available for issuance. The Company has reserved 1,350,000 shares of common stock to be issued through the ALLIED Group, Inc. Dividend Reinvestment and Stock Purchase Plan. Any stockholder of record may participate in the plan and have cash dividends reinvested in additional shares of Company common stock. The plan also provides for optional cash payments. Shares of common stock purchased under the plan may be either original issue shares or open market shares, such determination to be made at the discretion of the Company. The number of shares purchased by the plan participants is based upon fair market value on the dividend payment date. During 1995, 42,705 shares, puchased on the open market, were issued at a weighted average price per share of $30.01. During 1994 and 1993, 50,305 and 35,043 shares were issued at the weighted average prices per share of $26.06 and $27.39, respectively. At December 31, 1995, 626,941 shares were available for issuance. The Company has reserved 375,000 shares of common stock for issuance under the ALLIED Group, Inc. Outside Director Stock Purchase Plan. Under the plan, participants pay 85% of the fair value of the shares issued and the remainder is paid proportionally by the Company and/or the other companies within the ALLIED Group to which the director fees were allocated. Only nonemployee directors of the Company and its affiliates may participate in this plan. Shares of common stock may be purchased only on the purchase dates: the last business day of June and December. During 1995, 4,197 shares were issued at a weighted average price per share of $31.75. During 1994 and 1993, 5,231 and 4,530 shares were issued at a weighted average price of $24.85 and $24.98, respectively. At December 31, 1995, 355,816 shares were available for issuance. The Company has reserved 250,000 shares of common stock for issuance under the ALLIED Life Employee Stock Purchase Plan. The Company receives fair market value for the shares issued under the plan. During 1995, 2,005 shares were issued at a weighted average price per share of $28.76. During 1994 and 1993, 309 and 47 shares were issued at a weighted average price per share of $26.30 and $26.44, respectively. At December 31, 1995, 247,639 shares were available for issuance. 52 The Company awarded 13,311 shares of restricted stock to key employees, and 406 of such shares were cancelled in 1995. The restricted shares were awarded under the ALLIED Group, Inc. Long-Term Management Incentive Plan (note 12). During 1994, the Company repurchased and cancelled 250,000 shares of its common stock on the open market at an average cost of $25.44 per share. The repurchase was approved by the Board of Directors in the first quarter of 1994, implemented pursuant to Rule 10b-18 under the Securities Exchange Act of 1934, and completed on November 17, 1994. On December 14, 1994, the Company's Board of Directors approved a plan to repurchase 250,000 shares of the Company's common stock on the open market also pursuant to Rule 10b-18. The actual number of shares repurchased is dependent upon market conditions, and the plan may be suspended at the Company's discretion. The Company has no present intention to cause its shares to be delisted or deregistered as a result of this repurchase program. The Company did not repurchase any shares under this plan through December 31, 1995. During 1995, 1994, and 1993, 174,960, 110,956, and 94,124 ESOP Series shares were converted to 262,440, 166,434, and 141,186 shares of common stock, respectively. The Company has reserved 5,950,524 shares of common stock for conversion of the ESOP Series. On February 18, 1993, 2,587,500 shares of common stock were sold to the public at $24.67 per share. The Company received $37,600 in proceeds (net of underwriting discount and expenses) from the sale of 1,612,500 shares. The remaining 975,000 shares were sold by ALLIED Mutual. The dividend rate per common share was $0.68, $0.60, and $0.51 for 1995, 1994, and 1993, respectively. (12) Long-Term Incentive Plans The ALLIED Group, Inc. Restated and Amended Stock Option Plan (Option Plan) and the ALLIED Group, Inc. Nonqualified Stock Option Plan (Nonqualified Plan) had 675,000 and 225,000 shares of common stock, respectively, reserved for issuance to certain key employees of ALLIED Group, Inc. and subsidiaries. Both plans are nonqualified stock option plans as defined by the Internal Revenue Code. The period for granting options under these plans expired on August 5, 1995. During 1995, 30,000 and 40,000 options were granted under the Option Plan and the Nonqualified Plan, respectively, at an exercise price of $27.50 per share. The options expire ten years after the date of grant. During 1995, 33,135 shares were deregistered under the Nonqualified Plan. The Company deregistered 103,955 shares under the ALLIED Group Executive Equity Incentive Plan (Equity Plan) during 1994. The Company had reserved 525,000 shares of common stock for issuance under the terms of the Equity Plan. The Equity Plan is a nonqualified stock option plan as defined by the Internal Revenue Code, with eligibility granted only to certain key employees of the Company and its affiliated companies. The optionees pay $0.67 of the per share option price upon exercise; the balance of the exercise price is paid by the company that leases the employee. At December 31, 1995, 14,460 options were outstanding and exercisable under the Equity Plan. There are no shares available to grant any additional options under the Equity Plan, and the options currently outstanding expire on December 31, 1997. Under the Freedom Group Incentive Plan (Freedom Plan), the Company had reserved 270,000 shares of authorized but unissued common stock. The Freedom Plan is a nonqualified stock option plan as defined by the Internal Revenue Code. Three key employees were granted options to purchase up to 270,000 shares of the Company's common stock. The optionees pay $0.67 of the per share option price upon exercise; the balance of the exercise price is to be paid by Freedom Group. On April 30, 1993, the participants were vested in 54,000 stock options and the remaining 216,000 unvested shares were deregistered. At year-end 1995, 18,000 vested options remained unexercised. During 1994, the Company reserved 600,000 shares of common stock for issuance to key employees of the Company and its affiliates under the ALLIED Group, Inc. Long-Term Management Incentive Plan (Incentive Plan). Under the Incentive Plan, 53 shares of common stock are available for grant until December 31, 2003 as incentive and nonqualified stock options (collectively, Options), stock appreciation rights (SARs), and restricted stock. The Options, SARs, and restricted stock were issued to vest two years after the grant date at a rate of 25% per year and expire ten years after the date of grant. Options, SARs, and restricted stock prices are based upon the fair market value as of the date of grant. During 1995, 60,000 Options and 7,667 SARs were granted at $27.63 per share. At December 31, 1995, 452,522 shares were available for award under the Incentive Plan. A summary of the status of the Company's stock option plans as of December 31, 1995, 1994, and 1993 and changes during the years ending on those dates is presented below:
1995 1994 1993 -------------------------- --------------------------- -------------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price ------------ ---------- ------------- ---------- ------------ ---------- Outstanding at beginning of year 402,164 $ 17.45 395,001 $ 16.58 938,263 $ 7.71 Granted 130,000 27.56 63,000 24.30 180,000 26.34 Exercised (137,004) 9.41 (32,000) 8.32 (225,480) 7.80 Cancelled (16,923) 11.17 (23,837) 27.06 (497,782) 7.62 ------------ ------------- ------------ Outstanding at end of year 378,237 $ 24.11 402,164 $ 17.45 395,001 $ 16.58 ============ ============= ============ Options exercisable at end of year 46,971 191,165 215,001 ============ ============= ============
The issuance of SARs and restricted stock under the Incentive Plan reduces the number of Options available for future issuance. During 1995, 13,311 shares of restricted stock were awarded at $27.38 per share, and 406 restricted shares were cancelled. At December 31, 1995, 12,671 restricted shares were outstanding. The following table shows SAR activity for the years ended December 31, 1995 and 1994:
1995 1994 --------------------------- -------------------------- Weighted Weighted Number average Number average of SARs price of SARs price ------------- ---------- ------------ ---------- Outstanding at beginning of year 8,000 $ 24.34 --- $ --- Granted 7,667 27.63 8,500 24.34 Exercised (1,000) 24.25 --- --- Cancelled --- --- (500) 24.25 ------------- ------------ Outstanding at end of year 14,667 $ 26.07 8,000 $ 24.34 ============= ============
54 (13) Retained Earnings Retained earnings of the property-casualty and excess & surplus lines subsidiaries available for distribution as dividends are limited by law to the amount of statutory unassigned surplus as of the date the dividend is authorized or paid. The maximum dividend the property-casualty subsidiaries may pay without prior approval of the state of Iowa (state of domicile) insurance regulatory authorities is the greater of either 10% of the property-casualty statutory capital stock and surplus as of the preceding December 31 or statutory net income of the preceding calendar year. The amount legally available for distribution from the property-casualty segment in 1996 to the Company without regulatory approval is $44,121. The maximum dividend the excess & surplus lines subsidiary may pay without prior approval of the state of Arizona (state of domicile) insurance regulatory authorities is the lesser of either 10% of the statutory capital stock and surplus as of the preceding year or net investment income of the preceding year. The maximum amount legally available for distribution in 1996 without regulatory approval is $2,777. The following table includes selected information for the Company's insurance subsidiaries as determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities:
As of December 31, 1995 1994 ------------ ------------ Statutory capital and surplus Property-casualty $ 257,845 $ 233,407 ============ ============ Excess & surplus lines $ 27,770 $ 23,896 ============ ============ Year ended December 31, 1995 1994 1993 ------------ ------------ ------------ Statutory net income Property-casualty $ 41,995 $ 40,699 $ 22,052 ============ ============ ============ Excess & surplus lines $ 2,773 $ 3,047 $ 3,484 ============ ============ ============
(14) Commitments and Contingent Liabilities The Company leases data processing equipment and certain office facilities under operating leases expiring in various years through 2003. Rental expense amounted to $2,587, $3,845, and $3,817 for the years ended December 31, 1995, 1994, and 1993, respectively. For each of the next five years and in the aggregate as of December 31, 1995, these are the minimum future rental payments under noncancellable operating leases having remaining terms in excess of one year:
1996 $ 982 1997 1,022 1998 906 1999 768 2000 644 Subsequent to 2000 306 ------------ Total $ 4,628 ============
In the normal course of business, ALLIED Mortgage grants mortgage loan commitments to borrowers, subject to normal loan underwriting standards. As of December 31, 1995, ALLIED Mortgage had granted loan commitments of approximately $39,500, including floating rate commitments of $12,600. To hedge loan commitments, ALLIED Mortgage may enter into options, futures, or cash delivery 55 contracts. As of December 31, 1995, ALLIED Mortgage had commitments to sell mortgage securities totaling approximately $27,000 and no outstanding options. In connection with these commitments to buy and sell mortgages, ALLIED Mortgage is exposed to credit risk in the event the counterparty is unable to fulfill its contractual obligations. Although loans serviced for others are not on the accompanying balance sheets, ALLIED Mortgage does have credit risk associated with the mortgage servicing portfolio. As the loan servicer, ALLIED Mortgage is required to process delinquent loans through the foreclosure process, thereby incurring certain direct expenses which generally are, but may not be, reimbursed. At December 31, 1995, ALLIED Mortgage had sold loans totaling approximately $20,500 while retaining recourse risk. ALLIED Mortgage established allowances for losses in connection with these various risks, which totaled $1,476 and $1,495 at December 31, 1995 and 1994, respectively. These allowances are included in other liabilities on the accompanying balance sheets. California was the source of 24% of the pool's direct written premiums in 1995. 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 exceeded 10%. Since it was passed, Proposition 103 has been the subject of a number of legal and regulatory proceedings for the purpose of clarifying the scope and extent of insurers' rollback obligations. Management of the Company continues to believe that the insurance subsidiaries will not be liable for any material rollback of premiums. The Company is party to various lawsuits arising in the normal course of business. Management believes the resolution of these lawsuits will not have a material adverse effect on its financial condition or its results of operations. (15) Employee Retirement Plan The ESOP established by ALLIED Group, Inc. covers all of its employees who meet age and service requirements. Shares of ESOP Series preferred stock are allocated annually to each employee's account pursuant to a formula and held in trust until the employee's termination, retirement, or death. As shares of ESOP Series preferred stock are allocated to participants, the cost of such shares is expensed and deducted from "Unearned compensation related to ESOP" included in stockholders' equity. The Company's ESOP expense was $2,682 in 1995, $1,780 in 1994, and $1,529 in 1993. Of those respective amounts, $65, $30, and $37 were included in the employee lease fee received from affiliates pursuant to the terms of the Intercompany Operating Agreement for the years ended December 31, 1995, 1994, and 1993, respectively. During 1995, 1994, and 1993, the ESOP Trust received $2,782, $2,782, and $2,783, respectively, from dividends on the ESOP Series used to service debt on the ESOP obligations and to purchase stock for participants. ALLIED Group, Inc. made ESOP contributions of $733 in 1995, $35 in 1994, and $54 in 1993. Interest incurred on the ESOP debt, which is included as a component of ESOP expense, was $1,831, $1,225, and $918 in 1995, 1994, and 1993, respectively. The ESOP shares as of December 31, 1995 and 1994 were as follows:
1995 1994 ------------ ------------ Allocated shares 1,254,784 1,297,657 Unallocated shares 1,737,926 1,856,587 ------------ ------------ Total ESOP shares 2,992,710 3,154,224 ============ ============
56 (16) Other Postretirement Benefit Plan In addition to the ESOP, the Company sponsors a health care plan that provides postretirement medical benefits to full-time employees who meet age and service requirements. The plan is contributory with retiree contributions adjusted annually, and it contains other cost-sharing features such as deductibles and coinsurance. The Company's policy is to fund the cost of medical benefits in amounts determined at the discretion of management. The following table presents the plan's postretirement benefit obligations as of December 31, 1995 and 1994 reconciled with the plan's funded status and the amount recognized in the Company's consolidated balance sheets:
1995 1994 ----------- ------------ Accumulated postretirement benefit obligation Retirees $ (3,170) $ (2,690) Other fully eligible plan participants (620) (560) Other active plan participants (2,470) (2,440) ----------- ------------ Obligation at year-end (6,260) (5,690) Plan assets --- --- ----------- ------------ Funded status (6,260) (5,690) Unrecognized transition obligation 4,100 4,340 Unrecognized net loss (gain) 50 (20) Fourth-quarter payments 70 80 ----------- ------------ Accrued postretirement benefit liability at year-end $ (2,040) $ (1,290) =========== ============
A 7.5% weighted average discount rate was used to determine the accumulated postretirement benefit obligation at December 31, 1995 and 1994. Net periodic postretirement benefit cost for the years ended December 31, 1995, 1994, and 1993 included the following:
1995 1994 1993 ------------ ----------- ------------ Service cost $ 350 $ 360 $ 270 Interest cost 420 390 380 Return on assets --- --- --- Amortization of transition obligation 240 240 240 ------------ ----------- ------------ Net periodic postretirement benefit cost $ 1,010 $ 990 $ 890 ============ =========== ============
For measurement purposes, a 9% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 1996; the rate was assumed to decrease in equal annual increments to 5% by the year 2000 and to remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation by approximately $430 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $40. 57 (17) Income Taxes Total income taxes for the years ended December 31, 1995, 1994, and 1993 were allocated as follows:
1995 1994 1993 ---------- ---------- ---------- Net income $ 21,471 $ 19,074 $ 16,835 ---------- ---------- ---------- Stockholders' equity Unrealized appreciation (depreciation) of investments 12,776 (6,036) 3,168 Tax-deductible dividends paid on unallocated ESOP Series shares (849) (907) (942) Tax-basis compensation expense in excess of amounts recognized for financial reporting purposes from the exercise of stock options (1,064) (175) (3,791) ---------- ---------- ---------- 10,863 (7,118) (1,565) ---------- ---------- ---------- Total $ 32,334 $ 11,956 $ 15,270 ========== ========== ==========
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 relate to the following:
1995 1994 ----------- ----------- Deferred tax assets Loss and loss settlement expense reserve discounting $ 13,540 $ 12,194 Unrealized depreciation of investments --- 2,869 Unearned premium reserve 13,277 12,161 Deferred compensation 2,187 2,054 Other 1,790 1,078 ----------- ----------- Total gross deferred tax assets 30,794 30,356 Less valuation allowance --- --- ----------- ----------- Net deferred tax assets 30,794 30,356 ----------- ----------- Deferred tax liabilities Deferred policy acquisition costs (14,591) (13,394) Mortgage servicing rights (3,497) (2,745) Unrealized appreciation of investments (9,907) --- Deferred software development and fees (3,106) (2,448) Other (2,547) (2,669) ----------- ----------- Total gross deferred tax liabilities (33,648) (21,256) ----------- ----------- Net deferred tax (liabilities) assets $ (2,854) $ 9,100 =========== ===========
Since adoption of SFAS 109 on January 1, 1993, there has not been a valuation allowance for deferred income tax assets. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers primarily tax planning strategies and the scheduled reversal of deferred tax liabilities in making this assessment and believes it is more likely than not the Company ultimately will realize the benefits of the deductible differences recognized at December 31, 1995. The actual income tax expense for the years ended December 31, 1995, 1994, and 1993 differed from the expected tax expense (computed by applying the federal corporate tax rate of 35% to income before income taxes). The difference was primarily a result of investment income exempt from federal income tax, which decreased tax expense by $4,504, $4,630, and $3,445 in 1995, 1994, and 1993, respectively. 58 Included in income tax expense is state income tax expense of $402, $456, and $956 for the years ended December 31, 1995, 1994, and 1993, respectively. The Company paid federal and state income taxes of $19,117, $16,702, and $14,525 in 1995, 1994, and 1993, respectively. The IRS is currently examining the 1992 income tax return. Any proposed adjustments are not expected to have a material impact on the Company's financial condition or results of operations. (18) Segment Information The Company's operations include two major segments: property-casualty and excess & surplus lines. Their principal products, services, revenues, income before income taxes, assets, depreciation and amortization, and capital expenditures are identified by segment. Property-casualty--Predominantly private passenger automobile, homeowners, and small commercial lines of insurance. Excess & surplus lines--Primarily commercial casualty and commercial property lines of insurance coverages that standard insurers are unable or unwilling to provide. Eliminations and other--Eliminations between segments plus other noninsurance operations not reported as segments (including investment services, data processing, and employee lease fees from affiliates).
At or for the year ended December 31, 1995 1994 1993 ------------- ----------- ------------ Revenues (1) Property-casualty $ 472,034 $ 431,110 $ 384,613 Excess & surplus lines 35,356 31,003 28,985 Eliminations and other (2) 45,375 45,251 68,844 ------------- ----------- ------------ Total $ 552,765 $ 507,364 $ 482,442 ============= =========== ============ Income before income taxes Property-casualty $ 63,883 $ 54,186 $ 40,902 Excess & surplus lines 4,840 4,999 5,618 Eliminations and other (2) 5,125 7,514 10,237 ------------- ----------- ------------ Total $ 73,848 $ 66,699 $ 56,757 ============= =========== ============ Assets Property-casualty $ 847,401 $ 749,760 $ 675,194 Excess & surplus lines 122,200 105,722 96,543 Eliminations and other 40,997 37,269 83,788 ------------- ----------- ------------ Total $ 1,010,598 $ 892,751 $ 855,525 ============= =========== ============ Depreciation and amortization Property-casualty $ 851 $ 281 $ --- Excess & surplus lines 58 58 --- Other (2) 8,674 6,237 10,463 ------------- ----------- ------------ Total $ 9,583 $ 6,576 $ 10,463 ============= =========== ============ Capital expenditures Property-casualty $ 3,390 $ 1,161 $ --- Excess & surplus lines 131 16 --- Other (2) 4,273 4,476 4,942 ------------- ----------- ------------ Total $ 7,794 $ 5,653 $ 4,942 ============= =========== ============
(1) Including realized investment gains or losses. (2) Including the results of Dougherty Dawkins' operations through the sale date of October 29, 1993. Its results are also reflected in the Company's consolidated income statements. The loss on the sale is reported in eliminations and other. 59 (19) Unaudited Interim Financial Information
Quarter ended March 31 June 30 September 30 December 31 ------------- ------------ ------------ ----------- 1995 Operating Summary Earned premiums $ 109,481 $ 111,583 $ 115,768 $ 118,667 ============= ============ ============ =========== Investment income $ 11,275 $ 11,664 $ 12,396 $ 11,907 ============= ============ ============ =========== Realized investment gains $ 15 $ 248 $ (24) $ 267 ============= ============ ============ =========== Total revenues $ 132,276 $ 134,686 $ 140,159 $ 145,644 ============= ============ ============ =========== Losses and expenses $ 115,016 $ 116,772 $ 121,143 $ 125,986 ============= ============ ============ =========== Net income $ 12,384 $ 12,756 $ 13,405 $ 13,831 ============= ============ ============ =========== Fully diluted earnings per share Net income $ .83 $ .86 $ .90 $ .93 ============= ============ ============ =========== 1994 Operating Summary Earned premiums $ 97,817 $ 102,277 $ 104,762 $ 107,662 ============= ============ ============ =========== Investment income $ 9,614 $ 10,420 $ 10,347 $ 10,689 ============= ============ ============ =========== Realized investment gains $ 391 $ 2,683 $ 30 $ (215) ============= ============ ============ =========== Total revenues $ 119,734 $ 127,351 $ 127,100 $ 133,180 ============= ============ ============ =========== Losses and expenses $ 103,663 $ 107,885 $ 111,984 $ 117,133 ============= ============ ============ =========== Net income $ 11,471 $ 13,836 $ 10,813 $ 11,505 ============= ============ ============ =========== Fully diluted earnings per share Net income $ .76 $ .94 $ .72 $ .77 ============= ============ ============ ===========
Caution should be exercised in comparing the results of consecutive quarters. (20) Subsequent Event On March 7, 1996, the ESOP Trust converted all of its shares of ESOP Series to 4,402,797 shares of common stock. The conversion increased the number of common shares outstanding to approximately 13,949,000 shares. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None 60 PART III Item 10. Directors and Executive Officers of the Registrant The information under the caption "Directors and Executive Officers" in the 1996 Proxy Statement is incorporated herein by reference. Item 11. Executive Compensation The information under the caption "Compensation of Executive Officers" in the 1996 Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information under the caption "Security Ownership of Directors and Executive Officers" in the 1996 Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information under the caption "Certain Transactions and Relationships" in the 1996 Proxy Statement is incorporated herein by reference. 61 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) List of Financial Statements and Schedules. Form 10-K Page(s) --------- 1. Financial Statements. Independent Auditors' Report. 31 Consolidated Balance Sheets as of December 31, 1995 and 1994. 32 to 33 Consolidated Statements of Income for the Years ended December 31, 1995, 1994 and 1993. 34 Statements of Stockholders' Equity for the Years ended December 31, 1995, 1994 and 1993. 35 Consolidated Statements of Cash Flows for the Years ended December 31, 1995, 1994 and 1993. 36 Notes to Consolidated Financial Statements. 37 to 59 2. Schedules. Report of Independent Auditors on Schedules. 68 I - Summary of Investments-Other Than Investments in Related Parties. 69 II - Condensed Financial Information of Registrant 70 to 73 III - Supplementary Insurance Information. 74 IV - Reinsurance. 75 VI - Supplemental Information. 76 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. 3. Executive Compensation Plans and Arrangements. Long-term Management Incentive Compensation Plan for 1991 (Incorporated by reference to Exhibit 10.3 to the Company's September 30, 1993 Form 10-Q on file with the Commission), Exhibit 10.3. Long-term Management Incentive Compensation Plan for 1992 (Incorporated by reference to Exhibit 10.4 to the Company's September 30, 1993 Form 10-Q on file with the Commission), Exhibit 10.4. 62 Short-term and Long-term Management Incentive Compensation Plans for 1993 (Incorporated by reference to Exhibit 10.5 to the Company's September 30, 1993 Form 10-Q on file with the Commission), Exhibit 10.5. ALLIED Group, Inc. Restated and Amended Stock Option Plan (Incorporated by reference to Exhibit 10.19 to the Company's December 31, 1992 Form 10-K on file with the Commission), Exhibit 10.18. ALLIED Group, Inc. Nonqualified Stock Option Plan (Incorporated by reference to Exhibit 10.20 to the Company's December 31, 1992 Form 10-K on file with the Commission), Exhibit 10.19. ALLIED Group, Inc. Outside Director Stock Purchase Plan (Incorporated by reference to Exhibit 10.21 to the Company's December 31, 1992 Form 10-K on file with the Commission), Exhibit 10.20. ALLIED Group, Inc. Executive Equity Incentive Plan (Incorporated by reference to Exhibit 10.22 to the Company's December 31, 1992 Form 10-K on file with the Commission), Exhibit 10.21. The ALLIED Group Employee Stock Ownership Plan, Amended and Restated, dated September 27, 1994 (Incorporated by reference to Exhibit 10.27 to the Company's September 30, 1994 Form 10-Q on file with the Commission), Exhibit 10.27. First Amendment to The ALLIED Group Employee Stock Ownership Plan, dated March 7, 1995 (Incorporated by reference to Exhibit 10.50 to the Company's March 31, 1995 Form 10-Q on file with the Commission), 10.29. Second Amendment to The ALLIED Group Employee Stock Ownership Plan, dated May 15, 1995 (Incorporated by reference to Exhibit 10.51 to the Company's June 30, 1995 Form 10-Q on file with the Commission), 10.30. ALLIED Group Mortgage Company Nonqualified Stock Option Plan (Incorporated by reference to Exhibit 10.28 of the Company's Registration Statement on Form S-3 filed with the Commission on February 2, 1993, Registration No. 33-55714), Exhibit 10.35. Short-term Management Incentive Plans for 1993 (Incorporated by reference to Exhibit 10.39 to the Company's December 31, 1993 Form 10-K on file with the Commission), Exhibit 10.39. ALLIED Group Short Term Management Incentive Plan for 1994 (Incorporated by reference to Exhibit 10.40 to the Company's June 30, 1994 Form 10-Q on file with the Commission), Exhibit 10.40. ALLIED Group, Inc. Long-Term Management Incentive Plan (Incorporated by reference to Exhibit 10.42 to the Company's March 31, 1994 Form 10-Q on file with the Commission), Exhibit 10.42. Consulting Agreement between John E. Evans and ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED Life Financial Corporation (Incorporated by reference to Exhibit 10.48 to the Company's December 31, 1994 Form 10-K on file with the Commission), Exhibit 10.48. ALLIED Group Short Term Management Incentive Plan for 1995 (Incorporated by reference to Exhibit 10.49 to the Company's December 31, 1994 Form 10-K on file with the Commission), Exhibit 10.49. ALLIED Group Short Term Management Incentive Plan for 1996, Exhibit 10.52. (b) Reports on Form 8-K. None. 63 (c) Exhibits. NOTE: See "Index to Exhibits" on page number 78, which discloses the specific page numbers for the exhibits included in this Form 10-K. 2. Plan of acquisition, reorganization, arrangement, liquidation or succession. 2.2 Stock Rights Agreement between ALLIED Mutual Insurance Company and ALLIED Group, Inc. dated July 5, 1990 (Incorporated by reference to Exhibit 2.4 to the Company's July 1, 1990 Form 8-K on file with the Commission). 2.3 First Amendment to Stock Rights Agreement between ALLIED Mutual Insurance Company and ALLIED Group, Inc. (Incorporated by reference to Exhibit 2.5 to the Company's September 30, 1992 Form 10-Q on file with the Commission). 3. Articles of incorporation and bylaws. 3.1 Amended and Restated Articles of Incorporation of the Company as of December 22, 1989 (Incorporated by reference to Exhibit 3.1 to the Company's December 31, 1989 Form 10-K on file with the Commission). 3.2 Articles of Amendment dated May 26, 1993 of the Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.10 of the Company's June 30, 1993 From 10-Q on file with the Commission). 3.3 Bylaws of the Company as of July 9, 1991 (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-2 filed with the Commission on July 9, 1991, Registration No. 33-40995). 3.4 Amendment to Bylaws of the Company as of March 3, 1992 (Incorporated by reference to Exhibit 3.6 to Company's December 31, 1992 Form 10-K on file with the Commission). 3.5 Amendment to Bylaws of the Company as of October 14, 1993 (Incorporated by reference to Exhibit 3.5 to Company's December 31, 1993 Form 10-K on file with the Commission). 3.6 Certificate of Designations, defining the rights of holders of Series A ESOP Convertible Preferred Stock of ALLIED Group, Inc. (Incorporated by reference to Exhibit 4.1 to the Company's July 1, 1990 Form 8-K on file with the Commission). 3.7 Certificate of Designations, defining the rights of holders of Series B ESOP Convertible Preferred Stock of ALLIED Group, Inc. (Incorporated by reference to Exhibit 4.3 to the Company's December 31, 1990 Form 10-K on file with the Commission). 3.9 Certificate of Designations, defining the rights of holders of 6-3/4% Series Preferred Stock of ALLIED Group, Inc. (Incorporated by reference to Exhibit 3.7 to Company's November 2, 1992 Form 8-K on file with the Commission). 