1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission File Number 0-14243
ALLIED Group, Inc.
(Exact name of registrant as specified in its charter)
Iowa
(State or other jurisdiction of incorporation or organization)
42-0958655
(I.R.S. Employer Identification No.)
701 Fifth Avenue, Des Moines, Iowa 50391-2000
(Address of principal executive offices) (Zip Code)
515-280-4211
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 29, 1996 the number of Registrant's Common Stock, no par value,
outstanding was 9,496,465. The aggregate market value of the Common Stock of the
Registrant (based on the average bid and asked prices at closing) held by
nonaffiliates at February 29, 1996 was $392,458,345.
Documents Incorporated By Reference
The Registrant's definitive proxy statement (1996 Proxy Statement), which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1995, is incorporated by reference under Part III.
The index to the exhibits is located on page 78.
This document contains 211 pages.
2
TABLE OF CONTENTS
Part I
Item 1. Business......................................................... 3
Item 2. Properties........................................................18
Item 3. Legal Proceedings.................................................19
Item 4. Submission of Matters to a Vote of Security Holders...............19
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...............................................20
Item 6. Selected Financial Data...........................................21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................22
Item 8. Financial Statements and Supplementary Data.......................30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................59
Part III
Item 10. Directors and Executive Officers of the Registrant................60
Item 11. Executive Compensation............................................60
Item 12. Security Ownership of Certain Beneficial Owners and Management....60
Item 13. Certain Relationships and Related Transactions....................60
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..61
Index to Financial Statement Schedules........................................61
Signatures....................................................................77
Index to Exhibits.............................................................78
3
Part I
Item 1. Business
ALLIED Group, Inc. (the Company) was incorporated in 1971 as an Iowa corporation
and operates as a regional insurance holding company headquartered in Des
Moines, Iowa. At year-end 1995, The ALLIED Group Employee Stock Ownership Trust
owned 26.9% of the outstanding voting stock of the Company. ALLIED Mutual
Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance
company, controlled 18% of the voting stock of the Company. The Company has two
reportable business segments: property-casualty insurance and excess & surplus
lines insurance. Property-casualty insurance was the most significant segment in
1995, accounting for 85.4% of consolidated revenues. The Company's segment
information is contained in note 18 of Notes to Consolidated Financial
Statements.
Property-casualty Insurance
The Company's property-casualty segment operates through three subsidiaries:
AMCO Insurance Company (AMCO), ALLIED Property and Casualty Insurance Company
(ALLIED Property and Casualty), and Depositors Insurance Company (Depositors),
which underwrite personal lines (primarily automobile and homeowners) and small
commercial lines. The property-casualty segment operates exclusively in the
United States; primarily in the central and western states. The segment and
ALLIED Mutual pool their property-casualty business. See notes 4 and 6 of Notes
to Consolidated Financial Statements and "Business-Relationship with ALLIED
Mutual-Pooling Agreement."
A.M. Best has assigned a rating of A+ (superior) to each of the Company's
property-casualty subsidiaries and to ALLIED Mutual for 1995 with respect to
their financial strength and their ability to meet policyholder and other
contractual obligations based on the review of the pool's 1994 statutory results
and operating performance.
The profitability of the property-casualty segment is affected by many factors,
including industry price competition, the severity and frequency of
weather-related claims, the adequacy of prior-year estimates of loss and loss
settlement expense reserves, court decisions that define the extent of coverage
and the compensation awarded for injuries and losses, insurance laws and
regulations, fluctuations in the financial markets, interest rates, reinsurance
costs, and general business and economic conditions.
The Company pursues a strategy of growth in personal lines of insurance, which
it sells predominantly in central and western United States, primarily through a
system of more than 2,100 independent agencies, a growing number of which
represent the property-casualty subsidiaries of the Company on an exclusive
basis for their personal lines of insurance. For the year ended December 31,
1995, 65.7% of the property-casualty subsidiaries' net earned premiums were
attributable to personal lines of insurance. While the majority of the Company's
revenues are attributable to personal lines, the Company also writes commercial
lines of insurance for small businesses through such agents. Because the
Company's primary focus, and primary market served by its independent agency
force, is personal lines of insurance and because the Company perceives the
risks to be greater in commercial lines, the Company has been conservative in
the types of commercial risks it underwrites and in the pricing therefor.
Historically, this has resulted in the Company writing less commercial business
than it might otherwise have if it adopted a more aggressive strategy in
commercial lines. It has also resulted in a lower combined ratio for the
commercial lines compared with its core personal lines business.
The property-casualty segment markets its products through three distribution
systems: independent agencies, exclusive agencies, and direct response
marketing. Generally, AMCO writes, through independent agencies, personal and
commercial property-casualty insurance lines, consisting primarily of private
passenger automobile and homeowners, with lesser emphasis on special multiple
peril, workers' compensation, inland marine, and other miscellaneous lines of
business. ALLIED Property and Casualty generally writes personal lines insurance
products through agents who sell ALLIED Property and Casualty personal lines
exclusively, and Depositors generally writes personal lines through a direct
mail and telemarketing agency, ALLIED Group Insurance Marketing Company, an
affiliate of ALLIED Mutual.
4
Neither the insurance subsidiaries in the property-casualty segment nor ALLIED
Mutual appoint managing general agents, and each retains all underwriting,
claims, and reinsurance authority. While the insurers provide contractual
binding authority to most agents, such authority is subject to express
limitations on the nature, type, and extent of each risk. With respect to the
ability of the agents to bind the insurers, the insurers have no right to reject
any contracts entered into by the agents even if the agent exceeds the express
limitations; however, such instances occur infrequently, and constitute no
material financial risk to the Company.
The pooling agreement provides that ALLIED Mutual, ALLIED Property and Casualty,
and Depositors cede to AMCO (pool administrator) premiums, losses, allocated
loss settlement expenses, commissions, premium taxes, service charge income, and
dividends to policyholders and assume from AMCO an amount of this pooled
property-casualty business equal to their participation in the pooling
agreement. ALLIED Mutual's crop hail business is not pooled. AMCO pays certain
underwriting expenses, unallocated loss settlement expenses, and premium
collection expenses for all of the pool participants and receives a fee equal to
a specified percentage of premiums as well as a contingent fee based on the
attainment of certain combined ratios from each of the pool participants.
The pooling arrangement provides ALLIED Mutual, ALLIED Property and Casualty,
and Depositors more predictable expense levels by limiting such expenses to a
specified percentage of their premiums. AMCO has opportunities to profit from
the efficient administration of such underwriting, loss settlement, and premium
collection activities and to provide similar services to nonaffiliated insurance
companies in the future. The property-casualty segment's participation in the
pool in 1995, 1994, and 1993 was 64%. As of December 31, 1995, the statutory
capital and surplus of ALLIED Mutual and AMCO was $229,848,488 and $196,568,115,
respectively.
The following table sets forth statutory basis and generally accepted accounting
principles (GAAP) basis information for the Company's property-casualty
subsidiaries for the years indicated.
