-----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, MY1v3eKtdNIeAdoTcxBwuS/jIYZO/VAEJUYY9DFE6h8hIQrsIUoabeW9gLrg/3U2 oIKMf8JSoGTz9pGC+inoWg== 0000774624-97-000033.txt : 19970317 0000774624-97-000033.hdr.sgml : 19970317 ACCESSION NUMBER: 0000774624-97-000033 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED GROUP INC CENTRAL INDEX KEY: 0000774624 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 420958655 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12663 FILM NUMBER: 97556373 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 1996 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, 1996 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: Common Stock, no par value (Title of Class) Securities registered pursuant to Section 12(g) of the Act: None (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 28, 1997 the number of Registrant's Common Stock, no par value, outstanding was 20,398,117. The aggregate market value of the Common Stock of the Registrant held by nonaffiliates at February 28, 1997 was $668,516,603. Documents Incorporated By Reference The Registrant's definitive proxy statement (1997 Proxy Statement), which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996, is incorporated by reference under Part III. The index to the exhibits is located on page 74. This document contains 142 pages. 2 TABLE OF CONTENTS Part I Item 1. Business....................................................... 3 Item 2. Properties......................................................18 Item 3. Legal Proceedings...............................................18 Item 4. Submission of Matters to a Vote of Security Holders.............18 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................19 Item 6. Selected Financial Data..........................................20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................21 Item 8. Financial Statements and Supplementary Data......................28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................57 Part III Item 10.Directors and Executive Officers of the Registrant..................58 Item 11.Executive Compensation..............................................58 Item 12.Security Ownership of Certain Beneficial Owners and Management......58 Item 13.Certain Relationships and Related Transactions......................58 Part IV Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K....59 Index to Financial Statement Schedules.......................................59 Signatures...................................................................73 Index to Exhibits............................................................74 3 Part I Item 1. Business ALLIED Group, Inc. (ALLIED) was incorporated in 1971 as an Iowa corporation and operates as a regional insurance holding company headquartered in Des Moines, Iowa. ALLIED and its subsidiaries (collectively, the Company) operate exclusively in the United States and primarily in the central and western states. At year-end 1996, The ALLIED Group Employee Stock Ownership Trust owned 26.5% and ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company, controlled 18.3% of the outstanding voting stock of ALLIED. The Company has two reportable business segments: property-casualty insurance and excess & surplus lines insurance. Property-casualty insurance was the most significant segment in 1996, accounting for 86.5% of consolidated revenues. The Company's segment information is contained in note 17 of Notes to Consolidated Financial Statements. Property-casualty Insurance The 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 write personal lines (primarily automobile and homeowners) and small commercial lines. 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 property-casualty subsidiaries and to ALLIED Mutual for 1996 with respect to their financial strength and their ability to meet policyholder and other contractual obligations based on the review of the pool's 1995 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 adjusting expense reserves, insurance laws and regulations, fluctuations in the financial markets, interest rates, reinsurance costs, and general business and economic conditions. The property-casualty segment pursues a strategy of growth in personal lines of insurance primarily through a system of more than 2,250 independent agencies, a growing number of which represent the property-casualty subsidiaries on an exclusive basis for their personal lines of insurance. For the year ended December 31, 1996, 66.8% of the property-casualty subsidiaries' net earned premiums were attributable to personal lines of insurance. While the majority of the revenues are attributable to personal lines, the segment also writes commercial lines of insurance for small businesses through such agents. Because the primary focus, and the primary market served by the segment's independent agency force, is personal lines of insurance and because management perceives the risks to be greater in commercial lines, the property-casualty segment has been conservative in the types of commercial risks it underwrites and in the pricing of the commercial risks. Historically, this has resulted in writing less commercial business than the segment might otherwise have if a more aggressive strategy in commercial lines was adopted. 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 adjusting 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 adjusting 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 adjusting, 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 was 64% for 1996, 1995, and 1994. As of December 31, 1996, the statutory capital and surplus of ALLIED Mutual and AMCO was $231.5 million and $223.3 million, respectively. The following table sets forth statutory and generally accepted accounting principles (GAAP) basis information for the property-casualty subsidiaries for the years indicated.
At or for the year ended December 31, ------------------------------------------- 1996 1995 1994 ----------- ---------- ----------- (dollars in thousands) Reinsurance pool percentage 64% 64% 64% Net written premiums $ 488,189 $ 440,838 $ 403,066 =========== ========== ========== Earned premiums $ 466,211 $ 425,838 $ 386,732 Losses and loss adjusting expenses 335,615 295,583 268,302 Underwriting expenses 124,622 114,511 110,259 ----------- ---------- ---------- Statutory underwriting gain 5,974 15,744 8,171 GAAP adjustments 3,965 1,943 1,637 ----------- ---------- ---------- GAAP underwriting gain 9,939 17,687 9,808 Investment income excluding realized gains 42,296 39,110 35,279 Realized investment gains 180 236 2,956 Other income 7,020 6,850 6,143 ----------- ---------- ---------- Income before income taxes $ 59,435 $ 63,883 $ 54,186 =========== ========== ========== Statutory combined ratio 97.7 95.7 97.1 Wind and hail losses, net of reinsurance $ 39,111 $ 28,664 $ 24,383 Impact of wind and hail losses on combined ratio 8.4 6.7 6.3 Invested assets $ 710,629 $ 658,044 $ 565,490 Loss and loss adjusting expense reserves, net of reinsurance $ 297,343 $ 277,819 $ 252,608 Statutory capital and surplus $ 285,854 $ 257,845 $ 233,407
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 5 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, ------------------------------------------------------------------------------ 1996 1995 1994 ------------------------ ------------------------ ------------------------- 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 $ 229,894 98.9 $ 208,873 96.5 $ 192,712 97.4 Homeowners 81,617 102.4 71,035 99.2 60,204 107.4 ----------- ---------- ---------- Personal lines 311,511 99.8 279,908 97.2 252,916 99.8 ----------- ---------- ---------- Commercial automobile 25,272 98.8 23,873 95.2 22,384 98.4 Workers' compensation 25,499 76.5 29,443 70.2 28,251 83.3 Other property and liability 101,591 97.3 90,302 100.2 80,908 94.0 Other lines 2,338 45.7 2,312 50.2 2,273 66.6 ----------- ---------- ---------- Commercial lines 154,700 93.5 145,930 92.7 133,816 92.0 ----------- ---------- ---------- Total $ 466,211 97.7 $ 425,838 95.7 $ 386,732 97.1 =========== ========== ==========
The following table sets forth the components of the statutory combined ratio and wind and hail loss information for the property-casualty segment for the years indicated.
Year ended December 31, ------------------------------- 1996 1995 1994 ----- ----- ----- Statutory combined ratio - ------------------------ Loss ratio 62.6 60.1 60.1 Loss adjusting expense ratio 9.4 9.3 9.3 Underwriting expense ratio 25.5 26.0 27.3 Dividend ratio 0.2 0.3 0.4 ----- ----- ----- Total 97.7 95.7 97.1 ===== ===== ===== Impact of wind and hail losses on the statutory combined ratio - --------------------------------- Personal automobile 3.9 1.8 2.1 Homeowners 23.6 21.7 21.5 Personal lines 9.1 6.8 6.7 Commercial lines 7.1 6.5 5.5 Total 8.4 6.7 6.3
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, ----------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (dollars in thousands) Direct written premiums by distribution system ---------------------------------------------- Independent agency system $ 549,598 $ 503,922 $ 479,351 Exclusive agency system 210,648 180,799 148,777 Direct response marketing system 28,437 22,136 18,418 ---------- ---------- ---------- Total direct written premiums, excluding crop hail premiums 788,683 706,857 646,546 Crop hail premiums (non-pooled) 7,049 7,781 6,024 ---------- ---------- ---------- Total direct written premiums $ 795,732 $ 714,638 $ 652,570 ========== ========== ========== Agency counts ------------- Independent agencies 2,000 1,968 1,910 Exclusive agencies 257 192 164 Net written premiums $ 773,593 $ 699,608 $ 638,301 Net earned premiums $ 739,251 $ 676,169 $ 612,799
The following table sets forth the geographic percentage distribution of property-casualty pool (including ALLIED Mutual) direct written premiums for the years indicated.
1996 1995 1994 ------ ------ ------ California 24.5% 24.0% 24.0% Iowa 21.7 23.3 24.6 Kansas 8.1 8.4 8.4 Nebraska 7.4 7.9 8.1 Minnesota 7.3 7.6 7.9 Missouri 4.8 4.8 4.8 Colorado 3.6 3.6 3.5 Illinois 3.5 3.1 2.8 Utah 2.9 2.5 2.2 Tennessee 2.7 2.4 2.2 Washington 2.3 2.1 1.7 Other * 11.2 10.3 9.8 ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ====== *Includes all other states, none of which accounted for more than 2% in 1996.
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 1996 based on the review of their 1995 statutory results and operating performance. For 1996, Western Heritage's net earned premiums were 64.1% specialty commercial casualty, 9.2% commercial property, 23.9% commercial transportation, and 2.8% 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 coverages for buildings that are older, in higher risk locations, or vacant; agricultural and contractor equipment; and protection against vandalism. 7 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 even if the agent exceeds the express limitations; however, such instances occur infrequently and constitute no material financial risk to the Company. 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, -------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (dollars in thousands) Net written premiums $ 28,417 $ 30,606 $ 27,026 =========== =========== =========== Earned premiums $ 27,314 $ 29,661 $ 25,786 Losses and loss adjusting expenses 17,484 22,357 18,568 Underwriting expenses 8,106 8,202 7,536 ----------- ----------- ----------- Statutory underwriting gain (loss) 1,724 (898) (318) GAAP adjustments 86 43 100 ----------- ----------- ----------- GAAP underwriting gain (loss) 1,810 (855) (218) Investment income excluding realized gains 6,241 5,830 5,241 Realized investment gains (losses) 2 (135) (24) ----------- ----------- ----------- Income before income taxes $ 8,053 $ 4,840 $ 4,999 =========== =========== =========== Statutory combined ratio 92.5 102.2 99.9 Invested assets $ 104,403 $ 96,435 $ 79,588 Loss and loss adjusting expense reserves, net of reinsurance $ 49,319 $ 47,120 $ 40,066 Statutory capital and surplus $ 33,478 $ 27,770 $ 23,896
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, ---------------------------------------------------------------------------- 1996 1995 1994 ------------------------ ------------------------ ----------------------- Net Statutory Net Statutory Net Statutory earned combined earned combined earned combined premiums ratio premiums ratio premiums ratio ----------- --------- ----------- --------- ----------- --------- (dollars in thousands) Commercial casualty $ 17,508 92.1 $ 22,031 103.9 $ 20,800 103.5 Commercial property 2,513 70.2 2,676 91.2 2,579 80.5 Commercial transportation 6,538 103.7 4,254 98.6 1,682 101.8 Personal lines 755 86.9 700 115.1 725 60.4 ----------- ----------- ----------- Total $ 27,314 92.5 $ 29,661 102.2 $ 25,786 99.9 =========== =========== ===========
8 The following table sets forth the geographic percentage distribution of excess & surplus lines direct written premiums for the years indicated.
1996 1995 1994 ----- ----- ----- Texas 25.0% 23.3% 23.9% Illinois 8.6 9.9 10.9 California 8.0 8.8 11.9 Florida 5.5 7.2 8.4 Oklahoma 4.0 4.3 4.0 Alabama 3.9 3.1 1.5 Missouri 3.9 3.0 1.2 Louisiana 3.2 3.0 3.6 Hawaii 3.0 3.7 3.7 Colorado 2.9 2.8 2.5 Mississippi 2.9 2.6 1.2 Connecticut 2.8 0.6 --- Ohio 2.7 2.9 2.4 Arkansas 2.0 2.5 1.6 Indiana 2.0 1.9 2.1 Other* 19.6 20.4 21.1 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== *Includes all other states, none of which accounted for more than 2% in 1996
Reinsurance The 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 subsidiaries monitor the availability of replacement coverages in the reinsurance market, and believe that replacement coverages from financially responsible reinsurers is available and accordingly do not deem existing reinsurance arrangements to be material. 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. See "Business-Relationship with ALLIED Mutual-Other Relationships" for the ALLIED Mutual and American Re-Insurance Company property catastrophe reinsurance agreement. With the exception of Western Heritage, all retentions discussed in this section are for the entire pool. The property-casualty subsidiaries 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 1996, the pool liability limit of the cover is 90% of $120,000,000 with retention of $10,000,000. A reinstatement agreement exists allowing purchases of reinsurance for an additional catastrophe occurring in the same year. 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 surplus share reinsurance on property risks covering 75% of the risk with limits 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 covering 92.5% of the risk in excess of $200,000 to a maximum of $1,000,000, the largest casualty risk insured. Western Heritage also purchases two layers of reinsurance, each of which covers $1,000,000 in excess of the underlying layers for both property and casualty coverages. Each of the layers contain a reinstallment provision. 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, 1996, there were no past due amounts from reinsurers. Historically, the Company has had no adverse collection experience with its reinsurers. Losses and Loss Adjusting 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 adjusting 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, 1996. Management 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 adjusting expense reserves for 1986 to 1995 for the pool (which includes ALLIED Mutual) and Western Heritage. The top line of the table shows the estimated reserve for losses and loss adjusting expenses at the balance sheet date for each of the indicated years. These figures represent the estimated amount of losses and loss adjusting 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 10 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.
At or for the year ended December 31, ------------------------------------------------------------------------------------------------------------ 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- (dollars in thousands) Reserves for losses and loss adjusting expenses, net $126,150 $160,152 $210,746 $248,870 $280,443 $312,089 $355,092 $386,936 $424,595 $471,247 $503,638 Paid (cumulative) as of (1) 1 year later 42.7% 47.5% 41.7% 43.6% 44.2% 43.6% 40.1% 40.8% 39.9% 43.1% 2 years later 68.8 70.8 64.0 65.8 67.2 66.3 61.9 60.7 61.7 3 years later 84.0 85.8 77.2 79.3 80.4 79.8 72.6 73.2 4 years later 93.3 93.6 84.1 86.3 88.5 86.0 78.8 5 years later 98.2 97.9 87.7 91.5 92.5 89.6 6 years later 100.7 101.0 90.2 94.1 95.2 7 years later 103.3 102.8 92.1 96.0 8 years later 104.8 104.3 93.6 9 years later 106.7 106.0 10 years later 108.5 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 102.7 103.6 98.3 100.4 101.0 100.2 97.7 98.3 100.1 100.0 2 years later 104.2 106.3 97.6 99.6 101.1 101.1 96.8 98.9 98.9 3 years later 106.9 106.8 97.3 99.6 102.6 102.4 97.2 97.4 4 years later 107.9 107.1 97.5 101.5 104.6 103.1 96.3 5 years later 107.8 107.8 98.1 103.4 105.7 102.9 6 years later 108.7 108.9 99.3 104.5 105.7 7 years later 109.9 110.5 100.4 104.8 8 years later 111.7 111.8 100.7 9 years later 113.2 112.1 10 years later 113.2 Net cumulative redundancy (deficiency) Dollars $(16,694) $(19,400) $ (1,370) $(11,872) $(16,098) $ (8,953) $ 13,043 $ 9,887 $ 4,875 $ (187) Percentage (13.2)% (12.1)% (0.7)% (4.8)% (5.7)% (2.9)% 3.7% 2.6% 1.1% (0.0)% Gross reserves - end of year $373,958 $400,912 $447,311 $492,304 $522,366 Reinsurance recoverables 18,866 13,976 22,716 21,057 18,728 -------- -------- -------- -------- -------- Net reserves - end of year $355,092 $386,936 $424,595 $471,247 $503,638 ======== ======== ======== ======== ======== Gross re-estimated reserves - latest (2) 98.3% 100.1% 100.2% 100.5% Re-estimated recoverables - latest (2) 135.7% 173.9% 125.6% 110.2% Net re-estimated reserves - latest (2) 96.3% 97.4% 98.9% 100.0% Gross cumulative redundancy Dollars $ 6,315 $ (435) $ (942) $ (2,341) Percentage 1.6% (0.1)% (0.2)% (0.5)% (1) Shown as a percentage of reserves for losses and loss adjusting 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 adjusting expenses from the previous table to the amount shown on the Company's consolidated balance sheets.
Year ended December 31, ---------------------------- 1996 1995 ---------- ---------- (in thousands) Loss and loss adjusting expense reserves for the property-casualty pool and Western Heritage $ 503,638 $ 471,247 Less: Loss and loss adjusting expense reserves of ALLIED Mutual 156,975 146,308 ---------- ---------- 346,663 324,939 Add: Reinsurance recoverables 15,528 16,925 ---------- ---------- Loss and loss adjusting expense reserves (GAAP) $ 362,191 $ 341,864 ========== ==========
11 The next table sets forth a reconciliation of beginning and ending GAAP reserves for losses and loss adjusting expenses for the years indicated, net of reinsurance recoverables. The table includes property-casualty and excess & surplus lines insurance loss and loss adjusting expense reserves. Developments for losses and loss adjusting expenses on prior years is immaterial to the Company's consolidated financial statements taken as a whole.
Year ended December 31, ----------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (in thousands) Net reserves for losses and loss adjusting expenses at beginning of year $ 324,939 $ 292,674 $ 268,050 ---------- ---------- ---------- Incurred losses and loss adjusting expenses Provision for insured events of current year 353,675 315,956 288,574 (Decrease) increase in provision for insured events of prior years (680) 1,984 (1,630) ---------- ---------- ---------- Total incurred losses and loss adjusting expenses 352,995 317,940 286,944 ---------- ---------- ---------- Payments Losses and loss adjusting expenses attributable to insured events of current year 194,735 169,254 151,479 Losses and loss adjusting expenses attributable to insured events of prior years 136,536 116,421 110,841 ---------- ---------- ---------- Total payments 331,271 285,675 262,320 ---------- ---------- ---------- Net reserves for losses and loss adjusting expenses at end of year $ 346,663 $ 324,939 $ 292,674 ========== ========== ==========
Noninsurance Operations ALLIED Group Mortgage Company (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." ALLIED Mortgage began operations in 1987, and by year-end 1996, its servicing portfolio included 51,125 mortgages for a total value of $2.8 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. ALLIED's data processing segment consists of The Freedom Group, Inc. (Freedom) and its subsidiary ALLIED Group Information Systems, Inc. (AGIS), which have a line of property-casualty and life insurance software products and data processing services which are marketed under the name "Freedom Group" primarily to, affiliated and nonaffiliated, insurance companies. Prior to March 1, 1996, AGIS provided management information services to ALLIED Mutual, ALLIED Life Insurance Company (ALLIED Life), ALLIED and other company subsidiaries. These services included the processing of policies and claims, billing, rating, statistical and regulatory reporting, and recordkeeping. AGIS also provided automated systems to the property-casualty segment's agency force. Prior to March 1, 1996, the majority of the AGIS's revenues and operating profits came from affiliated companies. See note 4 of Notes to Consolidated Financial Statements. 12 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 96.7% of the Company's invested assets, 99.7% of those had a "BBB" rating or higher from Standard & Poor's (or the equivalent from Moody's) at December 31, 1996. The portfolio contained no real estate or mortgage loans. At year-end 1996, the Company held $2.7 million 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, 1996, the fair value of the Company's fixed maturity portfolio was $17.1 million over amortized cost. The carrying values of all the Company's investments in fixed maturities are reviewed for impairment 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. The table below shows the classifications of the Company's investments at December 31, 1996.
Carrying Percent value of total ---------- -------- (dollars in thousands) Fixed maturities U.S. Government obligations (1) $ 102,819 12.5% U.S. Government corporations and agencies 129,328 15.8 State municipalities and political subdivisions 336,720 41.1 Foreign governments 2,086 0.3 Public utilities 11,956 1.5 All other corporate bonds 209,359 25.5 ---------- ----- Total fixed maturities 792,268 96.7 Equity securities 20,384 2.5 Short-term investments at cost 6,993 0.8 ---------- ----- $ 819,645 100.0% ========== ===== (1) All such securities are backed by the full faith and credit of the United States Government.
13 The following table sets forth the composition of the Company's fixed maturity investment portfolio by rating at December 31, 1996.
Carrying Percent of value portfolio ---------- ---------- Rating (1) (dollars in thousands) --------- AAA $ 538,846 68.0% AA 113,653 14.4 A 128,120 16.2 BBB 8,952 1.1 Nonrated 2,697 0.3 ---------- ----- Total $ 792,268 100.0% ========== ===== (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 investment portfolio at December 31, 1996. 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.
Carrying Percent of value portfolio ---------- ----------- Maturity (dollars in thousands) -------- One year or less $ 52,335 6.6% Over 1 year through 5 years 267,058 33.7 Over 5 years through 10 years 285,887 36.1 Over 10 years 16,759 2.1 ---------- ------ 622,039 78.5 Mortgaged-backed securities 170,229 21.5 ---------- ------ Total $ 792,268 100.0% ========== ======
Investment results of the Company for each year in the three years ended December 31, 1996 are shown in the following table.
1996 1995 1994 ---------- ---------- ---------- (dollars in thousands) Average invested assets $ 784,247 $ 714,720 $ 627,677 Investment income (1) 49,222 47,242 41,070 Average annual yield on total investments 6.3% 6.6% 6.5% Tax equivalent yield on total investments (2) 7.4% 7.8% 7.9% Realized investment gains $ 49 $ 505 $ 2,888 (1) Investment income is net of investment expenses and does not include realized investment gains or losses or provision for income taxes. (2) Assuming an effective tax rate of 35%.