3.10 Certificate of Designations, defining the rights of holders of Series D ESOP Convertible Preferred Stock of ALLIED Group, Inc. (Incorporated by reference to Exhibit 3.8 to the Company's Registration Statement on Form S-3 filed with the Commission on February 2, 1993, Registration No. 33-55714). 64 3.11 Articles of Correction for the Certificate of Designations defining the rights of holders of Series D ESOP Convertible Preferred Stock of ALLIED Group, Inc. (Incorporated by reference to Exhibit 3.9 to the Company's Registration Statement on Form S-3 filed with the Commission on February 9, 1993, Registration No. 33-55714). 3.12 Amendment to Bylaws of the Company as of December 14, 1994, (Incorporated by reference to Exhibit 3.12 to the Company's December 31, 1994 Form 10-K on file with the Commission). 4. Instruments defining the rights of security holders including indentures. 4.6 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust Company, dated December 31, 1993 (Incorporated by reference to Exhibit 4.6 of the Company's December 31, 1993 Form 10-K on file with the Commission). 4.7 Agreement between ALLIED Group, Inc. and State Street Bank and Trust Company, dated March 7, 1996. 4.8 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust Company dated December 30, 1994. 4.9 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust Company dated December 29, 1995. 10. Material contracts. 10.3 Long-term Management Incentive Compensation Plan for 1991 (Incorporated by reference to Exhibit 10.3 to the Company's September 30, 1993 Form 10-Q on file with the Commission). 10.4 Long-term Management Incentive Compensation Plan for 1992 (Incorporated by reference to Exhibit 10.4 to the Company's September 30, 1993 Form 10-Q on file with the Commission). 10.5 Short-term and Long-term Management Incentive Compensation Plans for 1993 (Incorporated by reference to Exhibit 10.5 to the Company's September 30, 1993 Form 10-Q on file with the Commission). 10.7 Amended and Restated Management Information Services Agreement between ALLIED Group Information Systems, Inc. and certain of its affiliated companies. 10.10 Amended and Restated Reinsurance Pooling Agreement between ALLIED Mutual Insurance Company and certain of its affiliated companies (Incorporated by reference to Exhibit 10.7 to the Company's December 31, 1989 Form 10-K on file with the Commission). 10.11 Amendment to Amended and Restated Reinsurance Pooling Agreement between ALLIED Mutual Insurance Company and certain of its affiliated companies as of March 28, 1990 (Incorporated by reference to Exhibit 10.11 to the Company's March 31, 1990 Form 10-Q on file with the Commission). 10.12 Amendment to Amended and Restated Reinsurance Pooling Agreement between ALLIED Mutual Insurance Company and the Company's property-casualty insurance subsidiaries (Incorporated by reference to Exhibit 10.19 to the Company's December 31, 1991 Form 10-K on file with the Commission). 65 10.13 Fourth Amendment to Amended and Restated Reinsurance Pooling Agreement between ALLIED Mutual Insurance Company and the Company's property-casualty insurance subsidiaries (Incorporated by reference to Exhibit 10.33 to the Company's September 30, 1992 Form 10-Q on file with the Commission). 10.14 Second Amended and Restated Reinsurance Pooling Agreement between ALLIED Mutual Insurance Company and the Company's property-casualty insurance subsidiaries (Incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-3 filed with the Commission on December 15, 1992, Registration No. 33-55714). 10.15 First Amendment to the Second Amended and Restated Reinsurance Pooling Agreement between ALLIED Mutual Insurance Company and the Company's property-casualty insurance subsidiaries (Incorporated by reference to Exhibit 10.43 to the Company's March 31, 1993 Form 10-Q on file with the Commission). 10.16 Amended and Restated ALLIED Group Intercompany Operating Agreement between the Company and its affiliated companies dated August 25, 1993 and amendment thereto dated November 1, 1993 (Incorporated by reference to Exhibit 10.14 to the Company's September 30, 1993 Form 10-Q on file with the Commission). 10.17 ALLIED Group, Inc. Federal Income Tax Sharing Agreement. 10.18 ALLIED Group, Inc. Restated and Amended Stock Option Plan (Incorporated by reference to Exhibit 10.19 to the Company's December 31, 1992 Form 10-K on file with the Commission). 10.19 ALLIED Group, Inc. Nonqualified Stock Option Plan (Incorporated by reference to Exhibit 10.20 to the Company's December 31, 1992 Form 10-K on file with the Commission). 10.20 ALLIED Group, Inc. Outside Director Stock Purchase Plan (Incorporated by reference to Exhibit 10.21 to the Company's December 31, 1992 Form 10-K on file with the Commission). 10.21 ALLIED Group, Inc. Executive Equity Incentive Plan (Incorporated by reference to Exhibit 10.22 to the Company's December 31, 1992 Form 10-K on file with the Commission). 10.22 Agency Agreement between ALLIED Group Insurance Marketing Company and Depositors Insurance Company, AMCO Insurance Company, and ALLIED Property and Casualty Insurance Company (Incorporated by reference to Exhibit 10.17 to the Company's December 31, 1991 Form 10-K on file with the Commission). 10.27 The ALLIED Group Employee Stock Ownership Plan, Amended and Restated, dated September 27, 1994 (Incorporated by reference to Exhibit 10.27 to the Company's September 30, 1994 Form 10-Q on file with the Commission). 10.28 The ALLIED Group Employee Stock Ownership Trust (Incorporated by reference to Exhibit 10.27 to the Company's March 31, 1991 Form 10-Q on file with the Commission). 10.29 First Amendment to The ALLIED Group Employee Stock Ownership Plan, dated March 7, 1995 (Incorporated by reference to Exhibit 10.50 to the Company's March 31, 1995 Form 10-Q on file with the Commission). 10.30 Second Amendment to The ALLIED Group Employee Stock Ownership Plan, dated May 15,1995 (Incorporated by reference to Exhibit 10.51 to the Company's June 30, 1995 Form 10-Q on file with the Commission). 66 10.32 Term Credit Agreement and Guaranty between ALLIED Group, Inc., ALLIED Group Employee Ownership Trust, Bank of Montreal, and Norwest Bank Iowa, N.A. (Incorporated by reference to Exhibit 10.29 to the Company's March 31, 1995 Form 10-Q on file with the Commission). 10.33 First Amendment to the Term Credit Agreement and Guaranty, dated October 12, 1995. (Incorporated by reference to Exhibit 10.30 to the Company's September 30, 1995 Form 10-Q on file with the Commission). 10.35 ALLIED Group Mortgage Company Nonqualified Stock Option Plan (Incorporated by reference to Exhibit 10.28 of the Company's Registration Statement on Form S-3 filed with the Commission on February 2, 1993, Registration No. 33-55714). 10.37 Stock Purchase Agreement between ALLIED Group, Inc. and Michael E. Dougherty and Dougherty Dawkins, Inc. (Incorporated by reference to Exhibit 10.38 to the Company's June 30, 1993 Form 10-Q on file with the Commission). 10.38 The ALLIED Group Marketing Agreement between the Company's property-casualty subsidiaries and certain of its affiliated companies dated August 25, 1993 and amendment thereto dated November 1, 1993 (Incorporated by reference to Exhibit 10.39 to the Companies September 30, 1993 Form 10-Q on file with the Commission). 10.39 Short-term Management Incentive Plan for 1993 (Incorporated by reference to Exhibit 10.39 to the Company's December 31, 1993 Form 10-K on file with the Commission). 10.40 ALLIED Group Short Term Management Incentive Plan for 1994 (Incorporated by reference to Exhibit 10.40 to the Company's June 30, 1994 Form 10-Q on file with the Commission). 10.42 ALLIED Group, Inc. Long-Term Management Incentive Plan (Incorporated by reference to Exhibit 10.42 to the Company's March 31, 1994 Form 10-Q on file with the Commission). 10.44 Second Amendment to Amended and Restated ALLIED Group Intercompany Operating Agreement dated May 16, 1994 (Incorporated by reference to Exhibit 10.42 to the Company's June 30, 1994 Form 10-Q on file with the Commission). 10.45 Second Amendment to the ALLIED Group Marketing Agreement between the Company's property-casualty subsidiaries and certain of its affiliated companies, dated August 25, 1994 (Incorporated by reference to Exhibit 10.45 to the Company's September 30, 1994 Form 10-Q on file with the Commission). 10.46 Third Amendment to Amended and Restated ALLIED Group Intercompany Operating Agreement (Incorporated by reference to Exhibit 10.46 to the Company's December 31, 1994 Form 10-K on file with the Commission). 67 10.47 Second Amendment to Amended and Restated Reinsurance Pooling Agreement (Incorporated by reference to Exhibit 10.47 to the Company's December 31, 1994 Form 10-K on file with the Commission). 10.48 Consulting Agreement between John E. Evans and ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED Life Financial Corporation (Incorporated by reference to Exhibit 10.48 to the Company's December 31, 1994 Form 10-K on file with the Commission). 10.49 ALLIED Group Short Term Management Incentive Plan for 1995 (Incorporated by reference to Exhibit 10.49 to the Company's December 31, 1994 Form 10-K on file with the Commission). 10.50 Intercompany Cash Concentration Fund Agreement, dated April 24, 1995 (Incorporated by reference to Exhibit 10.52 to the Company's June 30, 1995 Form 10-Q on file with the Commission) 10.51 Amendment to the Nonqualified Stock Option Plan, dated October 20, 1995 (Incorporated by reference to Exhibit 10.53 to the Company's September 30, 1995 Form 10-Q on file with the Commission). 10.52 ALLIED Group Short Term Management Incentive Plan for 1996. 10.53 Property Special Catastrophe Excess Contract. 11. Statement re computation of per share earnings. 21. Subsidiaries of the Registrant. 23. Consent of Independent Auditors. 27. Financial Data Schedule 28P. Information from Reports Furnished to State Insurance Regulatory Authorities. (d) Financial Statements required by Regulation S-X which are excluded from the Annual Report to Stockholders by Rule 14a-3(b)(1). None. 68 REPORT OF INDEPENDENT AUDITORS ON SCHEDULES The Board of Directors and Stockholders ALLIED Group, Inc.: Under date of February 2, 1996 we reported on the consolidated balance sheets of ALLIED Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in the 1995 Annual Report. As reported in Note 1 to the consolidated financial statements, the Company changed its method of accounting for investments in 1993. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedules listed in Part IV, Item 14(a)2. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Des Moines, Iowa February 2, 1996 69 ALLIED Group, Inc. and Subsidiaries SCHEDULE I SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1995
Amount at Market which shown in Type of investment Cost value the balance sheet ------------------ --------------- --------------- ----------------- Fixed maturities - bonds U.S. Government and government agencies and authorities $ 244,165,971 $ 254,337,128 $ 254,337,128 States, municipalities, and political subdivisions 273,822,087 284,640,205 284,640,205 Foreign governments 2,090,501 2,160,580 2,160,580 All other corporate bonds 206,647,060 213,408,867 213,408,867 --------------- --------------- --------------- Total fixed maturities 726,725,619 $ 754,546,780 754,546,780 =============== Equity securities 7,527,302 $ 7,948,517 7,948,517 =============== Other long-term investments 1,840 1,840 Short-term investments 9,801,481 9,801,481 --------------- --------------- Total investments $ 744,056,242 $ 772,298,618 =============== ===============
70 ALLIED Group, Inc. and Subsidiaries SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS December 31, 1995 and 1994
Assets 1995 1994 --------------- --------------- Cash $ --- $ 164,912 Indebtedness from affiliates 4,768,770 3,429,295 Accrued investment income 72,518 65,853 Short-term investments 6,021,020 2,520,286 Fixed maturities -- Available for sale at fair value (amortized cost $8,976,639 and $5,896,422) 9,080,124 5,279,682 Equity securities at fair value (cost $1,790,896 and $1,799,700) 2,071,834 1,883,963 Investment in subsidiaries at equity (note 1) 362,026,479 300,515,572 Current income taxes recoverable 79,129 269,597 Deferred income taxes 110,152 --- Other assets 551,593 686,604 --------------- --------------- Total assets $ 384,781,619 $ 314,815,764 =============== =============== Liabilities Guarantee of ESOP obligations $ 26,270,000 $ 28,150,000 Deferred income taxes --- 173,358 Other liabilities 6,926,145 4,611,710 --------------- --------------- Total liabilities 33,196,145 32,935,068 --------------- --------------- Stockholders' Equity Preferred stock, no par value, issuable in series, authorized 7,500,000 shares; issued and outstanding 4,819,932 shares in 1995 and 4,981,466 in 1994 83,647,674 85,565,516 Common stock, no par value, $1 stated value, authorized 40,000,000 shares; issued and outstanding 9,444,646 in 1995 and 8,999,661 in 1994 9,444,646 8,999,661 Additional paid-in capital 104,595,912 98,926,297 Retained earnings 159,469,625 119,752,032 Unrealized appreciation (depreciation) of investments (net of deferred income tax (expense) benefit of $(9,906,744) and $2,868,709) 18,335,633 (5,240,883) Unearned compensation related to ESOP (23,908,016) (26,121,927) --------------- -------------------- Total stockholders' equity 351,585,474 281,880,696 --------------- --------------- Total liabilities and stockholders' equity $ 384,781,619 $ 314,815,764 =============== ===============
See accompanying Notes to Condensed Financial Statements 71 ALLIED Group, Inc. and Subsidiaries SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED STATEMENTS OF INCOME Years ended December 31, 1995, 1994, and 1993
1995 1994 1993 -------------- -------------- -------------- Revenues Equity in undistributed earnings of subsidiaries (note 1) $ 38,478,651 $ 38,772,373 $ 32,398,744 Dividends received from subsidiaries (note 1) 12,985,307 8,866,550 8,169,554 Employee leasing income 93,265,042 83,265,394 83,941,836 Realized investment losses 405,654 (43,024) --- Investment income 654,489 452,030 491,885 Other income 47,621 53,018 57,386 -------------- -------------- -------------- 145,836,764 131,366,341 125,059,405 -------------- -------------- -------------- Expenses Salaries, benefits, payroll taxes and other employee leasing costs 91,929,248 82,177,291 81,826,843 Operating expenses 1,375,281 2,067,786 2,297,743 Interest expense 4,014 24,060 808,117 -------------- -------------- -------------- 93,308,543 84,269,137 84,932,703 -------------- -------------- -------------- Income from operations before income taxes 52,528,221 47,097,204 40,126,702 Income tax (benefit) expense 151,392 (527,792) 204,281 -------------- -------------- -------------- Net income $ 52,376,829 $ 47,624,996 $ 39,922,421 ============== ============== ==============
See accompanying Notes to Condensed Financial Statements. 72 ALLIED Group, Inc. and Subsidiaries SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, 1995, 1994, and 1993
1995 1994 1993 -------------- --------------- -------------- Cash flows from operating activities: Net income $ 52,376,829 $ 47,624,996 $ 39,922,421 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed earnings (38,478,651) (38,772,373) (32,398,744) Realized investment losses (405,654) 43,024 --- Indebtedness from affiliates (1,339,475) (1,359,725) (5,406,842) Accrued investment income (6,665) 19,629 (63,760) Cost of ESOP Series shares allocated 2,213,911 1,751,994 1,347,539 Income taxes: Current 190,468 2,110,615 (1,702,670) Deferred (656,689) 597,191 (23,427) Other, net 529,635 1,272,665 6,016,967 -------------- --------------- -------------- Net cash provided by operating activities 14,423,709 13,288,016 7,691,484 -------------- --------------- -------------- Cash flows from investing activities: Investments in subsidiaries 539 350 (49,382,962) Sale of subsidiary --- --- 14,303,671 Purchase of fixed maturities Available for sale (3,276,014) (16,030,000) (8,491,352) Held to maturity --- --- (1,260,199) Purchase of equity securities (1,630,622) (813,638) (1,203,172) Short-term investments, net (3,500,734) 199,744 1,284,155 Sale of fixed maturities--available for sale --- 7,487,290 512,892 Maturities, calls, and principal reductions of fixed maturities Available for sale 235,608 10,564,855 --- Held to maturity --- 1,244,960 --- Sale of equity securities 2,045,080 214,660 --- -------------- --------------- -------------- Net cash provided by (used in) investing activities (6,126,143) 2,868,221 (44,236,967) -------------- --------------- -------------- Cash flows from financing activities: Issuance of preferred stock 699,559 794,133 889,470 Issuance of common stock 3,497,199 1,128,345 46,469,119 Repurchase of common stock --- (6,360,128) --- Dividends paid to stockholders, net of income tax benefit (12,659,236) (11,795,038) (10,901,459) -------------- --------------- -------------- Net cash (used in) provided by financing activities (8,462,478) (16,232,688) 36,457,130 -------------- --------------- -------------- Net decrease in cash (164,912) (76,451) (88,353) Cash beginning of year 164,912 241,363 329,716 -------------- --------------- -------------- Cash end of year $ --- $ 164,912 $ 241,363 ============== =============== ==============
See accompanying Notes to Condensed Financial Statements. 73 ALLIED Group, Inc. and Subsidiaries SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) NOTES TO CONDENSED FINANCIAL STATEMENTS The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of ALLIED Group, Inc. and its subsidiaries. (1) The Company's investment in subsidiaries, undistributed earnings of subsidiaries, and dividends received from subsidiaries are shown by segment below:
Property- Excess & casualty Surplus Other Total ---------------- --------------- --------------- --------------- Year ended December 31, 1995 Investment in subsidiaries $ 293,167,247 $ 37,291,129 $ 31,568,103 $ 362,026,479 Equity in undistributed earnings of subsidiaries $ 33,655,150 $ 3,516,974 $ 1,306,527 $ 38,478,651 Dividends received from subsidiaries $ 12,011,307 $ --- $ 974,000 $ 12,985,307 Year ended December 31, 1994 Investment in subsidiaries $ 239,722,727 $ 31,341,143 $ 29,451,702 $ 300,515,572 Equity in undistributed earnings of subsidiaries $ 31,614,854 $ 3,634,920 $ 3,522,599 $ 38,772,373 Dividends received from subsidiaries $ 7,799,550 $ --- $ 1,067,000 $ 8,866,550 Year ended December 31, 1993 Investment in subsidiaries $ 217,048,558 $ 28,991,799 $ 26,291,417 $ 272,331,774 Equity in undistributed earnings of subsidiaries $ 22,081,768 $ 4,049,891 $ 6,267,085 $ 32,398,744 Dividends received from subsidiaries $ 7,729,354 $ --- $ 440,200 $ 8,169,554
74 ALLIED Group, Inc. and Subsidiaries SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION Years ended December 31, 1995, 1994, and 1993
Reserves for Amortization Deferred losses and Losses of deferred Other policy loss Net and loss policy under- acquisition settlement Unearned Premiums investment settlement acquisition writing Premiums Segments costs expenses premiums earned income expenses costs expenses written -------- ----------- ------------ ---------- --------- ---------- ---------- ------------ ---------- ---------- (in thousands) 1995 Property-casualty $ 38,846 $ 285,385 $ 180,217 $ 425,838 $ 39,110 $ 295,583 $ 93,684 $ 18,859 $ 440,838 Excess & Surplus 2,842 56,479 16,244 29,661 5,830 22,357 6,436 1,724 30,606 Other operations --- --- --- --- 2,302 --- --- --- --- Eliminations --- --- --- --- --- --- --- --- --- ---------- ----------- ---------- --------- ---------- ---------- ------------ ---------- ---------- Consolidated $ 41,688 $ 341,864 $ 196,461 $ 455,499 $ 47,242 $ 317,940 $ 100,120 $ 20,583 $ 471,444 ========== =========== ========== ========= ========== ========== ============ ========== ========== 1994 Property-casualty $ 35,546 $ 260,420 $ 164,938 $ 386,732 $ 35,279 $ 268,376 $ 85,081 $ 23,466 $ 403,066 Excess & Surplus 2,723 50,576 15,175 25,786 5,242 18,568 5,777 1,659 27,026 Other operations --- --- --- --- 549 --- --- --- --- Eliminations --- --- --- --- --- --- --- (35) --- ---------- ----------- ---------- --------- ---------- ---------- ------------ ---------- ---------- Consolidated $ 38,269 $ 310,996 $ 180,113 $ 412,518 $ 41,070 $ 286,944 $ 90,858 $ 25,090 $ 430,092 ========== =========== ========== ========= ========== ========== ============ ========== ========== 1993 Property-casualty $ 31,952 $ 233,508 $ 148,255 $ 344,322 $ 33,471 $ 242,196 $ 75,751 $ 25,764 $ 370,218 Excess & Surplus 2,455 46,348 13,575 24,014 4,867 16,722 5,403 1,242 24,892 Other operations --- --- --- --- 1,661 --- --- --- --- Eliminations --- --- --- --- (969) --- --- --- --- ---------- ----------- ---------- --------- ---------- ---------- ------------ ---------- ---------- Consolidated $ 34,407 $ 279,856 $ 161,830 $ 368,336 $ 39,030 $ 258,918 $ 81,154 $ 27,006 $ 395,110 ========== =========== ========== ========= ========== ========== ============ ========== ==========
75 ALLIED Group, Inc. and Subsidiaries SCHEDULE IV REINSURANCE Years ended December 31, 1995, 1994, and 1993
Percentage Ceded Assumed of amount Gross other from other Net assumed to amount companies companies (1) amount net -------------- --------------- ------------------ --------------- -------------- (in thousands) 1995 Premiums: Property-casualty $ 435,223 $ 265,571 $ 256,186 $ 425,838 60.2% Excess & surplus lines 37,184 7,523 --- 29,661 --- -------------- --------------- ------------------ --------------- Total premiums $ 472,407 $ 273,094 $ 256,186 $ 455,499 56.2% ============== =============== ================== =============== 1994 Premiums: Property-casualty $ 383,510 $ 242,490 $ 245,712 $ 386,732 63.5% Excess & surplus lines 32,257 6,471 --- 25,786 --- -------------- --------------- ------------------ --------------- Total premiums $ 415,767 $ 248,961 $ 245,712 $ 412,518 59.6% ============== =============== ================== =============== 1993 Premiums: Property-casualty $ 328,530 $ 415,752 $ 431,544 $ 344,322 125.3% Excess & surplus lines 29,961 5,947 --- 24,014 --- -------------- --------------- ------------------ --------------- Total premiums $ 358,491 $ 421,699 $ 431,544 $ 368,336 117.2% ============== =============== ================== ===============
(1) See note 6 of Notes to Consolidated Financial Statements for additional information on amounts assumed from ALLIED Mutual Insurance Company in accordance with the affiliated reinsurance pooling agreement. 76 ALLIED Group, Inc. and Subsidiaries SCHEDULE VI SUPPLEMENTAL INFORMATION Years ended December 31, 1995, 1994, and 1993
Losses and loss Discount settlement expenses if any incurred related to Paid losses deducted ---------------------------------- and loss from Current Prior settlement Segment reserves year years expenses ------- --------------- --------------- -------------- --------------- (in thousands) 1995 Property-casualty $ --- $ 294,176 $ 1,407 $ 270,373 Excess & surplus lines --- 21,780 577 15,302 --------------- --------------- -------------- --------------- Total $ --- $ 315,956 $ 1,984 $ 285,675 =============== =============== ============== =============== 1994 Property-casualty $ --- $ 271,723 $ (3,347) $ 245,416 Excess & surplus lines --- 16,851 1,717 16,904 --------------- --------------- -------------- --------------- Total $ --- $ 288,574 $ (1,630) $ 262,320 =============== =============== ============== =============== 1993 Property-casualty $ --- $ 247,211 $ (5,014) $ 203,228 Excess & surplus lines --- 15,561 1,160 15,611 --------------- --------------- -------------- --------------- Total $ --- $ 262,772 $ (3,854) $ 218,839 =============== =============== ============== ===============
77 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 5, 1996 By /s/ Jamie H. Shaffer ------------------------------------- Jamie H. Shaffer (Principal Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated. By: /s/ Douglas L. Andersen By: /s/ Jamie H. Shaffer By: /s/ John E. Evans - -------------------------------------- ------------------------------------- -------------------------------- Douglas L. Andersen Jamie H. Shaffer John E. Evans President (Property-casualty) President (Financial) and Treasurer Chairman of the Board March 5, 1996 March 5, 1996 and Director March 5, 1996 By: /s/ James W. Callison By: By: /s/ Charles I. Colby - -------------------------------------- ------------------------------------- -------------------------------- James W. Callison Harold S. Carpenter Charles I. Colby Director Director Director March 5, 1996 March 5, 1996 March 5, 1996 By: /s/ Harold S. Evans By: /s/ Richard O. Jacobson By: /s/ John P. Taylor - -------------------------------------- ------------------------------------- -------------------------------- Harold S. Evans Richard O. Jacobson John P. Taylor Director Director Director March 5, 1996 March 5, 1996 March 5, 1996 By: /s/ William E. Timmons By: /s/ Donald S. Willis - -------------------------------------- ------------------------------------- William E. Timmons Donald S. Willis Director Director March 5, 1996 March 5, 1996
78 ALLIED Group, Inc. and Subsidiaries INDEX TO EXHIBITS
Exhibit Number Item Page 4.7 Agreement between ALLIED Group, Inc. and State Street Bank and Trust Company, 79 dated March 7, 1996. 4.8 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust 83 Company, dated December 31, 1994. 4.9 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust 99 Company, dated December 31, 1995. 10.7 Amended and Restated Management Information Services Agreement between ALLIED 115 Group Information Systems, Inc. and certain of its affiliated companies dated January 1, 1995 10.17 ALLIED Group, Inc. Federal Income Tax Sharing Agreement 142 10.52 ALLIED Group Short Term Management Incentive Plan for 1996 148 10.53 Property Special Catastrophe Excess Contract 156 11 Statement re Computation of Per Share Earnings 169 21 Subsidiaries of the Registrant 170 23 Consent of Independent Auditors 171 27 Financial Data Schedule 172 28P Information from Reports Furnished to State Insurance Regulatory Authorities 173
EX-4 2 4.7 AGI & STATE ST AGRMNT 3/7/96 79 EXHIBIT 4.7 AGREEMENT THIS AGREEMENT dated as of March 7, 1996, between ALLIED GROUP, INC,. an Iowa corporation (the "Company") and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, solely in its capacity as trustee under the Plan defined below and not individually (the "Trustee"). Defined terms used herein and not defined herein shall have the meaning ascribed to them in The ALLIED Group Employee Stock Ownership Plan (the "Plan"). WITNESSETH: WHEREAS, the Company has established and maintains the Plan for the benefit of all employees eligible to participate therein; WHEREAS, the Plan qualifies as an "employee stock ownership plan" within the meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, the Company has established and maintains The ALLIED Group Employee Stock Ownership Trust (the "Trust") and the Company has appointed the Trustee to act as the trustee thereof pursuant to a trust agreement between the Company and the Trustee amended and restated as of January 7, 1991 (the "Trust Agreement"); WHEREAS, the Trustee has determined to convert the Company Preferred Stock held by the Trustee to Company Common Stock on March 7, 1996, based upon such facts and circumstances which the Trustee has determined to be relevant including, without limitation, the Company's execution of this Agreement and the declaration by the Board of Directors of the Company of a $0.22 per share dividend on the Company Common Stock for the first quarter 1996; NOW THEREFORE, in consideration of these premises and the mutual promises contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. This Agreement shall be effective on March 7, 1996. 2. For the purpose of this Agreement, the following terms shall have the following meanings: (a) "Mandatory Employer Contributions" shall mean and include all contributions made to the Trust by the Company pursuant to Section 4.1 of the Plan (or any successor provision thereto). 80 (b) "Credited Shortfall Amount", with respect to any Reconciliation Date, shall mean the sum of the Shortfall Amounts with respect to all prior Reconciliation Dates. (c) "Reconciliation Date" shall mean each of December 31, 1996, December 31, 1997, December 31, 1998, December 31, 1999, and March 7, 2000. (d) "Release Date" shall mean no later than the April 12th (or the following business day) following a Reconciliation Date. (e) "Shortfall Amount" with respect to any Reconciliation Date means the excess, if any, of (i) the sum of the aggregate dividends which would have been paid on the Company Preferred Stock held by the Trustee but for its conversion to Company Common Stock from March 7, 1996 through the Reconciliation Date over (ii) the sum of the aggregate dividends paid on the Company Common Stock from March 7, 1996 through the Reconciliation Date plus the Credited Shortfall Amount. The Shortfall Amount with respect to a Reconciliation Date shall be calculated based on the number of allocated shares of Company Common Stock held by the Trustee on such Reconciliation Date (and the equivalent number of shares of Company Preferred Stock). 3. Subject to compliance with all requirements of federal and state law, the Company agrees to effectuate a release of Company Common Stock in excess of the Mandatory Employer Contribution with a fair market value equal to the Shortfall Amount. The Company shall effectuate a release of any shares of Company Common Stock necessary to meet any such Shortfall Amount by the Release Date. Subject to the requirements of federal law, the shares of Company Common Stock released pursuant to this paragraph shall be allocated to make up the Shortfall Amount among the active Participants in the Plan as of the applicable Reconciliation Date. 4. The Company agrees that it will use its best efforts to (i) cause the Plan to qualify as an employee stock ownership plan within the meaning of Section 4975(e)(7) and 401(a) of the Code and (ii) maintain such qualification at all times prior to the termination of the Plan. 5. The representations, warranties, and agreements in this Agreement shall survive the date hereof. 6. This Agreement shall be governed by and construed in accordance with the laws of the State of Iowa applicable to contracts to be executed, delivered and performed in such state, to the extent not preempted by the laws of the United States of America. The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the courts of the State of Iowa and the United States of America located in Polk County, Iowa for any 81 actions, suits or proceedings arising out of or relating to this Agreement. This Agreement, the Plan and Trust Agreement (including documents referred to therein or delivered pursuant thereto) set forth the entire Agreement of the parties with respect to the subject matter contained herein and supersede all prior oral and written agreements, if any, between the parties with respect to such subject matter. This Agreement shall bind and inure to the benefit of all successors to, and assigns of, the parties hereto; provided, however, that the Trustee shall not assign or otherwise transfer its interest in, or obligations under, this Agreement without the written consent of the Company, except that the Trustee may assign, without the Company's written consent, all its rights hereunder to any institution exercising trust powers in connection with any such institution assuming the duties of a trustee under the Trust Agreement. In the event that any provision of this Agreement shall be declared unenforceable by a court of competent jurisdiction, such provision shall be stricken herefrom and the remainder of this Agreement shall remain binding on the parties hereto. In the event any such provision shall be so declared unenforceable due to its scope or breadth, then it shall be narrowed to the scope or breadth permitted by law. 7. This Agreement may be executed in two counterparts, each of which shall be deemed an original, but each of which taken together shall constitute one and the same instrument. 