At or for the year ended December 31,
--------------------------------------------
1995 1994 1993
----------- ----------- ----------
(dollars in thousands)
Reinsurance pool percentage 64% 64% 64%
Net written premiums $ 440,838 $ 403,066 $ 370,218
=========== =========== ==========
Earned premiums $ 425,838 $ 386,732 $ 344,322
Losses and loss settlement expenses 295,583 268,302 242,208
Underwriting expenses 114,511 110,259 105,707
----------- ----------- ----------
Statutory underwriting gain (loss) 15,744 8,171 (3,593)
GAAP adjustments 1,943 1,637 4,204
----------- ----------- ----------
GAAP underwriting gain 17,687 9,808 611
Investment income excluding realized gains 39,110 35,279 33,471
Realized investment gains 236 2,956 1,293
Other income 6,850 6,143 5,527
----------- ----------- ----------
Income before income taxes $ 63,883 $ 54,186 $ 40,902
=========== =========== ==========
GAAP combined ratio 95.8 97.5 99.8
Wind and hail losses $ 28,664 $ 24,383 $ 18,737
Impact of wind and hail losses on combined ratio 6.7 6.3 5.4
Invested assets $ 658,044 $ 565,490 $ 511,464
Statutory loss and loss settlement expense reserves $ 277,819 $ 252,608 $ 229,649
Statutory capital and surplus $ 257,845 $ 233,407 $ 208,273
5
The underwriting experience of the pool is indicated by the statutory combined
ratio, a measure of underwriting profitability which excludes investment income
and income taxes. Generally, a ratio below 100 indicates underwriting
profitability and a ratio exceeding 100 indicates an underwriting loss. The
following table sets forth the net earned premiums and the statutory combined
ratios (after policyholder dividends) by line of insurance business for the
property-casualty segment for the years indicated.
Year ended December 31,
---------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- -------------------------
Net Statutory Net Statutory Net Statutory
earned combined earned combined earned combined
premiums ratio premiums ratio premiums ratio
----------- ---------- ---------- --------- ---------- ---------
Line of business (dollars in thousands)
Personal automobile $ 208,873 96.5 $ 192,712 97.4 $ 174,243 98.3
Homeowners 71,035 99.2 60,204 107.4 51,351 109.1
----------- ---------- ----------
Personal lines 279,908 97.2 252,916 99.8 225,594 100.8
----------- ---------- ----------
Commercial automobile 23,873 95.2 22,384 98.4 20,526 90.5
Workers' compensation 29,443 70.2 28,251 83.3 24,291 96.3
Other property and liability 90,302 100.2 80,908 94.0 71,723 99.5
Other lines 2,312 50.2 2,273 66.6 2,188 47.6
----------- ---------- ----------
Commercial lines 145,930 92.7 133,816 92.0 118,728 96.3
----------- ---------- ----------
Total $ 425,838 95.7 $ 386,732 97.1 $ 344,322 99.3
=========== ========== ==========
The following table sets forth the components of the statutory combined ratio
and wind and hail loss information for the Company's property-casualty segment
for the years indicated.
Year ended December 31,
-----------------------------------
1995 1994 1993
------ ------ ------
Statutory combined ratio
Loss ratio 60.1 60.1 59.4
Loss adjustment expense ratio 9.3 9.3 10.9
Underwriting expense ratio 26.0 27.3 28.6
Dividend ratio 0.3 0.4 0.4
------ ------ ------
Total 95.7 97.1 99.3
======= ======= =======
Impact of wind and hail losses
on the statutory combined ratio
Personal automobile 1.8 2.1 2.1
Homeowners 21.7 21.5 17.9
Personal lines 6.8 6.7 5.7
Commercial lines 6.5 5.5 4.9
Total 6.7 6.3 5.4
Wind and hail losses are calculated by adding together all claims with a cause
of loss from wind or hail and then deducting the related reinsurance recoveries.
The information provides an indication of how weather-related losses impact the
property-casualty segment's operating results for the years presented. Losses
not resulting from either wind or hail are excluded from these calculations.
6
The following table sets forth premium information and agency counts for the
property-casualty pool (including ALLIED Mutual) for the years indicated.
At or for the year ended December 31,
-------------------------------------------
1995 1994 1993
---------- ----------- ----------
(dollars in thousands)
Direct written premiums by distribution system
Independent agency system $ 503,922 $ 479,351 $ 444,453
Exclusive agency system 180,799 148,777 121,026
Direct response marketing system 22,136 18,418 15,144
---------- ----------- ----------
Total direct written premiums,
excluding crop hail premiums 706,857 646,546 580,623
Crop hail premiums (non-pooled) 7,781 6,024 4,660
---------- ----------- ----------
Total direct written premiums $ 714,638 $ 652,570 $ 585,283
========== =========== ==========
Agency counts
Independent agencies 1,968 1,910 1,833
Exclusive agencies 192 164 126
Net written premiums $ 699,608 $ 638,301 $ 572,129
Net premiums earned $ 676,169 $ 612,799 $ 544,099
The following table sets forth the geographic percentage distribution of
property-casualty pool (including ALLIED Mutual) direct written premiums for the
years indicated.
1995 1994 1993
------- ------- ------
California 24.0% 24.0% 24.0%
Iowa 23.3 24.6 26.0
Kansas 8.4 8.4 8.2
Nebraska 7.9 8.1 8.2
Minnesota 7.6 7.9 8.4
Missouri 4.8 4.8 5.1
Colorado 3.6 3.5 3.7
Illinois 3.1 2.8 2.5
Utah 2.5 2.2 2.2
Tennessee 2.4 2.2 1.7
Washington 2.1 1.7 1.2
South Dakota 2.0 2.1 2.0
Other * 8.3 7.7 6.8
------- ------- ------
100.0% 100.0% 100.0%
======= ======= ======
*Includes all other states, none of which accounted for more than 2% in 1995.
Excess & Surplus Lines
Western Heritage Insurance Company (Western Heritage) is an excess & surplus
lines insurance subsidiary, which primarily underwrites commercial lines. A.M.
Best has assigned a rating of A- (excellent) to Western Heritage for 1995 based
on the review of their 1994 statutory results and operating performance.
For 1995, Western Heritage's net earned premiums were 74.3% specialty commercial
casualty, 9% commercial property, 14.3% commercial transportation, and 2.4%
personal lines coverages. Specialty commercial casualty lines include general
liability, multiple peril, and product liability coverages for special events,
such as concerts, fairs, exhibitions, and parades as well as coverages for
merchants and artisan contractors. Specialty commercial property lines include
7
coverages for buildings that are older, in higher risk locations, or vacant;
agricultural and contractor equipment; and protection against vandalism.
Commercial transportation coverages include liability, physical damage, and
garagekeepers insurance written for used car dealers and repair shops. The
personal lines consist primarily of basic property coverages for dwellings.
Western Heritage agents are accorded contractual binding authority for risks
which meet the insurer's written underwriting guidelines and rules. Western
Heritage appoints no managing general agents, however, and retains all
underwriting, claims, and reinsurance authority. With respect to the ability of
the agents to bind Western Heritage, Western Heritage has no right to reject any
contracts entered into by the agents.
The following table sets forth statutory and GAAP basis information for the
excess & surplus lines segment for the years indicated.
At or for the year ended December 31,
----------------------------------------------
1995 1994 1993
----------- ------------ -----------
(dollars in thousands)
Net written premiums $ 30,606 $ 27,026 $ 24,892
=========== ============ ===========
Earned premiums $ 29,661 $ 25,786 $ 24,014
Losses and loss settlement expenses 22,357 18,568 16,696
Underwriting expenses 8,202 7,536 6,605
----------- ------------ -----------
Statutory underwriting (loss) gain (898) (318) 713
GAAP adjustments 43 100 (66)
----------- ------------ -----------
GAAP underwriting (loss) gain (855) (218) 647
Investment income excluding realized gains 5,830 5,241 4,868
Realized investment (losses) gains (135) (24) 103
----------- ------------ -----------
Income before income taxes $ 4,840 $ 4,999 $ 5,618
=========== ============ ===========
GAAP combined ratio 102.9 100.8 97.3
Invested assets $ 96,435 $ 79,588 $ 75,111
Loss and loss settlement expense reserves $ 47,120 $ 40,066 $ 38,401
Statutory capital and surplus $ 27,770 $ 23,896 $ 21,942
The following table sets forth the net earned premiums and statutory combined
ratios of the commercial casualty, commercial property, commercial
transportation, and personal lines written by Western Heritage for the years
indicated.