Competition The insurance industry is highly competitive. The insurance subsidiaries compete with numerous insurance companies, many of which are substantially larger and have considerably greater financial resources. Because the insurance subsidiaries operate through independent agents and such agents represent more than one company, they face competition within each agency. The insurance 14 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 $2.8 billion at December 31, 1996. The largest competitors service in excess of $205 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 ALLIED 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 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 for other purposes; establishment and maintenance of reserves for unearned premiums and losses and loss adjusting expenses; and requirements regarding numerous other matters. In general, the 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Regulations" and note 13 of Notes to Consolidated Financial Statements for a discussion of dividend limitations. Until January 1997, AMCO and ALLIED Property and Casualty were 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. 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 of business exceeded 10%. The rollback liability, if any has not been finalized. Management of the Company continues to believe that the insurance subsidiaries will not be liable for any material rollback of premiums. ALLIED is also subject to statutes governing insurance holding company systems in various jurisdictions. Typically, such statutes require ALLIED 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 ALLIED'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 ALLIED is subject, requires disclosure of transactions between the ALLIED 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. 15 Under insolvency or guaranty fund laws in most states in which the 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 insurance subsidiaries are required to participate in various mandatory pools or underwriting associations in amounts related to the amount of direct writings in the applicable state. Recently, the insurance regulatory framework has received increased scrutiny by various states, the federal government, and the National Association of Insurance Commissioners (NAIC). The NAIC has recommended to the states for adoption and implementation several regulatory initiatives designed to reduce the risk of insurance company insolvencies. None of these are expected to be significant to the Company. ALLIED Mortgage 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 ALLIED 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, ALLIED effected an initial public offering which then resulted in public ownership of approximately 22% of its common stock. As of December 31, 1996, ALLIED Mutual controlled 18.3% of the outstanding voting stock of ALLIED. The operations of the Company are interrelated with the operations of ALLIED Mutual. ALLIED and ALLIED Mutual share common executive officers, and three directors of ALLIED are also directors of ALLIED Mutual. For the year ended December 31, 1996, ALLIED Mutual reported, in accordance with Statutory Accounting Practices, net income of $6.7 million, a statutory combined ratio of 107.0, and admitted assets and surplus at December 31, 1996 of $524.1 million and $231.5 million, respectively. As of December 31, 1996, ALLIED Mutual's invested assets were $474.1 million. Invested assets included a fixed maturity portfolio of $347 million (at amortized cost), of which over 98.3% was rated "BBB" or higher by Standard & Poor's or a recognized equivalent rating agency. Invested assets also included $77 million in equity investments in affiliates (which includes ALLIED, ALLIED Life Financial Corporation (ALFC), which is a 54.4% 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. ALLIED and ALLIED Mutual formalized their relationship by entering into an Intercompany Operating Agreement, a Pooling Agreement, and a Stock Rights Agreement. Intercompany Operating Agreement ALLIED, 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 receives from and pays 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, ALLIED leases employees 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 ALLIED and ALLIED Mutual were not affiliated and had 16 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 ALLIED. ALLIED 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. ALLIED 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 ALLIED. In 1996, 1995, and 1994, ALLIED Mutual and its subsidiaries paid ALLIED $2.5 million, $2.5 million, and $2.4 million, respectively, for leased employees, substantially all of which represented cost reimbursement. 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 ALLIED's property-casualty subsidiaries share agency forces as well as other services and facilities. The Intercompany Operating Agreement contains a covenant not to compete that binds each of ALLIED, ALLIED Mutual, and ALFC not to engage in a business Intercompany Operating Agreement and five years thereafter. The Intercompany Operating Agreement is in effect to December 31, 2004 and continues thereafter subject to any party providing two years notice that such party intends to cease participation. Termination prior to December 31, 2004 requires the Coordinating Committee's approval. In addition, ALLIED Mutual, ALLIED, and ALFC have certain rights under the Pooling Agreement and the Intercompany Operating 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, ALLIED, or ALFC, as the case may be, have the right to (i) terminate such agreements upon six months notice (ii) extend the term 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. Pooling Agreement The Pooling Agreement provides that ALLIED Mutual, ALLIED Property and Casualty, and Depositors cede to AMCO premiums, losses, allocated loss adjusting 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 adjusting 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 adjusting expenses, and 0.75% of earned premiums for premium collection services. AMCO received pool administrative fees of $61.3 million, $55.7 million, and $50.4 million from ALLIED Mutual in 1996, 1995, and 1994, 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. The Pooling Agreement may be terminated by a participant to the agreement on or after December 31, 2004 upon giving notice at least five years prior to the date of termination. Termination of the Pooling Agreement prior to December 31, 2004 must be approved by the Coordinating Committee. 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." 17 Stock Rights Agreement ALLIED 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 ALLIED's common and preferred stock. This Agreement expires in 2005. Pursuant to the Stock Rights Agreement, ALLIED Mutual is entitled to nominate, and ALLIED is required to use its best efforts to cause the election or retention of, a number of members of ALLIED's Board of Directors in proportion to ALLIED Mutual's percentage ownership of the total number of shares of ALLIED's voting stock outstanding at the time of nomination. In addition, ALLIED is required to elect to its Executive Committee at least one 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 ALLIED. Under the Stock Rights Agreement, ALLIED Mutual is prohibited from initiating or accepting a tender offer for shares of ALLIED's common stock except under certain conditions. ALLIED has a right of first refusal with respect to any sale by ALLIED Mutual of ALLIED'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 ALLIED's common and 6-3/4% Series preferred stock (6-3/4% Series) 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 ALLIED terminate upon a consolidation or merger of the ALLIED with another corporation in which ALLIED 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 ALLIED then outstanding. The Agreement will be suspended for as long as ALLIED Mutual holds less than 10% of the outstanding common stock and 6-3/4% Series stock of ALLIED. The Coordinating Committee Under the Intercompany Operating Agreement, ALLIED, ALLIED Mutual, and ALFC have formed a Coordinating Committee comprised of two independent directors of ALLIED, 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. ALLIED 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 participates with American Re-Insurance Company in a property catastrophe reinsurance agreement covering the property-casualty segment's share of pooled losses. In 1996, 1995, and 1994, 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, 1996, ALLIED was the direct employer of personnel for all subsidiaries of ALLIED and of ALLIED Mutual and its subsidiaries other than ALFC, employing 2,398 persons. None of ALLIED's employees are members of a collective bargaining unit. Management believes that its employee relations are good. 18 Item 2. Properties The majority of the real property occupied by the Company are owned or leased by ALLIED Mutual. A portion of the costs of the properties is paid by the Company. 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. Item 3. Legal Proceedings The Company is party to various lawsuits arising in the normal course of business. The Company believes the resolution of these lawsuits will not have a material adverse effect on its financial condition, results of operations, or liquidity. Item 4. Submission of Matters to a Vote of Securities Holders During the fourth quarter of 1996 no matters were submitted to a vote of holders of ALLIED Group, Inc. stock. 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders' Matters Effective February 11, 1997, ALLIED Group, Inc.'s common stock began trading on The New York Stock Exchange under the symbol GRP. During 1996, the Company's common stock traded on The Nasdaq Stock Market under the symbol ALGR during 1996. As of December 31, 1996, there were 1,179 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. The prices and dividends per share have been restated for the November 29, 1996 3-for-2 stock split and rounded to the nearest 1/64. - -------------------------------------------------------------------------------- First Second Third Fourth 1996 Quarter Quarter Quarter Quarter --------- ---------- ---------- ---------- ---------- High $ 29- 1/2 $ 29 $ 28-53/64 $ 33- 1/4 Low 23-11/32 23-21/32 22-11/32 25-11/32 Dividends 0.14-2/3 0.14-2/3 0.14-2/3 0.15 First Second Third Fourth 1995 Quarter Quarter Quarter Quarter --------- ---------- ---------- ---------- ---------- High $ 19-11/64 $ 20-11/64 $ 22 $ 24- 1/2 Low 15-17/32 18-11/64 18-11/32 21 Dividends 0.11-1/3 0.11-1/3 0.11-1/3 0.11-1/3 - -------------------------------------------------------------------------------- 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. 20
Item 6. Selected Financial Data * - ------------------------------------------------------------------------------------------------------------------ At or for the year ended December 31, -------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ----------- ---------- ---------- ---------- (in thousands, except per share data) Income Statement Data Premiums earned Personal $ 311,511 $ 279,908 $ 252,916 $ 225,594 $ 191,059 Commercial 154,700 145,930 133,816 118,728 101,364 ------------ ----------- ---------- ---------- ---------- Total property-casualty 466,211 425,838 386,732 344,322 292,423 Excess & Surplus Lines 27,314 29,661 25,786 24,014 27,738 ------------ ----------- ---------- ---------- ---------- Total 493,525 455,499 412,518 368,336 320,161 Investment income 49,222 47,242 41,070 39,030 32,716 Realized investment gains 49 505 2,888 1,396 1,975 Other income 53,558 49,519 50,888 73,680 91,739 ------------ ----------- ---------- ---------- ---------- Total revenues 596,354 552,765 507,364 482,442 446,591 Losses and expenses 525,043 478,917 440,665 425,685 407,584 ------------ ----------- ---------- ---------- ---------- Income from before income taxes 71,311 73,848 66,699 56,757 39,007 Income taxes 20,227 21,471 19,074 16,835 10,332 ------------ ----------- ---------- ---------- ---------- Net income $ 51,084 $ 52,377 $ 47,625 $ 39,922 $ 28,675 ============ =========== ========== ========== ========== Fully diluted earnings per share Net income $ 2.31 $ 2.35 $ 2.12 $ 1.74 $ 1.29 ============ =========== ========== ========== ========== Realized investment gain $ .01 $ .02 $ .09 $ .04 $ .06 ============ =========== ========== ========== ========== Property-casualty wind and hail losses $ 1.23 $ .90 $ .77 $ .60 $ .49 ============ =========== ========== ========== ========== Dividends paid $ .59 $ .45 $ .40 $ .34 $ .29 ============ =========== ========== ========== ========== Balance Sheet Data Total investments $ 819,645 $ 772,299 $ 655,906 $ 606,511 $ 460,038 Total assets 1,077,659 1,010,598 892,751 855,525 688,488 Notes payable 34,094 39,465 43,541 82,459 66,543 Guarantee of ESOP obligations 24,370 26,270 28,150 29,500 30,590 Other Data Pool percentage 64% 64% 64% 64% 60% Book value per share $ 17.39 $ 16.16 $ 13.12 $ 11.98 $ 9.56 Closing stock price per share $ 32.63 $ 24.00 $ 16.50 $ 17.50 $ 14.11 Return on average book value per share 14.0% 16.1% 16.9% 15.9% 14.2% Pretax investment yield 6.3% 6.6% 6.5% 7.1% 7.6% Pretax profit on revenues 12.0% 13.4% 13.1% 11.8% 8.7% Effective tax rate 28.4% 29.1% 28.6% 29.7% 26.5% Cash dividends to closing stock price 1.8% 1.9% 2.4% 1.9% 2.0% Closing stock price to earnings ratio 14.1 10.2 7.8 10.1 10.9 Property-casualty statutory combined ratio 97.7 95.7 97.1 99.3 102.5 Shares outstanding Preferred shares 1,827 4,820 4,981 5,070 5,141 Common shares 20,383 9,445 9,000 9,026 4,469 * Per share data has been restated to retroactively reflect the 3-for-2 stock split issued in 1996.
21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking Information The Private Securities Litigation Reform Act of 1995 provides a safe harbor to encourage companies to provide prospective information so long as it is identified as forward-looking and accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. Forward-looking statements are related to the plans and objectives of management for the future operations, economic performance, of projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items. In the following discussion and elsewhere in this report, statements containing words such as "expect," "anticipate," "believe," "goal," "objective," or similar words are intended to identify forward-looking statements. ALLIED Group, Inc. (ALLIED) undertakes no obligation to update such forward-looking statements, and it wishes to identify important factors that could cause actual results to differ materially from those projected in the forward-looking statements contained in the following discussion and elsewhere in this report. The risks and uncertainties that may affect the operations, performance, development, and results of ALLIED's business include but are not limited to the following: (1) heightened competition, particularly intensified price competition; (2) adverse state and federal legislation and regulations; (3) changes in interest rates causing a reduction of investment income; (4) general economic and business conditions which are less favorable than expected; (5) unanticipated changes in industry trends; (6) adequacy of loss reserves; (7) catastrophic events or the occurrence of a significant number of storms and wind and hail losses; and (8) other risks detailed herein and from time to time in ALLIED's other reports. Overview The following analysis of the consolidated results of operations and financial condition of ALLIED should be read in conjunction with the Selected Financial Data and Consolidated Financial Statements and related footnotes included elsewhere herein. ALLIED, a regional insurance holding company, and its subsidiaries (collectively, the Company) operate exclusively in the United States and primarily in the central and western states. The Company's largest segment includes three property-casualty insurance companies that write personal lines (primarily automobile and homeowners) and small commercial lines of insurance. The other reportable segment is excess & surplus lines insurance. The property-casualty insurance segment accounted for 86.5% of consolidated revenues in 1996 and 85.4% in 1995. At December 31, 1996, The ALLIED Group Employee Stock Ownership Trust (ESOP Trust) owned 26.5% and ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company, controlled 18.3% of the outstanding voting stock of ALLIED. The Board of Directors authorized a 3-for-2 stock split issuable November 29, 1996 to common stockholders of record on November 15, 1996. All fractional shares were paid in cash. All share and per share amounts included throughout this report have been restated to reflect the stock split. 1996 Compared to 1995 Consolidated revenues for 1996 were $596.4 million, up 7.9% over the $552.8 million reported for 1995. The increase occurred primarily because of the 8.3% growth in earned premiums. Income before income taxes decreased 3.4% to $71.3 million from $73.8 million for 1995. The decrease was due primarily to the highest ever wind and hail losses for the year ended December 31, 1996. Wind and hail losses increased 36.4% to $39.1 million from $28.7 million in 1995. 22 Net income for the year ended December 31, 1996 was down 2.5% to $51.1 million, lowering fully diluted earnings per share to $2.31 from $2.35 in 1995. Fully diluted earnings per share excluding net realized investment gains were $2.30 for 1996 compared with $2.33. On a fully diluted basis, the impact of wind and hail losses was $1.23 per share versus $0.90 in 1995. Book value per share at December 31, 1996 increased to $17.39 from $16.16. The increase in book value was constrained by higher dividend payments, increased wind and hail losses, and the share repurchase program. The fair value of investments in fixed maturities was $17.1 million above amortized cost compared with $27.8 million above amortized cost at December 31, 1995. If the investments in fixed maturities were reported at amortized cost, book value per share at December 31, 1996 would have been $16.85 compared with $15.29 at December 31, 1995. Property-casualty Revenues for the property-casualty segment increased to $515.7 million from $472 million for 1995. Direct earned premiums for the segment were $497.1 million for 1996 compared with $435.2 million one year earlier. Earned premiums increased 9.5% to $466.2 million from $425.8 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 $767.2 million, a 10.8% increase over 1995 production. The average premium per policy for personal lines was up 4.6% to $613 while the policy count grew 8.7%. The average premium per policy for commercial lines increased 2.2% to $1,110, and policy count was up 4.3%. Earned premiums for the property-casualty segment were 66.8% personal lines and 33.2% commercial lines in 1996. The business mix for 1995 was 65.7% personal and 34.3% commercial lines. Investment income for 1996 was $42.3 million compared with $39.1 million. The pretax yield on invested assets was 6.3%, down from 6.4% one year earlier. Investment income increased due to a larger average balance of invested assets in 1996, which more than offset the decrease experienced in the pretax yield. Realized investment gains for 1996 were $180,000 compared with $236,000. Other income increased slightly to $7 million from $6.9 million in 1995. Income before income taxes decreased 7% to $59.4 million from $63.9 million. The decrease was due primarily to higher losses and loss adjusting expenses in 1996, brought on by higher wind and hail losses in the second and third quarters. The statutory combined ratio (after policyholder dividends) deteriorated to 97.7 from the 95.7 reported in 1995, primarily due to a 2.6-point increase in the loss and loss adjusting expense ratio. Higher wind and hail losses accounted for 2.2 points of the deterioration. The deterioration was partially offset by a 0.5-point reduction in the Company's underwriting expense ratio, achieved through improved efficiency and productivity. Wind and hail losses increased to $39.1 million from $28.7 million in 1995. The impact of wind and hail losses on the statutory combined ratio was 8.4 points for 1996 and 6.7 points for 1995. The 1996 underwriting gain (on a generally accepted accounting principles basis) was $9.9 million compared with $17.7 million for 1995. The personal auto statutory combined ratio increased to 98.9 from 96.5 for 1995, reflecting a 2.8-point increase in the loss and loss adjusting expense ratio. The statutory combined ratio for the homeowners line was 102.4 compared with 99.2 for 1995. Wind and hail losses increased the homeowners combined ratio 23.6 points in 1996 and 21.7 points in 1995. Overall, the personal lines statutory combined ratio deteriorated to 99.8 from 97.2 in 1995. The statutory combined ratio for commercial lines increased to 93.5 from 92.7 for the previous year. Excess & Surplus Lines Earned premiums for 1996 decreased to $27.3 million from $29.7 million for 1995, primarily because of higher reinsurance costs. Direct earned premiums were nearly flat at $37.6 million compared with $37.2 million. Net written premiums were down 7.2% to $28.4 million from $30.6 million, reflecting a continuing soft market and management's decision not to sacrifice underwriting results for premium growth. For the year ended December 31, 1996, the segment's book of business was comprised of 2.8% personal and 97.2% commercial lines. For 1995, the business mix was 2.4% personal and 97.6% commercial lines. 23 The subsidiary's invested assets rose 8.3% from the previous year-end to $104.4 million at December 31, 1996. Investment income increased 7% to $6.2 million from $5.8 million because a larger average balance of invested assets more than offset a 30 basis-point decline in the pretax yield to 6.4% from last year's 6.7%. Realized investment gains were $2,000 compared with losses of $136,000 for 1995. The statutory combined ratio (after policyholder dividends) was 92.5, which produced an underwriting gain (on a generally accepted accounting principles basis) of $1.8 million. The statutory combined ratio of 102.2 for 1995 resulted in an underwriting loss of $855,000. The 1996 combined ratio improved primarily because of a 21.8% decrease in losses and loss adjusting expenses (11.4 points on the combined ratio). The decrease in the loss and loss adjusting expense ratio was primarily due to favorable loss development in 1996. Income before income taxes for 1996 increased 66.4% to $8.1 million from $4.8 million. The increase was primarily due to favorable loss development. Noninsurance Operations Revenues for the noninsurance operations (including investment services, data processing, and employee lease fees from affiliates) decreased 8.8% to $147.2 million from $161.3 million in 1995. The decrease was primarily due to a decline in data processing revenues from affiliates. Income before income taxes was $3.8 million for the year ended December 31, 1996 compared with $5.1 million in 1995. Effective March 1, 1996, certain personnel of ALLIED previously providing computer-related services to a certain affiliate were employed by the affiliate. Since the effective date, those employees have been paid directly by the affiliate. 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 established exchanges or publicly traded in the over-the-counter market. Preferred stocks are to be comprised primarily of issues rated at least A3/A- by Standard & Poor's Corporation or Moody's. At December 31, 1996 the Company's investment portfolios consisted almost exclusively of fixed income securities; 99.7% were rated investment grade or higher. The portfolios contained no real estate or mortgage loans at December 31, 1996. Consolidated invested assets were up 6.1% to $819.6 million from $772.3 million at year-end 1995. Fixed maturities at amortized cost increased 6.7%. Consolidated investment income increased 4.2% to $49.2 million from $47.2 million in 1995. The increase was due primarily to a larger average balance of invested assets. The tax-equivalent yield was down in 1996 to 7.4% compared with 7.8% one year earlier. The aftertax yield for 1996 and 1995 was 4.8 and 5%, respectively. Income Taxes The Company's effective income tax rate was 28.4% compared with 29.1% for 1995. The decrease in the effective rate was due primarily to a higher percentage of income from tax-exempt securities. The income tax expense for 1996 decreased 5.8% to $20.2 million. 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 investment 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, generating operating income of $63.9 million. 24 Net income for the year ended December 31, 1995 was up 10% to $52.4 million, raising fully diluted earnings per share to $2.35 from $2.12. Fully diluted earnings per share before net realized investment gains were $2.33 for 1995 compared with $2.03 in 1994. Book value per share increased to $16.16 from $13.12. 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 from growth in insurance exposures as well as higher rates. Net written premiums for the pool (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. 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 $0.90 per share versus $0.77 in 1994. The personal auto statutory combined ratio improved to 96.5 for 1995 from 97.4 for 1994. 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 adjusting 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 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 adjusting 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 due primarily to poor loss development. Realized investment losses were $136,000 compared with losses of $24,000 for 1994. 25 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 the previous 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 the noninsurance operations (including investment services, data processing, and employee lease fees from affiliates) increased 4.5% to $161.3 million from $154.5 million in 1994. The increase was primarily the result of an increase in employee lease fees in 1995. The increase in revenues generated from employee lease fees more than offset the decreases in revenue from investment services and data processing. Investment services was affected by a decrease in investment income brought on by a low average balance of mortgage loans held for sale, and data processing was down primarily as a result of the reduction in revenues generated from the affiliated property-casualty segment. Income before income taxes was $5.1 million for the year ended December 31, 1995 compared with $7.5 million in 1994. Fees paid to data processing for processing and product maintenance services were lowered during 1995 to approximate more closely the cost for providing such services to the property-casualty segment's companies. Investments and Investment Income 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. 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%. 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. Regulations The insurance subsidiaries are subject to regulation and supervision by the states in which they are admitted to transact business. State insurance laws generally establish supervisory agencies with broad administrative and supervisory powers related to granting and revoking licenses to transact business, establishing guaranty fund associations, licensing agents, regulating premium rates for some lines of business, establishing reserve requirements, prescribing the form and content of required financial statements and reports, determining the reasonableness and adequacy of statutory capital and surplus, and regulating the type and amount of permitted investments. Recently, the insurance regulatory framework has received increased scrutiny from various states, the federal government, and the National Association of Insurance Commissioners (NAIC). The NAIC has recommended to the states for adoption and implementation several regulatory initiatives. None of these is expected to be significant to the Company. 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 of business exceeded 10%. The rollback liability, if any, has not been finalized. Management continues to believe the insurance subsidiaries will not be liable for any material rollback of premiums. 