8. This Agreement may not be modified with respect to the obligations of a party hereto except by an instrument in writing signed by such party. 9. The terms and provisions of the Trust Agreement relating to the nature of the responsibilities of the Trustee and the indemnification by the Company of the Trustee are incorporated herein by reference and made applicable to this Agreement. 10. All notices, requests, or other communications required or permitted to be delivered hereunder shall be in writing, delivered to each party hereto at its address specified in the Trust Agreement and shall become effective as therein provided. Any party hereto may from time to time, by written notice given as aforesaid, designate any other address to which notices, requests or other communications addressed to it shall be sent. 82 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first above written. ALLIED GROUP, INC. By ______________________________ Name _____________________________ Title ____________________________ STATE STREET BANK AND TRUST COMPANY solely in its capacity as Trustee under the Plan and Trust Agreement referred to herein and not individually By _______________________________ Name _____________________________ Title ____________________________ EX-4 3 4.8 STOCK PURCHASE AGREEMENT 94 83 EXHIBIT 4.8 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT dated as of December 30, 1994, between ALLIED GROUP, INC., an Iowa corporation (the "Company"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company (the "Trustee"), solely in its capacity as trustee under the Plan defined below and not individually. WITNESSETH; WHEREAS, the Company has established and maintains The ALLIED Group Employee Stock Ownership Plan (the "Plan"), for the benefit of all employees eligible to participate therein; WHEREAS, the Plan qualifies as an "employee stock ownership plan" within the meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, the Company has established and maintains The ALLIED Group Employee Stock Ownership Trust (the "Trust") and the Company has appointed the Trustee to act as the trustee thereof pursuant to a trust agreement between the Company and the Trustee amended and restated as of April 16, 1991 (the "Trust Agreement"); WHEREAS, the Trust Agreement provides that the assets of the trust created thereunder shall be invested in, among other things, shares of common stock of the Company ("Common Stock") or convertible preferred stock of the Company; WHEREAS, the Company has previously designated 85,000 shares as a series of preferred stock, with no par value, called the Series C ESOP Convertible Preferred Stock, of which 75,753 shares were previously issued and the Company has offerred 9,247 shares for sale to the Trustee (the "Series C Preferred Stock"); WHEREAS, the Company has designated 500,000 shares as a series of convertible preferred stock, with no par value, called the Series D ESOP Convertible Preferred Stock, of which 30,762 shares were previously issued and of which the Company has offered 12,976 shares for sale to the Trustee (the "Series D Preferred Stock"); WHEREAS, as directed by the ESOP Committee (the "Committee") under the terms of the Trust Agreement, the Trustee is authorized to purchase shares of Series C Preferred Stock and Series D Preferred Stock and the Company wishes to issue and sell such shares of Series C Preferred Stock and Series D Preferred Stock to the Trustee, and no commission will be paid by the Trustee in connection with the purchase of such shares of Series C Preferred Stock and Series D Preferred Stock; and WHEREAS, the Trustee is required under the Trust Agreement to independently determine (i.e., without direction from the Company) the purchase price that shall be paid for any stock of the Company, and the Trustee has received an opinion of Whitman Heffernan & Rhein Co., Inc. (the "Valuation 84 Opinion") that the purchase of the shares of Series C Preferred Stock and Series D Preferred Stock pursuant to the terms to this Agreement is fair and equitable to the participants in the Plan and the price to be paid for the Series C Preferred Stock and Series D Preferred Stock is not in excess of adequate consideration. NOW THEREFORE, in consideration of these premises and the mutual promises contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. The Trustee hereby agrees to purchase (the "Purchase") with the Proceeds, and the Company hereby agrees to issue and sell for cash to the Trust 9,247 shares of Series C Preferred Stock and 12,976 shares of Series D Preferred Stock (the "Shares") for an aggregate purchase price (the "Purchase Price") of $825,000.00 (or approximately $37.125 per share). The Company will pay all stamp and other transfer taxes, if any, which may be payable in respect of the issuance, sale and delivery of the Shares and shall be entitled to any refund thereof. 2. The Purchase shall be consummated at or about 5:30 P.M. Central Standard Time on December 30, 1994 (such date of delivery being hereinafter called the "Delivery Date") at the offices of the Company, Des Moines, Iowa or as otherwise agreed by the parties hereto. On the Delivery Date, the Trustee shall deliver to the Company the Purchase Price in immediately available funds together with an opinion of Goodwin, Proctor & Hoar, counsel to the Trustee, in the form attached as Annex A hereto and a copy of the Valuation Opinion, and the Company will deliver to the Trustee a certificate or certificates representing the Shares which shall be registered in the name of the Trustee, as trustee under the Plan, or in the name of its nominee, together with an opinion of Katherine E. Schmidt, Associate Corporate Counsel of the Company, in the form attached as Annex B hereto. 3. The Comp any hereby represents, warrants and covenants to the Trustee as follows: a. the Company (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Iowa and (ii) has full corporate power and authority to execute and deliver this Agreement, to carry out the transactions contemplated hereby, to own, lease and operate its assets and properties, and to carry on its business as now being conducted; b. this Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and to general principles of equity (regardless of whether considered in a proceeding at law or in equity); 85 c. the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby will not violate (i) the Company's Certificate of Incorporation or By-laws, each as amended to date or, (ii) any provision of any agreement, instrument, order, award, judgment or decree to which the Company is a party or by which it or any of its businesses or properties are bound, or (iii) any statute, rule or regulation of any federal, state or local government or governmental agency applicable to the Company except in the case of subparagraphs (ii) or (iii) of this Section 3(c) for any such violations which either individually or in the aggregate do not have a material adverse effect on the business or properties of the Company and its subsidiaries taken as a whole; d. except for any necessary applications with the National Association of Securities Dealers Automated Quotation system with respect to any newly issued shares of Common Stock which may be issued upon conversion of the Shares, no approval, authorization or other action by, or filing (other than such filings of the Company as may be necessary in connection with any registration for sale of the common stock that may be issuable upon conversion of the Shares) with, any government authority is required to be obtained or made by the Company in connection with the execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby; e. the Shares have been duly and validly authorized and, when issued and delivered to and paid for by the Trustee pursuant to this Agreement, (i) will be validly issued, fully paid and nonassessable and not liable to any further call or assessment, (ii) the certificates representing the Shares comply with the applicable requirements of Iowa law and (iii) the Trustee will acquire full right, title and interest in and to the Shares free and clear of any and all liens, claims, charges and encumbrances (other than rights of participants in the Plan); f. the Company (i) has duly and validly authorized and reserved for issuance a sufficient number of shares of Common Stock, as may be issued, from time to time, upon conversion of the Shares and (ii) such shares of Common Stock, when issued upon conversion of the Shares in accordance with the Certificate of Designations, will be validly issued, fully paid and nonassessable and not liable to any further call or assessment and will not be subject to preemptive rights; 86 g. the Plan has been duly authorized and established, and the Trust Agreement has been duly authorized, by all necessary corporate action on the part of the Company; the Plan constitutes in all material respects in form an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code, Code Regulation Section 54.4975-11 and Section 407(d)(6) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); and each of the Shares constitute a qualifying employer security within the meaning of Section 4975(e)(8) of the Code; provided, however, that in making the representations contained in this Section 3(g) the Company has relied upon the correctness of the Trustee's representations contained in Section 4(f) of this Agreement; h. the Company's Reports on Form 10-Q for the quarterly period ended September 30, 1994, on the date filed with the Securities and Exchange Commission ("SEC"), conformed in all material respects to the requirements of the Securities Exchange Act of 1934, as amended; i. no person or other entity is entitled to any fees or commissions due to the Company's actions in connection with the purchase and sale of the Shares; j. the Company shall use its best efforts during the term of the Trust to cause the Plan to maintain its qualification as an employee stock ownership plan within the meaning of Section 4975 of the Code; and k. the Company has furnished and will continue to furnish to the Trustee from time to time copies of all reports and financial statements which the Company shall send or make available to its public stockholders generally, all other written communications from the Company to public shareholders generally and each regular or periodic report, proxy statement, registration statement or prospectus, if any, filed by the Company with the SEC; and 4. The Trustee represents and warrants to the Company as follows: a. the Trustee (i) is a duly organized and validly existing Massachusetts trust company in good standing and with full power and authority to act as Trustee and exercise trust powers, including without limitation, the trust powers provided in and contemplated by the Trust Agreement, and (ii) has full corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby; 87 b. this Agreement has been duly authorized, executed and delivered by the Trustee and constitutes a valid and binding obligation of the Trustee, enforceable against the Trustee in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and to general principles of equity (regardless of whether considered in a proceeding at law or in equity); c. the execution, delivery and performance of this Agreement by the Trustee and the consummation of the transactions contemplated hereby will not violate (i) the Trustee's Corporate Charter or By-laws, each as amended to date, or (ii) any provision of any agreement, instrument, order, award, judgment or decree to which the Trustee is a party or by which it or any of its businesses or properties are bound or (iii) any statute, rule or regulation of any federal, state or local government or governmental agency applicable to the Trustee except in the case of subparagraphs (ii) or (iii) of this Section 4(c) for any such violations which either individually or in the aggregate do not have a material adverse effect on the business or properties of the Trustee; provided, however, that in making the representations contained in clause (iii) of this Section 4(c), the Trustee has relied upon the correctness of the Company's representations in Sections 3(g) of this Agreement, as limited by the proviso therein, and 3(i) and (2) the Committee's direction letter dated December 29, 1994; d. no approval, authorization or other action by, or filing with, any governmental authority is required to be obtained or made by the Trustee in connection with the execution, delivery and performance by the Trustee of this Agreement and the consummation of the transactions contemplated hereby; e. the Trustee is acquiring the Shares on behalf of the Plan solely for investment purposes and not with a view to, or for sale in connection with, any distribution thereof; provided, however, that the Shares will be allocated to the accounts of the participants in the Plan pursuant to the terms of the Plan and distributions may be made to participants and beneficiaries of the Plan in shares of Common Stock issuable upon conversion of the Series C Preferred Stock and Series D Preferred Stock or payable upon redemption of the Series C Preferred Stock and Series D Preferred Stock, including upon exercise of the rights set forth in Section 7 of the Certificate of Designations, or in shares of Common Stock otherwise 88 acquired by the Trustee pursuant to the terms of the Plan, it being understood that the Shares are being sold to the Trustee pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon this representation and warranty; f. the purchase of the Shares on the Delivery Date by the Trust for the Purchase Price is for not greater than "adequate consideration" as that phrase is defined in Section 3(18) of ERISA, and proposed regulations thereunder, and will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975(c) of the Code by reason of the exemptions set forth in Section 408(e) of ERISA and Section 4975(d) (13) of the Code; provided that in making the representations contained in this Section 4(f), the Trustee has relied upon the correctness of the Company's representations contained in Sections 3(g), as limited by the proviso therein, and 3(i) of this Agreement as well as the Valuation Opinion; g. the Shares purchased by the Trust have a conversion price which is reasonable as of the date hereof; provided, however, that in making the representations contained in this Section 4(g), the Trustee has relied upon the correctness of the Valuation Opinion; and h. no person or other entity is entitled to any commissions due to the Trustee's actions in connection with the purchase and sale of the Shares. 5. The Trustee hereby (i) acknowledges that the Shares purchased on behalf of the Trust pursuant to this Agreement may, by their terms, be issued only to the Trustee or a successor trustee acting on behalf of the Trust, (ii) acknowledges that the Trust Agreement provides that none of the Series C Preferred Shares and Series D Preferred Shares shall be transferred in any manner to participants under the Plan but in lieu thereof shares of Common Stock shall be distributed to participants or transferred to the participants' Section 401(k) accounts pursuant to the terms of the Plan, (iii) acknowledges that the Certificate of Designations provides that any Shares that are transferred sold or otherwise disposed of by the Trustee shall be automatically, and without any action on the part of the Company, converted into shares of Common Stock, and (iv) agrees not to transfer, sell or otherwise dispose of any of the Shares or other shares of Series C Preferred Stock and Series D Preferred Stock or to attempt to do so, except in compliance with the Trust Agreement. Nothing contained in this Section 5 shall be deemed to restrict the ability of the Trustee to convert shares of Series C Preferred Stock and Series D Preferred Stock into shares of Common Stock or to require the Company to redeem shares of Series C Preferred Stock and Series D Preferred 89 Stock, in each case in accordance with the Certificate of Designations, or the ability of the Trustee to transfer, sell or otherwise dispose of shares of Common Stock of the Company issued upon conversion of shares of Series C Preferred Stock and Series D Preferred Stock or upon a redemption of shares of Series C Preferred Stock and Series D Preferred Stock. 6. The Trustee understands that the certificate(s) representing the Shares will bear the following legend and that a notation restricting their transfer will be made on the stock transfer books of the Company: a. Series C: The shares of Series C preferred stock represented by this certificate have not been registered under the Securities Act of 1933, as amended. Such shares of stock may not be sold, assigned, pledged or otherwise transferred in the absence of an effective registration statement under said Securities Act covering such transfer or an opinion of counsel satisfactory to the issuer that registration under said Securities Act is not required. The shares of stock represented by this certificate are subject to restrictions on transfer set forth in the Certificate of Designations relating to the Corporation's Series C ESOP Convertible Preferred Stock and in a Stock Purchase Agreement dated as December 30, 1994. The Corporation will furnish a copy of such agreement to the holder of this certificate without charge upon written request. b. Series D: The shares of Series D preferred stock represented by this certificate have not been registered under the Securities Act of 1933, as amended. Such shares of stock may not be sold, assigned, pledged or otherwise transferred in the absence of an effective registration statement under said Securities Act covering such transfer or an opinion of counsel satisfactory to the issuer that registration under said Securities Act is not required. The shares of stock represented by this certificate are subject to restrictions on transfer set forth in the Certificate of Designations relating to the Corporation's Series D ESOP Convertible Preferred Stock and in a Stock Purchase Agreement dated as December 30, 1994. The Corporation will furnish a copy of such agreement to the holder of this certificate without charge upon written request. 7. Upon the reasonable written request of the Trustee, the Company agrees that, at the Company's expense, it will prepare and file, as promptly as practicable after such request, and use its best efforts to cause to become 90 effective, a registration statement on an appropriate form, including a final prospectus (the "Registration Statement"), under and complying with the Securities Act and the rules and regulations thereunder, relating to the number of shares of the Company's Common Stock into which the Shares are from time to time convertible or as are acquired upon a redemption or repurchase, including a redemption pursuant to the provisions of Section 7 of the Certificate of Designations, as shall be necessary, in the opinion of counsel to the Company, for the Trustee to carry out its responsibilities under the Plan and Trust Agreement. Whenever shares of Common Stock are so registered, the Company shall also use its best efforts to register of qualify such shares covered by the Registration Statement under the "blue sky" or securities laws of such jurisdictions within the United States as the Trustee may reasonably request; provided, however, that the Company shall not be required to consent to the general service of process for all purposes in any jurisdiction where it is not then qualified to do business. 8. The Company agrees that it will use its best efforts to (i) cause the Plan to qualify as an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code and (ii) maintain such qualification at all times prior to the termination of the Plan. 9. The representations, warranties and agreements in this Agreement shall survive the date hereof and the Delivery Date. 10. This Agreement shall be governed by and construed in accordance with the laws of the State of Iowa applicable to contracts to be executed, delivered and performed in such state, to the extent not preempted by the laws of the United States of America. The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the courts of the State of Iowa and the United States of America located in Polk County, Iowa for any actions, suits or proceedings arising out of or relating to this Agreement. This Agreement, the Plan and Trust Agreement (including documents referred to therein or delivered pursuant thereto) set forth the entire Agreement of the parties with respect to the subject matter contained herein and supersede all prior oral and written agreements, if any, between the parties with respect to such subject matter. This Agreement shall bind and inure to the benefit of all successors to, and assigns of, the parties hereto; provided, however, that the Trustee shall not assign or otherwise transfer its interest in, or obligations under, this Agreement without the written consent of the Company, except that the Trustee may assign, without the Company's written consent, all its rights hereunder to any institution exercising trust powers in connection with any such institution assuming the duties of a trustee under the Trust Agreement. In the event that any provision of this Agreement shall be declared unenforceable by a court of competent jurisdiction, such provision shall be stricken herefrom and the remainder of this Agreement shall remain binding on the 91 parties hereto. In the event any such provision shall be so declared unenforceable due to its scope or breadth, then it shall be narrowed to the scope or breadth permitted by law. 11. This Agreement may be executed in two counterparts, each of which shall be deemed an original, but each of which taken together shall constitute one and the same instrument. 12. This Agreement may not be modified with respect to the obligations of a party hereto except by an instrument in writing signed by such party. 13. The terms and provisions of the Trust Agreement relating to the nature of the responsibilities of the Trustee and the indemnification by the Company of the Trustee are incorporated herein by reference and made applicable to this Agreement. 14. All notices, requests, or other communications required or permitted to be delivered hereunder shall be in writing, delivered to each party hereto at its address specified in the Trust Agreement and shall become effective as therein provided. Any party hereto may from time to time, by written notice given as aforesaid, designate any other address to which notices, requests or other communications addressed to it shall be sent. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first above written. ALLIED GROUP, INC. By __________________________________ Name ________________________________ Title _______________________________ STATE STREET BANK AND TRUST COMPANY solely in its capacity as Trustee under the Plan and Trust Agreement referred to herein and not individually By __________________________________ Name ________________________________ Title _______________________________ 92 Annex A December 30, 1994 ALLIED Group, Inc. 701 Fifth Avenue Des Moines, Iowa 50391-2003 Re: The ALLIED Group Employee Stock Ownership Trust ----------------------------------------------- Ladies and Gentlemen: We have acted as special counsel for State Street Bank and Trust Company ("State Street"), as trustee (the "Trustee") of The ALLIED Group Employee Stock Ownership Trust (the "Trust"), which forms a part of the ALLIED Group Employee Stock Ownership Plan ("Plan"), and which is evidenced by the Trust Agreement dated April 16, 1991 (the "ESOP Trust Agreement") between Trustee and ALLIED Group, Inc. (the "Company") in connection with the purchase by the Trustee of 9,247 shares of Series C ESOP Convertible Preferred Stock and _______ shares Series D ESOP Convertible Preferred Stock of the Company, no par value (the "Preferred Stock") pursuant to the Stock Purchase Agreement between the Company and the Trustee dated as of December 30, 1994 (the "Stock Purchase Agreement"). Capitalized terms used herein that are not defined herein have the meanings set forth in the Stock Purchase Agreement. In connection therewith, we have reviewed executed copies of: (i) the Stock Purchase Agreement; (ii) the ESOP Trust Agreement; (iii) the Certificate of Designations of Series C ESOP Convertible Preferred Stock and Series D ESOP Convertible Preferred Stock of ALLIED Group, Inc.; (iv) the corporate charter and by-laws of State Street, both as amended to date; (v) other records, documents, and instruments relating to the powers and organization of State Street and to State Street's acceptance of fiduciary duties, obligations and trusts; and (vi) such other certificates and documents as we have deemed relevant or necessary as a basis for the opinion expressed below. In our examination, we have assumed without any investigation (i) the legal capacity of each natural person, (ii) the full power and authority of each person other than State Street to execute, deliver and perform its obligations under each document heretofore executed and delivered or hereafter to be executed and delivered and to do each other act heretofore done or hereafter to be done by such person, (iii) the due authorization, execution and delivery by each person other than State Street of each document heretofore executed and delivered by such person, (iv) the legality, validity, binding effect and enforceability as to each person other than State Street of each document heretofore executed and delivered or hereafter to be 93 ALLIED Group, Inc. December 30, 1994 executed and delivered and of each other act heretofore done or hereafter to be done by such person, (v) the genuineness of each signature other than those of officers of State Street and the completeness and authenticity of each document submitted to us as an original, (vi) the conformity to the original of each document submitted to us as a copy, (vii) the authenticity of the original of each document submitted to us as a copy and (viii) no amendment or modification hereafter of any provision of any document. Insofar as our opinion relates to, or depends on, any matter of fact, we have relied on representations as set forth in the Stock Purchase Agreement, and upon written statements and certificates of officers of State Street and of public officials. We are members of the Bar of the Commonwealth of Massachusetts and, accordingly, we express no opinion herein concerning any law other than the laws of the Commonwealth of Massachusetts and the Federal laws of the United States of America, to the extent specifically referred to herein. As used in this opinion with respect to any matter, the qualifying phrase "to the best of our knowledge" means that, without independent review or verification, nothing has come to our attention in the course of our performing legal services for the Trustee with respect to said matter. We express no opinion as to matters governed by the Internal Revenue Code of 1986 (the "Code") or the Employee Retirement Income Security Act of 1974 ("ERISA"), both as amended, or federal or state securities laws. Based on and subject to the foregoing, we are of the opinion that: 1. State Street, acting solely in its capacity as Trustee, has all requisite power and authority to execute, deliver and perform its obligations under the Stock Purchase Agreement. 2. The execution, delivery and performance of the Stock Purchase Agreement by State Street, as Trustee, will not violate the charter or the by-laws of State Street or, to the best of our knowledge, any order, judgment or decree binding on State Street (individually or as trustee). 3. The Stock Purchase Agreement has been duly executed and delivered by State Street, as Trustee. 4. No authorization, approval or consent of, and no filings or registrations with, any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by State Street of the Stock Purchase Agreement or for the validity or enforceability thereof, except for filings with the Internal Revenue Service or the Department of Labor which may from time to time be required by ERISA or the Code. 94 ALLIED Group, Inc. December 30, 1994 We express no opinion as to any matter other than as expressly set forth above, and no other opinion is intended to be implied nor may be inferred herefrom. The opinions expressed herein are given as of the date hereof and we undertake no obligation hereby and disclaim any obligation to advise you of any change after the date hereof pertaining to any matter referred to herein. Neither this opinion nor any part hereof may be delivered to, used or relied upon by any person or entity other than you without our prior written consent. Very truly yours, ------------------------------ 95 Annex B December 30, 1994 State Street Bank and Trust Company Legal Division, Q6N 200 Newport Avenue North Quincy, MA 02171 Ladies and Gentlemen: I have acted as legal counsel of ALLIED Group, Inc., an Iowa corporation (the "Company"), and in such capacity I have advised the Company in connection with The ALLIED Group Employee Stock Ownership Trust (the "ESOP Trust"), a trust established under that certain Trust Agreement amended and restated as of April 16, 1991 (the "Trust Agreement"), between the Company and State Street Bank and Trust Company, as trustee (the "Trustee" or "State Street"), which implements and forms a part of the ALLIED Group Employee Stock Ownership Plan (the "Plan"), and in connection with the purchase by the Trustee of 9,247 shares of Series C ESOP Convertible Preferred Stock and _______ shares of Series D ESOP Convertible Preferred Stock of the Company, no par value (the "Preferred Stock"), pursuant to the Stock Purchase Agreement between the Company and the Trustee dated December 30, 1994 (the "Stock Purchase Agreement"). Capitalized terms used herein without definition shall have the meanings ascribed to them in the Stock Purchase Agreement. In connection therewith, I have reviewed executed copies of (i) the Stock Purchase Agreement, (ii) the Certificate of Designations in respect to the Series C Convertible Preferred Stock and Series D Convertible Preferred Stock (the "Certificate of Designations"), and (iii) such other certificates and documents as I have deemed relevant or necessary as a basis for the opinion expressed below. In such connection, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as photostatic or certified copies, and the authenticity of the originals of such copies. I have relied, to the extent I deem such reliance proper, upon representations made in the documents and certificates or representations made in writing by duly authorized representatives of the Company. In rendering the opinions contained herein, I have assumed that (a) State Street, as Trustee, has all requisite power and authority to execute, deliver, and perform its obligations under the Stock Purchase Agreement; (b) that the execution, delivery, and performance of the Stock Purchase Agreement by State Street, as Trustee, will not violate the charter or bylaws of State Street; and (c) that the Stock Purchase Agreement has been executed and delivered by State Street as Trustee and constitutes the legal, 96 December 30, 1994 valid, and binding obligation of the ESOP Trust, enforceable in accordance with its terms, except as enforcement may be limited by (i) bankruptcy, insolvency, reorganization, or similar laws affecting the enforcement of creditors' rights generally, or (ii) equitable principles of general applicability (regardless of whether such enforceability is considered in a proceeding in equity or law). I express no opinion with respect to the laws of any jurisdiction other than the State of Iowa and the United States of America. These opinions are expressed as of the date hereof and are therefore subject to subsequent interpretive, regulatory, legislative, and judicial developments. Based on and subject to the foregoing, I am of the opinion that: 1. The Company is validly existing and in good standing under the laws of the State of Iowa and has all requisite corporate power to execute, deliver, and perform the Stock Purchase Agreement. The Company has taken all necessary corporate action to authorize the execution, delivery, and performance of the Stock Purchase Agreement. 