Year ended December 31,
--------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- ------------------------
Net Statutory Net Statutory Net Statutory
earned combined earned combined earned combined
premiums ratio premiums ratio premiums ratio
----------- --------- ----------- --------- ----------- ---------
(dollars in thousands)
Commercial casualty $ 22,031 103.9 $ 20,800 103.5 $ 20,002 99.3
Commercial property 2,676 91.2 2,579 80.5 2,530 57.9
Commercial transportation 4,254 98.6 1,682 101.8 636 162.2
Personal lines 700 115.1 725 60.4 846 81.6
----------- ----------- -----------
Total $ 29,661 102.2 $ 25,786 99.9 $ 24,014 96.1
=========== =========== ===========
8
The following table sets forth the geographic percentage distribution of excess
& surplus lines direct written premiums for the years indicated.
1995 1994 1993
------ ------ ------
Texas 23.3% 23.9% 27.6%
Illinois 9.9 10.9 11.2
California 8.8 11.9 14.1
Florida 7.2 8.4 5.2
Oklahoma 4.3 4.0 3.8
Hawaii 3.7 3.7 4.1
Alabama 3.1 1.5 0.9
Missouri 3.0 1.2 1.0
Louisiana 3.0 3.6 3.4
Ohio 2.9 2.4 2.3
Colorado 2.8 2.5 2.6
Mississippi 2.6 1.2 0.8
Arkansas 2.5 1.6 1.2
New Mexico 2.0 1.9 1.4
Other* 20.9 21.3 20.4
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
*Includes all other states, none of which accounted for more than 2%
in 1995.
Reinsurance
The Company's insurance subsidiaries follow the industry practice of reinsuring
a portion of their insured risks, paying to the reinsurer a portion of the
premiums received on all policies. Insurance is ceded principally to reduce the
net liability on individual risks and to protect against catastrophic losses.
The basic reinsurance treaties benefiting the parties to the pooling agreement
insure risks in excess of specific amounts. Except for crop-hail reinsurance,
all reinsurance is obtained by the pool participants directly and the pool
administrator does not have any additional or special reinsurance arrangements
other than as a pool participant. The financial stability of each participating
reinsurer is independently monitored by the pool participants and by their
reinsurance intermediaries.
The property-casualty pool participants and Western Heritage purchase coverage
from nonaffiliated reinsurers in the ordinary course of their businesses. See
"Business-Relationship with ALLIED Mutual-Other Relationships" for the ALLIED
Mutual and American Re-Insurance Company property catastrophe reinsurance
agreement. The insurers monitor the availability of replacement coverages in the
reinsurance market, and the Company believes that replacement coverages from
financially responsible reinsurers are available and accordingly does not deem
its existing reinsurance arrangements to be material.
With the exception of Western Heritage, all retentions discussed in this section
are for the entire pool. The property-casualty subsidiaries of the Company are
allocated a portion of the stated pool retentions based upon their respective
pool participation percentage.
The parties to the pooling agreement are covered by a property treaty which
provides per risk property reinsurance in excess of a retention of $500,000 to a
maximum limit of $5,000,000 per risk. Such parties are also covered by a
property treaty that provides coverage on a facultative basis in excess of a
retention of $5,000,000 to a maximum limit of $15,000,000.
The pool participants purchase property catastrophe reinsurance from a large
number of reinsurers each of which provides a relatively small percentage of the
total cover. For 1995, the pool liability limit of the cover is 90% of
$100,000,000 with retention of $10,000,000. A reinstatement agreement exists
allowing purchases of reinsurance for an additional catastrophe occurring in the
same year. See "Business-Relationship with ALLIED Mutual for affiliated
reinsurance relationships." In 1996 the pool increased its maximum property
catastrophe coverage to 90% of $120,000,000.
9
The pool's retention for most casualty risks is $375,000, with a reinsurance
limit of $1,000,000 per occurrence. Other treaties provide reinsurance for each
workers' compensation loss over $375,000 and up to $5,000,000. Catastrophe
workers' compensation treaties increase the reinsurance to $35,000,000.
Western Heritage, which is not a participant in the property-casualty pool,
purchases reinsurance on property risks covering 75% of the risk in excess of
$50,000 to a maximum of $1,000,000, which is the largest property risk insured.
Western Heritage also purchases casualty reinsurance in excess of $200,000 to a
maximum of $1,000,000, the largest casualty risk insured. Western Heritage does
not write workers' compensation or primary auto coverage.
Although reinsurance does not legally discharge an insurer from its primary
liability for the full amount of the policies, it does make the assuming
reinsurer liable to the insurer to the extent of the reinsurance ceded. As of
December 31, 1995, there were no past due amounts from reinsurers. Historically,
the Company has had no adverse collection experience with its reinsurers.
Losses and Loss Settlement Expense Reserves
In many cases, several years may elapse between the occurrence of an insured
loss, the reporting of the loss to the insurer, and the insurer's payment of
that loss. To recognize liabilities for unpaid losses, the insurance
subsidiaries establish reserves, which are balance sheet liabilities
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events which have occurred. The insurance
subsidiaries do not discount loss reserves for financial statement purposes.
When a claim is reported, a case reserve for the estimated amount of the
ultimate payment is established. The estimate reflects an informed judgment
based on general corporate reserving practices and the Company's experience and
knowledge regarding the nature and value of the specific type of claim. Reserves
are also established on an aggregate basis to provide for losses incurred but
not yet reported to the insurer and the overall adequacy of case reserves. The
insurance subsidiaries also establish reserves representing the estimated
expenses of settling claims, including legal and other fees and general expenses
of administering the claims adjustment process.
As part of the reserving process, historical data is reviewed and consideration
is given to the anticipated impact of various factors such as known and
anticipated legal developments, changes in social attitudes, inflation, and
economic conditions. This process relies on the basic assumption that past
experience, adjusted for the effect of current developments and likely trends,
is an appropriate basis for predicting future events. Reserve amounts are
necessarily based on management's informed estimates, and as other data becomes
available and is reviewed, these estimates and judgments are revised, resulting
in increases or decreases to existing reserves.
While the methods for setting the reserve structure are well tested, some
assumptions about loss patterns have changed. In particular, recent higher jury
verdicts and judicial decisions which expand coverage to new theories of
liability have increased the demands against the loss and loss settlement
expense reserves of the insurance subsidiaries. Not only have anticipated claims
increased in severity, but unanticipated claims have arisen. In establishing
reserves, management considers exposure the Company may have to environmental
claims. Because reported claim activity levels are minimal and the emphasis of
the Company's property-casualty business is primarily on personal lines and
small commercial business, management believes exposure to material liability on
environmental claims to be remote as of December 31, 1995. The Company continues
to monitor legal developments as they relate to the Company's exposure to
environmental claims.
The following table presents the development of losses and loss settlement
expense reserves for 1985 to 1994 for the pool (which includes ALLIED Mutual)
and Western Heritage. The top line of the table shows the estimated reserve for
losses and loss settlement expenses at the balance sheet date for each of the
indicated years. These figures represent the estimated amount of losses and loss
settlement expenses, net of reinsurance recoverables, for claims arising in the
current and all prior years that were unpaid at the balance sheet date,
including losses that had been incurred but not yet reported. The lower portion
of the table shows the re-estimated amount of net reserves as a percentage of
the previously recorded net reserves based on experience as of the end of each
succeeding year. The re-estimated reserves change as more information becomes
known about the frequency and severity of claims for individual years.