26 Liquidity and Capital Resources Substantial cash inflows for the Company are generated from premiums, pool administration fees, investment income, and proceeds from maturities of investments. The principal outflows of cash are payments of claims, commissions, premium taxes, operating expenses, and income taxes and the purchase of fixed income and equity securities. In developing its strategy, the Company establishes a level of cash and highly liquid short- and intermediate-term securities that, combined with expected cash flow, is believed adequate to meet anticipated short-term and long-term payment obligations. In 1996, operating activities generated cash flows of $95.1 million; in 1995, the total was $97.9 million; in 1994, the total was $85.5 million. For each year, the primary source of funds was premium growth in the property-casualty insurance operations. In each of the years, funds generated from operating activities were primarily used to purchase investment grade fixed income securities, accounting for the majority of cash used in investing activities. The net cash used in investing activities in 1996, 1995, and 1994 was $65.7 million, $88.8 million, and $69.5 million, respectively. In 1996, 1995, and 1994, ALLIED paid dividends of $16.3 million, $13.5 million, and $12.7 million, respectively. Dividend payments to common stockholders totaled $12.2 million for the year ended December 31, 1996, up from $6.3 million and $5.4 million in 1995 and 1994, respectively. In 1996, 1995, and 1994, dividends paid on the ESOP Series Preferred Stock (ESOP Series) were $595,000, $3.7 million, and $3.8 million, respectively. In each year, dividends of $3.5 million on the 6-3/4% Series Preferred Stock were paid. The increase in dividends to common shareholders and the decrease in ESOP Series were due to the conversion of the ESOP Series completed on March 7, 1996 (see note 10 of the Notes to Consolidated Financial Statements for a further discussion of the conversion). Prior to the conversion, ALLIED and the ESOP Trustee entered into an agreement whereby ALLIED agrees to release additional shares held by the ESOP Trustee if the dividend paid on common stock is less than $0.20 per share per quarter, which calculates to $0.13 per share per quarter on a post-split basis. The agreement is in effect from March 7, 1996 through March 7, 2000. The agreement ensures that the allocated shares in the ESOP Trust receive at least the same amount of dividends that would have been paid on the ESOP Series had they not been converted to common stock. ALLIED relies primarily on dividends from its insurance subsidiaries to pay preferred and common stock dividends to stockholders. The Iowa state insurance regulations restrict the maximum amount of dividends the property-casualty subsidiaries can pay without prior regulatory approval. The maximum dividend allowed is the greater of either 10% of the subsidiary's statutory capital stock and surplus as of the preceding December 31 or net income of the preceding calendar year. In 1997 the maximum amount legally available for distribution to ALLIED without prior approval is $52.6 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 preceding year. The excess & surplus lines segment could pay $3.3 million in 1997 without prior notice to the insurance commissioner. ALLIED anticipates the excess & surplus lines segment will not pay dividends in 1997. During 1996, ALLIED received dividend payments of $23.7 million from the property-casualty subsidiaries and $916,000 from noninsurance subsidiaries. During 1995 and 1994, the property-casualty subsidiaries paid ALLIED dividends of $12 million and $7.8 million, respectively; noninsurance subsidiaries paid dividends of $974,000 and $1.1 million, respectively. In 1996 and 1994, ALLIED also used funds to repurchase $16.5 million and $6.4 million of its common stock, respectively. No shares were repurchased in 1995. During 1996, ALLIED repurchased 443,000 shares of its common stock on the open market at an average price per share of $37.31, which, reflecting the November 1996 stock split, was 664,500 shares at $24.87 per share. Pursuant to SEC Rule 10b-18, the Board of Directors (Board) authorized stock repurchase programs on December 14, 1994 and July 16, 1996, each for 250,000 shares (375,000 shares on a post-split basis). The stock repurchase program the Board approved on December 14, 1994 was completed on July 15, 1996. The stock repurchase program the Board approved on July 16, 1996 is not complete; 57,000 shares remain to be repurchased. During 1994, ALLIED repurchased 250,000 shares (375,000 shares on a post-split basis) of its common stock at an average price per share of $25.44 ($16.96 on a post-split basis) under a stock repurchase program the Board approved on February 11, 1994, which was completed in November 1994. 27 ALLIED's mortgage banking subsidiary, ALLIED Group Mortgage Company (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 ALLIED. At December 31, 1996, ALLIED Mortgage had short-term borrowings of $19.7 million, which are to be repaid through the subsequent sale of its mortgage loan inventory. The amount of short-term borrowings fluctuates daily depending on the level of inventory being financed. Long-term borrowings amounted to $12 million to be repaid over the next eight years. See note 8 of Notes to Consolidated Financial Statements for a further discussion of ALLIED Mortgage's finance arrangements. 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 for a further discussion of such commitments. In 1990, the ESOP Trust issued floating rate notes totaling $35 million (ESOP obligations) to acquire ESOP Series stock for the Employee Stock Ownership Plan (ESOP). In March 1995, the ESOP Trust refinanced the notes pursuant to a Term Credit Agreement and Guaranty (Agreement) with two separate commercial banks. ALLIED guaranteed the ESOP Trust's obligations under the Agreement. See note 9 of Notes to Consolidated Financial Statements for a discussion of ESOP obligations. At December 31, 1996, the balance of the obligations was $24.4 million. Contributions plus dividends on leveraged shares held by the ESOP 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 ALLIED to fund the amounts paid to the ESOP Trust. ALLIED made contributions to the ESOP Trust of $529,000 in 1996, $733,000 in 1995, and $35,000 in 1994. ALLIED paid dividends of $3.5 million in 1996, $2.8 million in 1995, and $2.8 million in 1994, which were used for such debt service. In connection with its guarantee of ESOP obligations, ALLIED is required to maintain minimum stockholders' equity and to comply with certain other financial covenants. Historically, the 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 guidelines suggest that a property-casualty insurer's annual net written premiums should not exceed approximately 300% of statutory surplus. At December 31, 1996, the property-casualty and excess & surplus lines segments' net written premiums were 173% and 85% of their statutory surplus, respectively. 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. In 1996, the Company received an additional $620,000 as the final payment on that 1994 sale. The payment represents the Company's share of the contingent purchase price that was distributed when all known claims were settled. As of December 31, 1996, the Company 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. At its March 4, 1997 meeting, the Board of Directors approved a first-quarter 1997 common stock dividend of $0.17 per share. The dividend is $0.02 per share (13.3%) higher than the amount paid in the fourth quarter of 1996. Insurance premiums are established before the amount of losses and loss adjusting 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 adjusting 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. 28 Item 8. Financial Statements and Supplementary Data Management 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 judgments. 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 of 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, 1996 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 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. /s/ Jamie H. Shaffer - --------------------------------- Jamie H. Shaffer Chief Financial Officer 29 Report of Independent Auditors 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, 1996 and 1995 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ALLIED Group, inc. and subsidiaries as of December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP - ---------------------------------- KPMG Peat Marwick LLP Des Moines, Iowa February 3, 1997 30 ALLIED Group, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands)
December 31, ------------------------------ 1996 1995 ------------- ------------- Assets Investments (note 2) Fixed maturities at fair value (note 3) $ 792,268 $ 754,547 Equity securities at fair value (note 3) 20,384 7,948 Short-term investments at cost (notes 3 and 4) 6,993 9,802 Other investments at equity --- 2 ------------- ------------- Total investments 819,645 772,299 Cash 1,067 1,465 Accrued investment income 11,563 10,467 Accounts receivable 84,706 76,118 Current income taxes recoverable (note 16) 2,878 1,330 Reinsurance receivables for losses and loss adjusting expenses 18,183 19,293 Mortgage loans held for sale (notes 2 and 8) 12,054 13,673 Deferred policy acquisition costs 46,671 41,688 Prepaid reinsurance premiums 7,838 6,784 Mortgage servicing rights (note 8) 33,094 35,705 Other assets 39,960 31,776 ------------- ------------- Total assets $ 1,077,659 $ 1,010,598 ============= =============
See accompanying Notes to Consolidated Financial Statements. 31
December 31, ------------------------------ 1996 1995 ------------- ------------- Liabilities Losses and loss adjusting expenses (notes 5 and 6) $ 362,191 $ 341,864 Unearned premiums 220,596 196,461 Indebtedness to affiliates (note 4) 2,130 1,019 Notes payable to nonaffiliates (notes 2 and 8) 31,744 35,965 Notes payable to affiliates (notes 2 and 4) 2,350 3,500 Guarantee of ESOP obligations (notes 2 and 9) 24,370 26,270 Deferred income taxes (note 16) 2,244 2,854 Other liabilities (notes 14 and 15) 61,443 51,079 ------------- ------------- Total liabilities 707,068 659,012 ------------- ------------- 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 37,812 37,812 ESOP Series, issued and outstanding 2,993 shares in 1995 --- 45,836 Common stock, no par value, $1 stated value, authorized 40,000 shares, issued and outstanding 20,383 shares in 1996 and 9,445 shares in 1995 (notes 11 and 12) 20,383 9,445 Additional paid-in capital 126,078 104,596 Retained earnings (note 13) 195,276 159,470 Unrealized appreciation (depreciation) of investments (net of deferred income tax expense of $6,907 and $9,907) 12,699 18,335 Unearned compensation related to ESOP (note 9) (21,657) (23,908) ------------- ------------- Total stockholders' equity 370,591 351,586 ------------- ------------- Commitments and contingent liabilities (notes 6 and 14) Total liabilities and stockholders' equity $ 1,077,659 $ 1,010,598 ============= =============
See accompanying Notes to Consolidated Financial Statements. 32 ALLIED Group, Inc. and Subsidiaries Consolidated Statements of Income (in thousands, except per share data)
Year ended December 31, ------------------------------------------------ 1996 1995 1994 ------------- ------------- ------------- Revenues Earned premiums (notes 4 and 6) $ 493,525 $ 455,499 $ 412,518 Investment income (note 3) 49,222 47,242 41,070 Realized investment gains (notes 3 and 7) 49 505 2,888 Income from affiliates (note 4) 4,880 5,285 4,737 Other income 48,678 44,234 46,151 ------------- ------------- ------------- 596,354 552,765 507,364 ------------- ------------- ------------- Losses and expenses (note 4) Losses and loss adjusting expenses (notes 5 and 6) 352,995 317,940 286,944 Amortization of deferred policy acquisition costs 108,315 100,120 90,858 Other underwriting expenses 20,438 20,583 25,090 Other expenses 41,650 38,713 35,419 Interest expense (note 8) 1,645 1,561 2,354 ------------- ------------- ------------- 525,043 478,917 440,665 ------------- ------------- ------------- Income before income taxes 71,311 73,848 66,699 ------------- ------------- ------------- Income taxes (note 16) Current 17,890 22,293 17,499 Deferred 2,337 (822) 1,575 ------------- ------------- ------------- 20,227 21,471 19,074 ------------- ------------- ------------- Net income $ 51,084 $ 52,377 $ 47,625 ============= ============= ============= Net income applicable to common stock $ 46,974 $ 45,160 $ 40,319 ============= ============= ============= Earnings per share Primary $ 2.42 $ 3.27 $ 2.98 ============= ============= ============= Fully diluted $ 2.31 $ 2.35 $ 2.12 ============= ============= =============
See accompanying Notes to Consolidated Financial Statements. 33 ALLIED Group, Inc. and Subsidiaries Statements of Stockholders' Equity (in thousands)
Year ended December 31, ------------------------------------------------ 1996 1995 1994 ------------- ------------- ------------- Preferred stock, beginning of year $ 83,648 $ 85,566 $ 87,125 Issuance of shares of ESOP Series (note 10) --- 699 794 ESOP Series shares converted to common shares (note 11) (45,836) (2,617) (2,353) ------------- ------------- ------------- Preferred stock, end of year 37,812 83,648 85,566 ------------- ------------- ------------- Common stock, beginning of year 9,445 9,000 9,026 Issuance of shares of common stock (notes 11 and 12 4,597 445 224 Repurchase of shares of common stock (note 11) (443) --- (250) Effect of 3-for-2 stock split 6,784 --- --- ------------- ------------- ------------- Common stock, end of year 20,383 9,445 9,000 ------------- ------------- ------------- Additional paid-in capital, beginning of year 104,596 98,926 101,541 Issuance of shares of common stock (notes 11 and 12) 44,356 5,670 3,258 Repurchase of shares of common stock (note 11) (16,082) --- (6,110) Effect of 3-for-2 stock split (6,792) --- --- Other, net --- --- 237 ------------- ------------- ------------- Additional paid-in capital, end of year 126,078 104,596 98,926 ------------- ------------- ------------- Retained earnings, beginning of year 159,470 119,752 83,922 Net income 51,084 52,377 47,625 Dividends paid on preferred stock (note 10) (4,111) (7,217) (7,306) Dividends paid on common stock (note 11) (12,156) (6,291) (5,396) Tax benefits attributable to tax-deductible dividends on unallocated shares of the ESOP 989 849 907 ------------- ------------- ------------- Retained earnings, end of year 195,276 159,470 119,752 ------------- ------------- ------------- Unrealized appreciation (depreciation) of investments, beginning of year 18,335 (5,241) 5,900 Change in unrealized (depreciation) appreciation, net (5,636) 23,576 (11,141) ------------- ------------- ------------- Unrealized appreciation (depreciation) of investments, end of year 12,699 18,335 (5,241) ------------- ------------- ------------- Unearned compensation related to ESOP, beginning of year (23,908) (26,122) (27,874) Cost of ESOP Series shares allocated 2,251 2,214 1,752 ------------- ------------- ------------- Unearned compensation related to ESOP, end of year (21,657) (23,908) (26,122) ------------- ------------- ------------- Total stockholders' equity $ 370,591 $ 351,586 $ 281,881 ============= ============= =============
See accompanying Notes to Consolidated Financial Statements. 34 ALLIED Group, Inc. and Subsidiaries Statements of Cash Flows (in thousands)
Year ended December 31, ------------------------------------------------ 1996 1995 1994 ------------- ------------- ------------- Cash flows from operating activities Net income $ 51,084 $ 52,377 $ 47,625 Adjustments to reconcile net income to net cash provided by operating activities Losses and loss adjusting expenses 20,327 30,868 31,140 Unearned premiums, net 23,081 15,945 17,575 Deferred policy acquisition costs (4,983) (3,419) (3,861) Accounts receivable, net (7,478) (6,009) (13,151) Depreciation and amortization 11,030 9,583 6,576 Realized investment gains (49) (505) (2,888) Mortgage loans held for sale, net (2,602) (1,529) 9,944 Indebtedness with affiliates 1,111 1,591 1,815 Accrued investment income (1,096) (118) (992) Other assets (8,376) (6,644) (15,386) Cost of ESOP shares allocated 2,251 2,214 1,752 Current (1,548) 1,264 (81) Deferred 2,337 (822) 1,575 Other, net 10,053 3,109 3,902 ------------- ------------- ------------- Net cash provided by operating activities 95,142 97,905 85,545 ------------- ------------- ------------- Cash flows from investing activities Purchase of fixed maturities (222,566) (184,600) (195,955) Purchase of equity securities (10,990) (4,819) (814) Purchase of equipment (8,313) (7,794) (5,653) Sale of fixed maturities (note 3) 81,689 48,012 32,339 Maturities, calls, and principal reductions of fixed maturities 90,907 61,966 89,357 Sale of equity securities 682 2,072 215 Short-term investments, net 2,809 (4,146) 1,263 Sale of other investment (note 7) --- --- 9,395 Sale of equipment 86 470 358 ------------- ------------- ------------- Net cash used in investing activities (65,696) (88,839) (69,495) ------------- ------------- ------------- Cash flows from financing activities Notes payable to nonaffiliates, net --- (2,180) 380 Notes payable to affiliates, net (1,150) 1,500 (1,500) Issuance of preferred stock --- 699 794 Issuance of common stock 3,109 3,498 1,129 Repurchase of common stock (16,525) --- (6,360) Dividends paid to stockholders, net of income tax benefit (15,278) (12,659) (11,795) ------------- ------------- ------------- Net cash used in financing activities (29,844) (9,142) (17,352) ------------- ------------- ------------- Net decrease in cash (398) (76) (1,302) Cash at beginning of year 1,465 1,541 2,843 ------------- ------------- ------------- Cash at end of year $ 1,067 $ 1,465 $ 1,541 ============= ============= =============
See accompanying Notes to Consolidated Financial Statements. 35 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 financial statements include the accounts of ALLIED Group, Inc. (ALLIED) and its subsidiaries (collectively, the Company) on a consolidated basis. 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 for 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. 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 21.7% and 24.5%, respectively, of 1996 direct written premiums. The property-casualty segment sells its products through three distribution systems: independent agencies, exclusive agencies, and direct response marketing. The property-casualty segment accounted for 86.5% of 1996 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 1996, the segment accounted for 5.6% of consolidated revenues. The noninsurance subsidiaries are ALLIED Group Mortgage Company (ALLIED Mortgage), The Freedom Group, Inc. (Freedom Group), ALLIED Group Information Systems, Inc. (AGIS), Midwest Printing Services, Ltd., and ALLIED General Agency Company. During 1996, the Board of Directors authorized a 3-for-2 stock split issuable November 29, 1996 to stockholders of record on November 15, 1996. All fractional shares were paid in cash. All weighted average shares outstanding, per share amounts, and references in the footnotes to share information have been restated retroactively to reflect the stock split. At year-end 1996, the ALLIED Group Employee Stock Ownership Trust (ESOP Trust) owned 26.5% and ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company, controlled 18.3% of the outstanding voting stock of ALLIED. Investments 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 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. 36 The carrying values of all investments in fixed maturities are reviewed for impairment 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, 1996 and 1995 included a 20% ownership in an abstract and title holding company. In 1996, the investment was written down to zero. 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 adjusting 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 contracts. Liabilities for loss adjusting 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 adjusting 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 adjusting 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 Mortgage 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. 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 37 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 $2.7 million as of December 31, 1996 and $1.4 million at December 31, 1995. The fair value of capitalized mortgage servicing rights as of December 31, 1996 was approximately $44.2 million. Capitalized mortgage servicing rights are amortized 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, 1996, 1995, and 1994 was $5.4 million, $4.7 million, and $3.5 million, respectively. Depreciation and Amortization Equipment and software are included in other assets at historic cost net of 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 method). The income tax benefit for the tax deductibile dividends paid on unallocated shares of the ESOP available for debt service is included as a direct addition to retained earnings. 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 and 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. Securities that are in substance equivalent to common stock (primarily stock options) are referred to as common stock equivalents. To calculate primary earnings per share, net income is reduced by dividends on the preferred stock. For fully diluted earnings per share, net income is reduced by dividends on the 6-3/4% Series preferred stock. 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. New Accounting Pronouncements The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) 121,"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are 38 considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. The Financial Accounting Standards Board (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 Accounting Principles Board Opinion 25 (APB 25), "Accounting for Stock Issued to Employees," but must comply with the disclosure requirements of SFAS 123. The Company adopted the disclosure requirements of SFAS 123 (note 12) for the year ended December 31, 1996, but accounts for stock-based compensation plans under APB 25. (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--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. 39 The following table presents the carrying value and estimated fair value of the financial instruments at December 31, 1996 and 1995.
1996 1995 --------------------------- --------------------------- Estimated Estimated Carrying fair Carrying fair value value value value ----------- ----------- ----------- ----------- (in thousands) Fixed maturities $ 792,268 $ 792,268 $ 754,547 $ 754,547 Equity securities 20,384 20,384 7,948 7,948 Short-term investments 6,993 6,993 9,802 9,802 Mortgage loans held for sale 12,054 12,115 13,673 13,821 Excess servicing rights 566 566 538 538 Notes payable to nonaffiliates (31,744) (31,604) (35,965) (36,364) Notes payable to affiliates (2,350) (2,350) (3,500) (3,500) Guarantee of ESOP obligations (24,370) (24,370) (26,270) (26,270) Interest rate swap agreement --- (449) --- (1,052)
The estimated fair values presented herein are based on pertinent information available to management as of December 31, 1996 and 1995. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been revalued for purposes of these financial statements since those dates; current estimates of fair value may differ significantly from the amounts presented herein. 40 (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, 1996 and 1995. 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 cost gains losses value ----------- ----------- ----------- ----------- 1996 (in thousands) Fixed maturities U.S. Treasury securities $ 61,557 $ 1,074 $ 9 $ 62,622 U.S. Government corporations and agencies 27,453 480 13 27,920 Obligations of states and political subdivisions 327,487 9,613 379 336,721 Foreign governments 2,064 32 9 2,087 Corporate securities and public utilities 190,244 2,860 415 192,689 Mortgage-backed securities 166,361 4,049 181 170,229 ----------- ----------- ----------- ----------- Totals $ 775,166 $ 18,108 $ 1,006 $ 792,268 =========== =========== =========== =========== Equity securities $ 17,880 $ 2,740 $ 236 $ 20,384 =========== =========== =========== =========== 1995 Fixed maturities 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 =========== =========== =========== ===========
41 The table below presents the amortized cost and estimated fair value of fixed maturities by contractual maturity at December 31, 1996. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations without call or prepayment penalties.
Estimated Amortized fair cost value ----------- ----------- (in thousands) Due in 1 year or less $ 51,955 $ 52,335 Due after 1 year through 5 years 262,073 267,058 Due after 5 years through 10 years 278,329 285,887 Due after 10 years 16,448 16,759 ----------- ----------- 608,805 622,039 Mortgage-backed securities 166,361 170,229 ----------- ----------- Totals $ 775,166 $ 792,268 =========== ===========
The following table presents the gross realized gains and losses by portfolio included in the proceeds from calls, principal reductions, and sales of fixed maturities for the years ended December 31, 1996, 1995, and 1994.
1996 1995 1994 ----------- ----------- ----------- (in thousands) Available for sale Gross realized gains $ 406 $ 957 $ 621 Gross realized losses (1,022) (910) (138) ----------- ----------- ----------- (616) 47 483 ----------- ----------- ----------- Held to maturity Gross realized gains --- 54 8 Gross realized losses --- (1) (246) ----------- ----------- ----------- --- 53 (238) ----------- ----------- ----------- Net realized (losses) gains $ (616) $ 100 $ 245 =========== =========== ===========
In November of 1995, the Company reclassified $359.4 million of fixed maturities as held to maturity to available for sale. The reclassification increased unrealized appreciation of investments by $7.7 million net of deferred income taxes, and was permitted under the implementation guide issued by the FASB, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." For the year ended December 31, 1994, gross realized losses of the held to maturity portfolio included a realized loss of $195,000 on the sale of an investment. The investment had an amortized cost of $4.9 million 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 million for a realized loss of $10,000. There were no transfers in 1994. As required by law, fixed maturities and short-term investments were on deposit with various insurance regulatory authorities, amounting to $10.5 million at December 31, 1996 and $10.5 million at year-end 1995. 42 As of December 31, 1996 and 1995, there were no investments that were non-income producing for the previous twelve months. A summary of net investment income for the years ended December 31, 1996, 1995, and 1994 follows:
1996 1995 1994 ----------- ----------- ----------- (in thousands) Interest on fixed maturities $ 48,770 $ 47,160 $ 40,760 Dividends on equity securities 478 167 220 Interest on short-term investments 771 665 367 Equity earnings in unconsolidated subsidiaries 52 11 555 Other, net 703 20 54 ----------- ----------- ----------- Total investment income 50,774 48,023 41,956 Investment expense 705 584 703 Interest expense 847 197 183 ----------- ----------- ----------- Net investment income $ 49,222 $ 47,242 $ 41,070 =========== =========== ===========
A summary of net realized investment gains (losses) and net changes in unrealized appreciation (depreciation) of investments for the years ended December 31, 1996, 1995, and 1994 follows:
1996 1995 1994 ----------- ----------- ----------- (in thousands) Net realized investment gains (losses) Fixed maturities Available for sale $ (616) $ 47 $ 483 Held to maturity --- 53 (238) Equity securities 45 405 (3) Other investments (note 7) 620 --- 2,646 ----------- ----------- ----------- 49 505 2,888 ----------- ----------- ----------- Net changes in unrealized appreciation (depreciation) of investments Fixed maturities Available for sale (10,719) 36,063 (17,293) Held to maturity --- 13,231 (32,016) Equity securities 2,083 289 104 ------------ ----------- ----------- (8,636) 49,583 (49,205) ----------- ----------- ----------- Net realized investment gains (losses) and changes in unrealized appreciation (depreciation) of investments $ (8,587) $ 50,088 $ (46,317) =========== =========== ===========
43 (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 adjusting 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 adjusting 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 adjusting 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 $61.3 million, $55.7 million, and $50.4 million from ALLIED Mutual in 1996, 1995, and 1994, respectively. The pooling agreement extends through December 31, 2004, after which it can be terminated by the participating parties upon five years' notice. Changes to the pooling agreement must be approved by the coordinating committee of the Board of Directors. Pursuant to the terms of the Intercompany Operating Agreement, ALLIED 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. For the years ended December 31, 1996, 1995, and 1994, ALLIED received revenues of $2.5 million, $2.5 million, and $2.4 million, respectively, for employees leased to affiliates which are included in income from affiliates and in eliminations and other within 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 $2.4 million, $2.8 million, and $2.3 million for the years ended December 31, 1996, 1995, and 1994, respectively, relating to data processing services provided by the Company to ALLIED Mutual and its subsidiaries under a Management Information Services Agreement. Effective March 1, 1996, the agreement was amended and certain personnel previously providing computer-related services to a certain affiliate were employed by the affiliate. As a result, fees paid for services provided by such employees prior to the amendment date are now paid directly by the affiliate. 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 1996, 1995, and 1994, the coverage was $5 million in excess of $5 million. ALLIED Mutual's and the reinsurance company's respective participation in such agreement was 90% and 10% in 1996, 1995, and 1994. Related premiums paid by the property-casualty segment to ALLIED Mutual were $2.7 million in 1996, $2.3 million in 1995, and $1.9 million in 1994. There were recoveries of $3.4 million, $2.6 million, and $2.2 million from ALLIED Mutual in 1996, 1995, and 1994, 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 third party nonaffiliate. During the normal course of business the aforementioned transactions result in intercompany balances that are created and are settled on a monthly basis. 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 44 subsidiary of ALLIED Mutual, is the administrator of the fund. At December 31, 1996 and 1995, the Company had $3.4 million and $7.8 million, respectively, invested in the fund. The Company also had three unsecured notes payable to the fund at December 31, 1996 totaling $2.4 million. Interest rates ranged from 5.6% to 8.5%, and the notes mature in January of 1997. At December 31, 1995 the Company had two unsecured notes payable totaling $3.5 million to the investment fund. The Company paid interest to affiliates of $270,000, $127,000, and $123,000 in 1996, 1995, and 1994, respectively. (5) Losses and Loss Adjusting Expenses The following table sets forth the reconciliation of beginning and ending reserves for losses and loss adjusting expenses for the years indicated. Reinsurance recoverables on unpaid losses and loss adjusting expenses are included on the consolidated balance sheets within reinsurance receivables for losses and loss adjusting expenses. The following table includes property-casualty and excess & surplus lines reserves for losses and loss adjusting expenses.