2. The Stock Purchase Agreement has been duly executed and delivered by the Company and is the legal, valid, and binding agreement of the Company, enforceable against the Company in accordance with its respective terms, except as the enforceability thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or similar laws affecting the enforcement of creditors' rights generally or (ii) equitable principles of general applicability (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3. The Preferred Shares have the rights, preferences, and qualifications set forth in the Certificate of Designations, have been validly authorized, and upon payment therefor as provided in the Stock Purchase Agreement, will be validly issued and outstanding and will constitute fully-paid and nonassessable shares of Series C ESOP Convertible Preferred Stock and Series D Convertible Preferred Stock of the Company. The shares of the Company's common stock, no par value ("Common Stock") initially reserved for issuance and to be issued upon conversion of the Preferred Shares in accordance with their terms have been duly and validly authorized and are sufficient in number for conversion of all the Preferred Shares, and such Common Stock, when so issued upon such conversion, will be duly and validly issued, fully-paid, and nonassessable. 4. Upon payment by the Trust as provided in the Stock Purchase Agreement, the Company will convey to the Trust good and valid title to the Preferred Shares free and 97 December 30, 1994 clear of any liens, claims, security interests, and encumbrances, except for beneficial interests accruing to Plan participants and their beneficiaries. 5. As of the date hereof, the Plan and the ESOP Trust in form meet in all material respects (a) the applicable requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), (b) the requirements applicable to an employee stock ownership plan for purposes of Section 4975(e)(7) of the Code and the regulations promulgated thereunder, and (c) the requirements for exemption from tax under Section 501(a) of the Code. 6. The shares of Preferred Stock to be purchased by the ESOP Trust constitute "employer securities" within the meaning of Section 409(1) of the Code and "qualifying employer securities" within the meaning of Section 407(d)(5) of ERISA. 7. The shares of Preferred Stock to be purchased by the ESOP Trust have voting rights equivalent to the common stock into which such shares may be converted, and the Plan meets the voting rights requirements of Section 409(e)(2) of the Code with respect to such shares. In rendering the foregoing opinions and any other opinions expressed in this letter, I have relied on the following assumptions: a. Except as to matters expressly opined on herein, the Plan and ESOP Trust have been, and will continue to be, administered and operated at all times strictly in accordance with their terms and with all requirements of applicable law including, but not limited to, all of the requirements applicable to a qualified plan under Section 401(a); the requirements applicable to an "employee stock ownership plan" (within the meaning of Section 4975(e)(7)) under Section 4975 and 409 of the Code; and the requirements applicable to a tax- exempt trust under Section 501(a); and with the provisions of ERISA and all regulations thereunder. b. The conversion price at which the shares of Preferred Stock may be converted to common stock of the Company is reasonable as of the date of acquisition of such Preferred Stock by the ESOP Trust. c. No fiduciary of the Plan has received any consideration of the type described in Section 4975(c)(1)(F) of the Code and Section 406(b)(3) of ERISA in connection with the transactions described herein. 98 December 30, 1994 d. The fiduciaries of the Plan and the ESOP Trust have acted prudently and in good faith, and have given appropriate consideration to those facts and circumstances that are relevant to the transactions in accordance with the fiduciary requirements of part 4 of Title I of ERISA. In connection with the assumptions made in paragraph (b) above, I understand that the Trustee has received an opinion from Whitman Heffernan and Rhein Co., Inc. to effect that (i) the price to be paid by the ESOP Trust per share of Preferred Stock is not in excess of fair market value or adequate consideration, as defined under Title I of the Employee Retirement Income Security Act of 1974, as amended, including the regulations thereunder ("ERISA"); and (ii) the terms and conditions of the proposed transaction, including the terms governing the right to convert the Preferred Stock into Common Stock of the Company, are fair and reasonable to the ESOP Trust from a financial point of view. These opinions are rendered solely to the Trustee in connection with the transactions of the Trustee contemplated by the Stock Purchase Agreement. No other person, firm, or corporation may rely upon these opinions for any purpose without my prior written consent. Yours very truly, - ------------------------- EX-4 4 4.9 STOCK PURCHASE AGREEMENT 95 99 EXHIBIT 4.9 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT dated as of December 29, 1995, between ALLIED GROUP, INC., an Iowa corporation (the "Company"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, solely in its capacity as trustee under the Plan defined below and not individually (the "Trustee"). WITNESSETH; WHEREAS, the Company has established and maintains The ALLIED Group Employee Stock Ownership Plan (the "Plan"), for the benefit of all employees eligible to participate therein; WHEREAS, the Plan qualifies as an "employee stock ownership plan" within the meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, the Company has established and maintains The ALLIED Group Employee Stock Ownership Trust (the "Trust") and the Company has appointed the Trustee to act as the trustee thereof pursuant to a trust agreement between the Company and the Trustee amended and restated as of April 16, 1991 (the "Trust Agreement"); WHEREAS, the Trust Agreement provides that the assets of the trust created thereunder shall be invested in, among other things, shares of common stock of the Company ("Common Stock") or convertible preferred stock of the Company; WHEREAS, the Company has designated 500,000 shares as a series of convertible preferred stock, with no par value, called the Series D ESOP Convertible Preferred Stock, of which 43,738 shares were previously issued and of which the Company has offered 13,426 shares for sale to the Trustee (the "Series D Preferred Stock"); WHEREAS, as directed by the ESOP Committee (the "Committee") under the terms of the Trust Agreement, the Trustee is authorized to purchase shares of Series D Preferred Stock and the Company wishes to issue and sell such shares of Series D Preferred Stock to the Trustee, and no commission will be paid by the Trustee in connection with the purchase of such shares of Series D Preferred Stock; and WHEREAS, the Trustee is required under the Trust Agreement to independently determine (i.e., without direction from the Company) the purchase price that shall be paid for any stock of the Company, and the Trustee has received an opinion of Whitman Heffernan & Rhein Co., Inc. (the "Valuation Opinion") that the purchase of the shares of Series D Preferred Stock pursuant to the terms to this Agreement is fair and equitable to the participants in the Plan and the price to be paid for the Series D Preferred Stock is not in excess of adequate consideration. 100 NOW THEREFORE, in consideration of these premises and the mutual promises contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. The Trustee hereby agrees to purchase (the "Purchase") with the funds directed by the Committee, and the Company hereby agrees to issue and sell for cash to the Trust 13,426 shares of Series D Preferred Stock (the "Shares") for an aggregate purchase price (the "Purchase Price") of $725,000 (or approximately $54.00 per share). The Company will pay all stamp and other transfer taxes, if any, which may be payable in respect of the issuance, sale and delivery of the Shares and shall be entitled to any refund thereof. 2. The Purchase shall be consummated at or about 5:30 P.M. Central Standard Time on December 29, 1995 (such date of delivery being hereinafter called the "Delivery Date") at the offices of the Company, Des Moines, Iowa or as otherwise agreed by the parties hereto. On the Delivery Date, the Trustee shall deliver to the Company the Purchase Price in immediately available funds together with an opinion of Goodwin, Proctor & Hoar, counsel to the Trustee, in the form attached as Annex A hereto and a copy of the Valuation Opinion, and the Company will deliver to the Trustee a certificate or certificates representing the Shares which shall be registered in the name of the Trustee, as trustee under the Plan, or in the name of its nominee, together with an opinion of Katherine E. Schmidt, Associate Corporate Counsel of the Company, in the form attached as Annex B hereto. 3. The Company hereby represents, warrants and covenants to the Trustee as follows: a. the Company (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Iowa and (ii) has full corporate power and authority to execute and deliver this Agreement, to carry out the transactions contemplated hereby, to own, lease and operate its assets and properties, and to carry on its business as now being conducted; b. this Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and to general principles of equity (regardless of whether considered in a proceeding at law or in equity); 101 c. the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby will not violate (i) the Company's Certificate of Incorporation or By-laws, each as amended to date or, (ii) any provision of any agreement, instrument, order, award, judgment or decree to which the Company is a party or by which it or any of its businesses or properties are bound, or (iii) any statute, rule or regulation of any federal, state or local government or governmental agency applicable to the Company except in the case of subparagraphs (ii) or (iii) of this Section 3(c) for any such violations which either individually or in the aggregate do not have a material adverse effect on the business or properties of the Company and its subsidiaries taken as a whole; d. except for any necessary applications with the National Association of Securities Dealers Automated Quotation system with respect to any newly issued shares of Common Stock which may be issued upon conversion of the Shares, no approval, authorization or other action by, or filing (other than such filings of the Company as may be necessary in connection with any registration for sale of the common stock that may be issuable upon conversion of the Shares) with, any government authority is required to be obtained or made by the Company in connection with the execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby; e. the Shares have been duly and validly authorized and, when issued and delivered to and paid for by the Trustee pursuant to this Agreement, (i) will be validly issued, fully paid and nonassessable and not liable to any further call or assessment, (ii) the certificates representing the Shares comply with the applicable requirements of Iowa law and (iii) the Trustee will acquire full right, title and interest in and to the Shares free and clear of any and all liens, claims, charges and encumbrances (other than rights of participants in the Plan); f. the Company (i) has duly and validly authorized and reserved for issuance a sufficient number of shares of Common Stock, as may be issued, from time to time, upon conversion of the Shares and (ii) such shares of Common Stock, when issued upon conversion of the Shares in accordance with the Certificate of Designations, will be validly issued, fully paid and nonassessable and not liable to any further call or assessment and will not be subject to preemptive rights; 102 g. the Plan has been duly authorized and established, and the Trust Agreement has been duly authorized, by all necessary corporate action on the part of the Company; the Plan constitutes in all material respects in form an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code, Code Regulation Section 54.4975-11 and Section 407(d)(6) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); and each of the Shares constitute a qualifying employer security within the meaning of Section 4975(e)(8) of the Code; provided, however, that in making the representations contained in this Section 3(g) the Company has relied upon the correctness of the Trustee's representations contained in Section 4(f) of this Agreement; h. the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and quarterly reports on Form 10-Q for the quarterly periods ended March 31, June 30, and September 30, 1995, on the respective dates filed with the Securities and Exchange Commission ("SEC"), conformed in all material respects to the requirements of the Securities Exchange Act of 1934, as amended; i. no person or other entity is entitled to any fees or commissions due to the Company's actions in connection with the purchase and sale of the Shares; j. the Company shall use its best efforts during the term of the Trust to cause the Plan to maintain its qualification as an employee stock ownership plan within the meaning of Section 4975 of the Code; and k. the Company has furnished and will continue to furnish to the Trustee from time to time copies of all reports and financial statements which the Company shall send or make available to its public stockholders generally, all other written communications from the Company to public shareholders generally and each regular or periodic report, proxy statement, registration statement or prospectus, if any, filed by the Company with the SEC; and 4. The Trustee represents and warrants to the Company as follows: a. the Trustee (i) is a duly organized and validly existing Massachusetts trust company in good standing and with full power and authority to act as Trustee and exercise trust powers, including without limitation, the trust powers provided in and contemplated by the Trust Agreement, and (ii) has full corporate power and 103 authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby; b. this Agreement has been duly authorized, executed and delivered by the Trustee and constitutes a valid and binding obligation of the Trustee, enforceable against the Trustee in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights generally and to general principles of equity (regardless of whether considered in a proceeding at law or in equity); c. the execution, delivery and performance of this Agreement by the Trustee and the consummation of the transactions contemplated hereby will not violate (i) the Trustee's Corporate Charter or By-laws, each as amended to date, or (ii) any provision of any agreement, instrument, order, award, judgment or decree to which the Trustee is a party or by which it or any of its businesses or properties are bound or (iii) any statute, rule or regulation of any federal, state or local government or governmental agency applicable to the Trustee except in the case of subparagraphs (ii) or (iii) of this Section 4(c) for any such violations which either individually or in the aggregate do not have a material adverse effect on the business or properties of the Trustee; provided, however, that in making the representations contained in clause (iii) of this Section 4(c), the Trustee has relied upon the correctness of the Company's representations in Sections 3(g), as limited by the proviso therein, and 3(i) of this Agreement and (2) the Committee's direction letter dated December 28, 1995; d. no approval, authorization or other action by, or filing with, any governmental authority is required to be obtained or made by the Trustee in connection with the execution, delivery and performance by the Trustee of this Agreement and the consummation of the transactions contemplated hereby; e. the Trustee is acquiring the Shares on behalf of the Plan solely for investment purposes and not with a view to, or for sale in connection with, any distribution thereof; provided, however, that the Shares will be allocated to the accounts of the participants in the Plan pursuant to the terms of the Plan and distributions may be made to participants and beneficiaries of the Plan in shares of Common Stock issuable upon conversion of the Series D Preferred Stock or payable upon redemption of Series D Preferred Stock, including upon exercise of the rights set forth 104 in Section 7 of the Certificate of Designations, or in shares of Common Stock otherwise acquired by the Trustee pursuant to the terms of the Plan, it being understood that the Shares are being sold to the Trustee pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon this representation and warranty; f. the purchase of the Shares on the Delivery Date by the Trust for the Purchase Price is for not greater than "adequate consideration" as that phrase is defined in Section 3(18) of ERISA, and any proposed regulations thereunder, and will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975(c) of the Code by reason of the exemptions set forth in Section 408(e) of ERISA and Section 4975(d) (13) of the Code; provided that in making the representations contained in this Section 4(f), the Trustee has relied upon the correctness of the Company's representations contained in Sections 3(g), as limited by the proviso therein, and 3(i) of this Agreement as well as the Valuation Opinion; g. the Shares purchased by the Trust have a conversion price which is reasonable as of the date hereof; provided, however, that in making the representations contained in this Section 4(g), the Trustee has relied upon the correctness of the Valuation Opinion; and h. no person or other entity is entitled to any commissions due to the Trustee's actions in connection with the purchase and sale of the Shares. 5. The Trustee hereby (i) acknowledges that the Shares purchased on behalf of the Trust pursuant to this Agreement may, by their terms, be issued only to the Trustee or a successor trustee acting on behalf of the Trust, (ii) acknowledges that the Trust Agreement provides that none of the Series D Preferred Shares shall be transferred in any manner to participants under the Plan but in lieu thereof shares of Common Stock shall be distributed to participants or transferred to the participants' Section 401(k) accounts pursuant to the terms of the Plan, (iii) acknowledges that the Certificate of Designations provides that any Shares that are transferred sold or otherwise disposed of by the Trustee shall be automatically, and without any action on the part of the Company, converted into shares of Common Stock, and (iv) agrees not to transfer, sell or otherwise dispose of any of the Shares or other shares of Series D Preferred Stock or to attempt to do so, except in compliance with the Trust Agreement. Nothing contained in this Section 5 shall be deemed to restrict the ability of the Trustee to convert shares of Series D Preferred Stock into shares of Common 105 Stock or to require the Company to redeem shares of Series D Preferred Stock, in each case in accordance with the Certificate of Designations, or the ability of the Trustee to transfer, sell or otherwise dispose of shares of Common Stock of the Company issued upon conversion of shares of Series D Preferred Stock or upon a redemption of shares of Series D Preferred Stock. 6. The Trustee understands that the certificate(s) representing the Shares will bear the following legend and that a notation restricting their transfer will be made on the stock transfer books of the Company: Series D: The shares of Series D preferred stock represented by this certificate have not been registered under the Securities Act of 1933, as amended. Such shares of stock may not be sold, assigned, pledged or otherwise transferred in the absence of an effective registration statement under said Securities Act covering such transfer or an opinion of counsel satisfactory to the issuer that registration under said Securities Act is not required. The shares of stock represented by this certificate are subject to restrictions on transfer set forth in the Certificate of Designations relating to the Corporation's Series D ESOP Convertible Preferred Stock and in a Stock Purchase Agreement dated as December 29, 1995. The Corporation will furnish a copy of such agreement to the holder of this certificate without charge upon written request. 7. The Company has at its expense, prepared, filed, and obtained the effectiveness of, and will use its best efforts to cause to remain effective, a registration statement on an appropriate form, including a final prospectus (the "Registration Statement"), under and complying with the Securities Act and the rules and regulations thereunder, relating to the number of shares of the Company's Common Stock into which the Shares are from time to time convertible or as are acquired upon a redemption or repurchase, including a redemption pursuant to the provisions of Section 7 of the Certificate of Designations, as shall be necessary, in the opinion of counsel to the Company, for the Trustee to carry out its responsibilities under the Plan and Trust Agreement. Whenever shares of Common Stock are so registered, the Company shall also use its best efforts to register or qualify such shares covered by the Registration Statement under the "blue sky" or securities laws of such jurisdictions within the United States as the Trustee may reasonably request; provided, however, that the Company shall not be required to consent to the general service of process for all purposes in any jurisdiction where it is not then qualified to do business. 106 8. The Company agrees that it will use its best efforts to maintain the qualification of the Plan as an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code. 9. The representations, warranties and agreements in this Agreement shall survive the date hereof and the Delivery Date. 10. This Agreement shall be governed by and construed in accordance with the laws of the State of Iowa applicable to contracts to be executed, delivered and performed in such state, to the extent not preempted by the laws of the United States of America. The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the courts of the State of Iowa and the United States of America located in Polk County, Iowa for any actions, suits or proceedings arising out of or relating to this Agreement. This Agreement, the Plan and Trust Agreement (including documents referred to therein or delivered pursuant thereto) set forth the entire Agreement of the parties with respect to the subject matter contained herein and supersede all prior oral and written agreements, if any, between the parties with respect to such subject matter. This Agreement shall bind and inure to the benefit of all successors to, and assigns of, the parties hereto; provided, however, that the Trustee shall not assign or otherwise transfer its interest in, or obligations under, this Agreement without the written consent of the Company, except that the Trustee may assign, without the Company's written consent, all its rights hereunder to any institution exercising trust powers in connection with any such institution assuming the duties of a trustee under the Trust Agreement. In the event that any provision of this Agreement shall be declared unenforceable by a court of competent jurisdiction, such provision shall be stricken herefrom and the remainder of this Agreement shall remain binding on the parties hereto. In the event any such provision shall be so declared unenforceable due to its scope or breadth, then it shall be narrowed to the scope or breadth permitted by law. 11. This Agreement may be executed in two counterparts, each of which shall be deemed an original, but each of which taken together shall constitute one and the same instrument. 12. This Agreement may not be modified with respect to the obligations of a party hereto except by an instrument in writing signed by such party. 13. The terms and provisions of the Trust Agreement relating to the nature of the responsibilities of the Trustee and the indemnification by the Company of the Trustee are incorporated herein by reference and made applicable to this Agreement. 107 14. All notices, requests, or other communications required or permitted to be delivered hereunder shall be in writing, delivered to each party hereto at its address specified in the Trust Agreement and shall become effective as therein provided. Any party hereto may from time to time, by written notice given as aforesaid, designate any other address to which notices, requests or other communications addressed to it shall be sent. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first above written. ALLIED GROUP, INC. By ________________________________ Name ______________________________ Title _____________________________ STATE STREET BANK AND TRUST COMPANY solely in its capacity as Trustee under the Plan and Trust Agreement referred to herein and not individually By _________________________________ Name _______________________________ Title ______________________________ 108 Annex A December 29, 1995 ALLIED Group, Inc. 701 Fifth Avenue Des Moines, Iowa 50391-2003 Re: The ALLIED Group Employee Stock Ownership Trust Ladies and Gentlemen: We have acted as special counsel for State Street Bank and Trust Company ("State Street"), as trustee (the "Trustee") of The ALLIED Group Employee Stock Ownership Trust (the "Trust"), which forms a part of the ALLIED Group Employee Stock Ownership Plan ("Plan"), and which is evidenced by the Trust Agreement dated April 16, 1991 (the "ESOP Trust Agreement") between Trustee and ALLIED Group, Inc. (the "Company") in connection with the purchase by the Trustee of _______ shares Series D ESOP Convertible Preferred Stock of the Company, no par value (the "Preferred Stock") pursuant to the Stock Purchase Agreement between the Company and the Trustee dated as of December 29, 1995 (the "Stock Purchase Agreement"). Capitalized terms used herein that are not defined herein have the meanings set forth in the Stock Purchase Agreement. In connection therewith, we have reviewed executed copies of: (i) the Stock Purchase Agreement; (ii) the ESOP Trust Agreement; (iii) the Certificate of Designations of Series D ESOP Convertible Preferred Stock of ALLIED Group, Inc.; (iv) the corporate charter and by-laws of State Street, both as amended to date; (v) other records, documents, and instruments relating to the powers and organization of State Street and to State Street's acceptance of fiduciary duties, obligations and trusts; and (vi) such other certificates and documents as we have deemed relevant or necessary as a basis for the opinion expressed below. In our examination, we have assumed without any investigation (i) the legal capacity of each natural person, (ii) the full power and authority of each person other than State Street to execute, deliver and perform its obligations under each document heretofore executed and delivered or hereafter to be executed and delivered and to do each other act heretofore done or hereafter to be done by such person, (iii) the due authorization, execution and delivery by each person other than State Street of each document heretofore executed and delivered by such person, (iv) the legality, validity, binding effect and enforceability as to each person other than State Street of each document heretofore executed and delivered or hereafter to be executed and delivered and of each other act heretofore done or hereafter to be done by such person, (v) the genuineness of each signature other than those of officers of State Street and the 109 ALLIED Group, Inc. December 29, 1995 completeness and authenticity of each document submitted to us as an original, (vi) the conformity to the original of each document submitted to us as a copy, (vii) the authenticity of the original of each document submitted to us as a copy and (viii) no amendment or modification hereafter of any provision of any document. Insofar as our opinion relates to, or depends on, any matter of fact, we have relied on representations as set forth in the Stock Purchase Agreement, and upon written statements and certificates of officers of State Street and of public officials. We are members of the Bar of the Commonwealth of Massachusetts and, accordingly, we express no opinion herein concerning any law other than the laws of the Commonwealth of Massachusetts and the Federal laws of the United States of America, to the extent specifically referred to herein. As used in this opinion with respect to any matter, the qualifying phrase "to the best of our knowledge" means that, without independent review or verification, nothing has come to our attention in the course of our performing legal services for the Trustee with respect to said matter. We express no opinion as to matters governed by the Internal Revenue Code of 1986 (the "Code") or the Employee Retirement Income Security Act of 1974 ("ERISA"), both as amended, or federal or state securities laws. Based on and subject to the foregoing, we are of the opinion that: 1. State Street, acting solely in its capacity as Trustee, has all requisite power and authority to execute, deliver and perform its obligations under the Stock Purchase Agreement. 2. The execution, delivery and performance of the Stock Purchase Agreement by State Street, as Trustee, will not violate the charter or the by-laws of State Street or, to the best of our knowledge, any order, judgment or decree binding on State Street (individually or as trustee). 3. The Stock Purchase Agreement has been duly executed and delivered by State Street, as Trustee. 