10
At or for the year ended December 31,
------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
Reserves for
losses and loss
settlement
expenses, net $110,145 $126,150 $160,152 $210,746 $248,870 $280,443 $312,089 $355,092 $386,936 $424,595 $471,247
Paid (cumulative)
as of (1)
1 year later 44.8% 42.7% 47.5% 41.7% 43.6% 44.2% 43.6% 40.1% 40.8% 39.9%
2 years later 65.5 68.8 70.8 64.0 65.8 67.2 66.3 61.9 60.7
3 years later 81.3 84.0 85.8 77.2 79.3 80.4 79.8 72.6
4 years later 91.1 93.3 93.6 84.1 86.3 88.5 86.0
5 years later 96.0 98.2 97.9 87.7 91.5 92.5
6 years later 99.4 100.7 101.0 90.2 94.1
7 years later 101.3 103.3 102.8 92.1
8 years later 103.2 104.8 104.3
9 years later 104.6 106.7
10 years later 106.2
Net reserves re-
estimated as of
end of year (1) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
1 year later 100.7 102.7 103.6 98.3 100.4 101.0 100.2 97.7 98.3 100.1
2 years later 102.3 104.2 106.3 97.6 99.6 101.1 101.1 96.8 98.9
3 years later 102.9 106.9 106.8 97.3 99.6 102.6 102.4 97.2
4 years later 105.5 107.9 107.1 97.5 101.5 104.6 103.1
5 years later 106.4 107.8 107.8 98.1 103.4 105.7
6 years later 106.8 108.7 108.9 99.3 104.5
7 years later 107.3 109.9 110.5 100.4
8 years later 108.6 111.7 111.8
9 years later 110.3 113.2
10 years later 111.3
Net cumulative redundancy (deficiency)
Dollars $(12,494) $(16,633) $(18,906) $ (911) $(11,157) $(15,958) $ (9,734) $ 10,037 $ 4,378 $ (292)
Percentage (11.3)% (13.2)% (11.8)% 0.4% (4.5)% (5.7)% (3.1)% 2.8% 1.1% (0.1)%
Gross reserves - end of year $373,958 $400,912 $447,311 $492,304
Reinsurance recoverables 18,866 13,976 22,716 21,057
-------- -------- -------- --------
Net reserves - end of year $355,092 $386,936 $424,595 $471,247
======== ======== ======== ========
Gross re-estimated reserves - latest (2) 98.7% 100.5% 100.6%
Re-estimated recoverables - latest (2) 127.6% 145.0% 109.7%
Net re-estimated reserves - latest (2) 97.2% 98.9% 100.1%
Gross cumulative redundancy (deficiency)
Dollars $ 4,825 $ (1,907) $ (2,497)
Percentage 1.4% (0.5)% (0.6)%
(1) Shown as a percentage of reserves for losses and loss settlement expenses.
(2) Shown as a percentage of gross reserves, reinsurance recoverables and net
reserves.
The cumulative redundancy or deficiency represents the aggregate change in the
estimates over all prior years. It should be emphasized that the table presents
a run-off of balance sheet reserves rather than accident or policy year loss
development. Therefore, each amount in the table includes the effects of changes
in reserves for all prior years.
The following table reconciles the reserves for losses and loss settlement
expenses from the previous table to the amount shown on the Company's
consolidated balance sheets.
Year ended December 31,
-------------------------------
1995 1994
----------- -----------
(in thousands)
Loss and loss settlement expense reserves for the property-casualty pool
and Western Heritage $ 471,247 $ 424,595
Less: Loss and loss settlement expense reserves of ALLIED Mutual 146,308 131,921
----------- -----------
324,939 292,674
Add: Reinsurance recoverables 16,925 18,322
----------- -----------
Loss and loss settlement expense reserves (GAAP) $ 341,864 $ 310,996
=========== ===========
11
The next table sets forth a reconciliation of beginning and ending GAAP reserves
for losses and loss settlement expenses for the years indicated, net of
reinsurance recoverables. The table includes property-casualty and excess &
surplus lines insurance loss and loss settlement expense reserves. Developments
for losses and loss settlement expenses on prior years is immaterial to the
Company's consolidated financial statements taken as a whole.
Year ended December 31,
-------------------------------------------
1995 1994 1993
---------- ----------- -----------
(in thousands)
Net reserves for losses and loss settlement
expenses at beginning of year $ 292,674 $ 268,050 $ 227,971
---------- ----------- -----------
Incurred losses and loss settlement expenses
Provision for insured events of current year 315,956 288,574 262,772
Increase (decrease) in provision for
insured events of prior years 1,984 (1,630) (3,854)
---------- ----------- -----------
Total incurred losses and loss
settlement expenses 317,940 286,944 258,918
---------- ----------- -----------
Payments
Losses and loss settlement expenses
attributable to insured events of current year 169,254 151,479 138,926
Losses and loss settlement expenses
attributable to insured events of prior years 116,421 110,841 91,848
Adjustment to beginning of the year
reserves resulting from the change in the
reinsurance pool participation percentage * --- --- (11,935)
Total payments 285,675 262,320 218,839
---------- ----------- -----------
Net reserves for losses and loss
settlement expenses at end of year $ 324,939 $ 292,674 $ 268,050
========== =========== ===========
* As of January 1, 1993, the property-casualty subsidiaries' underwriting
accounts were adjusted to reflect their increased participation in the pool. The
property-casualty subsidiaries received cash and securities for the transfer of
reserves from ALLIED Mutual as of January 1, 1993. There was no income statement
effect from this transaction as the amount received was offset by the increase
in the reserves. However, since the reserves transferred were necessarily based
upon estimates, subsequent changes in the estimates are reflected in current
operating results.
Noninsurance Operations
The investment services segment of the Company is comprised of ALLIED Group
Mortgage Company (ALLIED Mortgage) and, through October 29, 1993, Dougherty
Dawkins, Inc. and subsidiaries (Dougherty Dawkins). Dougherty Dawkins was sold
October 29, 1993 and the results of operations through the closing date are
reflected in the Company's consolidated financial statements. See note 7 of
Notes to Consolidated Financial Statements.
ALLIED Mortgage purchases, originates, and services single-family residential
mortgages. It acquires mortgage servicing rights from savings and loan
associations, banks, other mortgage companies, the Resolution Trust Corporation,
and other financial institutions. The market in which ALLIED Mortgage originates
mortgages is primarily Polk County, Iowa, which includes the Des Moines area.
ALLIED Mortgage purchases and services mortgages on a nationwide basis. See
"Business--Competition."
12
ALLIED Mortgage began operations in 1987, and by year-end 1995, its servicing
portfolio included 54,533 mortgages for a total value of $3 billion. ALLIED
Mortgage is an approved seller-servicer of mortgages guaranteed by Government
National Mortgage Association, Federal National Mortgage Association, and
Federal Home Loan Mortgage Corporation. See "Business--Regulation." Working
capital requirements are managed through short-term financing with commercial
banks. See note 8 of Notes to Consolidated Financial Statements.
The Company's data processing services segment is comprised of ALLIED Group
Information Systems, Inc. (AGIS) and The Freedom Group, Inc. (Freedom), which
have a line of property-casualty and life insurance software products and data
processing services which are marketed under the name "Freedom Group" to
affiliated and nonaffiliated insurance companies. AGIS provides management
information services to the property-casualty subsidiaries, ALLIED Mutual,
ALLIED Life Insurance Company (ALLIED Life), the Company, and other company
subsidiaries. See "Business--Relationship with ALLIED Mutual." These services
include the processing of policies and claims, billing, rating, statistical and
regulatory reporting, and recordkeeping. AGIS also provides automated systems to
the property-casualty segment's agency force. The majority of the segment's
revenues and operating profits came from affiliated companies.
Through its direct sales force, AGIS licenses property-casualty insurance
software to property-casualty insurance companies generally on a national basis.
AGIS also provides certain consulting services and software maintenance
services. On a nationwide basis, Freedom licenses statutory accounting insurance
software to property-casualty and life insurance companies on primarily a direct
sales basis.