Year ended December 31, 1996 1995 1994 ----------- ----------- ----------- (in thousands) Reserves for losses and loss adjusting expenses at beginning of year $ 341,864 $ 310,996 $ 279,856 Less reinsurance recoverables 16,925 18,322 11,806 ----------- ----------- ----------- Net reserves for losses and loss adjusting expenses at beginning of year 324,939 292,674 268,050 ----------- ----------- ----------- Incurred losses and loss adjusting expenses Provision for insured events of current year 353,675 315,956 288,574 (Decrease) increase in provisions for insured events of prior years (680) 1,984 (1,630) ----------- ----------- ----------- Total incurred losses and loss adjusting expenses 352,995 317,940 286,944 ----------- ----------- ----------- Payments Losses and loss adjusting expenses attributable to insured events of current year 194,735 169,254 151,479 Losses and loss adjusting expenses attributable to insured events of prior years 136,536 116,421 110,841 ----------- ----------- ----------- Total payments 331,271 285,675 262,320 ----------- ----------- ----------- Net reserves for losses and loss adjusting expenses at end of year 346,663 324,939 292,674 Plus reinsurance recoverables 15,528 16,925 18,322 ----------- ----------- ----------- Reserves for losses and loss adjusting expenses at end of year $ 362,191 $ 341,864 $ 310,996 =========== =========== ===========
The reserving process relies on the basic assumption that past experience, adjusted for 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 events in 45 prior years, the provision for losses and loss adjusting expenses decreased $680,000 in 1996, increased $2 million in 1995, and decreased $1.6 million in 1994. Development for losses and loss adjusting expenses on prior years is immaterial to the financial statements taken as a whole. 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 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, 1996. The Company routinely reviews its overall reserve position and reserving techniques as they relate to its exposure to environmental claims. (6) Reinsurance In the ordinary course of business the property-casualty and excess & surplus lines subsidiaries cede insurance to other insurers 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, 1996, reinsurance receivables and prepaid reinsurance premiums associated with three nonaffiliated reinsurers aggregated approximately $12.8 million, which represented a significant portion of the total prepaid reinsurance premiums and reinsurance receivables for losses and loss adjusting 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 adjusting expenses incurred for the years ended December 31, 1996, 1995, and 1994 was as follows:
1996 1995 1994 ----------- ----------- ----------- (in thousands) Direct written premiums $ 568,277 $ 494,462 $ 436,988 Assumed from nonaffiliates 6,536 8,572 8,667 Net (ceded to) assumed from ALLIED Mutual (26,639) (6,151) 8,793 Ceded to nonaffiliates (31,568) (25,439) (24,356) ----------- ----------- ----------- Net written premiums $ 516,606 $ 471,444 $ 430,092 =========== =========== =========== Direct earned premiums $ 534,738 $ 472,407 $ 415,767 Assumed from nonaffiliates 7,231 8,831 8,536 Net (ceded to) assumed from ALLIED Mutual (17,933) (703) 11,863 Ceded to nonaffiliates (30,511) (25,036) (23,648) ----------- ----------- ----------- Net earned premiums $ 493,525 $ 455,499 $ 412,518 =========== =========== =========== Direct losses and loss adjusting expenses $ 398,748 $ 335,779 $ 303,318 Assumed from nonaffiliates 4,239 5,889 5,821 Net (ceded to) assumed from ALLIED Mutual (37,957) (14,648) (9,450) Ceded to nonaffiliates (12,035) (9,080) (12,745) ----------- ----------- ----------- Net losses and loss adjusting expenses incurred $ 352,995 $ 317,940 $ 286,944 =========== =========== ===========
46 (7) Dispositions On June 1, 1994, the Company completed the sale of its investment in a savings and loan holding company for $9.4 million. The 20% interest was acquired for investment purposes and was reported in other investments. The pretax gain of $2.6 million is included in realized investment gains for 1994 in the consolidated statements of income. During July of 1996, the Company received $620,000 as the final settlement on the 1994 sale of its investment in the savings and loan holding company. The payment represents the Company's share of the contingent purchase price held by the buyer until all known claims were settled. (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, 1996 and 1995, ALLIED Mortgage had borrowed $19.7 million and $22.5 million, respectively, under mortgage loan warehousing agreements with three different commercial banks; the agreements expire in May and June of 1997. Under the terms of the agreements, ALLIED Mortgage can borrow up to the lesser of $67 million or 98% of the mortgage credit borrowing base, which includes related sublines. At December 31, 1996, the outstanding borrowings of ALLIED Mortgage under these line of credit agreements were secured by mortgage loans held for sale of $12.1 million, mortgage servicing rights on loans with a principal balance of $2.8 billion, and foreclosure loans of $5.4 million. Interest rates applicable to these borrowing arrangements vary with the level of investable deposits maintained at the respective commercial banks. ALLIED Mortgage entered into an agreement with a life insurance company for $15 million 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 $1.5 million every September 1; interest is payable semiannually. At December 31, 1996 and 1995, the outstanding balance was $12 million and $13.5 million, respectively. The Federal Home Loan Bank of Des Moines provides a $3 million committed credit facility through a line of credit agreement with AMCO that expires March 1, 1997. 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, 1996 and December 31, 1995. The Company paid interest to nonaffiliates of $1.5 million, $1.6 million, and $2.2 million in 1996, 1995, and 1994, respectively. (9) Guarantee of ESOP Obligations On July 12, 1990, the ESOP Trust issued Remarketed Floating Rate Notes (FRN) totaling $35 million with a final maturity of July 12, 2005. The proceeds from the FRN were used to acquire Series A ESOP Convertible Preferred Stock. During 1995, the ESOP Trust refinanced its $28.2 million 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. ALLIED has guaranteed on an unsecured basis the ESOP Trust's reimbursement obligations under the Credit Agreement. The guarantee has been recorded in the consolidated balance sheets as a liability under the caption, "Guarantee of ESOP obligations." At December 31, 1996 and 1995, ALLIED had an outstanding guarantee of principal of $24.4 million, and $26.3 million, respectively. 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. ALLIED 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 resets at the beginning of each interest period. The interest rate swap involves the exchange of fixed and floating rate 47 interest payments without the exchange of the underlying principal amount. As of December 31, 1996, the amount of principal covered under the swap agreement was $17.6 million 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 1996, the actual Credit Agreement interest rate ranged from 6% to 6.6%. During 1995 and 1994, the actual interest rates ranged from 6% to 6.8% and from 2.9% to 6.3%, respectively. Though nonperformance of the broker-dealer is not expected, ALLIED is exposed to credit loss should such an event occur. The Credit Agreement includes various financial and operating covenants with which ALLIED 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 ALLIED 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. Each share of the 6-3/4% Series has 2-1/4 votes. The annual dividend rate is 6-3/4% of the liquidation preference of $28.50 ($1.92 per share) and is payable quarterly. ALLIED 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 ALLIED's Board of Directors a number of director nominees that most closely approximates the same percentage of the total number of members of ALLIED's Board of Directors as is equal to ALLIED Mutual's percentage ownership of the total number of shares of ALLIED voting stock. ESOP Series On March 7, 1996, the commercial bank acting on behalf of the ESOP participants as the trustee for the ESOP Trust (Trustee) converted all of its shares of ESOP Convertible Preferred Stock (ESOP Series) to shares of common stock. The ESOP Series shares were convertible into 2-1/4 common shares and had 2-1/4 votes, subject to anti-dilution adjustments. In 1995 the ESOP Trust purchased 13,426 shares of ESOP Series for $54.00 per share of Series D. 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. (11) Common Stock ALLIED has reserved 2,025,000 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 common stock. The plan also provides for optional cash payments. During 1996, 61,447 shares, purchased on the open market, were issued at a weighted average price per share of $26.48. During 1995 and 1994, 64,058 and 75,458 shares, purchased on the open market, were issued at the weighted average prices per share of $20.01 and $17.37, respectively. At December 31, 1996, 878,967 shares were available for issuance. 48 ALLIED has reserved 375,000 shares of common stock for issuance under the ALLIED Life Employee Stock Purchase Plan. ALLIED receives fair market value for the shares issued under the plan. During 1996, 556 shares were issued at a weighted average price per share of $26.71. During 1995 and 1994, 3,008 and 464 shares were issued at a weighted average price per share of $19.17 and $17.53, respectively. At December 31, 1996, 370,903 shares were available for issuance. During 1996, ALLIED canceled 664,500 shares of its common stock repurchased on the open market at an average cost of $24.87 per share. No shares were repurchased in 1995. During 1994, ALLIED canceled 375,000 shares of its common stock repurchased on the open market at an average cost of $16.96 per share. During 1996, 2,992,710 ESOP Series shares were converted to 6,733,598 shares of common stock and the ESOP Trust purchased 24,381 shares at an average price per share of $32.89. As of December 31, 1996, the ESOP Trust was the holder of 6,482,223 shares, or 31.8% of ALLIED's common stock. The Trustee is entitled to vote the shares held in the ESOP Trust on all matters submitted to a vote of the holders of the common stock of ALLIED. 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 allocated to the participant's account. During 1995 and 1994, 174,960 and 110,956 ESOP Series shares were converted to 393,660 and 249,651 shares of common stock, respectively. The dividend rate per common share was $0.59, $0.45, and $0.40 for 1996, 1995, and 1994, respectively. (12) Stock-based Compensation Plans ALLIED has granted stock options to key employees under four nonqualified plans as defined by the Internal Revenue Service: the ALLIED Group, Inc. Restated and Amended Stock Option Plan (Option Plan), the ALLIED Group, Inc. Nonqualified Stock Option Plan (Nonqualified Plan), the ALLIED Group Executive Equity Incentive Plan (Equity Plan), and the Freedom Group Incentive Plan (Freedom Plan). No options remain to be granted under the plans, and during 1996 all Equity Plan options were exercised. Upon exercise of the stock options under each plan, ALLIED receives an amount equal to the common stock's fair market value at the grant date. The options vest at various times and must be exercised ten years after the date of grant. In addition, ALLIED has reserved 900,000 shares of common stock for issuance to key employees under the ALLIED Group, Inc. Long-Term Management Incentive Plan (Incentive Plan). Under the Incentive Plan, shares of common stock are available for grant until December 31, 2003 as incentive and nonqualified stock options (collectively, Options), SARs, and restricted stock. The Options, SARs, and restricted stock begin to vest two years after the date of grant. Options, SARs, and restricted stock prices are based upon the fair market values as of the date of grant. 49 The following table summarizes information about stock options outstanding at December 31, 1996:
Weighted average ---------------------------- Weighted Exercise price Remaining average Compensation range per Options contractual Exercise Options exercise plan share outstanding life price exercisable price - ----------------- --------------- ----------- ------------ ------------- ------------ ------------ Option Plan $ 14.08 - 19.42 223,467 6.7 $ 17.27 52,832 $ 16.85 Nonqualified Plan 18.33 - 19.42 86,549 7.8 18.67 2,183 19.42 Freedom Plan 5.06 27,000 1.3 5.06 27,000 5.06 Incentive Plan 16.17 - 29.08 283,688 8.0 21.78 20,996 18.82 --------- --------- 620,704 103,011 ========= =========
A summary of stock option activity and prices for 1996, 1995, and 1994 is presented below:
1996 1995 1994 ------------------------ ---------------------- ----------------------- Weighted Weighted Weighted average average average exercise exercise exercise Stock options Shares price Shares price Shares price - ----------------------------------- --------- --------- -------- --------- -------- --------- Outstanding at beginning of year 567,356 $ 16.07 603,246 $ 11.63 592,502 $ 11.05 Granted 129,000 26.97 195,000 18.37 94,500 16.20 Exercised (75,652) 10.71 (205,506) 6.27 (48,000) 5.55 Canceled --- --- (25,384) 7.45 (35,756) 18.04 --------- -------- -------- Outstanding at end of year 620,704 $ 18.99 567,356 $ 16.07 603,246 $ 11.63 ========= ======== ======== Options exercisable at end of year 103,011 70,457 287,748 ========= ======== ======== Weighted average fair value of options granted during the year $ 9.20 $ 6.91 ========= ========
The issuance of SARs and restricted stock under the Incentive Plan reduces the number of options available for future issuance. During 1996 and 1995, 6,387 and 19,967 shares of restricted stock were awarded at $28.75 per share and $18.25 per share, respectively. During 1996, the restriction was lifted on 417 shares and 173 restricted shares were canceled. In 1995, 609 restricted shares were canceled. At December 31, 1996, 25,586 restricted shares were outstanding. The following table presents SAR activity and prices for the years ended December 31, 1996, 1995, and 1994:
1996 1995 1994 ---------------------- ---------------------- --------------------- Weighted Weighted Weighted Number average average average SARs of shares price Shares price Shares price - --------------------------------- --------- --------- --------- --------- --------- --------- Outstanding at beginning of year 22,001 $ 17.38 12,000 $ 16.23 --- $ --- Granted 12,750 26.83 11,501 18.42 12,750 16.23 Exercised (1,875) 16.31 (1,500) 16.17 --- --- Canceled --- --- --- --- (750) 16.17 --------- --------- --------- Outstanding at end of year 32,876 $ 21.03 22,001 $ 17.38 12,000 $ 16.23 ========= ========= =========
50 ALLIED has reserved 1,125,000 and 562,500 shares of common stock for issuance under the ALLIED Group, Inc. Employee Stock Purchase Plan (ESPP) and the ALLIED Group, Inc. Outside Director Stock Purchase Plan (DSPP), respectively. Under the plans, participants pay 85% of the fair market value of the shares issued which are fully vested on the dates purchased. During 1996, 41,631 shares were issued at a weighted average price per share of $21.93. During 1995 and 1994, 46,043 and 49,252 shares were issued at a weighted average price per share of $17.09 and $15.17, respectively. At December 31, 1996, 385,893 and 529,313 shares were available for issuance under the ESPP and DSPP, respectively. The Company applies APB 25 and related interpretations in accounting for its stock-based compensation plans, as permitted by SFAS 123. Accordingly, no compensation cost for the Company's stock option plans has been recognized in the accompanying financial statements. Compensation cost of $386,000, $167,000, and $24,000 was recognized in 1996, 1995, and 1994, respectively, under ALLIED's other stock-based compensation plans. Had compensation cost been determined based on the fair market value at the grant date of the stock option plans in accordance with SFAS 123, the Company's net income and earnings per share could have been reduced to the pro forma amounts presented in the following table:
Fully Primary diluted Net earnings earnings income per share per share ----------- ----------- ----------- (in thousands, except per share data) 1996 As reported $ 51,084 $ 2.42 $ 2.31 Pro forma 50,624 2.40 2.28 1995 As reported $ 52,377 $ 3.27 $ 2.35 Pro forma 52,140 3.25 2.34
The proforma amounts presented are not necessarily indicative of future amounts; SFAS 123 does not apply to awards granted prior to 1995. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1996 and 1995:
Risk-free Dividend interest Expected Expected yield rate volatility life (yrs) -------- --------- ---------- --------- 1996 Incentive Plan 2.0% 6.2% 32.8% 5.5 1995 Option and Nonqualified Plans 2.0% 7.2% 31.7% 7.0 Incentive Plan 2.0 7.1 33.4 5.5
51 (13) Retained Earnings In 1996, 1995, and 1994, ALLIED paid dividends of $16.3 million, $13.5 million, and $12.7 million, respectively. 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 year. The maximum amount legally available for distribution from the property-casualty segment in 1997 to ALLIED without regulatory approval is $52.6 million. 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 1997 without regulatory approval is $3.3 million. The following table includes selected information for ALLIED's insurance subsidiaries as determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities:
As of December 31, 1996 1995 ------------ ------------- (in thousands) Statutory capital and surplus Property-casualty $ 285,854 $ 257,845 ============ ============= Excess & surplus lines $ 33,478 $ 27,770 ============ =============
Year ended December 31, 1996 1995 1994 ------------ ------------ ------------- (in thousands) Statutory net income Property-casualty $ 47,492 $ 41,995 $ 40,699 ============ ============ ============= Excess & surplus lines $ 5,669 $ 2,773 $ 3,047 ============ ============ =============
(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 $2.6 million, $2.6 million, and $3.8 million for the years ended December 31, 1996, 1995, and 1994, respectively. At December 31, 1996, future minimum lease payments under operating leases amounted to $13.2 million: $2.5 million in 1997, $2.4 million in 1998, $2.3 million in 1999, $869,000 in 2000, $401,000 in 2001, and $4.7 million in later years. In the normal course of business, ALLIED Mortgage grants mortgage loan commitments to borrowers, subject to normal loan underwriting standards. As of December 31, 1996, ALLIED Mortgage had granted loan commitments of approximately $28.2 million, including floating rate commitments of $10.6 million. To hedge loan commitments, ALLIED Mortgage may enter into options, futures, or cash delivery contracts. As of December 31, 1996, ALLIED Mortgage had commitments to sell mortgage securities totaling approximately $15.4 million and no outstanding options. In connection with its 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. 52 Although loans serviced for others are not on the accompanying balance sheets, ALLIED Mortgage has 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, 1996, ALLIED Mortgage had sold loans totaling approximately $16.2 million while retaining recourse risk. ALLIED Mortgage established allowances for losses in connection with these various risks. These are included in other liabilities on the accompanying balance sheets. 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%. The rollback liability, if any, has not been finalized. 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 Benefit Plans Retirement Plan The ESOP established by ALLIED covers all of its employees who meet age and service requirements. Shares of common 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 common 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 $1 million in 1996, $2.7 million in 1995, and $1.8 million in 1994. Of those respective amounts, $14,000, $65,000, and $30,000 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, 1996, 1995, and 1994, respectively. During 1996, 1995, and 1994, the ESOP Trust received $3.5 million, $2.8 million, and $2.8 million, respectively, from dividends on the leveraged shares used to service debt on the ESOP obligations and to purchase stock for participants. ALLIED made ESOP contributions of $529,000 in 1996, $733,000 in 1995, and $35,000 in 1994. Interest incurred on the ESOP debt, which is included as a component of ESOP expense, was $1.6 million, $1.8 million, and $1.2 million in 1996, 1995, and 1994, respectively. The ESOP shares as of December 31, 1996 and 1995 were as follows:
1996 1995 -------------- -------------- Allocated shares 2,879,194 2,823,264 Unallocated shares 3,603,029 3,910,334 -------------- -------------- Total ESOP shares 6,482,223 6,733,598 ============== ==============
In 1996, ALLIED and the ESOP Trustee entered into an agreement, whereby ALLIED agreed to release additional shares held by the ESOP Trustee in the event ALLIED pays a dividend on the common stock of less than $0.20 per share per quarter, which is equivalent to $0.13 per share per quarter on a post-split basis. The agreement is in effect from March 7, 1996 through March 7, 2000. The purpose of the agreement is to ensure that the allocated shares in the ESOP Trust receive at least the same amount of dividends that would have been paid on the ESOP Convertible Preferred Shares had they not been converted to common stock. 53 Other Postretirement Benefit Plan In addition to the ESOP, ALLIED 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 contains other cost-sharing features such as deductibles and coinsurance. ALLIED'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, 1996 and 1995 reconciled with the plan's funded status and the amount recognized in the Company's consolidated balance sheets:
1996 1995 ----------- ----------- (in thousands) Accumulated postretirement benefit obligation Retirees $ (3,520) $ (3,170) Other fully eligible plan participants (680) (620) Other active plan participants (2,700) (2,470) ----------- ----------- Obligation at year-end (6,900) (6,260) Plan assets --- --- ----------- ----------- Funded status (6,900) (6,260) Unrecognized transition obligation 3,860 4,100 Unrecognized net loss 230 50 Fourth-quarter payments 80 70 ----------- ----------- Accrued postretirement benefit liability at year-end $ (2,730) $ (2,040) =========== ===========
A 7.5% weighted average discount rate was used to determine the accumulated postretirement benefit obligation at December 31, 1996 and 1995. Net periodic postretirement benefit cost for the years ended December 31, 1996, 1995, and 1994 included the following:
1996 1995 1994 ----------- ----------- ----------- (in thousands) Service cost $ 340 $ 350 $ 360 Interest cost 460 420 390 Return on assets Amortization of transition obligation 240 240 240 ----------- ----------- ----------- Net periodic postretirement benefit cost $ 1,040 $ 1,010 $ 990 =========== =========== ===========
For measurement purposes, an 8% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 1997; 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 $430,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $40,000. 54 (16) Income Taxes Total income taxes for the years ended December 31, 1996, 1995, and 1994 were allocated as follows:
1996 1995 1994 ----------- ----------- ----------- (in thousands) Net income $ 20,227 $ 21,471 $ 19,074 ----------- ----------- ----------- Stockholders' equity Unrealized (depreciation) appreciation of investments (3,000) 12,776 (6,036) Tax-deductible dividends paid on unallocated ESOP Series shares (989) (849) (907) Tax-basis compensation expense in excess of amounts recognized for financial reporting purposes from the exercise of stock options (371) (1,064) (175) ----------- ----------- ----------- (4,360) 10,863 (7,118) ----------- ----------- ----------- Total $ 15,867 $ 32,334 $ 11,956 =========== =========== ===========
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 relate to the following:
1996 1995 ------------ ------------ (in thousands) Deferred tax assets Loss and loss adjusting expense reserve discounting $ 14,258 $ 13,540 Unearned premium reserve 14,893 13,277 Accrued employee benefits 2,858 3,017 Other 1,314 960 ------------ ------------ Total gross deferred tax assets 33,323 30,794 Less valuation allowance --- --- ------------ ------------ Net deferred tax assets 33,323 30,794 ------------ ------------ Deferred tax liabilities Deferred policy acquisition costs (16,335) (14,591) Mortgage servicing rights (4,533) (3,497) Unrealized appreciation of investments (6,907) (9,907) Deferred software development and fees (4,886) (3,106) Other (2,906) (2,547) ------------ ------------ Total gross deferred tax liabilities (35,567) (33,648) ------------ ------------ Net deferred tax liabilities $ (2,244) $ (2,854) ============ ============
55 Since adoption of SFAS 109, 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 recognition of future taxable income during the periods in which those temporary differences become deductible. Management considers 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, 1996. The actual income tax expense for the years ended December 31, 1996, 1995, and 1994 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 $4.7 million, $4.5 million, and $4.6 million in 1996, 1995, and 1994, respectively. Included in income tax expense is state income tax expense of $55,000, $402,000, and $456,000 for the years ended December 31, 1996, 1995, and 1994, respectively. The Company paid federal and state income taxes of $18 million, $19.1 million, and $16.7 million in 1996, 1995, and 1994, respectively. The IRS is currently examining the 1992 and 1993 income tax returns. Any proposed adjustments are not expected to have a material impact on the Company's financial condition, results of operations, or liquidity. (17) Segment Information The Company's 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). 56
At or for the year ended December 31, 1996 1995 1994 ----------- ----------- ----------- (in thousands) Revenues (1) Property-casualty $ 515,706 $ 472,034 $ 431,110 Excess & surplus lines 33,557 35,356 31,003 Eliminations and other 47,091 45,375 45,251 ----------- ----------- ----------- Total $ 596,354 $ 552,765 $ 507,364 =========== =========== =========== Income before income taxes Property-casualty $ 59,435 $ 63,883 $ 54,186 Excess & surplus lines 8,053 4,840 4,999 Eliminations and other 3,823 5,125 7,514 ----------- ----------- ----------- Total $ 71,311 $ 73,848 $ 66,699 =========== =========== =========== Assets Property-casualty $ 917,537 $ 847,401 $ 749,760 Excess & surplus lines 131,405 122,200 105,722 Eliminations and other 28,717 40,997 37,269 ----------- ----------- ----------- Total $ 1,077,659 $ 1,010,598 $ 892,751 =========== =========== =========== Depreciation and amortization Property-casualty $ 3,812 $ 851 $ 281 Excess & surplus lines 65 58 58 Other 7,153 8,674 6,237 ----------- ----------- ----------- Total $ 11,030 $ 9,583 $ 6,576 =========== =========== =========== Capital expenditures Property-casualty $ 7,101 $ 3,390 $ 1,161 Excess & surplus lines 34 131 16 Other 1,178 4,273 4,476 ----------- ----------- ----------- Total $ 8,313 $ 7,794 $ 5,653 =========== =========== ===========
(1) Including realized investment gains or losses. 57 (18) Unaudited Interim Financial Information
Quarter ended March 31 June 30 September 30 December 31 ------------- ------------- ------------- ------------- (in thousands, except per share data) 1996 Operating Summary Earned premiums $ 118,870 $ 121,114 $ 124,246 $ 129,295 ============= ============= ============= ============= Investment income $ 12,119 $ 12,044 $ 12,445 $ 12,614 ============= ============= ============= ============= Realized investment gains (losses) $ 8 $ 31 $ 26 $ (16) ============= ============= ============= ============= Total revenues $ 143,335 $ 146,585 $ 150,719 $ 155,715 ============= ============= ============= ============= Losses and expenses $ 123,551 $ 136,044 $ 130,438 $ 135,010 ============= ============= ============= ============= Net income $ 13,948 $ 7,548 $ 14,459 $ 15,129 ============= ============= ============= ============= Fully diluted earnings per share Net income $ .63 $ .32 $ .67 $ .70 ============= ============ ============= ============= 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 (losses) $ 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 $ .56 $ .57 $ .60 $ .62 ============= ============= ============= =============