4. No authorization, approval or consent of, and no filings or registrations with, any governmental or regulatory authority or agency are necessary for the execution, delivery or performance by State Street of the Stock Purchase Agreement or for the validity or enforceability thereof, except for filings with the Internal Revenue Service or the Department of Labor which may from time to time be required by ERISA or the Code. 110 ALLIED Group, Inc. December 29, 1995 We express no opinion as to any matter other than as expressly set forth above, and no other opinion is intended to be implied nor may be inferred herefrom. The opinions expressed herein are given as of the date hereof and we undertake no obligation hereby and disclaim any obligation to advise you of any change after the date hereof pertaining to any matter referred to herein. Neither this opinion nor any part hereof may be delivered to, used or relied upon by any person or entity other than you without our prior written consent. Very truly yours, ------------------------------ 111 Annex B December 29, 1995 State Street Bank and Trust Company Legal Division, Q6N 200 Newport Avenue North Quincy, MA 02171 Ladies and Gentlemen: I have acted as legal counsel of ALLIED Group, Inc., an Iowa corporation (the "Company"), and in such capacity I have advised the Company in connection with The ALLIED Group Employee Stock Ownership Trust (the "ESOP Trust"), a trust established under that certain Trust Agreement amended and restated as of April 16, 1991 (the "Trust Agreement"), between the Company and State Street Bank and Trust Company, as trustee (the "Trustee" or "State Street"), which implements and forms a part of the ALLIED Group Employee Stock Ownership Plan (the "Plan"), and in connection with the purchase by the Trustee of _______ shares of Series D ESOP Convertible Preferred Stock of the Company, no par value (the "Preferred Stock"), pursuant to the Stock Purchase Agreement between the Company and the Trustee dated December 29, 1995 (the "Stock Purchase Agreement"). Capitalized terms used herein without definition shall have the meanings ascribed to them in the Stock Purchase Agreement. In connection therewith, I have reviewed executed copies of (i) the Stock Purchase Agreement, (ii) the Certificate of Designations in respect to the Series D Convertible Preferred Stock (the "Certificate of Designations"), and (iii) such other certificates and documents as I have deemed relevant or necessary as a basis for the opinion expressed below. In such connection, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as photostatic or certified copies, and the authenticity of the originals of such copies. I have relied, to the extent I deem such reliance proper, upon representations made in the documents and certificates or representations made in writing by duly authorized representatives of the Company. In rendering the opinions contained herein, I have assumed that (a) State Street, as Trustee, has all requisite power and authority to execute, deliver, and perform its obligations under the Stock Purchase Agreement; (b) that the execution, delivery, and performance of the Stock Purchase Agreement by State Street, as Trustee, will not violate the charter or bylaws of State Street; and (c) that the Stock Purchase Agreement has been executed and delivered by State Street as Trustee and constitutes the legal, valid, and binding obligation of the ESOP Trust, enforceable in 112 December 29, 1995 accordance with its terms, except as enforcement may be limited by (i) bankruptcy, insolvency, reorganization, or similar laws affecting the enforcement of creditors' rights generally, or (ii) equitable principles of general applicability (regardless of whether such enforceability is considered in a proceeding in equity or law). I express no opinion with respect to the laws of any jurisdiction other than the State of Iowa and the United States of America. These opinions are expressed as of the date hereof and are therefore subject to subsequent interpretive, regulatory, legislative, and judicial developments. Based on and subject to the foregoing, I am of the opinion that: 1. The Company is validly existing and in good standing under the laws of the State of Iowa and has all requisite corporate power to execute, deliver, and perform the Stock Purchase Agreement. The Company has taken all necessary corporate action to authorize the execution, delivery, and performance of the Stock Purchase Agreement. 2. The Stock Purchase Agreement has been duly executed and delivered by the Company and is the legal, valid, and binding agreement of the Company, enforceable against the Company in accordance with its respective terms, except as the enforceability thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or similar laws affecting the enforcement of creditors' rights generally or (ii) equitable principles of general applicability (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3. The Preferred Shares have the rights, preferences, and qualifications set forth in the Certificate of Designations, have been validly authorized, and upon payment therefor as provided in the Stock Purchase Agreement, will be validly issued and outstanding and will constitute fully-paid and nonassessable shares of Series D Convertible Preferred Stock of the Company. The shares of the Company's common stock, no par value ("Common Stock") initially reserved for issuance and to be issued upon conversion of the Preferred Shares in accordance with their terms have been duly and validly authorized and are sufficient in number for conversion of all the Preferred Shares, and such Common Stock, when so issued upon such conversion, will be duly and validly issued, fully-paid, and nonassessable. 4. Upon payment by the Trust as provided in the Stock Purchase Agreement, the Company will convey to the Trust good and valid title to the Preferred Shares free and clear of any liens, claims, security interests, and 113 December 29, 1995 encumbrances, except for beneficial interests accruing to Plan participants and their beneficiaries. 5. As of the date hereof, the Plan and the ESOP Trust in form meet in all material respects (a) the applicable requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), (b) the requirements applicable to an employee stock ownership plan for purposes of Section 4975(e)(7) of the Code and the regulations promulgated thereunder, and (c) the requirements for exemption from tax under Section 501(a) of the Code. 6. The shares of Preferred Stock to be purchased by the ESOP Trust constitute "employer securities" within the meaning of Section 409(1) of the Code and "qualifying employer securities" within the meaning of Section 407(d)(5) of ERISA. 7. The shares of Preferred Stock to be purchased by the ESOP Trust have voting rights equivalent to the common stock into which such shares may be converted, and the Plan meets the voting rights requirements of Section 409(e)(2) of the Code with respect to such shares. In rendering the foregoing opinions and any other opinions expressed in this letter, I have relied on the following assumptions: a. Except as to matters expressly opined on herein, the Plan and ESOP Trust have been, and will continue to be, administered and operated at all times strictly in accordance with their terms and with all requirements of applicable law including, but not limited to, all of the requirements applicable to a qualified plan under Section 401(a); the requirements applicable to an "employee stock ownership plan" (within the meaning of Section 4975(e)(7)) under Section 4975 and 409 of the Code; and the requirements applicable to a tax-exempt trust under Section 501(a); and with the provisions of ERISA and all regulations thereunder. b. The conversion price at which the shares of Preferred Stock may be converted to common stock of the Company is reasonable as of the date of acquisition of such Preferred Stock by the ESOP Trust. c. No fiduciary of the Plan has received any consideration of the type described in Section 4975(c)(1)(F) of the Code and Section 406(b)(3) of ERISA in connection with the transactions described herein. 114 December 29, 1995 d. The fiduciaries of the Plan and the ESOP Trust have acted prudently and in good faith, and have given appropriate consideration to those facts and circumstances that are relevant to the transactions in accordance with the fiduciary requirements of part 4 of Title I of ERISA. In connection with the assumptions made in paragraph (b) above, I understand that the Trustee has received an opinion from Whitman Heffernan and Rhein Co., Inc. to effect that (i) the price to be paid by the ESOP Trust per share of Preferred Stock is not in excess of fair market value or adequate consideration, as defined under Title I of the Employee Retirement Income Security Act of 1974, as amended, including the regulations thereunder ("ERISA"); and (ii) the terms and conditions of the proposed transaction, including the terms governing the right to convert the Preferred Stock into Common Stock of the Company, are fair and reasonable to the ESOP Trust from a financial point of view. These opinions are rendered solely to the Trustee in connection with the transactions of the Trustee contemplated by the Stock Purchase Agreement. No other person, firm, or corporation may rely upon these opinions for any purpose without my prior written consent. Yours very truly, - ------------------------- EX-10 5 10.7 MIS AGREEMENT 95 115 EXHIBIT 10.7 AMENDED AND RESTATED MANAGEMENT INFORMATION SERVICES AGREEMENT Effective January 1, 1995 116 TABLE OF CONTENTS Page ---- I. Definitions...........................................................1 Section 1.1 AGI and Its Subsidiaries..........................1 Section 1.2 ALFC and Its Subsidiaries.........................1 Section 1.3 Coordinating Committee............................1 Section 1.4 Licensee..........................................1 Section 1.5 Management Information Services...................1 Section 1.6 Methods/Procedures................................2 Section 1.7 Mutual and Its Subsidiaries.......................2 Section 1.8 PC................................................2 Section 1.9 PC Support........................................2 Section 1.10 Pooling Agreement.................................2 Section 1.11 Pool Participants.................................2 Section 1.12 Programming/Development...........................2 Section 1.13 Software..........................................2 II. Services To Be Performed..............................................3 Section 2.1 General MIS.......................................3 Section 2.2 PC Support........................................3 Section 2.3 PC Maintenance....................................3 Section 2.4 PC Rating Disc Updates............................3 Section 2.5 Agency Automation.................................3 Section 2.6 Flexible Premium Payment Plans....................3 Section 2.7 Printing..........................................4 Section 2.8 Policy Assembly...................................4 Section 2.9 Postage/Mail Processing...........................4 Section 2.10 Supply Services...................................4 Section 2.11 Telephone/Communications..........................4 Section 2.12 Equipment Leasing.................................4 Section 2.13 License of Software...............................5 Section 2.14 Other Services....................................5 Section 2.15 ALIC Rights.......................................6 III. Payment For Services..................................................6 Section 3.1 General...........................................6 Section 3.2 Fees..............................................6 IV. Term, Termination, and Change of Control..............................6 Section 4.1 Term and Termination..............................6 Section 4.2 Change of Control of ALFC.........................6 Section 4.3 Change of Control of AGI..........................7 V. Dispute Resolution....................................................7 Section 5.1 AGI and Its Subsidiaries..........................7 Section 5.2 Mutual and Its Subsidiaries.......................8 Section 5.3 ALFC and Its Subsidiaries.........................8 Section 5.4 All Other Disputes................................8 Section 5.5 Arbitration.......................................8 VI. Confidential Information and Trade Secrets............................9 Section 6.1 Obligation to Keep Confidential ..................9 VII. Miscellaneous........................................................10 Section 7.1 Assignment.......................................10 Section 7.2 Waiver; Remedies.................................10 Section 7.3 Permissive Release of Confidential Information...10 Section 7.4 Notices..........................................11 Section 7.5 Governing Law....................................11 Section 7.6 Enforceability...................................11 Section 7.7 Survival of Representations, Warranties, and Covenants....................................11 Section 7.8 Counterparts ....................................11 Section 7.9 Headings.........................................11 Section 7.10 Entire Agreement.................................11 Section 7.11 Amendments.......................................12 117 Signature Page...............................................................13 Addendum A Addendum B 118 AMENDED AND RESTATED MANAGEMENT INFORMATION SERVICES AGREEMENT THIS AGREEMENT is made as of this ____ day of December, 1995, to be effective January 1, 1995, by and among ALLIED Group Information Systems, Inc. ("AGIS"), ALLIED Mutual Insurance Company ("Mutual"), ALLIED Group, Inc. ("AGI"), AMCO Insurance Company ("AMCO"), ALLIED General Agency Company ("AGA"), ALLIED Group Mortgage Company ("AGMC"), ALLIED Group Leasing Corporation ("AGLC"), ALLIED Life Financial Corporation ("ALFC"), ALLIED Life Insurance Company ("ALLIED Life"), ALLIED Life Brokerage Agency ("ALBA"), ALLIED Group Merchant Banking Corporation ("AGMBC"), and ALLIED Group Insurance Marketing Company ("AGIMC"). Mutual, AGI, AMCO, AGA, AGMC, AGLC, ALLIED Life, ALBA, ALFC, AGMBC, and AGIMC shall be hereinafter referred to collectively as the "Companies". WITNESSETH: WHEREAS, the Companies and AGIS entered into an Amended and Restated Management Information Services Agreement effective January 1, 1994 (the "Agreement") on February 27, 1995; and WHEREAS, the parties desire to amend and restate the terms of the Agreement to update the fees and other services that AGIS is providing to the Companies for the 1995 calendar year. NOW, THEREFORE, in consideration of the foregoing premises, and for and in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: I. DEFINITIONS 1.1. "AGI and Its Subsidiaries" shall mean the following companies which are parties to this Agreement: AGI, AMCO, AGA, AGMC, AGLC, and AGIS. 1.2 "ALFC and Its Subsidiaries" shall mean the following companies which are parties to this Agreement: ALFC, ALLIED Life, ALBA and AGMBC. 1.3. "Coordinating Committee" shall mean the joint meeting of the coordinating committees established by Mutual, AGI, and ALFC in accordance with their respective bylaws or pursuant to resolution for the purpose, among others, of resolving issues under this Agreement. 1.4 "Licensee" shall mean AMCO. 1.5. "Management Information Services" or "MIS" shall mean the Programming/Development, Methods/Procedures, processing, and support of all insurance-related information and data functions, including, but not limited to, policy processing, claims processing, data processing, accounting, billing, rating, marketing, recordkeeping, statistical and regulatory reporting, and 119 insurance-related services necessary or helpful in the operation of the Companies. MIS does not include: (a) third-party data processing services provided to any of the Companies by contract; (b) processing flexible premium payment plans; or (c) printing services, unless otherwise provided herein. 1.6. "Methods/Procedures" shall mean studies or work flow analysis, training on software systems, and other computer support. 1.7. "Mutual and Its Subsidiaries" shall mean the following companies which are parties to this Agreement: Mutual and AGIMC. 1.8. "PC" shall mean personal computer. 1.9. "PC Support" shall mean PC installation, training, and assistance, but shall not include PC maintenance. 1.10. "Pooling Agreement" shall mean the Second Amended and Restated Reinsurance Pooling Agreement dated December 14, 1992, as amended February 18, 1993, pursuant to which AMCO as the pool administrator provides certain services to Mutual, ALLIED Property and Casualty Insurance Company, and Depositors Insurance Company. 1.11. "Pool Participants" shall mean AMCO, Mutual, ALLIED Property and Casualty Insurance Company, and Depositors Insurance Company. 1.12. "Programming/Development" shall mean the analysis, design, programming, and development of PC and mainframe Software and shall include mainframe Software consulting and maintenance services. The maintenance services shall include, but not be limited to, error corrections, enhancements, and updates. Programming/Development shall not include those programming functions performed by any of the Companies on personal computers, which are generally limited to actuarial functions, unique branch office recordkeeping requirements, and internal accounting reports. 1.13. "Software" shall mean any and all computer programs, models, plans, outlines, packages, or systems thereof and related documentation or manuals as developed, or which may be developed in the future by AGIS, and used by the Companies for MIS, but does not include those computer programs which are used by any of the Companies pursuant to license agreements with third parties. 120 II. SERVICES TO BE PERFORMED 2.1. General MIS. AGIS shall provide all MIS required by AMCO, ALLIED Life, AGI's human resources department, and AGIMC. The MIS to be provided during the term of this Agreement shall be substantially the same as those services presently provided to or utilized by AMCO, ALLIED Life, AGI's human resources department, and AGIMC as of the effective date of this Agreement. In addition, AGIS shall provide MIS to any of the Companies if requested by such Companies. The scope and extent of MIS provided under this Agreement may be amended or modified from time to time by written agreement between AGIS and the party receiving the MIS. 2.2. PC Support. AGIS shall provide PC Support to AMCO, ALLIED Life, ALBA, AGI's human resources department, AGA, AGMC, AGLC, AGMBC, and AGIMC. AGIS shall also provide AGIMC with PC Support for its phone system. 2.3. PC Maintenance. AGIS will assist in coordinating with each of the Companies for third-party vendor maintenance on the personal computers, and each of the Companies shall be responsible for payment to such third-party vendor. 2.4. PC Rating Disc Updates. AGIS shall provide to AMCO custom software updates to the branch office PC rating discs. 2.5. Agency Automation. AGIS shall provide to AMCO access to data processing on an automated management and accounting ("AMANDA+") data processing system which will be offered by the Pool Participants to certain of their insurance agencies until December 31, 1995 and AGIS and the Pool Participants will negotiate, in good faith, fees applicable to this continued service. 2.6. Flexible Premium Payment Plans. AGIS shall perform the processing, billing, scanline, and remittance services with regard to the flexible premium payment plan offered by the Pool Participants to their insureds. All service charges and reinstatement fees assessed to insureds pursuant to the flexible premium payment plan shall be retained by the Pool Participants. AGIS also shall perform the remittance services for the Motor Club of Iowa Insurance Company pursuant to the Assumption Reinsurance Agreement between AMCO and the Motor Club of Iowa Insurance Company. It is contemplated that AMCO may enter similar agreements with other insurance companies for which AGIS will perform processing, billing, scanline, or remittance services for these other insurance companies, and AGIS agrees to provide such services provided that AMCO obtains AGIS' written consent prior to entering such agreements. AMCO shall be responsible for payment to AGIS for the services rendered with respect to the 121 flexible premium payment plan and the remittance services for the Motor Club of Iowa Insurance Company and other insurance companies which may be provided these services as contemplated above. 2.7. Printing. (a) Forms and Reports. AGIS shall generate the following data and record output for AMCO and ALLIED Life: (i) policy forms, (ii) claim forms, (iii) billing forms, and (iv) internal reports not generated by personal computers. AGIS shall generate internal reports for AGI's human resources department which cannot be generated by personal computers. (b) Typesetting and Other Printing. AGIS shall provide typesetting services to such Companies requesting typesetting services. Any other printing services including, but not limited to, specialty printing or brochures, shall be provided by AGIS to the Companies, or any of them, if requested. 2.8. Policy Assembly. AGIS shall provide policy assembly for AMCO and ALLIED Life. The policy assembly shall include the preparing, handling, and mailing of insurance policies. 2.9. Postage and Mail Processing. AGIS shall provide mail processing for the offices of the Companies which are located in Polk County, State of Iowa. This mail processing shall include internal and external distribution of mail among such Companies and to the proper post office facilities and may include inserting and sorting mail services. 2.10. Supply Services. For those Companies which desire to use the supply service, AGIS shall administer and manage the storage, warehousing, and distribution of the inventory of office supplies owned by such Companies. The supply service provided by AGIS shall include, but not be limited to, the ordering of paper used in processing forms for AMCO and ALLIED Life. 2.11. Telephone and Communications. AGIS shall provide telephone equipment, long-distance communication services, or both, for such Companies requesting equipment and/or service upon mutually agreeable terms and conditions. AGIS shall also provide computer and telephone port access to those Companies which office at 701 Fifth Avenue, Des Moines, Iowa. 2.12. Equipment Leasing. AGIS shall lease to each of AMCO, ALLIED Life, AGI, and AGIMC certain electronic data processing equipment as agreed to by the parties and under such specific lease term and fees as follows: (a) Reports will be given to AMCO, ALLIED Life, AGI, and AGIMC by AGIS on a monthly basis which shall identify the items of equipment subject to the lease (the "Equipment"). For each item of Equipment, the report shall specify any serial or model number, the term of the lease, 122 the monthly lease fee, the Equipment location, and the amount of lease deposit, if any. (b) AGIS shall be responsible for the installation of the Equipment and for the coordination of any movement of such Equipment. (c) AMCO, ALLIED Life, AGI, and AGIMC shall notify AGIS if there is a change in the location of each piece of leased Equipment. (d) AMCO, ALLIED Life, AGI, and AGIMC shall be responsible for the use and maintenance of the Equipment and shall bear all risks of loss, theft, damage, or destruction of the Equipment. (e) The Equipment shall have no warranties, and AGIS supplies the Equipment "as is". (f) At the expiration of the lease term for each item of Equipment, the lease term will automatically extend on a month-to-month basis unless AMCO, ALLIED Life, AGI, or AGIMC provide AGIS with 30 days written notice of termination for identified equipment. (g) After the expiration of the lease term for each item of Equipment, AMCO, ALLIED Life, AGI, and AGIMC shall promptly return to AGIS the Equipment unencumbered and in the same operating order, repair, condition, and appearance as when received (excepting only reasonable wear and tear resulting from proper use). (h) This lease may be assigned and may be terminated by AMCO, ALLIED Life, AGI, and AGIMC with thirty (30) days written notice. (i) This lease shall be construed and interpreted under the laws of the State of Iowa. 2.13 License of Software. AGIS shall license Software to the Licensee pursuant to the License Agreement effective January 1, 1993 which is incorporated into this Agreement and is included as Addendum A hereto. AGIS recognizes that AMCO, the Pool Participants, Motor Club of Iowa Insurance Company, and other third-party insurance companies which AMCO may enter into agreements with and AGIS may consent to, will utilize the Software set forth in Addendum A. In the event of a termination of this Agreement, the License Agreement will continue in effect in perpetuity. 2.14. Other Services. Any other services provided by AGIS to the Companies, or any of them, shall be negotiated between AGIS and such company on such terms and conditions as are mutually agreeable. 123 2.15. ALIC Service Rights. AGIS shall have a right of first refusal to provide MIS to ALIC. Prior to ALIC obtaining MIS from a source other than AGIS, ALIC shall present its requirements to AGIS in the form of a specifications sheet which will include a description of the services requested and a pricing target or range, and AGIS shall within 30 days (i) provide the MIS as specified by ALIC at the pricing target or within the range or (ii) decline in writing to provide the MIS. If AGIS declines in writing to provide the MIS, ALIC shall be entitled to seek and obtain such MIS from whatever source available. III. PAYMENT FOR SERVICES 3.1. General. The fees described in this Article III may be renegotiated in the future at the agreement of the affected parties. The amount of the renegotiated fee to be paid by any of the Companies shall reflect any market prices charged by AGIS under agreements with, or available to the Companies from, unaffiliated third parties for similar services; provided, however, that the services requested and provided to the Companies under this Agreement and contracted to or available from unaffiliated third-party purchasers of AGIS' services are reasonably comparable. If there are no unaffiliated third-party comparisons available, the fees shall be renegotiated on an arm's length basis. 3.2. Fees. The Companies shall pay the fees set forth in Addendum B to this Agreement. IV. TERM, TERMINATION, AND CHANGE OF CONTROL 4.1. Term and Termination. This Agreement shall be effective on January 1, 1995 and shall continue in effect until December 31, 2004, and shall continue thereafter unless prior to December 31, 2002, a party to this Agreement delivers to the other parties a written notice that such party intends to cease participation and terminate the Agreement as to it on December 31, 2004 or as of a specified date thereafter. This Agreement may be terminated by a party to this Agreement, as to such party's participation in the Agreement, effective after December 31, 2004, provided that such party has given written notice of termination to the others at least two (2) years prior to the proposed termination date. In the event of a termination of this Agreement, the License Agreement will continue in effect in perpetuity. 4.2. Change of Control of ALFC. In the event of a Change of Control (as hereinafter defined in this section) of ALFC, either Mutual or AGI may, in its sole discretion, at any time after such Change of Control: (i) terminate the Intercompany Operating Agreement ("IOA Agreement") and this Agreement upon six (6) months notice to ALFC; (ii) extend the term of the IOA Agreement and this Agreement for up to ten (10) additional years beyond December 31, 2004 upon six 124 (6) months notice to ALFC; or (iii) allow such agreements to continue in effect. "Change of Control" for purposes of this section shall mean an event whereby a person, group, or entity that is not affiliated with ALFC or Mutual acquires the ownership of 50% or more of the voting stock of ALFC. A person, group, or entity "affiliated" with ALFC or Mutual shall mean a person, group, or entity that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with ALFC or Mutual. 4.3 Change of Control of AGI. (a) In the event of a Change of Control (as hereinafter defined in this section) of AGI, Mutual may, in its sole discretion, at any time after such Change of Control: (i) terminate all three of the Pooling Agreement, IOA Agreement, and this Agreement upon six (6) months notice to AGI; (ii) extend the term of the Pooling Agreement, IOA Agreement, and this Agreement for up to ten (10) additional years beyond December 31, 2004 upon six (6) months notice to AGI; or (iii) allow such agreements to continue in effect. "Change of Control" for purposes of this section shall mean an event whereby a person, group, or entity that is not affiliated with AGI or Mutual acquires the ownership of 50% or more of the voting stock of AGI. A person, group, or entity "affiliated" with AGI or Mutual shall mean a person, group, or entity that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with AGI or Mutual. (b) In the event of a Change of Control (as hereinafter defined in this section) of AGI, ALFC may, in its sole discretion, at any time after such Change of Control: (i) terminate both the IOA Agreement and this Agreement upon six (6) months notice to AGI; (ii) extend the term of the IOA Agreement and this Agreement for up to ten (10) additional years beyond December 31, 2004 upon six (6) months notice to AGI; or (iii) allow such agreements to continue in effect. "Change of Control" for purposes of this section shall mean an event whereby a person, group, or entity that is not affiliated with AGI or Mutual acquires the ownership of 50% or more of the voting stock of AGI. A person, group, or entity "affiliated" with AGI or Mutual shall mean a person, group, or entity that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with AGI or Mutual. V. DISPUTE RESOLUTION 5.1. AGI and Its Subsidiaries. Any controversy, claim, or dispute arising out of or relating to this Agreement, or breach thereof, among or between AGI and Its Subsidiaries shall be resolved by AGI's Board of Directors, the decision of which shall be binding. 125 5.2. Mutual and Its Subsidiaries. Any controversy, claim, or dispute arising out of or relating to this Agreement, or breach thereof, among or between Mutual and Its Subsidiaries shall be resolved by Mutual's Board of Directors, the decision of which shall be binding. 5.3. ALFC and Its Subsidiaries. Any controversy, claim, or dispute arising out of or relating to this Agreement, or breach thereof, among or between ALFC and Its Subsidiaries shall be resolved by ALFC's Board of Directors, the decision of which shall be binding. 5.4. All Other Disputes. All other disputes under this Agreement shall be referred for resolution to the Coordinating Committee. Each of the coordinating committees of Mutual, AGI, and ALFC (a) has the right to participate in each and every Coordinating Committee deliberation unless it elects to abstain therefrom and (b) has one vote which shall be cast for or against any such decision unless it elects to abstain. Each such coordinating committee shall be comprised of two persons, one of whom shall constitute a quorum for the transaction of any business. All decisions of the Coordinating Committee must be unanimous, except for abstentions. All decisions of the Coordinating Committee are binding on the parties hereto. 5.5. Arbitration. If a controversy, claim, or dispute cannot be resolved by the Coordinating Committee pursuant to Section 5.4, then it will be submitted to arbitration as set forth hereafter. (a) Consent to Arbitration. Each party to this Agreement hereby consents and agrees that any dispute between the parties hereto with respect to the interpretation, performance, or breach of any of the terms of this Agreement or the transactions contemplated hereby which cannot be resolved by the Coordinating Committee shall be referred to arbitration conducted in accordance with the rules and procedures of the American Arbitration Association ("AAA"), upon written request of the disputing party hereto delivered to the party with which it has a dispute. Within thirty (30) days of the delivery of such written notice, each party involved shall nominate an AAA-licensed arbitrator (the "Party Arbitrators"). Within thirty (30) days of their nomination, if there are two Party Arbitrators, the Party Arbitrators shall select a third AAA-licensed arbitrator (the "Third-Arbitrator") and shall give the parties hereto written notice of such choice. If there are three parties to the dispute and each party selects a Party Arbitrator, the three Party Arbitrators selected shall constitute the Arbitrators without further selection. If there are more than three parties to the dispute, the parties to this Agreement agree that Mutual shall represent Mutual and Its Subsidiaries, ALFC shall represent ALFC and Its Subsidiaries, and AGI shall represent AGI and Its Subsidiaries. 