Investments
The Company uses its investments to generate the majority of its operating
profit and provide liquidity. Investments in fixed maturities are classified as
available for sale. See note 1--"Investments" of Notes to Consolidated Financial
Statements. The Company's invested assets are managed by Conning & Company,
subject to restrictions on permissible investments under applicable state
insurance codes and the Company's investment policies. Those policies require
that the fixed maturity portfolio be invested primarily in debt obligations
rated "BBB" (investment grade) or higher by Standard & Poor's Corporation
(Standard & Poor's) or a recognized equivalent at the time the security is
acquired by the Company. The policy also states that equity securities are to be
of United States and Canadian Corporations listed on established exchanges or
publicly traded in the over-the-counter market. Preferred stock is to be
comprised primarily of issues rated at least A3/A- by Standard & Poor's
Corporation or Moody's. The Company monitors the investment quality of the fixed
maturity portfolio subsequent to acquisition by reviewing on a quarterly basis
the current debt ratings assigned to each of the securities in the fixed
maturity portfolio.
Fixed income securities comprised 97.7% of the Company's invested assets, 98.1%
of those had an "BBB" rating from Standard & Poor's (or the equivalent from
Moody's) at December 31, 1995. The portfolio contain no real estate or mortgage
loans. At December 31, 1995, less than $300,000 of the Company's fixed
maturities were rated less than investment grade securities. At year-end 1995,
the Company held $14,439,351 of nonrated securities. Evaluation of the issuers'
rating and ratings for the issuers' other securities supports management's view
that the nonrated securities are investment grade. At December 31, 1995, the
fair value of the Company's fixed maturity portfolio was $27.8 million over
amortized cost.
As of December 31, 1995, the Company held collateralized mortgage obligation
(CMO) investments with a carrying and fair value of $77,671,819. Substantially
all of the Company's CMO investments are in planned amortization class bonds or
sequential pay bonds with anticipated durations of approximately 3.8 years at
December 31, 1995. The Company has not invested in the more volatile types of
CMO products such as companion or accrual (Z-bond) tranches. All of the
Company's CMO investments have an active secondary market; accordingly, their
effect on the Company's liquidity does not differ from that of other fixed
income investments.
The carrying values of all the Company's investments in fixed maturities are
reviewed on an ongoing basis. If this review indicates a decline in fair value
below cost is other than temporary, the Company's carrying value in the
investment is reduced to its estimated realizable value and a specific
write-down is taken. Such reductions in carrying value are recognized as
realized losses and charged to income.
13
The table below shows the classifications of the Company's investments at
December 31, 1995.
Fair Amount reflected Percent
value on balance sheet of total
----------- ---------------- --------
(dollars in thousands)
Fixed maturities
U.S. Government obligations (1) $ 109,329 $ 109,329 14.2%
U.S. Government corporations and agencies 145,008 145,008 18.8
State municipalities and political subdivisions 284,640 284,640 36.8
Foreign governments 2,161 2,161 0.3
Public utilities 11,773 11,773 1.5
All other corporate bonds 201,636 201,636 26.1
----------- ----------- ------
Total fixed maturities 754,547 754,547 97.7
Equity securities 7,948 7,948 1.0
Other investments 2 2
Short-term investments at cost 9,802 9,802 1.3
----------- ----------- ------
$ 772,299 $ 772,299 100.0 %
=========== =========== ======
(1) All such securities are backed by the full faith and credit of the
United States Government.
The following table sets forth the composition of the Company's fixed maturity
investments by rating at December 31, 1995.
Percent of
Amount portfolio
---------- ----------
Rating (1) (dollars in thousands)
----------
AAA $ 538,757 71.4%
AA 79,883 10.6
A 114,146 15.1
BBB 7,041 1.0
Below BBB 281
Nonrated 14,439 1.9
---------- -----
Total $ 754,547 100.0%
========== =====
(1) Ratings are assigned primarily by Standard & Poor's with remaining
ratings assigned by Moody's and converted to the equivalent Standard &
Poor's ratings.
The following table sets forth contractual maturities in the fixed maturity and
short-term investment portfolios at December 31, 1995. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Percent of
Amount portfolio
---------- ----------
Maturity (dollars in thousands)
--------
One year or less $ 40,813 5.4%
Over 1 year through 5 years 218,052 28.9
Over 5 years through 10 years 275,699 36.5
Over 10 years 16,615 2.2
---------- ------
551,179 73.0
Mortgaged-backed securities 203,368 27.0
---------- ------
Total $ 754,547 100.0%
========== ======
14
Investment results of the Company for each year in the three years ended
December 31, 1995 are shown in the following table.
1995 1994 1993
------------ ----------- ----------
(dollars in thousands)
Average invested assets (1) $ 714,720 $ 627,677 $ 549,621
Investment income (2) 47,242 41,070 39,030
Average annual yield on total investments 6.6% 6.5% 7.1%
Tax equivalent yield on total investments (3) 7.8% 7.9% 8.2%
Realized investment gains $ 505 $ 2,888 $ 1,396
(1) Represents total invested assets on an average quarterly basis. The
beginning of the period balance for 1993 has been adjusted to reflect
the effects of the changes in the pooling agreement.
(2) Investment income is net of investment expenses and does not include
realized investment gains or losses or provision for income taxes.
(3) Assuming an effective tax rate of 35%.
Competition
The insurance industry is highly competitive. The Company's insurance
subsidiaries compete with numerous insurance companies, many of which are
substantially larger and have considerably greater financial resources. Because
the Company's insurance subsidiaries operate through independent agents and such
agents represent more than one company, they face competition within each
agency. The Company's insurance subsidiaries compete by underwriting criteria,
pricing, automation, service, and product design. The Company believes that its
management information systems and procedures for selecting and rating risks
accord it a competitive advantage.
Competition in the excess & surplus lines market stiffened in recent years as
standard market capacity increased and prices decreased. Western Heritage
competes in its chosen market (approximately 40 states in the Midwest, West, and
South) with numerous insurers on the basis of service, price, and financial
strength.
ALLIED Mortgage, in originating residential mortgages in central Iowa and
servicing residential mortgages nationally, competes through competitive pricing
and service. Nationally, ALLIED Mortgage is a small-sized company servicing
mortgages with remaining principal balances aggregating $3 billion at December
31, 1995. The largest competitors service in excess of $126 billion of
mortgages. With greater capital and greater efficiencies, the larger companies
have an advantage in originating and purchasing mortgages to obtain the
servicing rights. ALLIED Mortgage has access to capital due to its association
with the Company and competes in the purchase of servicing on the basis of price
and in mortgage originations on the basis of price and quality of service.
Regulation
The Company's insurance subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they transact business
under statutes which delegate regulatory, supervisory, and administrative powers
to state insurance commissioners. Such regulation is designed generally to
protect policyholders rather than investors and relates to such matters as the
standards of solvency which must be met and maintained; the licensing of
insurers and their agents; the nature of and examination of the affairs of
insurance companies, which includes periodic market conduct and financial
examinations by the regulatory authorities; annual and other reports, prepared
on a statutory accounting basis, required to be filed on the financial condition
of insurers or for other purposes; establishment and maintenance of reserves for
unearned premiums and losses and loss settlement expenses; and requirements
regarding numerous other matters. In general, the Company's insurance
subsidiaries must file all rates for insurance directly underwritten with the
insurance department of each state in which they operate; reinsurance generally
is not subject to rate regulation. Further, state insurance statutes typically
place limitations on the amount of dividends or other distributions payable by
insurance companies in order to protect their solvency. Iowa, the jurisdiction
of incorporation of all of the Company's insurance subsidiaries (except Western
Heritage), requires that dividends be paid only out of statutory unassigned
15
surplus and requires prior regulatory approval for the payment of any dividend
which exceeds the greater of either 10% of the insurer's policyholders' surplus
as of the preceding December 31 or statutory net income of the preceding
calendar year. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Regulations" and note 13 of Notes to Consolidated
Financial Statements for additional discussion of dividend limitations. AMCO and
ALLIED Property and Casualty are also commercially domiciled insurers within the
State of California and subject to regulation (including limitations on dividend
payments) as California domiciled insurers by the California Insurance
Commissioner. The amounts available for distributions as dividends from Western
Heritage are limited by Arizona law, state of jurisdiction, to statutory
unassigned surplus and requires prior regulatory approval for the payment of any
dividends which exceed the lesser of 10% of the policyholders' surplus as of the
preceding December 31 or net investment income of the preceding calendar year.