Caution should be exercised in comparing the results of consecutive quarters. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None 58 PART III Item 10. Directors and Executive Officers of the Registrant The information under the caption "Directors and Executive Officers" in the 1997 Proxy Statement is incorporated herein by reference. Item 11. Executive Compensation The information under the caption "Compensation of Executive Officers" in the 1997 Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information under the caption "Security Ownership of Directors and Executive Officers" in the 1997 Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information under the caption "Certain Transactions and Relationships" in the 1997 Proxy Statement is incorporated herein by reference. 59 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. 29 Consolidated Balance Sheets as of December 31, 1996 and 1995. 30 to 31 Consolidated Statements of Income for the Years ended December 31, 1996, 1995 and 1994. 32 Statements of Stockholders' Equity for the Years ended December 31, 1996, 1995 and 1994. 33 Consolidated Statements of Cash Flows for the Years ended December 31, 1996, 1995 and 1994. 34 Notes to Consolidated Financial Statements. 35 to 57 2. Schedules. Report of Independent Auditors on Schedules. 64 I - Summary of Investments-Other Than Investments in Related Parties. 65 II - Condensed Financial Information of Registrant. 66 to 69 III - Supplementary Insurance Information. 70 IV - Reinsurance. 71 VI - Supplemental Information. 72 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. ALLIED Group 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. 60 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 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, (Incorporated by reference to Exhibit 10.49 to the Company's December 31, 1995 Form 10-K on file with the Commission), Exhibit 10.52. Amendment to Consulting Agreement between John E. Evans and ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED Life Financial Corporation, Exhibit 10.54. ALLIED Group Short Term Management Incentive Plan for 1997, Exhibit 10.55. (b) Reports on Form 8-K. None. (c) Exhibits. NOTE: See "Index to Exhibits" on page number 74, 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 ALLIED Group, Inc. as of May 1, 1996 (Incorporated by reference to Exhibit 3.1 to the Company's March 31, 1996 Form 10-Q on file with the Commission). 3.2 Bylaws of the Company as of July 9, 1991, as amended March 3, 1992, October 14, 1993, December 14, 1994, and March 4, 1997. 61 4. Instruments defining the rights of security holders including indentures. 4.7 Agreement between ALLIED Group, Inc. and State Street Bank and Trust Company, dated March 7, 1996. (Incorporated by reference to Exhibit 4.7 to the Company's December 31, 1995 Form 10-K on file with the Commission). 4.8 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust Company dated December 30, 1994. (Incorporated by reference to Exhibit 4.8 to the Company's December 31, 1995 Form10-K on file with the Commission). 4.9 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust Company dated December 29, 1995. (Incorporated by reference to Exhibit 4.9 to the Company's December 31, 1995 Form 10-K on file with the Commission). 4.10 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust Company dated December 31, 1996. 10. Material contracts. 10.7 Amended and Restated Management Information Services Agreement between AMCO Insurance Company and certain of its affiliated companies. 10.8 First Amendment to Amended and Restated Management Information Services Agreement. 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. (Incorporated by reference to Exhibit 10.17 to the Company's December 31, 1995 Form 10-K on file with the Commission). 10.18 ALLIED Group 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 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). 62 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). 10.28 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). 10.32 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). 10.34 Second Amendment to the Term Credit Agreement and Guaranty, dated March 6, 1996 (Incorporated by reference to Exhibit 10.30 to the Company's March 31, 1996 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). 10.40 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). 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). 63 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. (Incorporated by reference to Exhibit 10.52 to the Company's December 31, 1995 Form 10-K on file with the Commission). 10.53 Property Special Catastrophe Excess Contract. (Incorporated by reference to Exhibit 10.53 to the Company's December 31, 1995 Form 10-K on file with the Commission). 10.54 Amendment to Consulting Agreement between John E. Evans, and ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED Life Financial Corporation. 10.55 ALLIED Group Short Term Management Incentive Plan for 1997. 10.56 Amendment dated December 16, 1996, ALLIED Group, Inc. Long-Term Management Incentive Plan. 10.57 Amendment dated February 11, 1997, ALLIED Group, Inc. Outside Director Stock Purchase Plan. 10.58 Amendment dated February 11, 1997, ALLIED Group, Inc. Nonqualified Stock Option Plan. 10.59 Amendment dated February 11, 1997, ALLIED Group, Inc. Restated and Amended Stock Option Plan. 10.60 Amendment dated February 11, 1997, ALLIED Group, Inc. Long-Term Management Incentive Plan. 11. Statement re computation of per share earnings. 21. Subsidiaries of the Registrant. 23. Consent of Independent Auditors. 27. Financial Data Schedule. (d) Financial Statements required by Regulation S-X which are excluded from the Annual Report to Stockholders by Rule 14a-3(b)(1). None. 64 REPORT OF INDEPENDENT AUDITORS ON SCHEDULES The Board of Directors and Stockholders ALLIED Group, Inc.: Under date of February 3, 1997 we reported on the consolidated balance sheets of ALLIED Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the 1996 Annual Report. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedules listed in Part IV, Item 14(a)2. These 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. /s/ KPMG Peat Marwick LLP --------------------------------- KPMG Peat Marwick LLP Des Moines, Iowa February 3, 1997 65 ALLIED Group, Inc. and Subsidiaries SCHEDULE I SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1996
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 $ 226,803,182 $ 232,146,545 $ 232,146,545 States, municipalities, and political subdivisions 327,486,502 336,720,302 336,720,302 Foreign governments 2,064,095 2,086,600 2,086,600 All other corporate bonds 218,812,683 221,314,427 221,314,427 -------------- -------------- -------------- Total fixed maturities 775,166,462 $ 792,267,874 792,267,874 -------------- ============== -------------- Equity securities Common stock Public utilities 476,499 465,446 465,446 Banks, trust and insurance companies 4,128,094 4,608,693 4,608,693 Industrial, miscellaneous and all other 10,678,499 12,715,884 12,715,884 Nonredeemable preferred stocks 2,597,280 2,594,309 2,594,309 -------------- -------------- -------------- Total equity securities 17,880,372 $ 20,384,332 20,384,332 -------------- ============== -------------- Other long-term investments --- --- Short-term investments 6,992,430 6,992,430 -------------- -------------- Total investments $ 800,039,264 $ 819,644,636 ============== ==============
66 ALLIED Group, Inc. and Subsidiaries SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS December 31, 1996 and 1995
Assets 1996 1995 -------------- -------------- Indebtedness from affiliates $ 2,067,575 $ 4,768,770 Accrued investment income 6,078 72,518 Short-term investments 2,040,475 6,021,020 Fixed maturities at fair value (amortized cost $74,788 in 1996 and $8,976,639 in 1995) 74,773 9,080,124 Equity securities at fair value (cost $2,567,741 in 1996 and $1,790,896 in 1995) 3,356,145 2,071,834 Investment in subsidiaries at equity (note 1) 390,149,644 362,026,479 Current income taxes recoverable 972,757 79,129 Deferred income taxes 246,677 110,152 Other assets 1,224,474 551,593 -------------- -------------- Total assets $ 400,138,598 $ 384,781,619 ============== ============== Liabilities Guarantee of ESOP obligations $ 24,370,000 $ 26,270,000 Other liabilities 5,177,116 6,926,145 -------------- -------------- Total liabilities 29,547,116 33,196,145 -------------- -------------- Stockholders' Equity Preferred stock, no par value, issuable in series, authorized 7,500,000 shares; issued and outstanding 1,827,222 shares in 1996 and 4,819,932 in 1995 37,812,387 83,647,674 Common stock, no par value, $1 stated value, authorized 40,000,000 shares; issued and outstanding 20,382,954 in 1996 and 9,444,646 in 1995 20,382,954 9,444,646 Additional paid-in capital 126,078,569 104,595,912 Retained earnings 195,276,063 159,469,625 Unrealized appreciation of investments (net of deferred income tax expense of $6,906,819 and $9,906,744) 12,698,554 18,335,633 Unearned compensation related to ESOP (21,657,045) (23,908,016) -------------- -------------- Total stockholders' equity 370,591,482 351,585,474 -------------- -------------- Total liabilities and stockholders' equity $ 400,138,598 $ 384,781,619 ============== ==============
See accompanying Notes to Condensed Financial Statements 67 ALLIED Group, Inc. and Subsidiaries SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED STATEMENTS OF INCOME Years ended December 31, 1996, 1995, and 1994
1996 1995 1994 ------------- ------------- ------------- Revenues Equity in undistributed earnings of subsidiaries (note 1) $ 25,918,314 $ 38,478,651 $ 38,772,373 Dividends received from subsidiaries (note 1) 24,631,481 12,985,307 8,866,550 Employee leasing income 99,771,562 93,265,042 83,265,394 Realized investment gains (losses) (132,737) 405,654 (43,024) Investment income 590,435 654,489 452,030 Other income 56,167 47,621 53,018 ------------- ------------- ------------- 150,835,222 145,836,764 131,366,341 ------------- ------------- ------------- Expenses Salaries, benefits, payroll taxes and other employee leasing costs 98,322,653 91,929,248 82,177,291 Operating expenses 1,725,301 1,375,281 2,067,786 Interest expense 183,182 4,014 24,060 ------------- ------------- ------------- 100,231,136 93,308,543 84,269,137 ------------- ------------- ------------- Income from operations before income taxes 50,604,086 52,528,221 47,097,204 Income tax expense (benefit) (480,127) 151,392 (527,792) ------------- ------------- ------------- Net income $ 51,084,213 $ 52,376,829 $ 47,624,996 ============= ============= =============
See accompanying Notes to Condensed Financial Statements. 68 ALLIED Group, Inc. and Subsidiaries SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995, and 1994
1996 1995 1994 -------------- -------------- ------------- Cash flows from operating activities: Net income $ 51,084,213 $ 52,376,829 $ 47,624,996 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed earnings (25,918,314) (38,478,651) (38,772,373) Realized investment (gains) losses 132,737 (405,654) 43,024 Indebtedness from affiliates 2,701,195 (1,339,475) (1,359,725) Accrued investment income 66,440 (6,665) 19,629 Cost of ESOP shares allocated 2,250,971 2,213,911 1,751,994 Current (893,628) 190,468 2,110,615 Deferred (292,999) (656,689) 597,191 Other, net (4,336,578) 529,635 1,272,665 ------------- -------------- ------------ Net cash provided by operating activities 24,794,037 14,423,709 13,288,016 ------------- -------------- ------------ Cash flows from investing activities: Investments in subsidiaries (8,081,482) 539 350 Purchase of fixed maturities --- (3,276,014) (16,030,000) Purchase of equity securities (854,643) (1,630,622) (813,638) Short-term investments, net 3,980,545 (3,500,734) 199,744 Sale of fixed maturities 8,602,567 --- 7,487,290 Maturities, calls, and principal reductions of fixed maturities 167,853 235,608 11,809,815 Sale of equity securities 83,220 2,045,080 214,660 ------------- -------------- ------------- Net cash provided by (used in) investing activities 3,898,060 (6,126,143) 2,868,221 ------------- -------------- ------------- Cash flows from financing activities: Issuance of preferred stock --- 699,559 794,133 Issuance of common stock 3,110,431 3,497,199 1,128,345 Repurchase of common stock (16,524,753) --- (6,360,128) Dividends paid to stockholders, net of income tax benefit (15,277,775) (12,659,236) (11,795,038) ------------- -------------- ------------- Net cash used in financing activities (28,692,097) (8,462,478) (16,232,688) ------------- -------------- ------------- Net decrease in cash --- (164,912) (76,451) Cash beginning of year --- 164,912 241,363 ------------- -------------- ------------- Cash end of year $ --- $ --- $ 164,912 ============= ============== =============
See accompanying Notes to Condensed Financial Statements. 69 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, 1996 ----------------- Investment in subsidiaries $ 324,239,950 $ 42,083,857 $ 23,825,837 $ 390,149,644 Equity in undistributed earnings of subsidiaries $ 19,074,658 $ 5,680,219 $ 1,163,437 $ 25,918,314 Dividends received from subsidiaries $ 23,672,759 $ --- $ 958,722 $ 24,631,481 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
70 ALLIED Group, Inc. and Subsidiaries SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION Years ended December 31, 1996, 1995, and 1994
Reserves for Amortization Deferred losses and Losses of deferred Other policy loss Net and loss policy under- acquisition adjusting Unearned Earned investment adjusting acquisition writing Written Segments costs expenses premiums premiums income expenses costs expenses premiums ----------- ------------ --------- --------- ---------- ---------- ------------ -------- ---------- (in thousands) 1996 Property-casualty $ 43,681 $ 303,014 $ 202,378 $ 466,211 $ 42,296 $ 335,511 $ 102,566 $ 18,193 $ 488,189 Excess & Surplus 2,990 59,177 18,218 27,314 6,241 17,484 5,749 2,272 28,417 Other operations --- --- --- --- 756 --- --- --- --- Eliminations --- --- --- --- (71) --- --- (27) --- ----------- ------------ --------- --------- ---------- ---------- ------------ -------- ---------- Consolidated $ 46,671 $ 362,191 $ 220,596 $ 493,525 $ 49,222 $ 352,995 $ 108,315 $ 20,438 $ 516,606 =========== ============ ========= ========= ========== ========== ============ ======== ========== 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 =========== ============ ========= ========= ========== ========== ============ ======== ==========
71 ALLIED Group, Inc. and Subsidiaries SCHEDULE IV REINSURANCE Years ended December 31, 1996, 1995, and 1994
Percentage Ceded Assumed of amount Gross to other from other Net assumed to amount companies companies (1) amount net ------------- -------------- ----------------- -------------- -------------- (in thousands) 1996 Premiums: Property-casualty $ 497,099 $ 293,986 $ 263,098 $ 466,211 56.4% Excess & surplus lines 37,639 10,325 --- 27,314 --- ------------- -------------- ----------------- -------------- Total premiums $ 534,738 $ 304,311 $ 263,098 $ 493,525 53.3% ============= ============== ================= ============== 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% ============= ============== ================= ==============
(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. 72 ALLIED Group, Inc. and Subsidiaries SCHEDULE VI SUPPLEMENTAL INFORMATION Years ended December 31, 1996, 1995, and 1994
Losses and loss Discount adjusting expenses if any incurred related to Paid losses deducted -------------------------------- and loss from Current Prior adjusting Segment reserves year years expenses ------- --------------- -------------- ------------- -------------- (in thousands) 1996 Property-casualty $ --- $ 334,245 $ 1,266 $ 315,987 Excess & surplus lines --- 19,430 (1,946) 15,284 --------------- -------------- ------------- -------------- Total $ --- $ 353,675 $ (680) $ 331,271 =============== ============== ============= ============== 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 =============== ============== ============= ==============
73 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 4, 1997 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, CEO, and Director Senior Vice President, CFO Chairman of the Board March 4, 1997 and Treasurer and Director March 4, 1997 March 4, 1997 By: /s/ James W. Callison By: /s/ Harold S. Carpenter By: - ------------------------------------ ----------------------------------- ----------------------------- James W. Callison Harold S. Carpenter Charles I. Colby Director Director Director March 4, 1997 March 4, 1997 March 4, 1997 By: /s/ Harold S. Evans By: By: - ------------------------------------ ----------------------------------- ----------------------------- Harold S. Evans Richard O. Jacobson John P. Taylor Director Director Director March 4, 1997 March 4, 1997 March 4, 1997 By: /s/ William E. Timmons By: - ------------------------------------ ----------------------------------- William E. Timmons Donald S. Willis Director Director March 4, 1997 March 4, 1997
74 ALLIED Group, Inc. and Subsidiaries INDEX TO EXHIBITS Exhibit Number Item Page 3.2 Bylaws of the Company as of July 9, 1991, as amended March 3, 1992, October 14, 1993, December 14, 1994, and March 4, 1997 75 4.10 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust Company dated December 31, 1996 94 10.7 Amended and Restated Management Information Services Agreement between ALLIED Group Information Systems, Inc. and certain of its affiliated companies dated January 1, 1995 107 10.8 First Amendment to Amended and Restated Management Information Services Agreement 122 10.54 Amendment to Consulting Agreement John E. Evans and ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED Life Financial Corporation 125 10.55 ALLIED Group Short Term Management Incentive Plan for 1997 126 10.56 Amendment dated December 16, 1996, ALLIED Group, Inc. Long-Term Management Incentive Plan 134 10.57 Amendment dated February 11, 1997, ALLIED Group, Inc. Outside Director Stock Purchase Plan 135 10.58 Amendment dated February 11, 1997, ALLIED Group, Inc. Nonqualified Stock Option Plan 136 10.59 Amendment dated February 11, 1997, ALLIED Group, Inc. Restated and Amended Stock Option Plan 137 10.60 Amendment dated February 11, 1997, ALLIED Group, Inc. Long-Term Management Incentive Plan 138 11 Statement re Computation of Per Share Earnings 139 21 Subsidiaries of the Registrant 140 23 Consent of Independent Auditors 141 27 Financial Data Schedule 142 EX-3.(II) 2 3.2 AMENDMENT TO THE BYLAWS 3/4/97 75 EXHIBIT 3.2 ALLIED GROUP, INC. Amendment to the Bylaws March 4, 1997 RESOLVED, that the Bylaws of the Corporation are hereby amended by revising Section 5.1 to read as follows: Section 5.1 GENERALLY. The officers of the corporation shall be a President, one or more Vice Presidents (the number thereof to be determined by the board of directors), a Secretary, a Treasurer, and such other officers as may from time to time be appointed by the board of directors. None of the officers need be a director. One person may hold the offices and perform the duties of any two or more of said offices. In its discretion, the board of directors may delegate the powers and duties of any officer to any other officer or agent, notwithstanding any provisions of these bylaws, and the board of directors may leave unfilled for any such period as it may fix, any office except those of President, Treasurer, and Secretary. The officers of the Corporation shall be appointed annually by the board of directors at the annual meeting thereof. Each such officer shall hold office until the next succeeding annual meeting of the board of directors until his successor shall be duly chosen and shall qualify or until he or she shall resign or shall have been removed. FURTHER RESOLVED, that the Bylaws of the Corporation are hereby amended by revising Section 5.3 to read as follows: Section 5.3 POWERS AND DUTIES OF THE OFFICE OF THE PRESIDENT. The President shall be the chief executive officer of the Corporation. Subject to the provisions of these Bylaws and to the direction of the board of directors, he or she shall have the responsibility for the general management and control of the business affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the board of directors. He or she will have the power to sign all stock certificates, contracts, and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers, employees, and agents of the Corporation. 76 ALLIED GROUP, INC. Amendments to the Bylaws December 14, 1994 RESOLVED, that the Bylaws of the Corporation are hereby amended by revising Section 5.1 to delete Chairman as an officer position, and such amended Section 5.1 shall read as follows: Section 5.1 GENERALLY. The officers of the Corporation shall be one or more Presidents (the number thereof to be determined by the board of directors), one or more Vice Presidents (the number thereof to be determined by the board of directors), a Secretary, a Treasurer, and such other officers as may from time to time be appointed by the board of directors. None of the officers need be a director. One person may hold the offices and perform the duties of any two or more of said offices. In its discretion, the board of directors may delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provisions of these bylaws, and the board of directors may leave unfilled for any such period as it may fix, any office except those of President, Treasurer, and Secretary. The officers of the Corporation shall be appointed annually by the board of directors at the annual meeting thereof. Each such officer shall hold office until the next succeeding annual meeting of the board of directors until his successor shall be duly chosen and shall qualify or until his or her death or until he or she shall resign or shall have been removed from office. FURTHER RESOLVED, that the Bylaws of the Corporation are hereby amended by the deletion of Section 5.3 (Powers and Duties of the Chairman of the Board); that Sections 5.4 through 5.8 shall be renumbered as Section 5.3 through 5.7; and that the first sentence of Section 7.4 which references Section 5.5 shall be amended to reference Section 5.4. FURTHER RESOLVED, that the Bylaws of the Corporation are hereby amended by deleting renumbered Section 5.3 and inserting in lieu thereof the following: Section 5.3 POWERS AND DUTIES OF THE OFFICE OF THE PRESIDENT. The Office of the President shall consist of one or more individuals who shall serve in the capacity of President of the Corporation. Subject to the provisions of these bylaws and to the direction of the board of directors, the member(s) of the Office of President shall have the responsibility for the general management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are delegated to him or her by the board of directors. The member(s) of the Office of the President shall have the power to sign all stock certificates, certificates, contracts and other instruments of the Corporation and shall have general supervision and direction of all of the other officers, employees, and agents of the Corporation. 77 AMENDMENT TO ALLIED GROUP, INC. BYLAWS October 14, 1993 Article 4, Section 4.16(c) The Board of Directors at each annual meeting shall appoint a Coordinating Committee to consist of two members of the Board of Directors, who do not serve on the Board of Directors of ALLIED Mutual Insurance Company or ALLIED Life Financial Corporation. The Coordinating Committee shall be responsible for matters involving actual or potential conflicts of interest, if and when they arise, between ALLIED Mutual Insurance Company, ALLIED Life Financial Corporation, and the Corporation. 78 AMENDMENT TO ALLIED GROUP, INC BYLAWS AS OF MARCH 3, 1992 Section 3.8 Voting Shares (a) Every stockholder entitled to vote may vote in person or by proxy. Except as otherwise provided by law, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. Unless otherwise provided by law, at each meeting for election of directors, each stockholder entitled to vote shall be entitled to vote the number of shares owned by the stockholder for as many persons as there are directors to be elected and for whose election such stockholder has a right to vote, and directors shall be elected by a majority of the votes cast. 79 BYLAWS OF ALLIED GROUP, INC. (an Iowa Corporation) (hereinafter referred to as "Corporation") ARTICLE 1 PRINCIPAL OFFICE The principal office of the Corporation shall be located in Des Moines, Polk County, Iowa or as identified in the most recent annual report filed by the Corporation with the Iowa Secretary of State. ARTICLE 2 NUMBER OF DIRECTORS The number of directors shall be such number as the board of directors shall at the time have designated, but not less than five (5) persons nor more than thirteen (13) persons. ARTICLE 3 MEETINGS OF STOCKHOLDERS Section 3.1 ANNUAL MEETING. The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held during the month of May each year at the principal office of the Corporation (unless otherwise fixed by the board of directors) at such time as the board of directors shall each year fix. Section 3.2 SPECIAL MEETINGS. Special meetings of the stockholders for any purpose of purposes, unless otherwise prescribed by the Iowa Business Corporation Act or the Articles of Incorporation, may be called by the President or the board of directors and shall be called by the board of directors upon the written demand, signed, dated, and delivered to the Secretary, of the holders of at least ten percent of all the votes entitled to be cast on any issue proposed to be considered at the meeting. Such written demand shall state the purpose or purposes for which such meeting is to be called. The time, date, and place of any special meeting shall be determined by the board of directors or, at its direction, by the President. Section 3.3 NOTICE OF MEETINGS. Notice of (i) the place, date and time of all meetings of stockholders; (ii) if applicable law so requires, the initial authorization or issuance, subsequent to the next preceding stockholders meeting, of shares for promissory notes or promises to render services in the future; (iii) any indemnification of a director required by law to be reported to stockholders; and (iv) in the case of a special meeting, the purpose or 80 purposes for which the meeting is called shall be delivered not less than ten (10) days nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting and to such other stockholders as are required by law to be given such notice. The board of directors may establish a record date for the determination of stockholders entitled to notice, as provided in Section 6.9 of these bylaws. Notice of adjourned meetings need only be given if required by law or Section 3.6 of these bylaws. Section 3.4 WAIVER OF NOTICE. (a) A written waiver of notice of any meeting of the stockholders signed by any stockholder entitled to such notice, whether before or after the time stated in such notice for the holding of such meeting, shall be equivalent to the giving of such notice to such stockholder in due time as required by law and these bylaws. (b) A stockholder's attendance at any stockholders meeting, in person or by proxy, waives (i) giving of notice of such meeting and irregularities in any notice given, unless the stockholder at the beginning of the meeting or promptly upon the stockholder's arrival objects to holding the meeting or transacting business at the meeting, and (ii) objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the stockholder objects to considering the matter when it is presented. Section 3.5 VOTING LIST. After fixing a record date for a meeting, the Secretary shall prepare an alphabetical list of the names of all stockholders who are entitled to notice of the stockholders meeting. The list must be arranged by voting group and within each voting group by class or series of shares, and show the address of and number of shares held by each stockholder. The stockholders list must be available for inspection by any stockholder beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting at the Corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held. A stockholder, or a stockholder's agent or attorney, is entitled on written demand to inspect and, subject to the requirements of law, to copy the list during the period it is available for inspection during regular business hours and at the person's expense. The Corporation shall make the stockholders list available at the meeting, and any stockholder, or a stockholder's agent or attorney, is entitled to inspect the list at any time during the meeting or any adjournment. Section 3.6 QUORUM. (a) At any meeting of the stockholders, a majority of the votes entitled to be cast on the matter by a voting group constitutes a quorum of that voting group for action on that matter, unless the representation of a different number is required by law, and in that case, the representation of the number so required shall constitute a quorum. If a quorum shall fail to attend any 81 meeting, the chairman of the meeting or a majority of the votes present may adjourn the meeting to another place, date, or time. (b) When a meeting is adjourned to anther place, date, or time, notice need not be given of the adjourned meeting if the place, date, and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than one hundred twenty (120) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 3.7 ORGANIZATION. (a) The Chairman of the Board or such person as the board of directors may have designated or, in the absence of such a person, the President or, in his or her absence, such person as shall be designated by the holders of a majority of the shares present at the meeting shall call meetings of the stockholders to order and shall act as chairman of such meetings. (b) The Secretary of the Corporation shall act as Secretary at all meetings of the stockholders, but in the absence of the Secretary at any meeting of the stockholders, the presiding officer may appoint any person to act as Secretary of the meeting. Section 3.8 VOTING OF SHARES. (a) Every stockholder entitled to vote may vote in person or by proxy. Except as otherwise provided by law, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. Unless otherwise provided by law, at each meeting for election of directors, each stockholder entitled to vote shall be entitled to vote the number of shares owned by the stockholder for as many persons as there are directors to be elected and for whose election such stockholder has a right to vote, and directors shall be elected by a plurality of the votes cast. (b) The stockholders having the right to vote shares at any meeting shall only be those of record on the stock books of the Corporation on the record date fixed pursuant to the provisions of Section 6.9 of these bylaws or by law. (c) Absent special circumstances, the shares of the Corporation held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation is held by the Corporation, shall not be voted at any meeting. (d) Voting by stockholders on any question or any election may be viva voce unless the chairman of the meeting shall order or any stockholder shall demand that voting be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting or in the stockholder's name by proxy, if there be such proxy, and shall state the number of shares voted by such stockholder. 82 (e) If a quorum exists, action on a matter, other than the election of directors, by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless a greater number is required by law. Section 3.9 VOTING BY PROXY OR REPRESENTATIVE. (a) At all meetings of the stockholders, a stockholder entitled to vote may vote in person or by proxy appointed in writing and filed in accordance with the procedure established for the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. (b) Shares held by an administrator, executor, guardian, conservator, receiver, trustee, pledgee, or another corporation may be voted as provided by law. Section 3.10 INSPECTORS. The board of directors in advance of any meeting of stockholders may, but shall not be obliged to, appoint inspectors to act at such meeting or any adjournment thereof. If inspectors are not so appointed, the officer of person acting as chairman of any such meeting may, and on the request of any stockholder or his or her proxy shall, make such appointment. In case any person appointed as inspector shall fail to appear or act, the vacancy may be filled by appointment made by the board of directors in advance of the meeting or at the meeting by the officer or person acting as chairman. The inspectors shall register proxies; determine the number of shares outstanding; the voting power of each; the shares represented at the meeting; the existence of a quorum; the authenticity, validity, and effect of proxies; receive votes, ballots, assents, or consents; hear and determine all challenges and questions in any way arising in connection with the vote; count and tabulate all votes assents, and consents; determine and announce the result; and do such acts as may appear proper to conduct the election or vote with fairness to all stockholders. The maximum number of such inspectors appointed shall be three, and no inspector whether appointed by the board of directors or by the officer or person acting as chairman need be a stockholder. Section 3.11 CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Any action required or permitted by law to be taken at a meeting of the stockholders may be taken without a meeting if one or more consents in writing setting forth the action so taken shall be signed by the holders of outstanding shares having not less than ninety percent of the votes entitled to be cast at a meeting at which all shares entitled to vote on the action were present and voted, and are delivered to the Corporation for inclusion in the minutes. Section 3.12 CONDUCT OF BUSINESS. The chairman of any meeting of stockholders shall determine the order of business and procedure at the meeting, including such regulation of the manner of voting and the conduct of business as seem to him or her to be in order. 