126 (b) Authority of Arbitrators. The arbitrators shall be empowered to decide all issues submitted to arbitration using principles of law and equity and, if required, by application of any customary practices in the insurance and reinsurance industries. The arbitrators shall be relieved of all judicial formalities and shall not be required to follow any rules of evidence except as such rules may be imposed on arbitration proceedings conducted in accordance with the laws of the State of Iowa, but the arbitrators shall attempt to enforce the intents and purposes of this Agreement to the extent practicable and in accordance with Iowa law. The decision of a majority of the arbitrators shall be final and binding on each of the parties to the arbitration proceeding. (c) Expenses; Location. Each party to the dispute shall bear the expenses of its respective Party Arbitrator. If only two parties are involved in the arbitration, the involved parties shall jointly share all other expenses of the arbitration proceeding and the expenses of the Third Arbitrator. The arbitration proceeding shall take place at Des Moines, Iowa unless another location is mutually agreed upon by the parties. The arbitration proceeding shall be governed by the laws of the State of Iowa. The parties hereto hereby agree that any information respecting any matters submitted to arbitration in accordance with the foregoing or any aspect of the arbitration proceeding itself shall be treated as confidential and will not be disclosed to anyone not employed or acting on behalf of a party hereto in connection with such arbitration or used at any time in any manner that is adverse to the interests of either party hereto but, in any such case, such information may be disclosed if such disclosure is made in connection with either party's prosecution or defense of any legal proceedings or if such disclosure is required pursuant to a subpoena or other legal order issued by any judicial or regulatory body or is otherwise required by law. (d) Restriction. Anything set forth herein to the contrary notwithstanding, with respect to any issue to be determined by arbitration, each of the parties to the arbitration proceeding shall submit in writing to the arbitrators the party's proposed resolution of such issue. The arbitrators shall be constrained in their decision relating to such issue to select only between the proposed resolutions of the parties, and the arbitrators shall have no discretion to fashion any compromise or other resolution of the issue submitted for arbitration. VI. CONFIDENTIAL INFORMATION AND TRADE SECRETS 6.1. Obligation to Keep Confidential. 127 (a) Each party to this Agreement shall keep confidential, except as the other party or parties may otherwise consent in writing, and, except for the other parties' benefit, not disclose or make any use of at any time and for any purpose whatsoever, any trade secrets, confidential information, knowledge, data, trademarks or trade names, or other information of any of the Companies to their products, know-how, designs, customer lists, business plans, marketing plans and strategies, pricing strategies, or other subject matter pertaining to any business of the Companies or any of their clients, customers, consultants, licensees, or affiliates, which the party has obtained or may obtain, or otherwise acquire during the course of contacts, discussions, negotiation, or agreement with any of the other parties, except as herein provided (hereafter, collectively, "Confidential Information"). No party shall deliver, reproduce or in any way allow any Confidential Information of the other parties or any documentation relating thereto, to be delivered to or used by any third parties without specific written direction or consent of a duly authorized officer of the other party. (b) Upon termination of this Agreement for any reason whatsoever each party shall promptly surrender and deliver to each other party all records, materials, equipment, drawings, documents, data, and all Confidential Information of the other parties and shall not retain any description containing or pertaining to any Confidential Information of the other parties, unless otherwise consented to in writing by a duly authorized officer of the other party. VII. MISCELLANEOUS 7.1. Assignment. This Agreement, including any or all rights and obligations hereunder, shall not be assigned by any of the parties to any third party without the prior written consent of all of the other parties. Except as otherwise provided in this Agreement, the obligations and rights of the parties shall be binding upon and inure to the benefit of any assignee, transferee, successor, or receiver of each of the parties. 7.2 Waiver; Remedies. No delay or omission of any party to this Agreement to exercise any right or power hereunder shall impair such right or power or be a waiver of any default or an acquiescence therein; and any single or partial exercise of any such right or power shall not preclude other or further exercise thereof or the exercise of any other right. In addition to any rights granted herein, the parties hereto shall have and may exercise any and all rights and remedies now or hereafter provided by law except as may be limited by Section V of this Agreement. 7.3 Permissive Release of Confidential Information. Notwithstanding the provisions of Section VI of this Agreement, any Confidential Information may be used in connection with any arbitration relating to the transactions contemplated by this Agreement and such information may be disclosed if such disclosure is made in connection with the parties' prosecution or defense of any 128 legal proceedings or if such disclosure is required pursuant to a subpoena or other legal order issued by any judicial or regulatory body or is otherwise required by law. 7.4 Notices. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or if mailed by certified or registered mail (return receipt requested) to the party at its address as set forth on the signature page of this Agreement. Any notice given as provided in this Section 7.4, if given personally, shall be effective upon delivery, or if given by certified or registered mail, shall be effective three days after deposit in the mail. Any party hereto may change the address at which it is to be given notice by giving notice to the other party as provided in this Section 7.4. 7.5 Governing Law. This Agreement shall be deemed to be a contract made under the laws of the State of Iowa and shall be construed and interpreted under the laws of such state applicable to contracts made and to be performed entirely within such state. 7.6 Enforceability. If any one or more of the covenants, agreements, provisions, or other terms of this Agreement shall be for any reason whatsoever determined to be invalid, then such terms shall be deemed severable from the remaining terms of this Agreement and shall in no way affect the validity or enforceability of the other terms of this Agreement and such invalid terms shall be replaced by valid terms bearing the closest possible similarity in substance so that the intentions and purposes being the basis of this Agreement could be enforced to the greatest extent permitted by law. 7.7 Survival of Representations, Warranties, and Covenants. All covenants, agreements, representations, and warranties made in this Agreement by any of the parties hereto, including but not limited to, the indemnification provisions set forth herein, shall be effective on the effective date hereof and thereafter. 7.8 Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.9 Headings. The headings in the sections and subsections of this Agreement are inserted for convenience only and shall not constitute a part hereof. 7.10 Entire Agreement. This Agreement, including the schedules and addenda referred to herein and any documents executed by the parties simultaneously herewith constitute the entire understanding and agreement of the parties hereto and supersede all other prior agreements and understandings, written or oral, between the parties with respect to the transactions contemplated herein. Provided, however, the foregoing shall not operate or be 129 construed to prohibit proof of prior understandings and agreements between or among the parties to the extent necessary to properly construe or interpret this Agreement. 7.11 Amendments. Any changes to this Agreement and any further obligations of the parties to each other must be in writing and executed by their respective duly authorized officers. 130 IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Management Information Services Agreement to be signed by their duly-authorized officers all as of the date and year first written above. ALLIED Mutual Insurance Company ALLIED Group, Inc. 701 5th Ave. 701 5th Ave. Des Moines, IA 50391-2000 Des Moines, IA 50391-2000 By:S/S Douglas L. Andersen By:S/S Jamie H. Shaffer ------------------------------- ------------------------------- Title: President Title: President --------------------------- --------------------------- AMCO Insurance Company ALLIED General Agency Company 701 5th Avenue 701 5th Ave. Des Moines, IA 50391-2013 Des Moines, IA 50391-2002 By:S/S Douglas L. Andersen By:S/S Thomas K. Fever ------------------------------- ------------------------------- Title: President Title: Vice President --------------------------- --------------------------- ALLIED Life Financial ALLIED Group Leasing Corporation Corporation 701 5th Ave. 701 5th Ave. Des Moines, IA 50391-2003 Des Moines, IA 50391-2015 By:S/S Samuel J. Wells By:S/S Jamie H. Shaffer ------------------------------- ------------------------------- Title: President Title: President --------------------------- --------------------------- ALLIED Group Mortgage Company ALLIED Life Insurance Company 1701 48th St. 701 5th Ave. West Des Moines, IA 50391-2009 Des Moines, IA 50391-2003 By:S/S Rolland K. Riley By:S/S Samuel J. Wells ------------------------------- ------------------------------- Title: President Title: President --------------------------- --------------------------- ALLIED Group Merchant Banking ALLIED Group Insurance Corporation Marketing Company 701 5th Ave. 701 5th Ave. Des Moines, IA 50391-2003 Des Moines, IA 50391-2010 By:S/S Paul G. McGillivray By:S/S William G. Stevenson ------------------------------- ------------------------------- Title: President Title: President --------------------------- --------------------------- ALLIED Group Information ALLIED Life Brokerage Agency Systems, Inc. 701 5th Ave. 701 5th Ave. Des Moines, IA 50391-1002 Des Moines, IA 50391-2003 By:S/S Bob O. Myers By:S/S Samuel J. Wells ------------------------------- ------------------------------- Title: President Title: President --------------------------- --------------------------- 131 ADDENDUM A LICENSE OF SOFTWARE This Computer Software License Agreement ("Agreement") between ALLIED Group Information Systems, Inc. ("AGIS") and AMCO Insurance Company ("Licensee") shall be effective January 1, 1993. 1. Definitions. 1.1. "Distribution" or "to distribute" means any act or failure to act by Licensee, its employees, or its agents which violates accepted business practices for protecting the confidentiality of computer software and which results, directly or indirectly, in the possession of the Software Product by any person(s) or entity(ies) other than AGIS or Licensee for any purpose other than Licensee's business operations. 1.2. "Documentation" means the written description of a computer program in the form of a manual(s) which shall accompany the Program in order to assist the Licensee. 1.3. "Mainframe Computer" means a large computer occupying a specially air-conditioned room and supporting typically 100-500 users at a time. 1.4. "Object Code" means the Program after compilation or interpretation and in a form understandable only to a computer unless disassembled. 1.5. "Personal Computer" means a computer designed to be used by only one person. 1.6. "Program" means the computer programs and modules thereof in Source Code. A "computer program" is an organized set of instructions developed for the purpose of causing a computer to accomplish a desired result or outcome by acting on data. 1.7. "Reproduction" or "to reproduce" means to make copies of the Source or Object Code version of the Software Product for purposes of "distribution". Reproduction shall include the making of copies of the Software Product in any form currently used in the industry or in any form which may be developed. 1.8. "Software Product" means the Program(s) listed in Paragraph 3 and the Documentation, collectively, in the form in which it is distributed to Licensee. 1.9. "Source Code" means the Program when written in human understandable form in a higher level computer language. 1.10. All terms used herein are defined in the Management Information Services Agreement dated August 25, 1993 ("MIS Agreement"), and shall have the meaning therein attributed to them unless they are defined otherwise herein, whether or not the MIS Agreement has been terminated. 132 2. Grant of License. AGIS hereby grants to Licensee a non-exclusive right to use the Software Product specifically set forth in Paragraph 3 herein for the purposes of Licensee's business operations. As used in this Agreement, Licensee's "business operations" shall mean the corporate business activities of Licensee and its affiliates inclusive of its arrangement with Motor Club of Iowa Insurance Company and other insurance companies which Licensee and AGIS agree in writing shall be allowed access to the Software Product. Such business operations shall expressly include use of the Software Product by Pool Participants' insurance agents via the AMANDA+ program and by Licensee in its position as administrator of the Pooling Agreement. AGIS and Licensee acknowledge that full and adequate consideration for the granting of the license has been provided to AGIS pursuant to the Asset Transfer Agreement dated December 31, 1986, the Management Information Services Agreement dated December 31, 1986 (as amended from time to time), and among other things, the assistance of Pool Participants' employees to AGIS programmers in the development of the Software Product licensed hereunder. AGIS and Licensee further acknowledge that it was the intent of the parties to the Asset Transfer Agreement and the Management Information Services Agreement, both dated December 31, 1986, that AGIS provide a perpetual license of the Software Product to AMCO and the other Pool Participants. 3. Software Product Licensed. The Software Product referenced in said Agreement shall consist of the following Programs: ABC DAILY EDIT AND BALANCE MICROFILM INDEXING ACCOUNTING REPORTING DIRECT MARKETING MOTOR VEHICLE REPORT SYSTEM ACCOUNT PAK CONTROL ADVICE/REVIEW DIVIDENDS PAYROLL AGENCY PROCESSING GUIDES DRAFT LOG SYSTEM PERSONAL AUTO AGENCY PRODUCTION DRAFT RECONCILIATION PERSONNEL AGENTS ACCOUNT CURRENT DWELLING FIRE PLANNING DEPARTMENT AGENTS CONTEST ENDORSEMENT TEXT FILE PLEASURE BOATOWNERS AGENTS MASTERFILE EXPENSE REPORTING POLICY ENTRY AGENTS STATEMENT AND EXPERIENCE RATING POLICY EXPIRATIONS AGING SYSTEM POLICY REGISTER ALPHA SEARCH EXPIRATIONS PROCESS CASH/SUSPENSE AMANDA PLUS FARM PROCESSING SUSPENSE AND ASSIGNED RISK FLEX BILLING CASH PRODUCTIVITY BALANCING SYSTEM FLEXIBLE BENEFITS INFORMATION DEPARTMENT BONDS FORM LETTER GENERATOR PROFIT SHARE BUREAU AND STATISTICAL FORMATION PROMPTING BUSINESSOWNERS FORMS AND PRINTING RECORDS MANAGEMENT CASH CONCENTRATION FUND FREEDOM PACKAGE RECREATIONAL VEHICLE CASH DISBURSEMENT GENERAL LIABILITY REINSURANCE CBI GROUP 1 REMINDER/REMARKS CERTIFICATE SYSTEM HOMEOWNERS SAFETY MANAGEMENT CHECK RECONCILIATION HUMAN RESOURCES STATISTIC CLASS MASTER CLAIMS REPORTS INLAND MARINE STATUTORY AND FINANCIAL CLAIMS INPUT/OUTPUT MODULES SURETY BOND BILLING CODE CARD ENTRY INTERNAL REVENUE SYSM CODING MANUAL AND BUREAU INVENTORY AND SUPPLY TABLE SYSTEM COMMERCIAL AUTO MANAGEMENT EXPERIENCE TELEMARKETING COMMERCIAL PROPERTY REPORTS UNDERWRITING CORRESPONDENCE SYSTEM MANUAL POLICY WORKMAN'S COMPENSATION CRIME PROCESSING ASSIGNED RISK CROP SYSTEM ENTRY MARK IV PROGRAMS MARKETING REPORTING MCIIC
133 Licensee will be provided the aforementioned Software Product for use on both the Mainframe Computer and Personal Computer. Licensee will be provided the Source Code for the Mainframe Computer and the Object Code for the Personal Computer. 4. Updates, Corrections, Modifications. AGIS shall provide Licensee with the correction, modification, improvement, enhancement, upgrade, and update of the Software Product in consideration for payment of the Annual Product Support/Maintenance Fee of $250,000 on the first business day of each year in order to obtain all enhancements and upgrades made to the Software Product for that year. 5. Taxes. In addition to the payments provided for herein, Licensee shall pay any excise, sales, use, privilege, or other similar taxes levied or based upon payments made pursuant to this Agreement. 6. AGIS' Warranties. AGIS warrants that it is the sole owner of all rights to the Software Product and has full and unrestricted authority to copyright it and to enter into this Agreement, that the Software Product is an original work, and that it has not previously entered into a contract involving this work which would prohibit this Agreement. AGIS warrants further that the Software Product has not been assigned, transferred, or otherwise encumbered, that the Software Product does not infringe upon any copyright, patent, or trade secret of any third party, and that the Programs reasonably conform to Documentation. All warranties set forth herein shall be null and void in the event Licensee makes unauthorized use of or an unauthorized modification to the Software Product. THE WARRANTY PROVIDED HEREIN IS IN LIEU OF ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 7. Limitation of Liability. AGIS will defend, indemnify, and hold Licensee harmless against all claims, costs, damages, and expenses, including attorney's fees, that Licensee may sustain or incur by reason of an infringement or other similar violation by the Software Product of any copyright, patent, or trademark. AGIS and Licensee agree to notify each other promptly of any third party claim and to fully cooperate in the defense thereof. Notwithstanding the foregoing, it is expressly agreed and understood that AGIS shall not be liable for any direct, indirect, incidental, consequential, or similar damages or for lost data or profits to Licensee or any other entity or person which arise from Licensee's use of the Software Product. Licensee shall indemnify and hold AGIS harmless against any such damages, including attorney's fees, which arise from Licensee's use of the Software Product. Licensee further acknowledges and agrees that AGIS' liability to Licensee under this Agreement shall not exceed and shall be limited to, regardless of Licensee's damage or injury, the total amount received by AGIS under this Agreement. 8. Prohibited Use. Licensee agrees that it shall not create software that emulates the functionality of the Software Product. Licensee further agrees that it shall not reverse engineer the Software Product by decompilation and 134 disassembly. It is expressly understood and agreed that the reproduction or distribution of the Software Product, Source Code, Object Code, or any copy thereof by Licensee is strictly prohibited at any time. 9. Copying. Licensee may copy the Software Product or any part thereof at Licensee's cost for the sole purpose of Licensee's business operations and disaster recovery; provided, however, that Licensee shall have sole responsibility for insuring that no distribution of any such copy occurs. All copies shall display all copyright notices and be labeled externally as the property of AGIS. The use of any copies is subject to the terms and conditions of this Agreement. Licensee shall keep an accurate and complete record of all such copies made. 10. Use with Multiple Computers or Terminals. Licensee may use the Software Product on any computer(s) or terminals it deems necessary. Licensee shall have the right to make back-up copies of the Mainframe Computer Source Code and any number of copies of the Personal Computer Object Code and Documentation, if any. 11. Third-Party Processing. It is expressly understood and agreed that Licensee shall not use the Software Product for any transaction which does not involve its business operations. It is further expressly understood and agreed that Licensee's business operations as described in Paragraph 2 herein shall not include, without AGIS' express written consent, any use of the Software Product for the purpose of any transaction (1) undertaken for a fee or other consideration which is not contemplated herein or (2) which is not reasonably related to Licensee's business operations. 12. Proprietary Rights and Nondisclosure. Licensee hereby acknowledges the proprietary status of the Software Product, including, but not limited to, trade secret, copyright and trademark interests. The Software Product embodies substantial creative efforts and contains trade secrets comprised of confidential information, ideas, and expressions, including, but not limited to, specific design and structure of the individual Programs. Access to the Software Product by Licensee employees and agents shall be limited to a need-to-know basis, and Licensee shall use reasonable means, in any event not less than that used to protect Licensee's own proprietary materials, to safeguard the confidential status of the Software Product. Licensee acknowledges that unauthorized disclosure of the Source Code will cause material damage to AGIS. Licensee recognizes that a substantial piracy problem exists in the software industry. Licensee shall notify AGIS of any instance of illegal copying of AGIS products which comes to its attention and shall assist in prosecuting any infringers. 13. Source Code. AGIS shall make available to Licensee without charge the Source Code for the Software Product set forth in Paragraph 3 herein. 14. Term. This Agreement shall survive the termination of the MIS Agreement and continue in perpetuity. 135 15. Amendments. Any changes to this Agreement and further obligations of the parties to each other must be in writing and executed by their respective duly authorized officers. 16. Arbitration. (a) Consent to Arbitration. Each party to this Agreement hereby consents and agrees that any dispute between the parties hereto with respect to the interpretation, performance, or breach of any of the terms of this Agreement or the transactions contemplated hereby which cannot be resolved by the Coordinating Committee shall be referred to arbitration conducted in accordance with the rules and procedures of the American Arbitration Association ("AAA"), upon written request of either party hereto delivered to the other party. Within thirty (30) days of the delivery of such written notice, each party involved shall nominate an AAA-licensed arbitrator (the "Party Arbitrators"). Within thirty (30) days of their nomination, if there are two Party Arbitrators, the Party Arbitrators shall select a third AAA-licensed arbitrator (the "Third-Arbitrator") and shall give the parties hereto written notice of such choice. If each party selects a Party Arbitrator, the three Party Arbitrators selected shall constitute the Arbitrators without further selection. (b) Authority of Arbitrators. The arbitrators shall be empowered to decide all issues submitted to arbitration using principles of law and equity and, if required, by application of any customary practices in the insurance and reinsurance industries. The arbitrators shall be relieved of all judicial formalities and shall not be required to follow any rules of evidence except as such rules may be imposed on arbitration proceedings conducted in accordance with the laws of the State of Iowa, but the arbitrators shall attempt to enforce the intents and purposes of this Agreement to the extent practicable and in accordance with Iowa law. The decision of a majority of the arbitrators shall be final and binding on each of the parties to the arbitration proceeding. (c) Expenses; Location. Each party to the dispute shall bear the expenses of its respective Party Arbitrator and shall jointly share all other expenses of the arbitration proceeding and the expenses of the Third Arbitrator. The arbitration proceeding shall take place at Des Moines, Iowa unless another location is mutually agreed upon by the parties. The arbitration proceeding shall be governed by the laws of the State of Iowa. The parties hereto hereby agree that any information respecting any matters submitted to arbitration in accordance with the foregoing or any aspect of the arbitration proceeding itself shall be treated as confidential and will not be disclosed to anyone not employed or acting on behalf of a party hereto in connection with such arbitration or used at any time in any manner that is adverse to the interests of either party hereto but, in any such case, such information may be disclosed if such disclosure is made in connection with either party's prosecution or defense of any legal proceedings or if such disclosure is required pursuant to a subpoena or other legal order issued by any judicial or regulatory body or is otherwise required by law. 136 (d) Restriction. Anything set forth herein to the contrary notwithstanding, with respect to any issue to be determined by arbitration each of the parties to the arbitration proceeding shall submit in writing to the arbitrators the party's proposed resolution of such issue. The arbitrators shall be constrained in their decision relating to such issue to select only between the proposed resolutions of the parties, and the arbitrators shall have no discretion to fashion any compromise or other resolution of the issue submitted for arbitration. 17. Assignment. This Agreement, including any or all rights and obligations hereunder, shall not be assigned by any of the parties to any third party without the prior written consent of all of the other party. Except as otherwise provided in this Agreement, the obligations and rights of the parties shall be binding upon and inure to the benefit of any assignee, transferee, successor, or receiver of each of the parties. 18. Waiver; Remedies. No delay or omission of any party to this Agreement to exercise any right or power hereunder shall impair such right or power or be a waiver of any default or an acquiescence therein; and any single or partial exercise of any such right or power shall not preclude other or further exercise thereof or the exercise of any other right. In addition to any rights granted herein, the parties hereto shall have and may exercise any and all rights and remedies now or hereafter provided by law except as may be limited by Paragraph 16 of this Agreement. 19. Permissive Release of Confidential Information. Notwithstanding the provisions of Paragraph 13 of this Agreement, any proprietary information may be used in connection with any arbitration relating to the transactions contemplated by this Agreement and such information may be disclosed if such disclosure is made in connection with the parties' prosecution or defense of any legal proceedings or if such disclosure is required pursuant to a subpoena or other legal order issued by any judicial or regulatory body or is otherwise required by law. 20. Notices. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or if mailed by certified or registered mail (return receipt requested) to ALLIED Group Information Systems at 3820 109th Street, Urbandale, Iowa 50391-1001 and to AMCO Insurance Company at 701 5th Avenue, Des Moines, Iowa 50391-2013. Any notice given as provided in this Paragraph 20, if given personally, shall be effective upon delivery, or if given by certified or registered mail, shall be effective three days after deposit in the mail. Any party hereto may change the address at which it is to be given notice by giving notice to the other party as provided in this Paragraph 20. 21. Governing Law. This Agreement shall be deemed to be a contract made under the laws of the State of Iowa and shall be construed and interpreted under the laws of such state applicable to contracts made and to be performed entirely within such state. 22. Enforceability. If any one or more of the covenants, agreements, provisions, or other terms of this Agreement shall be for any reason whatsoever determined 137 to be invalid, then such terms shall be deemed severable from the remaining terms of this Agreement and shall in no way affect the validity or enforceability of the other terms of this Agreement and such invalid terms shall be replaced by valid terms bearing the closest possible similarity in substance so that the intentions and purposes being the basis of this Agreement could be enforced to the greatest extent permitted by law. 23. Survival of Representations, Warranties and Covenants. All covenants, representations, and warranties made in this Agreement by any of the parties hereto shall be effective on the effective date hereof and thereafter. 24. Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 25. Headings. The headings in the sections and subsections of this Agreement are inserted for convenience only and shall not constitute a part hereof. 