California was the source of approximately 25% of the pool's direct written
premiums for the past ten years. Proposition 103, approved by California voters
in 1988, provides for a rollback of rates on premiums collected in calendar year
1989 to the extent that the insurer's return on equity for each Proposition 103
line exceeded 10%. Since it was passed, Proposition 103 has been the subject of
a number of legal and regulatory proceedings for the purpose of clarifying the
scope and extent of insurers' rollback obligations. Management of the Company
continues to believe that the insurance subsidiaries will not be liable for any
material rollback of premiums.
The Company is also subject to statutes governing insurance holding company
systems in various jurisdictions. Typically, such statutes require the Company
periodically to file information with the state insurance regulatory authority,
including information concerning its capital structure, ownership, financial
condition and general business operations. Under the terms of applicable state
statutes, any person or entity desiring to acquire more than a specified
percentage (commonly 10%) of the Company's outstanding voting securities is
required first to obtain approval from the applicable state insurance
regulators. Chapter 521A of the Iowa Code relating to holding companies, to
which the Company is subject, requires disclosure of transactions between the
Company and its insurance subsidiaries or between an insurer and another
subsidiary, that such transactions satisfy certain standards, including that
they be fair, equitable, and reasonable and that certain material transactions
be specifically non-disapproved by the Iowa Insurance Division. Further, prior
approval by the Iowa Insurance Division is required of affiliated sales,
purchases, exchanges, loans or extensions of credit, guarantees, or investments,
any of which involve 5% or more of the insurer's admitted assets as of the
preceding December 31st.
Under insolvency or guaranty fund laws in most states in which the Company's
insurance subsidiaries and ALLIED Mutual operate, insurers doing business in
those states can be assessed, up to prescribed limits, for losses incurred by
policyholders as a result of the insolvency of other insurance companies. The
amounts and timing of such assessments are beyond the control of the Company and
generally have an adverse impact on the Company's earnings. Additionally, the
Company is required to participate in various mandatory pools or underwriting
associations in amounts related to the amount of the Company's direct writings
in the applicable state.
Recently, the insurance regulatory framework has been placed under increased
scrutiny by various states, the federal government, and the National Association
of Insurance Commissioners (NAIC). Various states have considered or enacted
legislation which changes, and in many cases increases, the state's authority to
regulate insurance companies. The NAIC has recommended to the states for
adoption and implementation several regulatory initiatives designed to reduce
the risk of insurance company insolvencies. Two of these initiatives include
risk based capital standards and a model investment law.
The NAIC's risk based capital (RBC) requirements were adopted by the NAIC in
1993 and require property-casualty insurance companies to calculate and report
information under the RBC formula. It is anticipated that the Iowa legislature
will enact the NAIC's proposal into law in 1996. The RBC formula uses the
statutory financial statements to calculate the minimum indicated capital level
to support asset (investment and credit) risk and underwriting (loss reserves,
premiums, and unearned premium) risk. Based on the subsidiaries' statutory
financial statements and interpretation of the RBC formula, management believes
capital levels are sufficient to support the level of risk inherent in Company
operations and are in excess of any amount which would require regulator action.
The NAIC's model legislation to govern insurance company investments is in
development. An exposure draft was released in December of 1995 and a model law
may be adopted by the NAIC in 1996. The effect of adoption by the Iowa
legislature is not expected to be a significant to the Company.
16
The mortgage banking subsidiary is subject to the rules and regulations of, and
examination by, the United States Department of Housing and Urban Development,
Federal National Mortgage Association (FNMA), and Government National Mortgage
Association (GNMA) with respect to originating, processing, selling, and
servicing mortgage loans. These rules and regulations, among other things,
prohibit discrimination, provide for inspection and appraisals of properties,
require credit reports on prospective borrowers, and sometimes fix maximum
interest rates, fees, and loan amounts. GNMA requires the maintenance of
specified amounts of net worth that vary with the amount of GNMA mortgage-backed
securities issued by ALLIED Mortgage. There are also various state laws
affecting mortgage banking operations.
Relationship with ALLIED Mutual
The Company is operated as a part of the ALLIED Group of insurance companies.
ALLIED Mutual has operated as a mutual property-casualty insurance company since
1929. In 1971, it organized the Company as a wholly owned subsidiary and
transferred to it certain assets, including the stock of AMCO, which had
operated as a subsidiary of ALLIED Mutual since 1959. In 1985, the Company
effected an initial public offering which then resulted in public ownership of
approximately 22% of its common stock. As of December 31, 1995, ALLIED Mutual
controlled 18% of the voting stock of the Company.
The operations of the Company and its subsidiaries are interrelated with the
operations of ALLIED Mutual. The Company and ALLIED Mutual share common
executive officers, and three directors of the Company are also directors of
ALLIED Mutual.
For the year ended December 31, 1995, ALLIED Mutual reported, in accordance with
Statutory Accounting Principles, net income of $12,162,049, a statutory combined
ratio of 104.5, and assets and surplus at December 31, 1995 of $498,568,711 and
$229,848,488, respectively. As of December 31, 1995, ALLIED Mutual's invested
assets were $453,311,143. Invested assets included a fixed maturity portfolio of
$338,971,484 (at amortized cost), of which over 95.3% was rated "BBB" or higher
by Standard & Poor's or a recognized equivalent rating agency. Invested assets
also included $72,071,431 in equity investments in affiliates (which includes
the Company, ALLIED Life Financial Corporation (ALFC), which is a 52% owned
subsidiary of ALLIED Mutual, and AID Finance Services, Inc.). ALLIED Mutual
files its statutory-basis financial reports with the state insurance departments
in the territories in which it operates.
The Company and ALLIED Mutual formalized their relationship by entering into an
Intercompany Operating Agreement, a Stock Rights Agreement, and a Pooling
Agreement.
Intercompany Operating Agreement
The Company, ALLIED Mutual, ALFC, and each of their respective subsidiaries are
parties to an Intercompany Operating Agreement providing for the sharing of
employees, office space, agency forces, data processing, and other services and
facilities. The Company and its subsidiaries receive from and pay to ALLIED
Mutual and its subsidiaries fees and cost reimbursements for the employees,
services, and facilities provided. In determining the allocated costs to the
companies, each provider of the various services (e.g., ALLIED Mutual leases
office facilities, AGIS provides data processing, etc.) attempts to set fees on
a basis consistent with that which would apply in an arm's length transaction
with nonaffiliates. However, there can be no assurance that the actual rates
charged reflect those which would be obtained if the Company and ALLIED Mutual
were not affiliated and had agreed upon rates following arm's length
negotiation. See "Relationship with ALLIED Mutual-Pooling Agreement" for a
discussion of changes that impact expense sharing arrangements between ALLIED
Mutual and the Company.
The Company leases to ALLIED Mutual and certain of its subsidiaries all of the
employees utilized in their operations for a fee and reimbursement of personnel
costs based on certain allocation methods. The Company is obligated to provide
the entire requirements for employees of ALLIED Mutual and certain of its
subsidiaries, but ALLIED Mutual reserves the right to hire employees
independently rather than leasing them from the Company. In 1995, 1994, and
1993, ALLIED Mutual and its subsidiaries paid the Company approximately
$2,489,390, $2,414,504, and $3,204,386, respectively, for leased employees,
substantially all of which represented cost reimbursement.