83 ARTICLE 4 BOARD OF DIRECTORS Section 4.1 QUALIFICATIONS AND GENERAL POWERS. No director is required to be an officer, stockholder, or employee of the Corporation or a resident of the State of Iowa. The business and affairs of the Corporation shall be managed by the board of directors. The board of directors may authorize any officer or officers, agent or agents, to enter into any contract or to execute and deliver any instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances. Section 4.2 INCREASE IN NUMBER OF DIRECTORS; TENURE; STAGGERED TERMS. In case the number of directors is increased by thirty percent or less of the number of directors last approved by the stockholders, by amendment to these bylaws by the board of directors or by resolution of the board of directors, the directorships to be filled by reason thereof may be filled by the affirmative vote of a majority of the directors, though less than a quorum of the board of directors. Any director so elected shall serve only until the next election of directors by the stockholders. Each director shall hold office until the next succeeding annual meeting and until his or her successor shall have been elected and qualifies or until his or her death, resignation, or removal. The directors are divided into three classes, each class to be nearly equal in number as possible, and are elected for three-year terms. Section 4.3 QUORUM AND MANNER OF ACTING. A majority of the number of directors then holding office shall constitute a quorum for the transaction of business, but if at any meeting of the board there be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. At all meetings of directors at which a quorum is present, the act of the majority of the directors present shall be the act of the board of directors. Section 4.4 RESIGNATION. Any director of the Corporation may resign at any time by giving written notice to the board of directors, its chairman, or the Corporation. The resignation of any director shall take effect upon delivery of notice thereof or at such later date as shall be specified in such notice, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.5 REMOVAL. A director shall be subject to removal, with or without cause, at a meeting of the stockholders called for that purpose in the manner prescribed by law. Section 4.6 VACANCIES. Any vacancy occurring in the board of directors through death, resignation, removal, or any other cause may be filled by the affirmative vote of a majority of the remaining directors, though less than a 84 quorum of the board of directors. A director elected to fill a vacancy shall be elected only until the next election of directors by the stockholders. Section 4.7 COMPENSATION OF DIRECTORS. The directors shall be entitled to be reimbursed for any expenses paid by them on account of attendance at any regular or special meeting of the board of directors, and the board may fix the compensation of directors from time to time by resolution of the board. Section 4.8 PLACE OF MEETINGS, ECT. The board of directors may hold its meetings and keep the books and records of the Corporation at its principal office (except that the record of its stockholders must also be kept as provided in Section 3.5 of these bylaws) or at such other place or places within or without the State of Iowa as the board may from time to time determine. A director may participate in any meeting by any means of communication, including but not limited to, a telephone conference call by which all directors participating may simultaneously hear each other during the meeting. Section 4.9 ANNUAL MEETING. Immediately after the final adjournment of each annual meeting of the stockholders for the election of directors, the board of directors shall meet, at the same place where said meeting of stockholders finally adjourned, for the purpose of organization, the election of officers, and the transaction of other business. Notice of such meeting need not be given. Such meeting may be held at any other time or place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors or in a consent and waiver of notice thereof signed by all directors, at which meeting the same matters shall be acted upon as is above provided. Section 4.10 REGULAR MEETINGS. Regular meetings of the board of directors shall be held at such place and at such times as the board of directors shall by resolution fix and determine from time to time. No notice shall be required for any such regular meeting of the board. Section 4.11 SPECIAL MEETINGS; NOTICE. (a) Special meetings of the board shall be held whenever called by direction of the Chairman of the Board, the President, or one-third (1/3) of the directors at the time being in office. (b) Notice of each such meeting shall be delivered to each director at least two (2) days before the date on which the meeting is to be held by mail, telegraph, cable, radio, or wireless, or personally or by telephone. Each notice shall state the time and place of the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. At any meeting at which every director shall be present, even without any notice, any business may be transacted. Section 4.12 SUBSTITUTES FOR NOTICE. A written waiver of notice signed by a director, whether before or after the time of the meeting stated therein, shall be equivalent to the giving of such notice in due time as required by 85 these bylaws. Attendance of a director at or participation in a meeting shall constitute a waiver of notice of such meeting, unless the director at the beginning of the meeting or promptly upon arrival objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Section 4.13 DIRECTOR'S ASSENT PRESUMED. A director of the Corporation who is present at a meeting of its board of directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless the director's dissent shall be entered in the minutes of the meeting or unless the director shall file a written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered or certified mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. Section 4.14 ORDER OF BUSINESS. (a) At meetings of the board of directors, business shall be transacted in such order as, from time to time, the Chairman of the board of directors or the board of directors may determine. (b) At all meetings of the board, the Chairman of the Board or, in his or her absence, the person designated by the vote of a majority of the directors present shall preside. Section 4.15 ACTION WITHOUT MEETING. Any action required or permitted by law to be taken at any meeting of the board of directors may be taken without a meeting if the action is taken by all members of the board and if one or more consents in writing setting forth the action so taken shall be signed by all of the directors then in office and included in the minutes. Section 4.16 COMMITTEES. (a) The board of directors, by resolution adopted by the affirmative vote of a majority of the number of directors then in office, may establish one or more committees, including an executive committee, each committee to consist of two (2) or more directors appointed by the board of directors. Any such committee shall serve at the will of the board of directors. Each such committee shall have the powers and duties delegated to it by the board of directors. The board of directors may elect one or more of its members as alternate members of any such committee who may take the place of any absent member or members at any meeting of such committee, upon request by the President or the chairman of such committee. Each such committee shall fix its own rules governing the conduct of its activities as the board of directors may request. (b) The Corporation shall have a committee of the board of directors known as the Executive Committee made up of at least two persons, with the number to be established by the board of directors at each annual meeting. The Executive Committee shall have and exercise all authority of the board of 86 directors in the management of the business and affairs of the Corporation except that the Executive Committee shall not: (1) authorize distributions; (2) approve or propose to stockholders action that is required by law to be approved by stockholders; (3) fill vacancies on the board of directors or on any of its committees; (4) amend articles of incorporation; (5) adopt, amend, or repeal bylaws; (6) approve a plan of merger not requiring stockholder approval; (7) authorize or approve reacquisition of shares, except according to a formula or method prescribed by the board of directors; and (8) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except according to limitations prescribed by the board of directors. (c) The Board of Directors at each annual meeting shall appoint a Coordinating Committee to consist of two members of the Board of Directors, who do not serve on the Board of Directors of ALLIED Mutual Insurance Company. The Coordinating Committee shall meet on an as-needed basis upon the call of the Chairman of the Board of Directors. The Coordinating Committee shall be responsible for matters involving actual or potential conflicts of interest, if and when they arise, between the Corporation and ALLIED Mutual Insurance Company and shall report thereon to the Board of Directors. (d) The Corporation shall have a committee of the board of directors known as the Audit Committee made up of at least two persons, with the number to be established by the board of directors at each annual meeting. The majority of the members of the Audit Committee shall be independent directors. The Audit Committee shall evaluate the Corporation's systems of internal control and test for compliance therewith on a continuing basis and shall report its findings to the board of directors at least annually. (e) A committee of the board shall not: (i) authorize distributions by the Corporation; (ii) approve or propose to stockholders of the Corporation action that the law requires be approved by stockholders; (iii) fill vacancies on the board of directors of the Corporation or on any of its committees; (iv) amend the articles of incorporation of the Corporation; (v) adopt, amend, or repeal bylaws of the Corporation; (vi) approve a plan of merger not requiring stockholder approval; (vii) authorize or approve reacquisition of shares by the Corporation, except according to a formula or method prescribed by the board of directors; or (viii) authorize or approve the issuance or sale or contract for sale of shares or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the board of directors may authorize a committee or a senior executive officer of the Corporation to do so within limits specifically prescribed by the board of directors. 87 (f) The board of directors at each annual meeting shall appoint a member or members of the board of directors to the Compensation Committee provided for in the ALLIED Group Intercompany Operating Agreement dated January 1, 1990, as amended from time to time ("IOA"). The Compensation Committee as set forth in the IOA shall be a joint committee of the boards of directors of the Corporation and ALLIED Mutual Insurance Company. The board of directors also may appoint a separate Compensation Committee for any other purpose, and the members thereof may include but need not be limited to those members appointed to the IOA Compensation Committee. ARTICLE 5 OFFICERS Section 5.1 GENERALLY. The officers of the Corporation shall be a Chairman of the Board, a President, one or more Vice Presidents (the number thereof to be determined by the board of directors), a Secretary, a Treasurer and such other officers as may from time to time be appointed by the board of directors. None of the officers, except the Chairman of the Board, need be a director. One person may hold the offices and perform the duties of any two or more of said offices. In its discretion, the board of directors may delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision of these bylaws, and the board of directors may leave unfilled for any such period as it may fix any office except those of President, Treasurer, and Secretary. The officers of the Corporation shall be appointed annually by the board of directors at the annual meeting thereof. Each such officer shall hold office until the next succeeding annual meeting of the board of directors and until his or her successor shall have been duly chosen and shall qualify or until his or her death or until he or she shall resign or shall have been removed. Section 5.2 REMOVAL. Any officer may be removed by the board of directors, with or without cause, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 5.3 POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the board at which he or she may be present and shall have such other powers and duties as he or she may be called upon by the board of directors to perform. Section 5.4 POWERS AND DUTIES OF THE PRESIDENT. The President shall be the chief executive officer of the Corporation. Subject to the provisions of these bylaws and to the direction of the board of directors, he or she shall have the responsibility for the general management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the board of directors. He or she shall have power to 88 sign all stock certificates, contracts, and other instruments of the Corporation and shall have general supervision and direction of all of the other officers, employees, and agents of the Corporation. Section 5.5 POWERS AND DUTIES OF THE VICE PRESIDENTS. In the absence of the President or in the event of his or her death or inability or refusal to act, the Vice President (or in the event there is more than one Vice President, the Vice Presidents in the order designated by the President, the Executive Committee, or the board of directors) shall perform the duties of the President and when so acting shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President may sign, with the Secretary or Assistant Secretary, certificates for shares of the Corporation and shall perform such other duties and have such authority as from time to time may be assigned to such Vice President by the President or by the board of directors. Section 5.6 POWERS AND DUTIES OF THE SECRETARY. The Secretary shall keep minutes of all meetings of the stockholders and of the board of directors; authenticate records of the Corporation and attend to giving and serving all notices of the Corporation as provided by these bylaws or as required by law; be custodian of the corporate seal, the stock certificate books, and such other books, records, and papers as the board of directors may direct and see that the corporate seal is affixed to all stock certificates and to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized; keep a stock record showing the names of all persons who are stockholders of the Corporation, their post office addresses as furnished by each such stockholder, and the number of shares of each class of stock held by them respectively and, at least ten (10) days before each stockholders meeting, prepare a complete list of stockholders entitled to vote at such meeting arranged in alphabetical order; sign with the President or a Vice President certificates for shares of the Corporation, the issuance of which shall have been duly authorized; and in general, perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to the Secretary by the President or the board of directors. Section 5.7 POWERS AND DUTIES OF THE TREASURER. The Treasurer shall have custody of and be responsible for all monies and securities of the Corporation and shall keep full and accurate records and accounts in books belonging to the Corporation showing the transactions of the Corporation, its accounts, liabilities, and financial condition and shall see that all expenditures are duly authorized and are evidenced by proper receipts and vouchers; deposit in the name of the Corporation in such depository or depositories as are approved by the directors all monies that may come into the Treasurer's hands for the Corporation's account; render an account of the financial condition of the Corporation at least annually; and in general, perform such duties as may from time to time be assigned to the Treasurer by the President or by the board of directors. 89 Section 5.8 ASSISTANTS. There shall be such number of Assistant Secretaries and Assistant Treasurers as the board of directors may from time to time authorize and appoint. The Assistant Secretaries and Assistant Treasurers, in general, shall perform such duties as shall be assigned to them by the Secretary or the Treasurer, respectively, or by the President or the board of directors. The board of directors shall have the power to appoint any person to act as assistant to any other officer, or to perform the duties of any other officer whenever for any reason it is impracticable for such officer to act personally, and such assistant or acting officer so appointed shall have the power to perform all the duties of the office to which he or she is so appointed to be assistant or as to which he or she is so appointed to act, except as such power may be otherwise defined or restricted by the board of directors. ARTICLE 6 SHARES, THEIR ISSUANCE AND TRANSFER Section 6.1 CONSIDERATION FOR SHARES. The board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the Corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the Corporation. Before the Corporation issues shares, the board of directors must determine that the consideration received or to be received for shares to be issued is adequate. If the Corporation issues or authorizes the issuance of shares for promissory notes or for promises to render services in the future, the Corporation shall report in writing to the stockholders the number of shares authorized or issued and the consideration received by the Corporation with or before the notice of the next stockholders meeting. Section 6.2 CERTIFICATES FOR SHARES. Every stockholder of the Corporation shall be entitled to a certificate or certificates, to be in such form as the board of directors shall prescribe, certifying the number and class of shares of the Corporation owned by such stockholder. Section 6.3 EXECUTION OF CERTIFICATES. The certificates for shares of stock shall be numbered in the order in which they shall be issued and shall be signed by the President or a Vice President and the Secretary or an Assistant Secretary of the Corporation and shall be sealed with the seal of the Corporation or a facsimile thereof. The signatures of the President or Vice President and the Secretary or Assistant Secretary or other persons signing for the Corporation upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. In case any officer or other authorized person who has signed or whose facsimile signature has been placed upon such certificate for the Corporation shall have ceased to be such 90 officer or employee or agent before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer or employee or agent at the date of its issue. Section 6.4 SHARE RECORD. A record shall be kept by the Secretary, or by any other officer, employee or agent designated by the board of directors, of the names and addresses of all stockholders and the number and class of shares held by each represented by such certificates and the respective dates thereof and in case of cancellation, the respective dates of cancellation. Section 6.5 CANCELLATION. Every certificate surrendered to the Corporation for exchange or transfer shall be cancelled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled, except in cases provided in Section 6.8 of these bylaws. Section 6.6 TRANSFERS OF STOCK. Transfers of shares of the capital stock of the Corporation shall be made only on the books of the Corporation by the record holder thereof, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation; provided, however, that whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact, if known to the Secretary of the Corporation, shall be so expressed in the entry of transfer. Section 6.7 REGULATIONS. The board of directors may make such other rules and regulations as it may deem expedient, not inconsistent with law, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. Section 6.8 LOST, DESTROYED, OR MUTILATED CERTIFICATES. In the event of the loss, theft, or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations or delegations as the board of directors may establish concerning proof of such loss, theft, or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 6.9 RECORD DATE. The board may fix, in advance, a date as the record date for any determination of stockholders for any purpose, such date in every case to be not more than seventy (70) days prior to the date on which the particular action or meeting, requiring such determination of stockholders, is to be taken or held. If no record date is so fixed for the determination of stockholders, the close of business on the day before the date on which the first notice of a stockholder meeting is delivered or the date on which the resolution of the board of directors declaring a share dividend or distribution (other than in connection with a repurchase or reacquisition of shares) is 91 adopted, as the case may be, shall be the record date for such determination of stockholders. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, unless the board of directors selects a new record date or unless a new record date is required by law. Section 6.10 DIVIDENDS. The directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law. ARTICLE 7 MISCELLANEOUS PROVISIONS Section 7.1 FACSIMILE SIGNATURES. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the board of directors or a committee thereof. Section 7.2 CORPORATE SEAL. The board of directors shall provide for a corporate seal which shall be circular in form and shall bear the name of the Corporation and the words "Corporate Seal" and "Iowa". The Secretary shall be custodian of any such seal. The board of directors may also authorize a duplicate seal to be kept and used by any other officer. Section 7.3 FISCAL YEAR. The fiscal year of the Corporation shall be at the close of business on the last day of December of each year. Section 7.4 VOTING OF STOCKS OWNED BY THE CORPORATION. In the absence of a resolution of the board of directors to the contrary, the President of the Corporation or any Vice President acting within the scope of his or her authority as provided in Section 5.5 of these bylaws is authorized and empowered on behalf of the Corporation to attend, vote at, and grant discretionary proxies to be used at any meeting of stockholders of any corporation in which this Corporation holds or owns shares of stock and, in that connection, on behalf of this Corporation, to execute a waiver of notice of any such meeting. The board of directors shall have authority to designate any officer or person as a proxy or attorney-in-fact to vote shares of stock in any other corporation in which this Corporation may own or hold shares of stock. Section 7.5 STOCKHOLDERS'RIGHT TO INFORMATION. (a) A stockholder of the Corporation is entitled to inspect and copy, during regular business hours at the Corporation's principal office, any of the following records of the Corporation, if the stockholder gives the Corporation written notice of the stockholder's demand at least five business days before the date on which the stockholder wishes to inspect and copy: (1) Articles or Restated Articles of Incorporation and all amendments currently in effect; 92 (2) Bylaws or Restated Bylaws and all amendments currently in effect; (3) Resolutions adopted by the board of directors creating one or more classes or series of shares and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding; (4) Minutes of all stockholders meetings and records of all action taken by stockholders without a meeting for the past three years; (5) All written communications to stockholders generally within the past three years, including the financial statements furnished for the past three years; (6) A list of the names and business addresses of the Corporation's current directors and officers; and (7) The Corporation's most recent annual report delivered to the Iowa Secretary of State. (b) If (i) a stockholder makes a demand in good faith and for a proper purpose, (ii) the stockholder describes with reasonable particularity the stockholder's purpose and the records the stockholder desires to inspect, and (iii) the record requested is directly connected with the stockholder's stated purpose, the stockholder shall also be entitled to inspect and copy, during regular business hours at a reasonable location specified by the Corporation, any of the following records of the Corporation provided the stockholder gives the Corporation written notice of the stockholder's demand at least five business days before the date on which the stockholder wishes to inspect and copy any of the following: (1) Excerpts from minutes of any meeting of the board of directors, records of any actions of a committee of the board of directors while acting as authorized by the board of directors on behalf of the Corporation, minutes of any meeting of the stockholders, and records of action taken by the stockholders or the board of directors without a meeting to the extent not subject to inspection under the preceding subparagraph; (2) Accounting records of the Corporation; and (3) The record of stockholders of the Corporation. ARTICLE 8 INDEMNIFICATION OF DIRECTORS Section 8.1 MANDATORY INDEMNITY. The Corporation shall indemnify a director, officer, employee, agent, and others of this Corporation, and each director, officer, employee, agent, and others of this Corporation who is serving or who has served, at the request of this Corporation, as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan to the fullest extent possible against expenses, including attorneys' fees, judgments, penalties, fines, settlements, and reasonable expenses actually incurred by such director, officer, employee, agent, and others of this Corporation or as a director, officer, partner, trustee, employee, or agent of another corporation, partnership, joint venture, trust, other enterprise, or 93 employee benefit plan, except that the mandatory indemnification required by this sentence shall not apply (i) to a breach of a director's, officer's, employee's, agent's, or other's duty of loyalty to the Corporation or its stockholders, (ii) to acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law, (iii) to a transaction from which a director, officer, employee, agent, or others derived an improper personal benefit, or (iv) against judgments, penalties, fines, and settlements arising from any proceeding by or in the right of the corporation, or against expenses in any such case where such director, officer, employee, or others shall be adjudged liable to the Corporation. Section 8.2 NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Articles of Incorporation, or any agreement, vote of stockholders or disinterested directors, or otherwise. ARTICLE 9 AMENDMENTS TO BYLAWS These bylaws may be amended or repealed by the board of directors or by the stockholders; provided, however, that the stockholders may from time to time specify particular provisions of the bylaws which shall not be amended or repealed by the board of directors. /s/ George T. Oleson ------------------------------ George T. Oleson Assistant Secretary EX-4 3 4.10 STOCK PURCHASE AGREEMENT 94 EXHIBIT 4.10 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT dated as of December 31, 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"). 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"); WHEREAS, as directed by the ESOP Committee (the "Committee") under the terms of the Trust Agreement, the Trustee is authorized to purchase shares of Common Stock and the Company wishes to issue and sell such shares of Common Stock to the Trustee, and no commission will be paid by the Trustee in connection with the purchase of such shares of Common 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 determined that the average of the high and low sale prices of the shares of Common Stock as reported on the Nasdaq National Market tier of The Nasdaq Stock Market on December 31, 1996 is fair and equitable to the participants in the Plan and the price to be paid for the Common 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: 95 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 24,381 shares of Common Stock (the "Shares") for an aggregate purchase price (the "Purchase Price") of $800,000.00 (or approximately $32.8125 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 31, 1996 (such date of delivery being hereinafter called the "Delivery Date") at the offices of the Company, Des Moines, Iowa or as otherwise agreed by the parties hereto. On the Delivery Date, the Trustee shall deliver to the Company the Purchase Price in immediately available funds together with an opinion of Goodwin, Procter & Hoar, LLP, counsel to the Trustee, in the form attached as Annex A hereto, and 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); c. the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby will not violate (i) the Company's Articles of Incorporation or By-laws, each as amended or restated to date or, (ii) any provision of any agreement, instrument, order, award, judgment or decree to 96 which the Company is a party or by which it or any of its businesses or properties are bound, or (iii) any statute, rule or regulation of any federal, state or local government or governmental agency applicable to the Company except in the case of subparagraphs (ii) or (iii) of this Section 3(c) for any such violations which either individually or in the aggregate do not have a material adverse effect on the business or properties of the Company and its subsidiaries taken as a whole; d. except for any necessary applications with The Nasdaq Stock Market with respect to any newly issued shares of Common Stock which may be issued upon conversion of the 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 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 constitutes a qualifying employer security within the meaning of Section 4975(e)(8) of the Code; provided, however, that in making the representations contained in this Section 3(f) the Company has relied upon the correctness of the Trustee's representations contained in Section 4(f) of this Agreement; g. the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and quarterly reports on Form 10-Q for the quarterly 97 periods ended March 31, June 30, and September 30, 1996, on the respective dates filed with the Securities and Exchange Commission ("SEC"), conformed in all material respects to the requirements of the Securities Exchange Act of 1934, as amended; h. 