26. Entire Agreement. This Agreement, including the schedules and addenda referred to herein and any documents executed by the parties simultaneously herewith constitute the entire understanding and agreement of the parties hereto and supersede all other prior agreements and understandings, written or oral, between the parties with respect to the transaction contemplated herein. Provided, however, the foregoing shall not operate or be construed to prohibit proof of prior understandings and agreements between or among the parties to the extent necessary to properly construe or interpret this Agreement. Agreed to and effective as of the date set forth above. ALLIED Group Information AMCO Insurance Company Systems, Inc. By:___________________________ By____________________________ Title:________________________ Title:________________________ 138 ADDENDUM B I. AMCO. AMCO, as administrator of the Pooling Agreement, shall reimburse AGIS for its Net Operating Costs in exchange for AGIS providing AMCO the services under this Agreement. AGIS' Net Operating Costs, as used in this Agreement, is the difference between all costs AGIS incurs on a monthly basis less the sum of income AGIS accrues on a monthly basis from providing services to all companies other than AMCO as administrator of the Pooling Agreement. In order to reimburse AGIS for its Net Operating Costs, AMCO will forward to AGIS $1,000,000 on the first of each month and $600,000 on the fifteenth of each month. At the end of each month, AGIS will either bill AMCO if the amount forwarded does not cover the Net Operating Costs or credit AMCO if the amount forwarded exceeds the Net Operating Costs. AMCO will promptly pay AGIS any bill it incurs hereunder and AGIS will promptly pay AMCO any credit it incurs hereunder. AMCO shall incur no other charges for services under this Agreement. II. ALLIED Life. ALLIED Life shall pay AGIS on a monthly basis fees for services under this Agreement in accordance with the following: (a) $37.50 per hour for Programming/Development time and Methods/Procedures time. (b) For the services provided under Section 2.12 ("Equipment Leasing"), lease payments shall be made by ALLIED Life monthly upon receipt of a bill from AGIS. The interest rate used to calculate the lease payments shall be 2 basis points over the T-bill rate adjusted quarterly. At the expiration of the lease term for each item of Equipment, ALLIED Life may elect to continue using the Equipment at no charge. (c) ALLIED Life shall also pay fees in accordance with Sections VI through X of this Addendum. (d) ALLIED Life shall reimburse AGIS for the actual costs AGIS incurs on a monthly basis for providing ALLIED Life the services provided under Sections 2.1 ("General MIS"), 2.2 ("PC Support"), 2.7 (a) ("Printing--Forms and Reports"), and 2.8 ("Policy Assembly"). In order to reimburse AGIS for the cost of these services, ALLIED Life will forward $56,250 at the end of each month as an estimation of the costs of providing the services for that month. (e) At the end of the calendar year, AGIS will calculate its actual cost of providing these services and compare it to the monthly payments forwarded to AGIS for the services by ALLIED Life. If the total actual costs exceed the total monthly payments made, ALLIED Life will promptly pay the difference to AGIS. If the total actual costs are less than the total monthly payments made, AGIS will promptly refund the difference to ALLIED Life. 139 The aforementioned fees shall be renegotiated by ALLIED Life and AGIS each calendar year. If ALLIED Life and AGIS are unable to agree on an annual fee for the next calendar year by December 15th of each year, the calculation of a reasonable annual fee for the next calendar year shall be submitted to the Coordinating Committee for resolution. III. AGI Human Resources. For the services provided by AGIS to AGI's human resources department under Sections 2.1 ("General MIS"), 2.2 ("PC Support"), and 2.7(a) ("Printing--Forms and Reports"), AGI shall pay to AGIS $42.00 per hour for Programming/Development time and $40.00 per hour for Methods/Procedures time. Each year, beginning January 1, 1996, this hourly rate shall be recalculated based upon estimated costs for the year in question. Such fees shall be billed and paid monthly. If applicable, AGI shall also pay fees in accordance with Sections VI through XI of this Addendum. IV. AGIMC. AGIMC shall pay AGIS for services under this Agreement in accordance with the following: (a) For the services provided under Sections 2.1 ("General MIS") and 2.2 ("PC Support"), AGIMC shall pay to AGIS $42.00 per hour for Programming/Development time and $40.00 per hour for Methods/Procedures. Such fees shall be billed and paid monthly. Each year, beginning January 1, 1996, this hourly rate shall be recalculated based upon estimated costs for the year in question. (b) For the services provided under Section 2.12 ("Equipment Leasing"), lease payments shall be made by AGIMC monthly upon receipt of a bill from AGIS. The interest rate used to calculate the lease payments shall be adjusted on the first business day of each quarterly period to a rate equal to 2% over the prime rate on such day. At the expiration of the lease term for each item of Equipment, AGIMC may elect to continue using the Equipment at no charge. (c) If applicable, AGIMC shall also pay fees in accordance with Sections VI through XI of this Addendum. V. Programming. Each of the Companies (except as may be provided elsewhere for AMCO, ALLIED Life, AGI, and AGIMC) which request that AGIS provide Programming/Development services shall pay a rate of $52.50 per hour. Each of the Companies (except for AMCO, ALLIED Life, AGI, and AGIMC) which request that AGIS provide Methods/Procedures services shall pay $40.00 per hour. Such fees shall be billed and paid monthly. Each year, beginning January 1, 1996, this hourly rate shall be recalculated based upon estimated costs for the year in question. VI. Typesetting/Other Printing. The Companies which request that AGIS provide typesetting services in accordance with Section 2.7(b) ("Printing--Typesetting/Other Printing") shall pay a rate of $22.00 per 140 hour. Such fees shall be billed and paid monthly. Any other printing services shall be provided by AGIS to any of the Companies for a fee to be negotiated between AGIS and such company in addition to the fees specified in this Addendum B. VII. PC Maintenance. If AGIS assists in coordinating third-party vendor maintenance for the personal computers of any of the Companies, such Companies agree to pay upon receipt of an invoice from AGIS the third-party vendor's actual charges as billed to AGIS. VIII. Postage/Mail Processing. For the services provided under Section 2.9, the Companies which have offices located in Polk County, State of Iowa, shall pay AGIS for mail processing as follows: (a) the Companies shall reimburse AGIS for the actual cost of postage utilized, (b) if AGIS performs any mail inserting services for any of the Companies, such Companies shall pay AGIS $0.027 per item, (c) if AGIS performs any proof of mail services for any of the Companies, such Companies shall pay AGIS $0.051 per item, (d) if AGIS performs any outgoing mail sorting services for any of the Companies, such Companies shall pay AGIS $0.027 per item, (e) if AGIS performs incoming mail sorting services for any of the Companies, such Companies shall pay AGIS $0.027 per item, (f) if AGIS performs special handling services in mail processing, it will be billed at $0.051 per item, and (g) if AGIS performs remittance processing, it will be billed at $0.10 per item. The number of items and the fees shall be billed to each of the Companies utilizing the services and paid by each of them monthly. IX. Telephone/Communications. The Companies which request that AGIS provide telephone/communications equipment under Section 2.11 ("Telephone and Communications") shall pay to AGIS a mutually agreed upon monthly fee for the equipment. Each of the Companies requesting long-distance communication services (the "Long-Distance Companies") will pay a monthly charge based upon the proportion of their actual long distance minutes to the total actual long distance minutes used by the Long-Distance Companies overall. X. Taxes. AGIS shall pay any sales, use, and personal property taxes which may be due and owing with respect to the Equipment leased or with 141 respect to the services provided under this Agreement. AGIS shall receive reimbursement from the appropriate Companies for any sales or use tax paid. AGIS shall be ultimately responsible for any personal property tax which may be due and owing with respect to the purchase or ownership of any Equipment leased under this Agreement. EX-10 6 10.17 TAX SHARE AGREEMENT 142 EXHIBIT 10.17 TAX SHARING AGREEMENT Agreement effective January 1, 1996 by and among ALLIED Group, Inc. ("Parent") and each of its undersigned subsidiaries. WHEREAS, the parties hereto are members of an affiliated group ("Affiliated Group") as defined in Section 1504(a) of the Internal Revenue Code of 1986 as amended; and WHEREAS, some of the parties hereto may be members of a unitary group ("Unitary Group") as defined by various state laws; and WHEREAS, the parties hereto may elect or be required to file their federal income tax returns on a consolidated basis and file their various state income tax returns on a consolidated, unitary or separate basis and desire to properly account for the economic consequences of this arrangement, WHEREAS, it is the intent and desire of the parties hereto that a method be established for reimbursing the Parent for payment of tax liability, for compensating any party for use of its losses or tax credits, and to provide for the allocation and payment of any refund arising from a carryback of losses or tax credits from subsequent taxable years, NOW THEREFORE, in consideration of the mutual covenants and promises contained herein, the parties hereto agree as follows: 1. Parent to Prepare and File Returns. A consolidated federal income tax return and consolidated, unitary, or separate state tax income tax returns shall be prepared and filed by the Parent for the taxable year ended December 31, 1996 and for each subsequent taxable period in respect of which this agreement is in effect. Each subsidiary shall execute and file such consent, elections, and other documents that may be required or appropriate for the proper filing of such returns. 2. Federal Tax Allocation. For each taxable period, each member of the Affiliated Group shall compute its separate tax liability as if it had filed a separate tax return and shall pay such amount to the Parent. The separate return tax liability of each member shall be computed pursuant to the provision of Regulations Section 1.1502-33(d)(3) in a manner provided by Regulations Section 1.1502-33(d)(2)(ii) in conjunction with the method described in Regulations Section 1.1552-1(a)(2). 143 3. State Tax Allocation. (a) Separate Returns. The Parent and each subsidiary shall be allocated its own separately computed state income tax liability from those states requiring tax to be computed on a separate return basis. (b) Unitary Group and Affiliated Group Returns. The Unitary or Affiliated Group shall allocate to each member the total state income tax liability from those states requiring a consolidated or unitary return filing based on the following formula: [each members separate company state taxable income or loss before apportionment and net operating loss deduction] divided by [total sum of all members separate state taxable income or loss before apportionment and net operating loss deduction] multiplyed by [total affiliated or unitary state income tax on taxable income before net operating deduction and tax credits] All prior tax year carryover tax credits and tax benefits of net operating loss deductions shall be specifically allocated to those members based on the allocation used in the tax year in which the net operating loss or tax credit was originally created. All tax credits except prior tax year carryover credits shall be specifically allocated to the unitary members computed on a separate return basis. All tax credits and net operating losses carried forward from years prior to a member joining the Affiliated or Unitary Group shall be specially allocated to that member. 4. Payments. Each subsidiary shall pay to the Parent its allocation of quarterly estimated, final or amended return taxes payable to the Internal Revenue Service and any other state taxing authority within five days of receiving notice of such payment from the Parent. 5. Refund of Overpayment. If for any taxable period the separate return liability of each member of the Affiliated Group, including the Parent or Unitary Group, exceeds the consolidated or unitary tax liability for such period as a result of any excess losses or tax credits of one or more members, then the Parent shall pay to each such member its allocable portion of such excess amount within sixty days after the date of filing of the consolidated or unitary return for such period. The excess federal tax amount to be reimbursed to such member shall be computed in a manner consistent with the provisions of Regulation Section 1.1502-33(d)(2)(ii). In utilization of this Regulation Section, the percentage referred to in Regulation Section 1.1502-33(d)(2)(ii)(b) shall be 100 percent. 144 6. Carryback or Forward of Unused Federal Loss or Tax Credit. If part of all of an unused loss or tax credit is allocated to a member of the Affiliated Group pursuant to Regulation Section 1.1502-79, and it is carried back or forward to a year in which such member filed a separate return or a consolidated return with another affiliated group, any refund or reduction in tax liability arising from the carryback or carryover shall be retained by such member. Notwithstanding the above, the Parent shall determine whether an election shall be made not to carryback part or all of the consolidated net operating loss for any taxable year in accordance with Section 172(b)(3)(c) of the Internal Revenue Code of 1986 as amended. 7. Adjustment of Taxable Period. If the consolidated or unitary tax liability is adjusted for any taxable period, whether by means of an amended return, claim for refund or after a tax audit by the Internal Revenue Service or respective states, the liability of each member shall be recomputed to give effect to such adjustments, and in the case of a refund, the Parent shall make payment to each member for its share of the refund, determined in the same manner as in paragraph (5) above, within thirty days after the refund is received by the Parent, and in the case of an increase in tax liability, each member shall pay to the parent its allocable share of such increased tax liability within five days after receiving notice of such liability from the Parent. In the event that the taxing authority levies upon a member's assets in excess of its adjusted portion of the consolidated tax liability, the member will be adequately indemnified by the other members. 8. Acquisition through Organization or Additional Corporation. If during a consolidated return period the Parent or any subsidiary acquires or organizes another corporation that is required to be included in the consolidated return, then such corporation shall join in and be bound by this agreement. 9. Term. This agreement shall apply to the taxable year ending December 31, 1996 and all subsequent taxable periods unless the Parent and the subsidiaries agree to terminate the agreement. Notwithstanding such termination, this agreement shall continue in effect with respect to any payment or refund for all taxable periods prior to termination. 10. Application to Successors in Interest. This agreement shall be binding upon and inure to the benefit of any successor, whether by statutory merger, acquisition of assets or otherwise, to any parties hereto, to the same extent as if the successor had been an original party to the agreement. 11. Arbitration. Any dispute arising out of or relating to this Tax Sharing Agreement("Agreement") or the breach thereof between Parent and any of the subsidiaries signatory hereto shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Arbitration may be initiated by any party to a dispute, giving notice to each other party two copies of such notice with the American Arbitration Association and by complying with other applicable provisions of the Association's Rules. 145 12. Modification of Agreement. No party has the authority to change any provisions of this Agreement or waive any of its provisions. No change in this Agreement shall be binding, unless first expressed in writing and signed by each party hereto. 13. Superseding Agreement. The parties hereto acknowledge that this agreement shall supersede all other agreements, oral or written, between the parties. 14. Exchange of Information. The parties hereto acknowledge that the exchange and flow of information is critical to the operation of this agreement. Having acknowledged this fact, the parties hereby agree to grant free and unrestricted access, at reasonable times, to those books and records necessary for the operation of this agreement. 146 IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed by their duly authorized representatives. ALLIED Group, Inc. By _________________________ Date __________________________ Jamie H. Shaffer President (Financial)/Treasurer AMCO Insurance Company By _________________________ Date __________________________ Randall J. Covey Assistant Vice President ALLIED Property and Casualty Insurance Company By _________________________ Date __________________________ Randall J. Covey Assistant Vice President Depositors Insurance Company By _________________________ Date __________________________ Randall J. Covey Assistant Vice President Western Heritage Insurance Company By _________________________ Date __________________________ Scott A. Wilson Treasurer/Assistant Secretary ALLIED Group Mortgage Company By _________________________ Date __________________________ Randall J. Covey Assistant Vice President 147 ALLIED General Agency Company By _________________________ Date __________________________ Randall J. Covey Assistant Vice President ALLIED Group Information Systems, Inc. By _________________________ Date __________________________ Randall J. Covey Assistant Vice President The Freedom Group, Inc. By _________________________ Date __________________________ Randall J. Covey Assistant Vice President Midwest Printing Services, Ltd. By _________________________ Date __________________________ Randall J. Covey Assistant Vice President ALLIED Group Leasing Corporation By _________________________ Date __________________________ Jamie H. Shaffer Treasurer EX-10 7 10.52 STIP 95 148 EXHIBIT 10.52 ALLIED GROUP SHORT TERM MANAGEMENT INCENTIVE PLAN 1. PURPOSE The initial ALLIED Group Short Term Management Incentive Plan (the "Plan") and the beginning of the first performance period was January 1, 1988. This amended and restated Plan shall be effective January 1, 1996. The purpose of this Plan is to encourage outstanding performance by certain key employees of ALLIED Group, Inc. ("AGI") in the attainment of annual financial and operating goals of AGI, ALLIED Mutual Insurance Company, and all of their subsidiaries except for ALLIED Life Financial Corporation and its subsidiaries (collectively, the "ALLIED Group"). 2. DEFINITIONS The capitalized terms used throughout the Plan have the following meaning: (a)"AGIMC" means ALLIED Group Insurance Marketing Company. (b)"AGIS" means ALLIED Group Information Systems, Inc. (c)"AGMC" means ALLIED Group Mortgage Company. (d)"ALLIED Group Net Income" means net income after income taxes (including net realized investment gains/losses) for the consolidated group of companies comprising the ALLIED Group (excluding crop-hail business) computed in conformity with generally accepted accounting principles ("GAAP"). (e)"Base Salary" is the annualized weekly base pay of the Participant in effect as of December 31 of the Plan year. (f)"Committee" shall mean the Compensation Committee of the Board of Directors of AGI in consultation with the Joint Compensation Committee of the Board of AGI and ALLIED Mutual Insurance Company. (g)"Discretionary Award" is the increment above the Guaranteed Award which is awarded to a Participant based on the discretion of the Committee. (h)"DPW" is direct premiums written, net of return premiums, as reported in the 1996 Planning Package for a particular regional office or company. For ALLIED Group, it includes all property-casualty companies but excludes (i) Western Heritage, (ii) crop-hail business, and (iii) flood program. For AGIMC, DPW shall exclude any premiums generated from business that is purchased by AGIMC from another entity. 149 (i)"Eligible Award Percentage" is that percentage amount set forth on Exhibit B which shows the direct numeric relationship associated with the attainment of Threshold, Goal, or Maximum performance, and it is used in determining potential Eligible Tier Awards. The Eligible Award Percentage is calculated as follows: Example Calculation for Eligible Award Percentage for Profit for a Participant from Des Moines Regional Office (DMRO) in Tier IV Step 1: Compare actual profit results for the fiscal year (if the actual Profit results for the fiscal year do not meet the Threshold, then the Eligible Award Percentage is 0, and no further calculations are necessary) to the highest goal specified in Exhibit A that it exceeds (in this example, assume the actual profit results are $24,750,000). $1,750,000 = $24,750,000 - $23,000,000 (Threshold) Step 2: Interpolate between the Threshold and Goal (or between the Goal and Maximum as the case may be) to determine what percentage the Participant is above the Threshold or Goal. There is no need to interpolate if the Maximum has been exceeded. In this example, $1,750,000 is 50% between Threshold ($23,000,000) and Goal ($26,500,000). 50% = $1,750,000 / ($26,500,000 - $23,000,000) Step 3: Take the eligible award percentage for Profit from Exhibit B for the Participant's particular tier category and for the goal level that has been attained (e.g., Threshold or Goal) and interpolate based on 50% attainment. The eligible award percentages for Profit in Tier IV on Exhibit B are 12% for Threshold and 24% for Goal. 18% = ((24% - 12%) x 50%) + 12% In this example, 18% is the Eligible Award Percentage for Profit for a Participant from DMRO in Tier IV. The same process is used to compute the Eligible Award Percentage for Growth. (j)"Eligible Individual Award" is the award potential for a Participant based on Profit and Growth results. Eligible Individual Award is the sum of (i) the Eligible Award Percentage for Profit multiplied by the Base Salary for the Participant and (ii) the Eligible Award Percentage for Growth multiplied by the Base Salary for the Participant. The Eligible Individual Award is the base used to determine the Guaranteed Award and the Discretionary Award. (k)"Eligible Tier Award" is the award potential for a tier based on Profit and Growth results. Eligible Tier Award is the sum of all Eligible Individual Awards for all of the Participants in a particular tier. 150 (l)"Goal" is the expected level of performance used to establish targeted awards as approved by the Committee. (m) "Growth" is a performance indicator and is the increase in revenue from the prior year stated in terms of a percentage increase or dollar target. Generally, revenue is expressed in DPW, except as follows: TFG Financial Division - total revenues for TFG Financial Division TFG Insurance Division - total revenues for TFG Insurance Division. Midwest Printing Services - percentage increase in total revenues. (n)"Guaranteed Award" is guaranteed to Participants and is 75% of their Eligible Individual Award. (o) "Maximum" is the level of performance at which the maximum eligible award could be made. (p) "Midwest Printing Services" is Midwest Printing Services, Ltd. but shall not include the revenues or expenses from the operations acquired in May 1995 from Monaco Computer Services, Inc. (q)"Operating Profit" is calculated on a GAAP basis, includes net realized investment gains/losses, and is after income taxes. (r)"Participant" is a key employee of AGI recommended by the President(s) of AGI and approved by the Committee to participate in this Plan. (s)"Persistency" for AGIMC is the year-end persistency percentage as shown on the ALLIED Group AGIMC Production Report B, which shall include any business that is purchased by AGIMC from another entity. (t)"Profit" is a performance indicator and shall be defined based on the particular area for which a Participant provides services: Regional Offices and Bonds - "Regional Office Operating Profit" AGIMC - "Persistency" AGI subsidiaries - "Operating Profit" Staff areas/all other areas - "ALLIED Group Net Income" TFG Financial Division - net income after tax before subsidiaries for TFG Financial Division TFG Insurance Division - net income after tax before subsidiaries for TFG Insurance Division. 151 (u) "Regional Office Operating Profit" is the Regional Office Operating Statement GAAP net income. (v)"TFG Financial Division" means The Freedom Group, Inc. (w) "TFG Insurance Division" means that division of AGIS involved in the sale/licensing of products and services to companies not affiliated with the ALLIED Group. (x)"TFG Insurance and Financial Divisions" means the consolidation of TFG Insurance Division and TFG Financial Division. (y)"Threshold" is the minimum level of performance that will warrant an award. (z)"WHIC" means Western Heritage Insurance Company. 3. PARTICIPATION AND TIERS Participation in the Plan is tiered by responsibility level and the short-term impact of the management position. Responsibility Levels Tier I President(s) Tier II Regional Vice Presidents Subsidiary Presidents Profit Center Officers Tier III Primary Corporate Staff Vice Presidents Tier IV Regional Office Managers and Subsidiary Managers Tier V Corporate Staff Vice Presidents and Officers Subsidiary Managers Tier VI Subsidiary Managers Tier VII TFG Managers A participation list specifying the Participants in each tier shall be approved by the Committee prior to each fiscal year. The Committee may amend such list from time to time to add or delete Participants. Each tier level of participation will have varying award opportunity at the Threshold, Goal, and Maximum performance levels for each of the performance indicators. 4. PERFORMANCE INDICATORS Two performance indicators, Profit and Growth, will be used to measure the success of ALLIED Group and the level of bonus to be paid under this Plan. The Threshold for Profit must be attained before any award will be made based on Growth. Notwithstanding the foregoing, for AGIMC, the Threshold for Profit need not be attained for there to be an award based on Growth. 152 Profit is the only indicator used to measure performance for AGMC, WHIC, and ALLIED General Agency, and the total bonus amount is paid based upon results of Profit. 5. AWARDS (a)A Participant may receive an Eligible Individual Award under the Plan. No award will be made for performance that does not meet the Threshold goal for Profit. Upon meeting the Threshold goal for Profit, a Participant will receive a Guaranteed Award. Depending on the determination of the Committee, a Participant may or may not receive a Discretionary Award. A Participant's total award is the sum of the Guaranteed Award and the Discretionary Award. The Discretionary Award combined with the Guaranteed Award cannot exceed 150% of the Participant's Eligible Individual Award. (b)In addition to the requirements in the foregoing paragraph, a pre-Threshold requirement will be applicable to Staff employees. "Staff employees" are defined to include those employees with overall corporate responsibilities, each of whom shall be identified as "Staff" on the participation list approved by the Committee. Staff employees must attain a 14% return on average equity based on AGI financial statements before they are eligible to meet the Threshold goal. "Return on equity" is defined as the "Return on Average Book Value per Fully-diluted Share" as calculated for and as disclosed in the ALLIED Group, Inc. Annual Report to Stockholders. (c)Total awards made to all of the Participants in a particular tier shall not exceed 100% of the Eligible Tier Award, but the total awards for a particular tier may be less than the Eligible Tier Award. Notwithstanding the foregoing, if the Committee determines that a Participant has shown extraordinary performance in a calendar year, the Committee may exceed the Eligible Tier Award in order to increase the Discretionary Award for the Participant showing such extraordinary performance. (d)In the event a Participant does not meet the Threshold goal for Profit, the Committee may, in unusual or extraordinary circumstances, award the Participant a special award under the Plan. This paragraph may only be invoked by the Committee in rare and extreme situations. 6. PRORATED AWARDS Employees who become eligible for participation in this Plan after the beginning of the Plan year may receive a prorated award based on the time the employee was a Participant and based on active time employed during the Plan year. Prorated awards will be calculated by determining the number of calendar weeks that a Participant has been eligible for a tier and dividing that number by the calendar weeks in that Plan year. 153 7. DEATH, DISABILITY, OR RETIREMENT In the event that a Participant dies, becomes disabled, or retires due to age in accordance with AGI policy, a prorated award will be made based on active time employed as a Participant during the Plan year. 8. PLAN YEAR The Plan year will be AGI's fiscal year. 9. TRANSFERABILITY A Participant may not sell, pledge, donate, or otherwise assign any interest in this Plan. 10. EMPLOYMENT Nothing in this Plan confers upon a Participant any right to continued employment or interferes with or limits in any way ALLIED Group's right to terminate the employment of a Participant at any time. 11. TERMINATION OF EMPLOYMENT If a Participant terminates employment or is terminated by ALLIED Group for any reason other than death, disability, or retirement due to age in accordance with AGI policy, and if such termination date is prior to the payment date of an award under this Plan, any right to an award under this Plan is forfeited. 12. PLAN AMENDMENT OR TERMINATION The Committee may amend or terminate the Plan at any time. Participants will be notified of such action as soon as it is practical to do so. In the event of any change in the corporate structure of AGI affecting the goals set forth in Exhibit A or the eligible award percentages set forth in Exhibit B and which change in corporate structure would adversely affect a Participant, the Committee may adjust or amend the Plan so as not to disadvantage a Participant. 13. ADMINISTRATION All matters pertaining to the administration of this Plan will be the responsibility of the Committee, and any decisions of the Committee shall be conclusive and binding. This includes all matters of interpretation, areas not specified in the Plan, and any other issues that may affect the Plan. 14. GOVERNING LAW The Plan will be administered, enforced, construed, and interpreted in accordance with the laws of the State of Iowa. 154 EXHIBIT A GOALS
Threshold Goal Maximum --------- ---- ------- PROFIT Regional Offices: DMRO $23,000,000 $26,500,000 $30,000,000 LRO $10,000,000 $12,000,000 $14,000,000 RMRO $5,000,000 $5,700,000 $6,400,000 PCRO $14,000,000 $16,000,000 $18,000,000 Bonds $675,000 $700,000 $725,000 Staff 1 $57,000,000 $66,000,000 $75,000,000 AGMC $2,100,000 $2,400,000 $2,700,000 WHIC $5,000,000 $6,000,000 $7,000,000 ALLIED General Agency $25,000 $30,000 $35,000 TFG Insurance Division 2 $300,000 $600,000 $900,000 TFG Financial Division 2 $650,000 $750,000 $850,000 TFG Insurance and Financial Divisions $950,000 $1,350,000 $1,750,000 Midwest Printing Services $275,000 $350,000 $425,000 AGIMC 86.5% 88.0% 89.5% GROWTH Regional Offices, Bonds, AGIS, and Staff in DPW 10.0% 12.5% 15.0% AGIMC DPW 18.0% 22.0% 26.0% Midwest Printing Services 10.0% 14.0% 18.0% TFG Insurance Division 2 $9,000,000 $10,500,000 $12,000,000 TFG Financial Division 2 $8,500,000 $9,500,000 $10,500,000 TFG Insurance and Financial Divisions $17,500,000 $20,000,000 $22,500,000 - --------------------
1 A pre-Threshold requirement will be applicable to Staff employees. Staff employees must attain a 14% return on equity based on ALLIED Group, Inc. financial statements before they are eligible to meet the Threshold goal. 2 In the event that The Freedom Group, Inc. receives a capital contribution in the Plan year, the Threshold, Goal, and Maximum shall each be adjusted upwards by the addition of the dollar amount derived from the following formula: Dollar Amount of x 14% x Remaining / Total Number Capital Contribution Days in of Days in Plan Year Plan Year 155 EXHIBIT B ELIGIBLE AWARD PERCENTAGES
Threshold Goal Maximum Weight --------- ---- ------- ------ Tier I: Profit 19% 38% 56% 75% Growth 6% 12% 19% 25% Total 25% 50% 75% Tier II:1 Profit 15% 30% 45% 75% Growth 5% 10% 15% 25% Total 20% 40% 60% Tier III: Profit 13% 27% 40% 75% Growth 5% 9% 14% 25% Total 18% 36% 54% Tier IV:1,2 Profit 12% 24% 36% 75% Growth 4% 8% 12% 25% Total 16% 32% 48% Tier V: Profit 9% 18% 27% 75% Growth 3% 6% 9% 25% Total 12% 24% 36% Tier VI: Profit 6% 12% 18% 75% Growth 2% 4% 6% 25% Total 8% 16% 24% Tier VII:2 Profit 3% 6% 9% 50% Growth 3% 6% 9% 50% Total 6% 12% 18% - -------------------