17
The Intercompany Operating Agreement also provides for the leasing by ALLIED
Mutual to the Company of substantially all of the office space utilized by the
Company. ALLIED Mutual and the Company share agency forces as well as other
services and facilities. The Intercompany Operating Agreement contains a
covenant not to compete that binds each of the Company, ALLIED Mutual, and ALFC
not to engage in a business that competes with the products or markets of any
other party or such party's subsidiaries for the term of the Intercompany
Operating Agreement and five years thereafter. The Intercompany Operating
Agreement can be terminated by ALLIED Mutual, ALFC, or the Company after
December 31, 2004 upon two years prior notice.
In addition, ALLIED Mutual, the Company, and ALFC have certain rights under the
Intercompany Operating Agreement, the Pooling Agreement, and the Management
Information Services Agreement in the event a nonaffiliated party acquires the
ownership of 50% or more of the voting stock of the Company or ALFC. If such an
event were to occur, ALLIED Mutual, the Company, or ALFC, as the case may be,
has the right to (i) terminate all three of the Intercompany Operating
Agreement, the Pooling Agreement, and the Management Information Services
Agreement upon six months notice (ii) extend the term of all three such
agreements for up to ten additional years beyond December 31, 2004, upon six
months notice, or (iii) allow such agreements to continue in effect.
Stock Rights Agreement
The Company and ALLIED Mutual are parties to a Stock Rights Agreement, which
grants certain rights to, and imposes certain restrictions on, ALLIED Mutual in
respect of its holdings of the Company's common and preferred stock. This
Agreement expires in 2005.
Pursuant to the Stock Rights Agreement, ALLIED Mutual is entitled to nominate,
and the Company is required to use its best efforts to cause the election or
retention of, a number of members of the Company's Board of Directors in
proportion to ALLIED Mutual's percentage ownership of the total number of shares
of the Company's voting stock outstanding at the time of nomination. In
addition, the Company is required to elect to its Executive Committee at least
one Company director who has been nominated by ALLIED Mutual but who is not an
officer or employee of ALLIED Mutual. The Stock Rights Agreement also restricts
the ability of ALLIED Mutual to grant proxies and solicit other shareholders of
the Company. Under the Stock Rights Agreement, ALLIED Mutual is prohibited from
initiating or accepting a tender offer for shares of the Company's common stock
except under certain conditions. The Company has a right of first refusal with
respect to any sale by ALLIED Mutual of the Company's common stock, subject to
certain exceptions, including a distribution of such stock to the public in a
registered public offering or sale pursuant to Rule 144. ALLIED Mutual has
incidental registration rights and three demand registration rights with respect
to the Company's common and 6-3/4% Series preferred stock it owns.
The limitations on ALLIED Mutual's ability to initiate, or tender shares, in a
tender offer as well as the limitations on its ability to grant proxies and
solicit other shareholders of the Company terminate upon a consolidation or
merger of the Company with another corporation in which the Company is not the
surviving corporation, a sale of substantially all of its assets, or the
holding, by any person other than ALLIED Mutual, of 50% or more of the voting
securities of the Company then outstanding. The Agreement will be suspended for
so long as ALLIED Mutual holds less than 10% of the outstanding common stock and
6-3/4% Series preferred stock of the Company.
Pooling Agreement
The Pooling Agreement provides that ALLIED Mutual, ALLIED Property and Casualty,
and Depositors cede to AMCO premiums, losses, allocated loss settlement
expenses, commissions, premium taxes, service charge income, and dividends to
policyholders and assume from AMCO an amount of this pooled property-casualty
business equal to their participation in the Pooling Agreement. ALLIED Mutual's
crop hail business is not pooled. AMCO pays certain underwriting expenses,
unallocated loss settlement expenses, and premium collection expenses for all of
the pool participants and receives a fee equal to a specified percentage of
premiums as well as a contingent fee based on the attainment of certain combined
ratios from each of the pool participants. AMCO charges each of the other pool
participants 12.85% of written premiums for underwriting services, 7.25% of
earned premiums for unallocated loss settlement expenses, and 0.75% of earned
premiums for premium collection services. AMCO received pool administrative fees
18
of $55,721,043, $50,449,437, and $44,920,376 from ALLIED Mutual in 1995, 1994,
and 1993, respectively. The administrative fees are subject to renegotiation
during the term of the pooling agreement upon five years notice.
The pooling agreement provides ALLIED Mutual, ALLIED Property and Casualty, and
Depositors more predictable expense levels by limiting such expenses to a
specified percentage of their premiums in lieu of the prior arrangement, where
such expenses were allocated based on the pool participation percentages. These
arrangements give AMCO opportunities to profit from the efficient administration
of such underwriting, loss settlement, and premium collection activities and to
provide similar services to nonaffiliated insurance companies in the future.
Changes to the Pooling Agreement must be approved by the Coordinating Committee.
The term of the Pooling Agreement extends to 2004 after which time it can be
terminated by either party on five years' notice. The Pooling Agreement may also
be terminated or extended by ALLIED Mutual upon the occurrence of certain
events. See "Relationship with ALLIED Mutual-Intercompany Operating Agreement."
The Coordinating Committee
Under the Intercompany Operating Agreement, the Company, ALLIED Mutual, and ALFC
have formed a Coordinating Committee comprised of two independent directors of
the Company, two directors of ALLIED Mutual, and two independent directors of
ALFC, none of whom serve on other ALLIED boards. All disputes arising under the
Intercompany Operating Agreement as well as other intercompany agreements are to
be submitted to the Coordinating Committee for resolution. Decisions of this
Coordinating Committee must be unanimous and are binding on the parties.
Historically, all issues that have been submitted to the Coordinating Committee
have been resolved by the Committee. The Company anticipates that any future
issues would be similarly resolved. If an issue is not resolved by the
Coordinating Committee, it will be submitted to arbitration. In such
arbitration, each party to the dispute selects one arbitrator, and if such
dispute involves only two parties, such arbitrators select a third arbitrator.
Other Relationships
ALLIED Mutual has participated with American Re-Insurance Company in a property
catastrophe reinsurance agreement to cover the property-casualty segment's share
of pooled losses. In 1995, 1994, and 1993, ALLIED Mutual's and American
Re-Insurance Company's respective participation in the reinsurance agreement
were 90% and 10% and covered the property-casualty segment's share of pooled
losses up to $5,000,000 in excess of $5,000,000. See notes 4 and 6 of Notes to
Consolidated Financial Statements for additional information concerning
transactions between the Company and ALLIED Mutual.
Employees
At December 31, 1995, the Company was the direct employer of personnel for all
subsidiaries of the Company and of ALLIED Mutual and its subsidiaries other than
ALFC, employing 2,243 persons. None of the Company's employees are members of a
collective bargaining unit. Management believes that its employee relations are
good.
Item 2. Properties
The majority of the real property occupied by the Company and its subsidiaries
are owned or leased by ALLIED Mutual. A portion of the costs of the properties
is paid by the Company and its subsidiaries. See "Relationship with ALLIED
Mutual-Intercompany Operating Agreement." Management considers the properties to
be adequate for its needs. The primary properties owned by ALLIED Mutual are the
home office in Des Moines, Iowa, a data processing facility and claims center in
Urbandale, Iowa, and regional offices in Denver, Colorado and Lincoln, Nebraska.
The Santa Rosa, California regional office building is leased by ALLIED Mutual.
The Company and its subsidiaries lease office space in Des Moines and Cedar
Rapids, Iowa, Minneapolis, Minnesota, Lincoln, Nebraska, and Scottsdale,
Arizona.
19
Item 3. Legal Proceedings
The Company and its subsidiaries are party to various lawsuits arising in the
normal course of business. The Company and its subsidiaries believe the
resolution of these lawsuits will not have a material adverse effect on their
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Securities Holders
No matters were submitted during the fourth quarter of 1995 to a vote of holders
of ALLIED Group, Inc. stock.