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; i. 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 j. 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; 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, 98 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 30, 1996; 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, 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; 99 g. 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 and Company agree that the per share purchase price for the Common Stock will be the average of the high and low sale prices of the shares of Common Stock on the Nasdaq National Market tier of The Nasdaq Stock Market on December 31, 1996, the day prior to the stock purchase. 6. 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 shares of the Company's Common Stock held by the Trust. 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. 7. 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. 8. The representations, warranties and agreements in this Agreement shall survive the date hereof and the Delivery Date. 9. 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 100 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. 10. 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. 11. 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. 12. 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. 13. 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 /s/ Jamie H. Shaffer ----------------------------- Name Jamie H. Shaffer --------------------------- Title President (Financial) -------------------------- STATE STREET BANK AND TRUST COMPANY solely in its capacity as Trustee under the Plan and Trust Agreement referred to herein and not individually By /s/ Marianne E. Sullivan ----------------------------- Name Marianne E. Sullivan --------------------------- Title Vice President -------------------------- 101 Annex A December 31, 1996 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 24,381 shares of Common Stock of the Company, no par value (the "Common Stock") pursuant to the Stock Purchase Agreement between the Company and the Trustee dated as of December 31, 1996 (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 corporate charter and by-laws of State Street, both as amended to date; (iv) other records, documents, and instruments relating to the powers and organization of State Street and to State Street's acceptance of fiduciary duties, obligations and trusts; and (v) such other certificates and documents as we have deemed relevant or necessary as a basis for the opinion expressed below. In our examination, we have assumed without any investigation (i) the legal capacity of each natural person, (ii) the full power and authority of each person other than State Street to execute, deliver and perform its obligations under each document heretofore executed and delivered or hereafter to be executed and delivered and to do each other act heretofore done or hereafter to be done by such person, (iii) the due authorization, execution and delivery by each person other than State Street of each document heretofore executed and delivered by such person, (iv) the legality, validity, binding effect and enforceability as to each person other than State Street of each document heretofore executed and delivered or hereafter to be executed and delivered and of each other act heretofore done or hereafter to be done by such person, (v) the genuineness of each signature other than those of officers of State Street and the completeness and authenticity of each document submitted to us as an original, (vi) the conformity to the original of each document submitted to us 102 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. 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 103 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, /s/ GOODWIN, PROCTER & HOAR, LLP --------------------------------- GOODWIN, PROCTER & HOAR, LLP 104 Annex B December 31, 1996 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 24,381 shares of Common Stock of the Company, no par value (the "Common Stock"), pursuant to the Stock Purchase Agreement between the Company and the Trustee dated December 31, 1996 (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) such other certificates and documents as I have deemed relevant or necessary as a basis for the opinion expressed below. In such connection, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as photostatic or certified copies, and the authenticity of the originals of such copies. I have relied, to the extent I deem such reliance proper, upon representations made in the documents and certificates or representations made in writing by duly authorized representatives of the Company. In rendering the opinions contained herein, I have assumed that (a) State Street, as Trustee, has all requisite power and authority to execute, deliver, and perform its obligations under the Stock Purchase Agreement; (b) that the execution, delivery, and performance of the Stock Purchase Agreement by State Street, as Trustee, will not violate the charter or bylaws of State Street; and (c) that the Stock Purchase Agreement has been executed and delivered by State Street as Trustee and constitutes the legal, valid, and binding obligation of the ESOP Trust, enforceable in accordance with its terms, except as enforcement may be limited by (i) bankruptcy, insolvency, reorganization, or similar laws affecting the enforcement of creditors' rights generally, or (ii) equitable principles of general applicability (regardless of whether such enforceability is considered in a proceeding in equity or law). 105 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 Shares 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 Common Stock of the Company. 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 Shares free and clear of any liens, claims, security interests, and encumbrances, except for beneficial interests accruing to Plan participants and their beneficiaries. 5. As of the date hereof, the Plan and the ESOP Trust in form meet in all material respects (a) the applicable requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), (b) the requirements applicable to an employee stock ownership plan for purposes of Section 4975(e)(7) of the Code and the regulations promulgated thereunder, and (c) the requirements for exemption from tax under Section 501(a) of the Code. 6. The shares of Common 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 Common Stock to be purchased by the ESOP Trust have voting rights, and the Plan meets the voting rights requirements of Section 409(e)(2) of the Code with respect to such shares. 106 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. 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. c. 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. 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, /s/ George T. Oleson - -------------------------- George T. Oleson EX-10 4 10.7 MIS AGREEMENT EFF 3/1/96 107 EXHIBIT 10.7 AMENDED AND RESTATED MANAGEMENT INFORMATION SERVICES AGREEMENT Effective March 1, 1996 108 AMENDED AND RESTATED MANAGEMENT INFORMATION SERVICES AGREEMENT This Agreement ("Agreement") is made as of this 24th day of January, 1997, to be effective March 1, 1996, (unless a different effective date is indicated) by and among AMCO Insurance Company ("AMCO"), ALLIED Group Information Systems, Inc. ("AGIS"), ALLIED Mutual Insurance Company ("Mutual"), ALLIED Group, Inc. ("AGI"), ALLIED General Agency Company ("AGA"), ALLIED Group Mortgage Company ("AGMC"), ALLIED Group Leasing Corporation ("AGLC"), ALLIED Life Financial Corporation ("ALFC"), ALLIED Life Insurance Company ("ALLIED Life"), ALLIED Life Brokerage Agency ("ALBA"), ALLIED Group Merchant Banking Corporation ("AGMBC"), ALLIED Group Insurance Marketing Company ("AGIMC"), The Freedom Group, Inc. ("TFG"), and Midwest Printing Services, Ltd. ("Midwest Printing"). AGIS, AGI, AGA, AGMC, AGLC, ALFC, ALLIED Life, ALBA, AGMBC, AGIMC, TFG, and Midwest Printing shall be hereinafter referred to collectively as the "Companies". WITNESSETH: WHEREAS, AGIS and Mutual, AGI, AMCO, AGA, AGMC, AGLC, ALFC, ALLIED Life, ALBA, AGMBC, and AGIMC entered into an Amended and Restated Management Information Services Agreement effective January 1, 1995 (the "January 1995 Agreement") on December 14, 1995; and WHEREAS, effective March 1, 1996, AGIS was restructured, with AGIS declaring and paying a dividend to AMCO consisting of all assets and related liabilities of TFG-ALLIED Operations; and WHEREAS, effective March 1, 1996, AMCO began providing the services previously provided by AGIS under the January 1995 Agreement; WHEREAS, effective May 13, 1996, the AMCO programmers working on ALIC data were transferred to ALIC as employees; NOW, THEREFORE, in consideration of the foregoing premises, and for and in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: I. DEFINITIONS 1.1 "AGI and Its Subsidiaries" shall mean the following companies which are parties to this Agreement: AGI, AMCO, AGA, AGMC, AGLC, TFG, AGIS, and Midwest Printing. 1.2 "ALFC and Its Subsidiaries" shall mean the following companies which are parties to this Agreement: ALFC, ALLIED Life, ALBA, and AGMBC. 109 1.3 "Coordinating Committee" shall mean the joint meeting of the coordinating committees established by Mutual, AGI, and ALFC in accordance with their respective bylaws or pursuant to resolution for the purpose, among others, of resolving issues under this Agreement. 1.4 "Management Information Services" or "MIS" shall mean the Methods/Procedures, the processing, and support of information and data functions. MIS does not include: (a) third-party data processing services provided to any of the Companies by contract; (b) processing flexible premium payment plans; or (c) printing services, unless otherwise provided herein. 1.5 "Methods/Procedures" shall mean studies or work flow analysis, training on software systems, and other computer support. 1.6 "Mutual and Its Subsidiaries" shall mean the following companies which are parties to this Agreement: Mutual and AGIMC. 1.7 "PC" shall mean personal computer. 1.8 "PC Support" shall mean PC installation, training, and assistance, but shall not include PC maintenance. 1.9 "Programming/Development" shall mean the analysis, design, programming, and development of PC and mainframe Software and shall include mainframe Software consulting and maintenance services. The maintenance services shall include, but not be limited to, error corrections, enhancements, and updates. Unless specifically provided for herein, Programming/Development shall not include those programming functions performed by any of the Companies on personal computers. 1.10 "Software" shall mean any and all computer programs, models, plans, outlines, packages, or systems thereof and related documentation or manuals as developed, or which may be developed in the future by AMCO and used by the Companies for MIS, but does not include those computer programs which are used by any of the Companies pursuant to license agreements with third parties. II. POOLING AGREEMENT 2.1 AMCO, Mutual, ALLIED Property and Casualty Insurance Company, and Depositors Insurance Company are parties to the Second Amended and Restated Reinsurance Pooling Agreement dated December 14, 1992, as amended February 18, 1993 and February 10, 1995 ("Pooling Agreement"), pursuant to which AMCO, as the pool administrator, conducts insurance operations and provides certain administrative services to the other parties. Included in these administrative services are the provision of data processing services for the jointly conducted insurance operations. The Pooling Agreement shall control as to matters 110 regarding data processing services provided by AMCO to Mutual, ALLIED Property and Casualty Insurance Company, and Depositors Insurance Company and the payment for any services provided thereto. III. SERVICES 3.1 GENERAL MIS. AMCO shall provide all MIS required by ALLIED Life, AGI's human resources department, and AGIMC. The MIS to be provided during the term of this Agreement shall be substantially the same as those services presently provided to or utilized by ALLIED Life, AGI's human resources department, and AGIMC as of the effective date of this Agreement. In addition, AMCO shall provide MIS to any of the Companies if requested. The scope and extent of MIS provided under this Agreement may be amended or modified from time to time by written agreement between AMCO and the party receiving the MIS. 3.2 PC SUPPORT. AMCO shall provide PC Support to ALLIED Life, ALBA, AGI's human resources department, AGA, AGMC, AGLC, AGMBC, AGIMC, and AGIS. AMCO shall also provide AGIMC with PC Support for its phone system. 3.3 PC MAINTENANCE. AMCO will assist in coordinating with each of the Companies for third-party vendor maintenance on the personal computers, and each of the Companies shall be responsible for payment to such third-party vendors. 3.4 AGMC SCANLINE PROCESSING. AMCO shall use its scanline equipment to process AGMC payment forms on a daily basis, Monday through Friday, during the term of this Agreement. AMCO shall provide its own personnel, program disk, and tapes to process such forms. 3.5 FLEXIBLE PREMIUM PAYMENT PLANS. AMCO shall perform the processing, billing, scanline, and remittance services with regard to the flexible premium payment plan offered by ALLIED Life to its insureds on ALLIED Life policies. All service charges and reinstatement fees assessed to insureds pursuant to the flexible premium payment plan shall be retained by ALLIED Life. 3.6 AGIS CUSTOMERS. AGIS sells to its insurance customers data processing services which are presently provided using AMCO's mainframe and other equipment. AMCO agrees to continue to provide insurance processing services subject to AGIS obtaining AMCO's written consent prior to entering into future data processing agreements and limiting annual growth so it does not exceed 10%. 3.7 PRINTING. (a) FORMS AND REPORTS. AMCO shall generate the following data and record output for ALLIED Life and AGIS customers: (i) policy forms, (ii) claim 111 forms, (iii) billing forms, and (iv) internal reports not generated by personal computers. AMCO shall generate internal reports for AGI's human resources department which cannot be generated by personal computers. (b) TYPESETTING AND OTHER PRINTING. AMCO shall provide typesetting services to Companies requesting typesetting services. Any other printing services including, but not limited to, specialty printing or brochures, shall be provided by AMCO to the Companies, or any of them, if requested. 3.8 POLICY ASSEMBLY. AMCO shall provide policy assembly for AGIS customers. The policy assembly shall include the preparing, handling, and mailing of insurance policies. 3.9 POSTAGE AND MAIL PROCESSING. AMCO shall provide mail processing for the Companies which are located in Polk County, Iowa. This mail processing shall include internal and external distribution of mail among such Companies, to and from the proper post office facilities and may include inserting and sorting mail services. 3.10 SUPPLY SERVICES. For those Companies which desire to use the supply service, AMCO shall administer and manage the storage, warehousing, and distribution of the inventory of office supplies owned by such Companies. The supply service provided by AMCO shall include, but not be limited to, the ordering of paper used in processing forms for ALLIED Life and AGIS customers. 3.11 TELEPHONE AND COMMUNICATIONS. AMCO shall provide telephone equipment, long-distance communication services, or both, for such Companies requesting equipment and/or service upon mutually agreeable terms and conditions. AMCO shall also provide computer and telephone port access to those Companies which office at 701 Fifth Avenue, Des Moines, Iowa. 3.12 OTHER SERVICES. Any other services provided by AMCO to the Companies, or any of them, shall be negotiated between AMCO and such company on such terms and conditions as are mutually agreeable. IV. WARRANTIES 4.1 LICENSE OF SOFTWARE. AMCO shall own or license any Software necessary to provide the services described in this Agreement. AMCO shall be responsible for resolving any licensing conflicts that may result from its use of such Software. 4.2 NO WARRANTIES. AMCO makes no warranties, express or implied as to performance of the machines, equipment, or Software provided under the terms of this Agreement. AMCO will not be liable for any damages, of any kind, as a result of the unavailability or malfunction of the machines, equipment or Software. 112 V. PAYMENT FOR SERVICES 5.1 GENERAL. The fees described in this Article III may be renegotiated in the future at the agreement of the affected parties. The amount of the renegotiated fee to be paid by any of the Companies shall be renegotiated on an arm's length basis. 5.2 FEES. The Companies shall pay the fees set forth in Addendum A to this Agreement. VI. TERM, TERMINATION, AND CHANGE OF CONTROL 6.1 TERM AND TERMINATION. This Agreement shall be effective on March 1, 1996 and shall continue in effect until December 31, 2004, and shall continue thereafter unless prior to December 31, 2002, a party to this Agreement delivers to the other parties a written notice that such party intends to cease participation and terminate the Agreement as to it on December 31, 2004 or as of a specified date thereafter. This Agreement may be terminated by a party to this Agreement, as to such party's participation in the Agreement, effective after December 31, 2004, provided that such party has given written notice of termination to the others at least two (2) years prior to the proposed termination date. 6.2 CHANGE OF CONTROL OF ALFC. In the event of a Change of Control (as hereinafter defined in this section) of ALFC, either Mutual or AGI may, in its sole discretion, at any time after such Change of Control: (i) terminate the Intercompany Operating Agreement ("IOA Agreement") and this Agreement upon six (6) months notice to ALFC; (ii) extend the term of the IOA Agreement and this Agreement for up to ten (10) additional years beyond December 31, 2004 upon six (6) months notice to ALFC; or (iii) allow such agreements to continue in effect. "Change of Control" for purposes of this section shall mean an event whereby a person, group, or entity that is not affiliated with ALFC or Mutual acquires the ownership of 50% or more of the voting stock of ALFC. A person, group, or entity "affiliated" with ALFC or Mutual shall mean a person, group, or entity that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with ALFC or Mutual. 6.3 CHANGE OF CONTROL OF AGI. (a) In the event of a Change of Control (as hereinafter defined in this section) of AGI, Mutual may, in its sole discretion, at any time after such Change of Control: (i) terminate all three of the Pooling Agreement, IOA Agreement, and 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" 113 for purposes of this section shall mean an event whereby a person, group, or entity that is not affiliated with AGI or Mutual acquires the ownership of 50% or more of the voting stock of AGI. A person, group, or entity "affiliated" with AGI or Mutual shall mean a person, group, or entity that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with AGI or Mutual. (b) In the event of a Change of Control (as hereinafter defined in this section) of AGI, ALFC may, in its sole discretion, at any time after such Change of Control: (i) terminate both the IOA Agreement and this Agreement upon six (6) months notice to AGI; (ii) extend the term of the IOA Agreement and this Agreement for up to ten (10) additional years beyond December 31, 2004 upon six (6) months notice to AGI; or (iii) allow such agreements to continue in effect. "Change of Control" for purposes of this section shall mean an event whereby a person, group, or entity that is not affiliated with AGI or Mutual acquires the ownership of 50% or more of the voting stock of AGI. A person, group, or entity "affiliated" with AGI or Mutual shall mean a person, group, or entity that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with AGI or Mutual. VII. DISPUTE RESOLUTION 7.1 AGI AND ITS SUBSIDIARIES. Any controversy, claim, or dispute arising out of or relating to this Agreement, or breach thereof, among or between AGI and Its Subsidiaries shall be resolved by AGI's Board of Directors, the decision of which shall be binding. 7.2 MUTUAL AND ITS SUBSIDIARIES. Any controversy, claim, or dispute arising out of or relating to this Agreement, or breach thereof, among or between Mutual and Its Subsidiaries shall be resolved by Mutual's Board of Directors, the decision of which shall be binding. 7.3 ALFC AND ITS SUBSIDIARIES. Any controversy, claim, or dispute arising out of or relating to this Agreement, or breach thereof, among or between ALFC and Its Subsidiaries shall be resolved by ALFC's Board of Directors, the decision of which shall be binding. 7.4 ALL OTHER DISPUTES. All other disputes under this Agreement shall be referred for resolution to the Coordinating Committee. Each of the coordinating committees of Mutual, AGI, and ALFC (a) has the right to participate in each and every Coordinating Committee deliberation unless it elects to abstain therefrom and (b) has one vote which shall be cast for or against any such decision unless it elects to abstain. Each such coordinating committee shall be comprised of two persons, one of whom shall constitute a 114 quorum for the transaction of any business. All decisions of the Coordinating Committee must be unanimous, except for abstentions. All decisions of the Coordinating Committee are binding on the parties hereto. 7.5 ARBITRATION. If a controversy, claim, or dispute cannot be resolved by the Coordinating Committee pursuant to Section 7.4, then it will be submitted to arbitration as set forth hereafter. (a) Consent to Arbitration. Each party to this Agreement hereby consents and agrees that any dispute between the parties hereto with respect to the interpretation, performance, or breach of any of the terms of this Agreement or the transactions contemplated hereby which cannot be resolved by the Coordinating Committee shall be referred to arbitration conducted in accordance with the rules and procedures of the American Arbitration Association ("AAA"), upon written request of the disputing party hereto delivered to the party with which it has a dispute. Within thirty (30) days of the delivery of such written notice, each party involved shall nominate an AAA-licensed arbitrator (the "Party Arbitrators"). Within thirty (30) days of their nomination, if there are two Party Arbitrators, the Party Arbitrators shall select a third AAA-licensed arbitrator (the "Third-Arbitrator") and shall give the parties hereto written notice of such choice. If there are three parties to the dispute and each party selects a Party Arbitrator, the three Party Arbitrators selected shall constitute the Arbitrators without further selection. If there are more than three parties to the dispute, the parties to this Agreement agree that Mutual shall represent Mutual and Its Subsidiaries, ALFC shall represent ALFC and Its Subsidiaries, and AGI shall represent AGI and Its Subsidiaries. (b) Authority of Arbitrators. The arbitrators shall be empowered to decide all issues submitted to arbitration using principles of law and equity and, if required, by application of any customary practices in the insurance and reinsurance industries. The arbitrators shall be relieved of all judicial formalities and shall not be required to follow any rules of evidence except as such rules may be imposed on arbitration proceedings conducted in accordance with the laws of the State of Iowa, but the arbitrators shall attempt to enforce the intents and purposes of this Agreement to the extent practicable and in accordance with Iowa law. The decision of a majority of the arbitrators shall be final and binding on each of the parties to the arbitration proceeding. (c) Expenses; Location. Each party to the dispute shall bear the expenses of its respective Party Arbitrator. If only two parties are involved in the arbitration, the involved parties shall jointly share all other expenses of the arbitration proceeding and the expenses of the Third Arbitrator. The arbitration proceeding shall take place at Des Moines, Iowa unless another location is mutually agreed upon by the parties. The arbitration proceeding 115 shall be governed by the laws of the State of Iowa. The parties hereto hereby agree that any information respecting any matters submitted to arbitration in accordance with the foregoing or any aspect of the arbitration proceeding itself shall be treated as confidential and will not be disclosed to anyone not employed or acting on behalf of a party hereto in connection with such arbitration or used at any time in any manner that is adverse to the interests of either party hereto but, in any such case, such information may be disclosed if such disclosure is made in connection with either party's prosecution or defense of any legal proceedings or if such disclosure is required pursuant to a subpoena or other legal order issued by any judicial or regulatory body or is otherwise required by law. (d) Restriction. Anything set forth herein to the contrary notwithstanding, with respect to any issue to be determined by arbitration, each of the parties to the arbitration proceeding shall submit in writing to the arbitrators the party's proposed resolution of such issue. The arbitrators shall be constrained in their decision relating to such issue to select only between the proposed resolutions of the parties, and the arbitrators shall have no discretion to fashion any compromise or other resolution of the issue submitted for arbitration. VIII. CONFIDENTIAL INFORMATION AND TRADE SECRETS 8.1 OBLIGATION TO KEEP CONFIDENTIAL. (a) Each party to this Agreement shall keep confidential, except as the other party or parties may otherwise consent in writing, and, except for the other parties' benefit, not disclose or make any use of at any time and for any purpose whatsoever, any trade secrets, confidential information, knowledge, data, trademarks or trade names, or other information of any of the Companies to their products, know-how, designs, customer lists, business plans, marketing plans and strategies, pricing strategies, or other subject matter pertaining to any business of the Companies or any of their clients, customers, consultants, licensees, or affiliates, which the party has obtained or may obtain, or otherwise acquire during the course of contacts, discussions, negotiation, or agreement with any of the other parties, except as herein provided (hereafter, collectively, "Confidential Information"). No party shall deliver, reproduce, or in any way allow any Confidential Information of the other parties or any documentation relating thereto, to be delivered to or used by any third parties without specific written direction or consent of a duly authorized officer of the other party. (b) Upon termination of this Agreement for any reason whatsoever each party shall promptly surrender and deliver to each other party all records, materials, equipment, drawings, documents, data, and all Confidential 116 Information of the other parties and shall not retain any description containing or pertaining to any Confidential Information of the other parties, unless otherwise consented to in writing by a duly authorized officer of the other party. 8.2 PERMISSIVE RELEASE OF CONFIDENTIAL INFORMATION. Notwithstanding the provisions of this section, any Confidential Information may be used in connection with any arbitration relating to the transactions contemplated by this Agreement and such information may be disclosed if such disclosure is made in connection with the parties' prosecution or defense of any legal proceedings or if such disclosure is required pursuant to a subpoena or other legal order issued by any judicial or regulatory body or is otherwise required by law. IX. MISCELLANEOUS 9.1 ASSIGNMENT. This Agreement, including any or all rights and obligations hereunder, shall not be assigned by any of the parties to any third party without the prior written consent of all of the other parties. Except as otherwise provided in this Agreement, the obligations and rights of the parties shall be binding upon and inure to the benefit of any assignee, transferee, successor, or receiver of each of the parties. 9.2 WAIVER; REMEDIES. No delay or omission of any party to this Agreement to exercise any right or power hereunder shall impair such right or power or be a waiver of any default or an acquiescence therein; and any single or partial exercise of any such right or power shall not preclude other or further exercise thereof or the exercise of any other right. In addition to any rights granted herein, the parties hereto shall have and may exercise any and all rights and remedies now or hereafter provided by law except as may be limited by Section 7 of this Agreement. 9.3 NOTICES. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or if mailed by certified or registered mail (return receipt requested) to the party at its address as set forth on the signature page of this Agreement. Any notice given as provided in this section, if given personally, shall be effective upon delivery, or if given by certified or registered mail, shall be effective three days after deposit in the mail. Any party hereto may change the address at which it is to be given notice by giving notice to the other party as provided in this section. 9.4 GOVERNING LAW. This Agreement shall be deemed to be a contract made under the laws of the State of Iowa and shall be construed and interpreted under the laws of such state applicable to contracts made and to be performed entirely within such state. 