1 AGIMC award percentage weighting = 25% Persistency, 75% Growth. 2 TFG Financial and Insurance Divisions weighted 50% Profit and 50% Growth (Revenue) EX-10 8 10.53 CAT. REINSURANCE 156 EXHIBIT 10.53 AMCO INSURANCE COMPANY ALLIED PROPERTY AND CASUALTY INSURANCE COMPANY DEPOSITORS INSURANCE COMPANY MOTOR CLUB OF IOWA INSURANCE COMPANY PROPERTY SPECIAL CATASTROPHE EXCESS CONTRACT EFFECTIVE 12:01 A.M., CENTRAL STANDARD TIME, JANUARY 1, 1993 PREAMBLE The Reinsurers hereby reinsure the excess liability of the Reassured resulting from losses which may occur during the term of this contract under the Reassured's policies, subject to the following conditions: TERM 1. A. The term of this contract shall be from 12:01 A.M., Central Standard Time, January 1,1993 until cancelled per the conditions of termination contained in this Agreement. B. Should this contract terminate while a loss occurrence is in progress, the Reinsurers shall nevertheless be liable, to the extent oftheir interest and subject to the other conditions of this contract, for all losses resulting from such loss occurrence, whether such losses occur before or after such termination. TERRITORY 2. The territorial limits of this contract shall be identical with those of the Reassured's policies. EXCLUSIONS 3. A. This contract shall not apply to: (1) All pro rata and excess of loss reinsurance assumed by the Reassured. This exclusion, however, shall not apply to agency reinsurance, reinsurance assumed between the member companies of the ALLIED Insurance Group (Inter-Company Reinsurance), nor to business reinsured 100% by the Reassured. (2) Policies or portions thereof classified by the Reassured as: Automobile (except Automobile Physical Damage (excluding Collision), Casualty (but not 157 the mandatory coverages under the Property portion of package policies), fidelity, Surety and Ocean Marine; (3) Perils of Flood and rising waters when written as such; (4) Financial guarantee and Insolvency; (5) Difference in conditions insurance when written as such; (6) All insurance on growing or standing crops; (7) Mortgage impairment insurance and similar kinds of insurance, however styled, providing coverage to be insured as respects its mortgagee interest in property or its owner interest in foreclosed property; (8) Loss or Liability excluded by the provisions of the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance" attached to and forming part of this contract; (9) Pool, Association or Syndicate business as excluded by the provisions of the "Pools Exclusion Clause" attached to and forming part of this contract. Nevertheless, it is specifically agreed that liability accruing to the Reassured from its participation in a. The following so-called "Coastal Pools":- Alabama Insurance Underwriting Association Florida Windstorm Underwriting Association Louisiana Insurance Underwriting Association Mississippi Insurance Underwriting Association North Carolina Insurance Underwriting Association South Carolina Windstorm and Hail Underwriting Association Texas Catastrophe Property Insurance Association and, b. All "FAIR Plan" business for all perils, including riot and civil disorder,otherwise protected hereunder shall not be excluded except, however, that this contract does not include any increase in such liability resulting from: i the inability of any other participant in such FAIR Plan or Coastal Pool to meet its liability 158 ii any claim against such FAIR Plan or Coastal Pool, or any participant therein, including the Reassured, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Funds Exclusion Clause incorporated in this contract); (10) Loss and/or Damage and/or Costs and/or Expenses arising from Seepage and/or Pollution and/or Contamination, other than Contamination from Smoke Damage. Nevertheless, this exclusion does not preclude payment of the costs of the removal of debris of property damaged or expenses for extraction of pollutants from land or water caused by aloss otherwise covered hereunder as follows: As respects amounts paid by the Reassured subject to this contract for debris removal, other than for extraction of pollutants from land or water or the removal, restoration or replacement of polluted land or water, as respects business classified as Commercial Property, Reinsurers shall be liable for an amount not to exceed 25% of the direct physical loss or damage, plus the deductible applicable to said loss or damage, paid by the Reassured, for any one loss, any one location, any one insured, plus an additional amount paid by the Reassured, not to exceed $5,000 for any one loss, any one location, any one insured, where the sum of loss or damage and debris removal expense exceeds the Reassured's original policy limit or the debris removal expense exceeds the amount payable under the 25% debris removal limitation. As respects amounts paid by the Reassured subject to this contract for extraction of pollutants from land or water, the release, discharge or dispersal of which is caused by or results from a covered cause of loss as respects business classified as Commercial Property, Reinsurers shall be liable for an amount not to exceed $10,000 each location, for the sum of all such expenses paid by the Reassured arising out of covered causes of loss occurring during each separate 12 months period of the Reassured's original policy. The word "pollutant" as used herein shall mean any solid, liquid, gaseous, or thermal irritant or contaminant, including, but not limited to smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed. B. Regarding interests which at time of loss or damage are on shore, no liability shall attach hereto for any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. This War Exclusion Clause shall not, however, apply to interests which at time of loss or damage are within the territorial limits of the United States of America (comprising the fifty States of the 159 Union and the District of Columbia and including Bridges between the U.S.A. and Mexico, provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under policies, endorsements, or binders containing a standard war or hostilities or warlike operations exclusion clause. Nevertheless, this clause shall not be construed to apply to riots, strikes, civil commotion, vandalism, malicious damage, including acts committed by the agent of any government, party, or faction engaged in war, hostilities, or other warlike operations, providing such agent is acting secretly and not in connection with any operation of military or naval armed forces in the county where the interest insured is situated. C. This contract shall exclude all liability of the Reassured arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Reassured of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. DEFINITION OF POLICIES 4. The term "policies", wherever used herein, shall mean all binders, policies, contracts, and other obligations of insurance and reinsurance heretofore issued or which hereafter may be issued by the Reassured. RETENTION AND LIMIT 5. A. The Reinsurers shall be liable in each and every loss occurrence, irrespective of the number and kinds of risks and perils involved, for 100% of the excess net loss above an initial net loss to the Reassured and ALLIED Mutual Insurance Company, who together are partners to an Amended and Restated Reinsurance Pooling Agreement (which establishes the "Reinsurance Pool") of $5,000,000; but the Reinsurers shall not be liable for more than the Reassured's percentage of the Reinsurance Pool at the time of loss multiplied by $5,000,000 in each and every such loss occurrence, not for more than the Reassured's percentage of the Reinsurance Pool multiplied by $10,000,000 in the aggregate during the term of this contract. REINSTATEMENT PROVISION 6. A. In the event of a claim under this contract, it is agreed that the amount of liability hereunder is reduced from the time of the 160 occurrence of the loss by the sum payable on such a claim. However, the amount so exhausted is immediately reinstated from the time of the occurrence of the loss. B. For each amount so reinstated, the Reassured agrees to pay an additional premium calculated at pro rata of the annual earned reinsurance premium hereon, being pro rata both as to the fraction of the face value of this contract so reinstated and as to the fraction of the unexpired term hereunder at the time of the loss occurrence subject to a minimum of 50% as to time. Nevertheless, the liability of the Reinsurers shall not exceed the amounts stated in 5.A above per occurrence and in the aggregate. DEFINITION OF LOSS OCCURRENCE 7. The term "Loss Occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "Loss Occcurrence" shall be limited to all individual losses sustained by the Reassured occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term "Loss Occurrence" shall be further defined as follows: (A) As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Reassured occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. (B) As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Reassured occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. (C) As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in the opening paragraph of this article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Reassured's "Loss Occurrence". 161 (D) As regards "Freeze", only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Reassured's "Loss Occurrence". Except for those "Loss Occurrences" referred to in (A) and (B) the Reassured may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Reassured arising out of that disaster, accident or loss and provided that only one such period of 168 consecutive hours shall apply with respect to one event. However, as respects those "Loss Occurrences" referred to in (A) and (B), if the disaster, accident or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Reassured may divide that disaster, accident or loss into two or more "Loss Occurrences" provided no two periods overlap and no individual loss is included in more than one such period and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Reassured arising out of that disaster, accident or loss. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any "Loss Occurrence" claimed under the 168 hours provision. NET RETAINED LINES 8. A. This contract applies only to that portion of any insurance or reinsurance which the Reassured retains net for its own account; and, in calculating the amount of loss hereunder and also in computing the amount or amounts in excess of which this contract attaches, only loss in respect of that portion of any insurance or reinsurance which the Reassured retains net for its own account shall be included. B. The amount of the Reinsurers' liability hereunder in any loss occurrence shall not be increased by reason of the inability of the Reassured to collect from any other reinsurers, whether specific or general, any amount which may have become due from them, whether such inability arises from the insolvency of such other reinsurers or not. DEFINITION OF NET LOSS 9. A. The term "net loss" shall mean only such amounts as are actually paid or payable by the Reassured in settlement of claim or in satisfaction of judgments and including court costs, interest upon judgments, and allocated investigation, adjustment, and legal expenses paid by the Reassured. Nothing in this clause, however, shall be construed to mean that losses under this contract are not recoverable until the Reassured's net loss has been ascertained. 162 B. All salvages, recoveries or payments recovered or received subsequent to a loss settlement under this contract shall be applied as if recovered or received prior to loss settlement, and all necessary adjustments shall be made between the Reassured and the Reinsurers. LOSSES 10. A The Reassured shall advise the Reinsurers promptly of all loss occurrences which, in the opinion of the Reassured, may result in a claim hereunder and of all subsequent developments thereto which, in the opinion of the Reassured, may materially affect the position of the Reinsurers. B. All loss settlements made by the Reassured, provided they are within the terms of this contract, shall be unconditionally binding upon the Reinsurers, who agree to pay all amounts for which they may be liable immediately upon being furnished by the Reassured with reasonable evidence of the amo unt due or to be due. PREMIUM 11. A. The premium to the Reinsurers for this contract shall be calculated by applying a rate of 1.15% to the Reassured's plus ALLIED Mutual Insurance Companies gross net earned premium income during the term of this contract times the Reassured's pool percentage. B. The term "gross net earned premium income" shall mean gross net earned premiums on business covered hereunder less premiums earned on reinsurance, recoveries under which would reduce the loss under this contract. As respects Homeowners Multiple Peril policies, 65% of the gross net earned premium shall be reported hereunder. As respects Farmowners Multiple Peril policies, 100% of the gross net earned premium applicable to the property coverages shall be reported hereunder. As respects Business Owners policies, 62% of the gross net earned premium shall be reported hereunder. C. The minimum premium to the Reinsurers shall be $957,375; however, a deposit premium equal to $2,127,500 multiplied by the Reassured's percentage of the Reinsurance Pool shall be payable to Reinsurers in equal quarterly installments as of January 1, April 1, July 1, and October 1, 1993. If the Reassured's percentage of the Reinsurance Pool should change during the term of the agreement, the deposit premium will adjust at the date of the change to reflect the new Reinsurance Pool percentage. As promptly as possible after the termination of this contract, the Reassured shall render a statement to the Reinsurers showing the actual reinsurance premiums due hereunder, calculated as provided in Paragraph A of this Article; the difference between the actual reinsurance premium due and the deposit premium shall, subject to the minimum premium, be paid by the debtor to the creditor. 163 CURRENCY 12. The net loss retention of the Reassured and the limit of the Reinsurers' liability shall be considered in terms of United States currency and all premiums and losses hereunder shall be payable in United States currency. TAXES (Paragraphs A. and B. applicable only to the participation of any Reinsurers subject to Federal Excise Tax) 13. A. The Reinsurers have agreed to allow, for the purpose of paying the Federal Excise Tax, one percent of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. B. In the event of any return of premium becoming due hereunder, the Reinsurers will deduct one percent from the amount of the return; the reassured or its Intermediary hereunder should take steps to recover the tax from the U.S. Government. C. In consideration of the terms under which this contract is issued, the Reassured undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when making tax returns, other than Income or Profits Tax returns, to any State or Territory of the United States of America or to the District of Columbia. ERRORS AND OMISSIONS 14. Any inadvertent delay, omission or error shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such delay, omission or error had not been made, provided such delay, omission or error is rectified immediately upon discovery. ACCESS TO REASSURED'S RECORDS 15. Upon reasonable notice being given to the Reassured, the Reinsurers or their designated representatives shall have free access at any reasonable time during the term of this contract and subsequent to its termination to all records of the Reassured which pertain in any way to this reinsurance. INSOLVENCY 16. In the event of the insolvency of the Reassured and the appointment of a liquidator, receiver, conservator or statutory successor, this reinsurance shall be payable immediately upon demand, with reasonable provision for verification, on the basis of the liability of the reassured as a result of claims allowed against the Reassured by any court of competent jurisdiction or any liquidator, receiver, conservator 164 or statutory successor having authority to allow such claims, without diminution because of such insolvency or because such liquidator, receiver, conservator or statutory successor has failed to pay all or a portion of any claims. Payments by the Reinsurers as above set forth shall be made directly to the Reassured or to its liquidator, receiver, conservator or statutory successor, except as provided by subsection (a) of section 4118 of the New York Insurance Laws of except (a) where this contract specifies another payee in the event of the insolvency of the Reassured, and (b) the Reinsurers with the consent of the direct insureds and, as respects New York risks, the approval of the Superintendent of the New York Insurance Department have assumed such policy obligations of the Reassured as their direct obligations to the payees under such policies, in substitution for the obligations of the Reassured to such payees. In the event of the insolvency of the Reassured, the liquidator, receiver, conservator or statutory successor of the Reassured shall give written notice to the Reinsurers of the pendency of a claim against the insolvent Reassured on the policy or policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and during the pendency of such claim any Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Reassured of its liquidator, receiver, conservator or statutory successor. The expense this incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Reassured as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reassured solely as a result of the defense undertaken by the Reinsurer. Where two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this contract as though such expense had been incurred by the Reassured. For the purposes of this Article, the term "Reassured" shall refer to any one or more of the Companies reinsured hereunder, as applicable. ARBITRATION 17. Any dispute or other matter in question between the Reassured and the Reinsurers arising out of or relating to the formation, interpretation, performance, or breach of this Contract, whether such dispute arises before or after termination of this Contract, shall be settled by arbitration. Arbitration shall be initiated by the delivery of a written notice of demand for arbitration by one party to the other within a reasonable time after the dispute has arisen. 165 If more than one Reinsurer is involved in the same dispute, all such Reinsurers shall constitute and act as one party for the purposes of this Article, provided, however, that nothing herein shall impair the rights of such Reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the Reinsurers under the terms of this Contract from several to joint. Each party shall appoint an individual as arbitrator and the two so appointed shall then appoint a third arbitrator. If either party refuses or neglects to appoint an arbitrator within sixty days, the other party may appoint the second arbitrator. If the two arbitrators do not agree on a third arbitrator within sixty days of their appointment, each of the arbitrators shall nominate three individuals. Each arbitrator shall then decline two of the nominations presented by the other arbitrator. The third arbitrator shall then be chosen from the remaining two nominations by drawing lots. The arbitrators shall be active or retired officers of insurance or reinsurance companies or Lloyd's London Underwriters; the arbitrators shall not have a personal or financial interest in the result of the arbitration. The arbitration hearings shall be held in Des Moines, Iowa, or such other place as may be mutually agreed. Each party shall submit its case to the arbitrators within sixty days of the selection of the third arbitrator or within such longer period as may be agreed by the arbitrators. The arbitrators shall not be obliged to follow judicial formalities or the rules of evidence except to the extent required by governming law, that is, the state law of the situs of the arbitration as herein agreed; they shall make their decisions according to the practice of the reinsurance business. The decision rendered by a majority of the arbitrators shall be final and binding on both parties. Such decision shall be a condition precedent to any right of legal action arising out of the arbitrated dispute which either party may have against the other. Judgment upon the award rendered may be entered in any court having jurisdiction thereof. Each party shall pay the fee and expenses of its own arbitrator and one-half of the fee and expenses of the third arbitrator. All other expenses of the arbitration shall be equally divided between the parties. Except as provided above, arbitration shall be based, insofar as applicable, upon the procedures of the American Arbitration Association. SERVICE OF SUIT (The first two paragraphs of this Clause only apply to Reinsurers domiciled outside of the United States and/or unauthorized in the State of New York) 18. It is agreed that in the event of the failure of the Reinsurers hereon to pay any amount claimed to be due hereunder, the Reinsurers hereon, at the request of the Reassured, will submit to the jurisdiction of a Court 166 of competent jurisdiction within the United States. Nothing in this Clause constitutes or should be understood to constitute a waiver of Reinsurers' rights to commence an action in any Court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another Court as permitted by the laws of the United States or of any State in the United States. It is further agreed that in any suit instituted against any one of them upon this contract, such Reinsurer(s) will abide by the final decision of such Court or of any Appellate Court in the event of an appeal. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefore, Reinsurers hereon hereby designate the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as their true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Reassured or any beneficiary hereunder arising out of this contract of reinsurance, and hereby designate the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof. RESERVES 19. If a jurisdiction of the United States will not permit the Reassured, in the statements required to be filed with its regulatory authority(ies), to receive full credit as admitted reinsurance for any Reinsurers's share of obligations, the Reassured shall forward to such Reinsurer a statement of the Reinsurer's share of such obligations. Upon receipt of such statement the Reinsurer shall promptly apply for, and provide the Reassured with, a "clean", unconditional and irrevocable Letter of Credit, in the amount specified in the statement submitted, with terms and bank acceptable to the regulatory authority(ies) having jurisdiction over the Reassured. "Obligations", as used in this Article, shall mean the sum of losses paid and allocated loss adjustment expenses paid by the Reassured but not yet recovered from the Reinsurer, plus reserves for reported losses and allocated loss adjustment expenses. It shall not include reserves for losses incurred but not reported. The Reinsurer hereby agrees that the Letter of Credit will provide for automatic extension of the Letter of Credit without amendment for one year from the date of expiration of said Letter or any future expiration date unless thirty (30) days prior to any expiration the issuing bank shall notify the Reassured by registered mail that the issuing bank elects not to consider the Letter of Credit renewed for any additional period. An issuing bank, not a "qualified bank" as defined by Regulation No. 133 promulgated by the Insurance Department of the State of New York, shall provide sixty (60) days notice to the Reassured prior to any expiration. 167 Notwithstanding any other provision of this contract, the Reassured or any successor by operation of law of the Reassured including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Reassured may draw upon such credit, without diminution because of the insolvency of any party hereto, at any time and undertakes to use and apply such credit for one or more of the following purposes only: A. To pay the Reinsurer's share or to reimburse the Reassured for the Reinsurer's share of any obligations, as 000stipulated in the statement submitted by the Reassured to the Reinsurer, which is due to the Reassured 000and not otherwise paid by the Reinsurer. B. In the event the Reassured has received effective notice f nonrenewal of the Letter of Credit and the Reinsurer's liability remains unliquidated and undischarged thirty (30) days prior to the expiry date of the Letter of Credit, to withdraw the balance of the Letter of Credit and place such sums in an interest bearing trust account to secure the continuing liabilities of the Reinsurer under this contract until a renewal Letter of Credit acceptable to the regulatory authority(ies) having jurisdiction over the Reassured, or a substitute in lieu thereof acceptable to the regulatory authority(ies) having jurisdiction over the Reassured, has been received by the Reassured. The Reassured shall provide to the Reinsurer payment of any interest thereon accruing from such account. C. To make refund of any sum which is in excess of the actual amount required for Sections A. and B. of this paragraph. At annual intervals or more frequently as determined by the Reassured, but never more frequently than quarterly, the Reassured shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Reinsurer's share of any obligations. If the statement shows that the Reinsurer's share of obligations exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Reassured of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If the statement shows, however, that the Reinsurer's share of obligations is less than the balance of credit as of the statement date, the Reassured shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit. The bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Reassured or the disposition of funds withdrawn, except to assure that withdrawls are made only upon the order of properly authorized representatives of the Reassured. The Reassured shall incur no obligation to the bank in acting upon the credit, other than as appears in the express terms thereof. 168 OFFSET CLAUSE 20. Each party hereto shall have, and may exercise at any time and from time to time, the right to offset any balance or balances, whether on account of premiums or on account of losses or otherwise, due from such party to the other (or, if more than one, any other) party hereto under this Agreement or under any other reinsurance agreement heretofore or hereafter entered into by and between them, any may offset the same against any balance or balances due or to become due to the former from the latter under the same or any other reinsurance agreement between them; and the party asserting the right of offset shall have and may exercise such right whether the balance or balances due or to become due to such party from the other are on account of premiums or on account of losses or otherwise and regardless of the capacity, whether as assuming insurer or as ceding insurer, in which each party acted under the agreement or, if more than one, the different agreements involved, provided, however, that, in the event of the insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of Section 7427 of the Insurance Law of the State of New York. COMMENCEMENT & TERMINATION 21. This Agreement shall take effect as of 12:01 A.M. Central Standard Time, January 1, 1993 and is entered into for an unlimited period but any parties to this Agreement may terminate their portion of this Agreement at the end of any Calendar year by giving not less than 90 days notice in writing by registered letter. Every notice of termination shall be given by registered letter addressed to the intended recipient at the recipients primary or home office. In determining whether the requisite number of days' notice has been given in any case, the date of termination shall be counted but the date of mailing shall not. Notwithstanding the termination of this Agreement as hereinabove provided, the provisions of this Agreement shall continue to apply to all unfinished business hereunder to the end that all obligations and liabilities incurred by each party hereunder prior to such termination shall be fully performed and discharged. EX-11 9 169 Exhibit 11 ALLIED Group, Inc. and Subsidiaries Computation of Per Share Earnings For the years ended December 31, 1995, 1994, 1993
1995 1994 1993 ------------------ ------------------- ------------------- Primary Net income $ 52,376,829 $ 47,624,996 $ 39,922,421 Preferred stock dividends (7,217,294) (7,305,585) (7,420,557) Stock options in subsidiary (387,580) (305,974) (296,391) ------------------ ------------------- ------------------- Adjusted net income $ 44,771,955 $ 40,013,437 $ 32,205,473 ================== =================== =================== Earnings per share $ 4.81 $ 4.37 $ 3.68 ================== =================== =================== Weighted average shares outstanding 9,204,321 9,008,497 8,394,366 Dilutive effective of unexercised stock options* 110,147 146,444 350,019 ------------------ ------------------- ------------------- Total 9,314,468 9,154,941 8,744,385 ================== =================== =================== Fully Diluted Net income $ 52,376,829 $ 47,624,996 $ 39,922,421 Preferred stock dividends (3,515,118) (3,515,118) (3,515,118) Stock options in subsidiary (389,683) (305,974) (299,237) Additional net ESOP expenses- assuming conversion of ESOP Series preferred stock (168,545) (303,129) (464,762) ------------------ ------------------- ------------------- Adjusted net income $ 48,303,483 $ 43,500,775 $ 35,643,304 ================== =================== =================== Earnings per share $ 3.46 $ 3.13 $ 2.61 ================== =================== =================== Weighted average shares outstanding 13,834,491 13,747,731 13,276,998 Dilutive effective of unexercised stock option* 124,913 147,423 364,716 ------------------ ------------------- ------------------- Total 13,959,404 13,895,154 13,641,714 ================== =================== ===================
* Note: Primary - Based on average market price Fully Diluted - Based on the higher of the average market price or the market price at December 31 of each year EX-21 10 170 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT State of Name of subsidiary incorporation - -------------------------------------------------------- ------------- I. AMCO Insurance Company Iowa A. Western Heritage Insurance Company Arizona B. ALLIED General Agency Company Iowa C. ALLIED Group Information Systems, Inc. Iowa 1. The Freedom Group, Inc. Iowa 2. Midwest Printing Services, Ltd. Iowa II. ALLIED Property and Casualty Insurance Company Iowa III. Depositors Insurance Company Iowa IV. ALLIED Group Mortgage Company Iowa V. ALLIED Group Leasing Corporation Iowa EX-23 11 171 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders ALLIED Group, Inc. We consent to incorporation by reference in the Registration Statement Nos. 33-48235, 33-6643, 33-6644, 33-48206, 33-24543, 33-28907, 33-48234, 33-76876, and 33-65037 on Form S-8 and Registration Statement Nos. 33-48233 and 33-61090 on Form S-3 of ALLIED Group, Inc. of our reports dated February 2, 1996, relating to the consolidated balance sheets of ALLIED Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and related consolidated statements of earnings, stockholders' equity, and cash flows and related schedules for each of the years in the three-year period ended December 31, 1995, which appears in the December 31, 1995 annual report on Form 10-K of ALLIED Group, Inc. Our report refers to a change in the Company's method of accounting for investments in 1993. KPMG Peat Marwick LLP Des Moines, Iowa March 7, 1996 EX-27 12 FDS -- ARTICLE 7 FDS FOR 10-K
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED GROUP, INC.'S DECEMBER 31, 1995 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FINANCIAL STATEMENTS 0000774624 ALLIED GROUP, INC. 1,000 US DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1.00000 754,547 0 0 7,948 0 0 772,299 1,465 19,293 41,688 1,010,598 341,864 196,461 0 0 39,465 0 83,648 9,445 258,493 1,010,598 455,499 47,242 505 49,519 317,940 100,120 20,583 73,848 21,471 52,377 0 0 0 52,377 4.910 3.520 292,674 315,956 1,984 169,254 116,421 324,939 (292)
-----END PRIVACY-ENHANCED MESSAGE-----