117 9.5 ENFORCEABILITY. If any one or more of the covenants, agreements, provisions, or other terms of this Agreement shall be for any reason whatsoever determined to be invalid, then such terms shall be deemed severable from the remaining terms of this Agreement and shall in no way affect the validity or enforceability of the other terms of this Agreement and such invalid terms shall be replaced by valid terms bearing the closest possible similarity in substance so that the intentions and purposes being the basis of this Agreement could be enforced to the greatest extent permitted by law. 9.6 SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND COVENANTS. All covenants, agreements, representations, and warranties made in this Agreement by any of the parties hereto, including but not limited to, the indemnification provisions set forth herein, shall be effective on the effective date hereof and thereafter. 9.7 COUNTERPARTS. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.8 HEADINGS. The headings in the sections and subsections of this Agreement are inserted for convenience only and shall not constitute a part hereof. 9.9 ENTIRE AGREEMENT. This Agreement, including the schedules and addenda referred to herein and any documents executed by the parties simultaneously herewith constitute the entire understanding and agreement of the parties hereto and supersede all other prior agreements and understandings, written or oral, between the parties with respect to the transactions contemplated herein. Provided, however, the foregoing shall not operate or be construed to prohibit proof of prior understandings and agreements between or among the parties to the extent necessary to properly construe or interpret this Agreement. 9.10 AMENDMENTS. Any changes to this Agreement and any further obligations of the parties to each other must be in writing and executed by their respective duly authorized officers. IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Management Information Services Agreement to be signed by their duly-authorized officers all as of the date and year first written above. ALLIED Mutual Insurance Company ALLIED Group, Inc. 701 5th Ave. 701 5th Ave. Des Moines, IA 50391-2000 Des Moines, IA 50391-2000 By: /s/ Douglas L. Andersen By: /s/ Jamie H. Shaffer ---------------------------- ---------------------------- Title: President Title: President (Financial) ------------------------- ------------------------- 118 AMCO Insurance Company ALLIED General Agency Company 701 5th Avenue 701 5th Ave. Des Moines, IA 50391-2013 Des Moines, IA 50391-2002 By: /s/ Douglas L. Andersen By: /s/ Douglas L. Andersen ---------------------------- ---------------------------- Title: President Title: President ------------------------- ------------------------- ALLIED Life Financial ALLIED Group Leasing Corporation Corporation 701 5th Ave. 701 5th Ave. Des Moines, IA 50391-2003 Des Moines, IA 50391-2015 By: /s/ Samuel J. Wells By: /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/ Jamie H. Shaffer By: /s/ Samuel J. Wells ---------------------------- ---------------------------- Title: Secretary Title: President ------------------------- ------------------------- ALLIED Group Merchant Banking ALLIED Group Insurance Corporation Marketing Company 701 5th Ave. 701 5th Ave. Des Moines, IA 50391-2003 Des Moines, IA 50391-2010 By: /s/ Paul McGillivray By: /s/ Jamie H. Shaffer ---------------------------- ---------------------------- Title: President Title: Treasurer ------------------------- ------------------------- ALLIED Group Information ALLIED Life Brokerage Agency Systems, Inc. 701 5th Ave. 701 5th Ave. Des Moines, IA 50391-2003 Des Moines, IA 50391-1002 By: /s/ Jamie H. Shaffer By: /s/ Samuel J. Wells ---------------------------- ---------------------------- Title: Secretary Treasurer Title: President ------------------------- ------------------------- The Freedom Group, Inc. Midwest Printing Services, Ltd. 701 5th Ave. 3820 109th St. Des Moines, IA 50391-1002 Des Moines, IA 50391-1003 By: /s/ Jamie H. Shaffer By: /s/ Leslie D. Peltz ---------------------------- ---------------------------- Title: Secretary Treasurer Title: Treasurer ------------------------- ------------------------- 119 ADDENDUM A I. ALLIED LIFE. ALLIED Life shall pay AMCO 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. (c) ALLIED Life shall also pay fees in accordance with Sections VII through XI of this Addendum. (d) ALLIED Life shall reimburse AMCO for the actual costs AMCO incurs on a monthly basis for providing ALLIED Life the services provided under Sections 3.1 ("General MIS"), 3.2 ("PC Support"), 3.7 (a) ("Printing--Forms and Reports"), and 3.8 ("Policy Assembly"). In order to reimburse AMCO for the cost of these services, ALLIED Life will forward $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, AMCO will calculate its actual cost of providing these services and compare it to the monthly payments forwarded to AMCO 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 AMCO. If the total actual costs are less than the total monthly payments made, AMCO will promptly refund the difference to ALLIED Life. The aforementioned fees shall be renegotiated by ALLIED Life and AMCO each calendar year. If ALLIED Life and AMCO 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. II. AGI HUMAN RESOURCES. For the services provided by AMCO to AGI's human resources department under Sections 3.1 ("General MIS"), 3.2 ("PC Support"), and 3.7(a) ("Printing--Forms and Reports"), AGI shall pay to AMCO $42.00 per hour for Programming/Development time and $40.00 per hour for Methods/Procedures time. Each year, beginning January 1, 1997, 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 X of this Addendum. III. AGIMC. AGIMC shall pay AMCO for services under this Agreement in accordance with the following: (a) For the services provided under Sections 3.1 ("General MIS") and 3.2 ("PC Support"), AGIMC shall pay to AMCO $42.00 per hour for Programming/Development time and $40.00 per hour for Methods/Procedures. Such fees shall be billed and paid monthly. 120 Each year, beginning January 1, 1996, this hourly rate shall be recalculated based upon estimated costs for the year in question. (b) If applicable, AGIMC shall also pay fees in accordance with Sections VII through XI of this Addendum. IV. AGMC. AGMC shall pay to AMCO for services under this Agreement in accordance with the following: (a) For the services provided under Section 3.4 ("AGMC Scanline Processing") the fee of .089 dollars ($.089) for each payment form processed daily. In the event of any dispute as to the amount due under the per item charge, AMCO's records shall control. AMCO will bill AGMC monthly for the per item processing charges. Such amount shall be immediately due and payable upon receipt by AGMC. (b) If applicable, AGMC shall also pay fees in accordance with Sections VI through X of this Addendum. V. PROGRAMMING. Each of the Companies (except as may be provided elsewhere for ALLIED Life, AGI, and AGIMC) which request that AMCO provide Programming/Development services shall pay a rate of $42.00 per hour. Each of the Companies (except for ALLIED Life, AGI, and AGIMC) which request that AMCO provide Methods/Procedures services shall pay $40.00 per hour. Such fees shall be billed and paid monthly. Each year, beginning January 1, 1997, this hourly rate shall be recalculated based upon estimated costs for the year in question. VI. TYPESETTING/OTHER PRINTING. The Companies which request that AMCO provide typesetting services in accordance with Section 3.7(b) ("Printing--Typesetting/Other Printing") shall pay a rate of $22.00 per hour. Such fees shall be billed and paid monthly. Any other printing services shall be provided by AMCO to any of the Companies for a fee to be negotiated between AMCO and such company in addition to the fees specified in this Addendum A. VII. PC MAINTENANCE. If AMCO 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 AMCO the third-party vendor's actual charges as billed to AMCO. VIII. POSTAGE/MAIL PROCESSING. For the services provided under Section 3.9, the Companies which have offices located in Polk County, State of Iowa, shall pay AMCO for mail processing as follows: (a) the Companies shall reimburse AMCO for the actual cost of postage utilized, 121 (b) if AMCO performs any mail inserting services for any of the Companies, such Companies shall pay AMCO $0.032 per item, (c) if AMCO performs any proof of mail services for any of the Companies, such Companies shall pay AMCO $0.057 per item, (d) if AMCO performs any outgoing mail sorting services for any of the Companies, such Companies shall pay AMCO $0.0225 per item, (e) if AMCO performs incoming mail sorting services for any of the Companies, such Companies shall pay AMCO $0.0225 per item, (f) if AMCO performs special handling services in mail processing, it will be billed at $0.051 per item, (g) if AMCO performs remittance processing, it will be billed at $0.089 per item, and, (h) if AMCO performs a manual look up requested by one of the Companies the fee is $0.54 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 AMCO provide telephone/communications equipment under Section 3.11 ("Telephone and Communications") shall pay to AMCO 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. AMCO shall pay any sales, use, and personal property taxes which may be due and owing with respect to the services provided under this Agreement. AMCO shall receive reimbursement from the appropriate Companies for any sales or use tax paid. EX-10 5 10.8 FIRST AMENDMENT TO MIS AGREEMENT 3/1/96 122 EXHIBIT 10.8 FIRST AMENDMENT TO AMENDED AND RESTATED MANAGEMENT INFORMATION SERVICES AGREEMENT Effective March 1, 1996 This First Amendment ("amendment") to the Amended and Restated Management Information Services Agreement ("Agreement") is made as of this 24th day of February, 1997, to be effective March 1, 1996, (unless a different effective date is indicated) by and among AMCO Insurance Company ("AMCO"), ALLIED Group Information Systems, Inc. ("AGIS"), ALLIED Mutual Insurance Company ("Mutual"), ALLIED Group, Inc. ("AGI"), ALLIED General Agency Company ("AGA"), ALLIED Group Mortgage Company ("AGMC"), ALLIED Group Leasing Corporation ("AGLC"), ALLIED Life Financial Corporation ("ALFC"), ALLIED Life Insurance Company ("ALLIED Life"), ALLIED Life Brokerage Agency ("ALBA"), ALLIED Group Merchant Banking Corporation ("AGMBC"), ALLIED Group Insurance Marketing Company ("AGIMC"), The Freedom Group, Inc. ("TFG"), and Midwest Printing Services, Ltd. ("Midwest Printing"). AGIS, AGI, AGA, AGMC, AGLC, ALFC, ALLIED Life, ALBA, AGMBC, AGIMC, TFG, and Midwest Printing shall be hereinafter referred to collectively as the "Companies". WITNESSETH: WHEREAS, AGIS, Mutual, AGI, AMCO, AGA, AGMC, AGLC, ALFC, ALLIED Life, ALBA, AGMBC, TFG, Midwest Printing, and AGIMC entered into an Amended and Restated Management Information Services Agreement effective March 1, 1996 on January 24, 1997; and WHEREAS, Section I of Addendum A to the Agreement was not accurate in stating certain fees for ALLIED Life; WHEREAS, Section IX of the Agreement allows amendment of the Agreement in writing and executed by the parties; NOW, THEREFORE, in consideration of the foregoing premises, and for and in consideration of the mutual covenants and agreements contained herein, the parties agree as follows: 1. The Agreement is hereby amended by deleting Section I(a) of the Addendum and inserting in place thereof the following: (a) $37.50 per hour for Programming/Development time and Methods/Procedures time from March 1, 1996 through May 13, 1996 when the programmers became ALLIED Life employees and no charge thereafter. 123 2. The Agreement is hereby amended by deleting Section I(d) of the Addendum and inserting in place thereof the following: (d) ALLIED Life shall reimburse AMCO for the actual costs AMCO incurs on a monthly basis for providing ALLIED Life the services provided under Sections 3.1 ("General MIS"), 3.2 ("PC Support"), 3.7 (a) ("Printing--Forms and Reports"), and 3.8 ("Policy Assembly"). In order to reimburse AMCO for the cost of these services, ALLIED Life will forward $50,000.00 at the end of each month as an estimation of the costs of providing the services for that month. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to the Amended and Restated Management Information Services Agreement to be signed by their duly-authorized officers all as of the date and year first written above. ALLIED Mutual Insurance Company ALLIED Group, Inc. 701 5th Ave. 701 5th Ave. Des Moines, IA 50391-2000 Des Moines, IA 50391-2000 By: /s/ Douglas L. Andersen By: /s/ Jamie H. Shaffer ----------------------------- ---------------------------- Title: President Title: President (Financial) -------------------------- ------------------------- AMCO Insurance Company ALLIED General Agency Company 701 5th Avenue 701 5th Ave. Des Moines, IA 50391-2013 Des Moines, IA 50391-2002 By: /s/ Douglas L. Andersen By: /s/ Jamie H. Shaffer ----------------------------- ---------------------------- Title: President Title: Treasurer -------------------------- ------------------------- 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/ Samuel J. Wells By: /s/ Jamie H. Shaffer ----------------------------- ---------------------------- Title: President Title: President -------------------------- ------------------------- 124 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/ Jamie H. Shaffer By: /s/ Samuel J. Wells ----------------------------- ---------------------------- Title: Secretary Title: President -------------------------- ------------------------- ALLIED Group Merchant Banking ALLIED Group Insurance Corporation Marketing Company 701 5th Ave. 701 5th Ave. Des Moines, IA 50391-2003 Des Moines, IA 50391-2010 By: /s/ Paul McGillivray By: /s/ Jamie H. Shaffer ----------------------------- ---------------------------- Title: President Title: Treasurer -------------------------- ------------------------- ALLIED Group Information ALLIED Life Brokerage Agency Systems, Inc. 701 5th Ave. 701 5th Ave. Des Moines, IA 50391-2003 Des Moines, IA 50391-1002 By: /s/ Jamie H. Shaffer By: /s/ Samuel J. Wells ----------------------------- ---------------------------- Title: Secretary Treasurer Title: President -------------------------- ------------------------- The Freedom Group, Inc. Midwest Printing Services, Ltd. 701 5th Ave. 3820 109th St. Des Moines, IA 50391-1002 Des Moines, IA 50391-1003 By: /s/ Jamie H. Shaffer By: /s/ Leslie D. Peltz ----------------------------- ---------------------------- Title: Secretary Treasurer Title: Treasurer -------------------------- ------------------------- EX-10 6 10.54 CONSULTING AGREEMENT 125 EXHIBIT 10.54 AMENDMENT TO CONSULTING AGREEMENT THIS AMENDMENT is made this 18th day of December, 1996, by and between John E. Evans ("Evans") and ALLIED Group, Inc. ("AGI"), ALLIED Mutual Insurance Company ("Mutual"), and ALLIED Life Financial Corporation ("ALFC"). AGI, Mutual, and ALFC shall be known collectively as "ALLIED". WHEREAS, on December 14, 1994, ALLIED and Evans entered into a Consulting Agreement setting forth the services which Evans was to render to ALLIED following his retirement; WHEREAS, the parties desire to amend the Consulting Agreement as set forth herein; NOW, THEREFORE, in consideration of the foregoing, and of the mutual covenants set forth below and other valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Section IV of the Consulting Agreement is amended to add new subsection (c) as follows: (c) Payment of expenses associated with income tax preparation and other tax services, provided that ALLIED may review Evans' tax returns at any time. 2. Subsection (a) of Section V of the Consulting Agreement is amended to read as follows: (a) the mutual agreement of the parties; 3. The last sentence of Section V of the Consulting Agreement which begins "If this Agreement has..." is deleted in its entirety. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year above first written. ALLIED Mutual Insurance Company /s/ John E. Evans By:/s/ Douglas L. Andersen - -------------------------------- ------------------------------ John E. Evans Its: President ----------------------------- ALLIED Group, Inc. ALLIED Life Financial Corporation By:/s/ Jamie H. Shaffer By:/s/ Samuel J. Wells ----------------------------- ------------------------------ Its: President (Financial) Its: President ---------------------------- ----------------------------- EX-10 7 10.55 SHORT TERM MGMT INCENTIVE PLAN 96 126 EXHIBIT 10.55 ALLIED GROUP SHORT TERM MANAGEMENT INCENTIVE PLAN 1. PURPOSE ------- This ALLIED Group Short Term Management Incentive Plan (the "Plan") is effective January 1, 1997. The purpose of this Plan is to encourage outstanding performance by certain key employees of ALLIED 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) "Consolidated TFG" shall mean The Freedom Group, Inc. and ALLIED Group Information Systems, Inc. (h) "Discretionary Award" is the increment above the Guaranteed Award which is awarded to a Participant based on the discretion of the Committee. (i) "DPW" is direct premiums written, net of return premiums, as reported in the 1997 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, 127 DPW shall exclude any premiums generated from business that is purchased by AGIMC from another entity, unless the Committee determines otherwise. (j) "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 $26,750,000). $1,750,000 = $26,750,000 - $25,000,000 (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 ($25,000,000) and Goal ($28,500,000). 50% = $1,750,000 / ($28,500,000 - $25,000,000) 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. (k) "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. 128 (l) "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. (m) "Goal" is the expected level of performance used to establish targeted awards as approved by the Committee. (n) "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: Consolidated TFG - total revenues for TFG and AGIS TFG - total revenues for TFG AGIS - total revenues for AGIS Midwest Printing Services - percentage increase in total revenues (o) "Guaranteed Award" is guaranteed to Participants and is 75% of their Eligible Individual Award. (p) "Maximum" is the level of performance at which the maximum eligible award could be made. (q) "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. (r) "Operating Profit" is calculated on a GAAP basis, includes net realized investment gains/losses, and is after income taxes. (s) "Participant" is a key employee of AGI recommended by the President(s) of AGI and approved by the Committee to participate in this Plan. (t) "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. (u) "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" Consolidated TFG - net income after tax including subsidiaries TFG - net income after tax excluding subsidiaries AGIS - net income after tax 129 (v) "Regional Office Operating Profit" is the Regional Office Operating Statement GAAP net income. (w) "TFG" means The Freedom Group, Inc. (x) "Threshold" is the minimum level of performance that will warrant an award. (y) "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) Regional Vice Presidents Subsidiary Presidents Profit Center Officers Tier II Regional Office Managers and Subsidiary Officers Tier III Primary Corporate Staff Vice Presidents Tier IV Subsidiary Managers Corporate Staff Vice Presidents and Officers Tier V Subsidiary Managers Tier VI Subsidiary Managers Regional Office 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. 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 130 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. 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. 131 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 where such change in corporate structure would adversely affect a Participant, the Committee may adjust or amend the Plan so as not to disadvantage a Participant. In the event that a change in accounting rules or procedures would affect the goals set forth in Exhibit A or the eligible award percentages set forth in Exhibit B, and where such change in accounting rules or procedures would adversely affect or create a windfall for a Participant, the Committee may adjust or amend the Plan. 13. ADMINISTRATION -------------- All matters pertaining to the administration of this Plan will be the responsibility of the Committee, and any decisions of the Committee shall be conclusive and binding. This includes all matters of interpretation, areas not specified in the Plan, and any other issues that may affect the Plan. 14. GOVERNING LAW ------------- The Plan will be administered, enforced, construed, and interpreted in accordance with the laws of the State of Iowa. 132 EXHIBIT A GOALS
Threshold Goal Maximum --------- ---- ------- PROFIT - ------ Regional Offices: DMRO $25,000,000 $28,500,000 $32,000,000 LRO $11,000,000 $12,500,000 $14,000,000 RMRO $6,000,000 $7,000,000 $8,000,000 PCRO $16,500,000 $19,000,000 $21,500,000 Bonds $675,000 $700,000 $725,000 Staff (1) $61,000,000 $70,500,000 $80,000,000 AGMC $2,400,000 $2,700,000 $3,000,000 WHIC $6,000,000 $7,000,000 $8,000,000 ALLIED General Agency $25,000 $30,000 $35,000 TFG (2) $800,000 $920,000 $1,040,000 AGIS (2) $400,000 $475,000 $550,000 Consolidated TFG (2) $1,200,000 $1,395,000 $1,590,000 Midwest Printing Services $275,000 $350,000 $425,000 AGIMC 87.5% 89% 90.5% GROWTH - ------ Regional Offices, Bonds, AGIS, and Staff in DPW 10% 12.5% 15% AGIMC DPW 18% 22% 26% Midwest Printing Services 10% 14% 18% TFG (2) $10,000,000 $11,000,000 12,000,000 AGIS (2) $11,000,000 $12,500,000 $14,000,000 Consolidated TFG (2) $21,000,000 $23,500,000 $26,000,000 - -------------------- (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 either TFG or AGIS 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
133 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: (2) 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% - ------------------- (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 10.56 LONG TERM MGMT INCENTIVE PLAN 134 EXHIBIT 10.56 AMENDMENT DATED DECEMBER 16, 1996 ALLIED GROUP, INC. LONG-TERM MANAGEMENT INCENTIVE PLAN The ALLIED Group, Inc. Long-Term Management Incentive Plan (the "Plan") was amended by the Executive Committee of the Board of Directors of ALLIED Group, Inc. (the "Company") on December 16, 1996, to reflect the changes set forth below. Capitalized terms used herein shall have the meaning as assigned thereto in the Plan. 1. Definition of Window Period. The definition of "Window Period" as set forth in Article 2, subsection "ad", is deleted in its entirety. 2. Committee. The references to Rule 16b-3(c)(2) in the second paragraph of Section 3.1 are amended to read "Rule 16b-3". 3. Six-Month Holding Period. The second paragraph of Section 6.7 of the Plan is amended by the deletion of the parenthetical "(provided that the Shares which are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price)". 4. Rule 16b-3 Requirements. Section 7.9 of the Plan is deleted in its entirety and shall remain reserved for future use. 5. Amendment and Shareholder Approval. Section 11.1 of the Plan is amended to read in its entirety as follows: The Board may at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part; provided, that no amendment which requires shareholder approval in order for the Plan to continue to satisfy the requirements of Section 422 of the Code, shall be effective unless such amendment shall be approved by the requisite vote of shareholders of the Company entitled to vote thereon. 6. Share Withholding. Section 12.2 of the Plan is amended to read in its entirety as follows: With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon any other taxable event hereunder, Participants may elect to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date of the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction. All elections shall be irrevocable, made in writing, and signed by the Participant. 7. Requirements of Law. The second paragraph of Section 15.3 of the Plan is deleted in its entirety. 8. Securities Law Compliance. The first sentence of Section 15.4 of the Plan is amended to read in its entirety as follows: With respect to Insiders, transactions under this Plan are intended to comply with the applicable conditions of Rule 16b-3 or its successors under the 1934 Act. EX-10 9 10.57 OUTSIDE DIRECTOR STOCK PURCHASE PLAN 135 EXHIBIT 10.57 AMENDMENT DATED FEBRUARY 11, 1997 ALLIED GROUP, INC. OUTSIDE DIRECTOR STOCK PURCHASE PLAN The ALLIED Group, Inc. Outside Director Stock Purchase Plan (the "Plan") was amended by the Executive Committee of the Board of Directors of ALLIED Group, Inc. on January 30, 1997, to reflect the change set forth below. Capitalized terms used herein shall have the meaning as assigned thereto in the Plan. CHANGE FROM NASDAQ TO NEW YORK STOCK EXCHANGE. Section 2 of the Plan is amended by the replacement of the definition of "Fair Market Value" with the following: "Fair Market Value" shall be the average of the high and low prices for a share of Common Stock as reported on the New York Stock Exchange Composite Tape, or if no Common Stock was traded on such date, then the last day traded immediately prior to the relevant date. EX-10 10 10.58 NONQUALIFIED STOCK OPTION PLAN 136 EXHIBIT 10.58 AMENDMENT DATED FEBRUARY 11, 1997 ALLIED GROUP, INC. NONQUALIFIED STOCK OPTION PLAN ALLIED Group, Inc. Nonqualified Stock Option Plan (the "Plan") was amended by the Executive Committee of the Board of Directors of ALLIED Group, Inc. on January 30, 1997, to reflect the change set forth below. Capitalized terms used herein shall have the meaning as assigned thereto in the Plan. CHANGE FROM NASDAQ TO NEW YORK STOCK EXCHANGE. Section 2 of the Plan is amended by the replacement of the definition of "Fair Market Value" with the following: "Fair Market Value" shall be the average of the high and low prices for a share of Common Stock as reported on the New York Stock Exchange Composite Tape, or if no Common Stock was traded on such date, then the last day traded immediately prior to the relevant date. EX-10 11 10.59 RESTATED AMENDED STOCK OPTION PLAN 137 EXHIBIT 10.59 AMENDMENT DATED FEBRUARY 11, 1997 ALLIED GROUP, INC. RESTATED AND AMENDED STOCK OPTION PLAN The ALLIED Group, Inc. Restated and Amended Stock Option Plan (the "Plan") was amended by the Executive Committee of the Board of Directors of ALLIED Group, Inc. on January 30, 1997, to reflect the change set forth below. Capitalized terms used herein shall have the meaning as assigned thereto in the Plan. CHANGE FROM NASDAQ TO NEW YORK STOCK EXCHANGE. Section 2 of the Plan is amended by the replacement of the definition of "Fair Market Value" with the following: "Fair Market Value" shall be the average of the high and low prices for a share of Common Stock as reported on the New York Stock Exchange Composite Tape, or if no Common Stock was traded on such date, then the last day traded immediately prior to the relevant date. EX-10 12 10.60 LONG TERM MGMT INCENTIVE PLAN 138 EXHIBIT 10.60 AMENDMENT DATED FEBRUARY 11, 1997 ALLIED GROUP, INC. LONG-TERM MANAGEMENT INCENTIVE PLAN The ALLIED Group, Inc. Long-Term Management Incentive Plan (the "Plan") was amended by the Executive Committee of the Board of Directors of ALLIED Group, Inc. on January 30, 1997, to reflect the change set forth below. Capitalized terms used herein shall have the meaning as assigned thereto in the Plan. CHANGE FROM NASDAQ TO NEW YORK STOCK EXCHANGE. Article 2, paragraph (n) of the Plan is amended by the replacement of the definition of "Fair Market Value" with the following: (n) "Fair Market Value" shall be the average of the high and low prices for a share of Common Stock as reported on the New York Stock Exchange Composite Tape, or if no Common Stock was traded on such date, then the last day traded immediately prior to the relevant date. EX-11 13 11 STMT COMPUTATION OF PER SHARE EARNINGS 139 Exhibit 11 ALLIED Group, Inc. and Subsidiaries Computation of Per Share Earnings For the years ended December 31, 1996, 1995, 1994
1996 1995 1994 ----------------- ----------------- ----------------- PRIMARY Net income $ 51,084,213 $ 52,376,829 $ 47,624,996 Preferred stock dividends (4,110,602) (7,217,294) (7,305,585) ----------------- ----------------- ----------------- Adjusted net income $ 46,973,611 $ 45,159,535 $ 40,319,411 ================= ================= ================= Earnings per share $ 2.42 $ 3.27 $ 2.98 ================= ================= ================= Weighted average shares outstanding 19,408,096 13,806,482 13,512,746 ================= ================= ================= FULLY DILUTED Net income $ 51,084,213 $ 52,376,829 $ 47,624,996 Preferred stock dividends (3,515,118) (3,515,118) (3,515,118) Additional net ESOP expenses- assuming conversion of ESOP Series preferred stock --- (168,545) (303,129) ----------------- ----------------- ----------------- Adjusted net income $ 47,569,095 $ 48,693,166 $ 43,806,749 ================= ================= ================= Earnings per share $ 2.31 $ 2.35 $ 2.12 ================= ================= ================= Weighted average shares outstanding 20,633,175 20,751,736 20,621,597 ================= ================= ================= The dilutive effect of ALLIED's common stock equivalents is less than 3% and have not entered into the earnings per share computations.
EX-21 14 21 SUBSIDIARIES OF THE REGISTRANT 140 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 II. ALLIED Property and Casualty Insurance Company Iowa III. Depositors Insurance Company Iowa IV. ALLIED Group Mortgage Company Iowa V. The Freedom Group, Inc. Iowa A. ALLIED Group Information Systems, Inc. Iowa VII. Midwest Printing Services, Ltd. Iowa EX-23 15 23 CONSENT OF EXPERTS AND COUNSEL 141 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders ALLIED Group, Inc. We consent to incorporation by reference in 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, 33-61090, and 333-19163 on Form S-3 of ALLIED Group, Inc. of our reports dated February 3, 1997, relating to the accompanying consolidated balance sheets of ALLIED Group, Inc. and subsidiaries as of December 31, 1996 and 1995, 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, 1996, which appears in the December 31, 1996 annual report on Form 10-K of ALLIED Group, Inc. KPMG Peat Marwick LLP Des Moines, Iowa March 14, 1997 EX-27 16 FDS -- ARTICLE 7 FDS FOR 10-K
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLIED GROUP, INC.'S DECEMBER 31, 1996 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY SUCH FINANCIAL STATEMENTS 0000774624 ALLIED GROUP, INC. 1,000 US DOLLARS YEAR DEC-31-1996 JAN-31-1996 DEC-31-1996 1 792,268 0 0 20,384 0 0 819,645 1,067 18,183 46,671 1,077,659 362,191 220,596 0 0 34,094 0 37,812 20,383 312,396 1,077,659 493,525 49,222 49 53,558 352,995 108,315 20,438 71,311 20,227 51,084 0 0 0 51,084 2.420 2.310 324,939 353,675 (680) 194,735 136,536 346,663 5,070
-----END PRIVACY-ENHANCED MESSAGE-----