20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders' Matters
The Company's common stock trades on The Nasdaq Stock Market under the symbol
ALGR. As of December 31, 1995, there were 1,026 stockholders of record. The
following table shows the high and low market prices and dividends paid per
share for each calendar quarter for the two most recent years.
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
High $ 28-3/4 $ 30-1/4 $ 33 $ 36-3/4
Low 23-5/16 27-1/4 27-1/2 31-1/2
Dividends 0.17 0.17 0.17 0.17
First Second Third Fourth
1994 Quarter Quarter Quarter Quarter
--------- --------- --------- --------- ---------
High $ 27-1/4 $ 26-3/4 $ 30-1/2 $ 31
Low 23 22-3/4 25 22
Dividends 0.15 0.15 0.15 0.15
There are certain regulatory restrictions relating to the payment of dividends
(see note 13 of Notes to Consolidated Financial Statements). It is the present
intention of the Board of Directors to declare quarterly cash dividends.
21
Item 6. Selected Financial Data
At or for the year ended December 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------ ----------- ---------- ----------- -----------
(in thousands, except per share data)
Income Statement Data
Premiums earned
Personal $ 279,908 $ 252,916 $ 225,594 $ 191,059 $ 145,029
Commercial 145,930 133,816 118,728 101,364 79,516
------------ ----------- ---------- ----------- -----------
Total property-casualty 425,838 386,732 344,322 292,423 224,545
Excess & Surplus Lines 29,661 25,786 24,014 27,738 23,612
------------ ----------- ---------- ----------- -----------
Total 455,499 412,518 368,336 320,161 248,157
Investment income 47,242 41,070 39,030 32,716 27,975
Realized investment gains 505 2,888 1,396 1,975 2,189
Other income 49,519 50,888 73,680 91,739 76,044
------------ ----------- ---------- ----------- -----------
Total revenues 552,765 507,364 482,442 446,591 354,365
Losses and expenses 478,917 440,665 425,685 407,584 332,242
------------ ----------- ---------- ----------- -----------
Income from before
income taxes 73,848 66,699 56,757 39,007 22,123
Income taxes 21,471 19,074 16,835 10,332 5,114
------------ ----------- ---------- ----------- -----------
Net income $ 52,377 $ 47,625 $ 39,922 $ 28,675 $ 17,009
============ =========== ========== =========== ===========
Fully diluted earnings per share
Net income $ 3.52 $ 3.19 $ 2.61 $ 1.94 $ 1.34
============ =========== ========== =========== ===========
Realized investment gain $ .02 $ .14 $ .06 $ .09 $ .12
============ =========== ========== =========== ===========
Property-casualty wind and
hail losses $ 1.35 $ 1.15 $ .89 $ .74 $ 1.04
============ =========== ========== =========== ===========
Dividends paid $ .68 $ .60 $ .51 $ .43 $ .37
============ =========== ========== =========== ===========
Balance Sheet Data
Total investments $ 772,299 $ 655,906 $ 606,511 $ 460,038 $ 356,788
Total assets 1,010,598 892,751 855,525 688,488 557,636
Notes payable 39,465 43,541 82,459 66,543 79,124
Guarantee of ESOP obligations 26,270 28,150 29,500 30,590 33,140
Other Data
Pool percentage 64% 64% 64% 60% 53%
Book value per share $ 24.23 $ 19.68 $ 17.98 $ 14.34 $ 13.18
Closing stock price per share $ 36.00 $ 24.75 $ 26.25 $ 21.17 $ 11.33
Return on average book value
per share 16.1% 17.0% 15.9% 14.2% 10.5%
Pretax investment yield 6.6% 6.5% 7.1% 7.6% 8.3%
Pretax profit on revenues 13.4% 13.1% 11.8% 8.7% 6.2%
Cash dividends to closing
stock price 1.9% 2.4% 1.9% 2.0% 3.3%
Closing stock price to
earnings ratio 10.2 7.8 10.1 10.9 8.5
Property-casualty statutory
combined ratio 95.7 97.1 99.3 102.5 107.9
Shares outstanding
Preferred shares 4,820 4,981 5,070 5,141 3,368
Common shares 9,445 9,000 9,026 4,469 4,281
22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the Selected
Financial Data and Consolidated Financial Statements and related footnotes
included elsewhere herein.
ALLIED Group, Inc. (the Company) is a regional insurance holding company. As of
December 31, 1995, The ALLIED Group Employee Stock Ownership Trust (ESOP Trust)
owned 26.9% of the outstanding stock. ALLIED Mutual Insurance Company (ALLIED
Mutual), an affiliated property-casualty insurance company, controlled 18% of
the voting stock of the Company.
The operating results of the property-casualty insurance industry are subject to
significant fluctuations from quarter to quarter and from year to year due to
the effect of competition on pricing, the frequency and severity of losses
incurred in connection with weather-related and catastrophic events, general
economic conditions, and other factors such as changes in tax laws and the
regulatory environment.
1995 COMPARED TO 1994
Consolidated revenues for 1995 were $552.8 million, up 8.9% over the $507.4
million reported for 1994. Excluding realized in gains, revenues grew 9.5% for
1995. The increase occurred primarily because of the 10.4% growth in earned
premiums.
Income before income taxes was up 10.7% to $73.8 million from $66.7 million for
1994 primarily because of revenue growth and improved underwriting margins for
the property-casualty segment. The property-casualty segment was the dominant
contributor to operating income with an increase of $9.7 million.
Net income for the year ended December 31, 1995 was up 10% to $52.4 million,
raising fully diluted earnings per share to $3.52 from $3.19. Fully diluted
earnings per share before net realized investment gains were $3.50 for 1995
compared with $3.05. Book value per share increased to $24.23 from $19.68.
Property-casualty
Revenues for the property-casualty segment increased to $472 million from $431.1
million for 1994. Direct earned premiums for the segment were $435.2 million for
1995 compared with $383.5 million one year earlier. Earned premiums increased
10.1% to $425.8 million from $386.7 million. The increase resulted primarily
from growth in insurance exposure as well as a larger average premium per
policy.
Pooled net written premiums (including ALLIED Mutual) totaled $692.6 million, a
9.4% increase over 1994 production. The average premium per policy for personal
lines was up 3.4% to $586 while the policy count grew 6.5%. The average premium
per policy for commercial lines increased 2% to $1,086, and policy count was up
5.3%. Earned premiums for the property-casualty segment were 65.7% personal
lines and 34.3% commercial lines. The business mix for 1994 was 65.4% personal
and 34.6% commercial lines.
Income before income taxes increased to $63.9 million from $54.2 million
primarily as a result of lower underwriting expenses in 1995 and an increase in
earned premiums. Investment income was $39.1 million compared with $35.3
million. The pretax yield on invested assets was 6.4%, down from 6.6% one year
earlier. Realized investment gains were $236,000 compared with $3 million.
Realized investment gains for 1994 included $2.6 million from the sale of the
segment's 20% interest in a savings and loan holding company. Other income
increased to $6.9 million from $6.1 million in 1994.
23
The statutory combined ratio (after policyholder dividends) improved to 95.7
from the 97.1 reported in 1994. Improvement was attributed primarily to a
1.3-point decrease in the underwriting expense ratio. The decrease was the
result of the Company's continuing efforts to improve efficiency and
productivity. Wind and hail losses for 1995 increased to $28.7 million from
$24.4 million in 1994. The impact of wind and hail losses on the statutory
combined ratio was 6.7 points for the year ended December 31, 1995 and 6.3
points for 1994. The underwriting gain (on a generally accepted accounting
principles basis) was $17.7 million compared with $9.8 million for 1994. On a
fully diluted basis, the impact of wind and hail losses on the results of
operations was $1.35 per share versus $1.15 in 1994.
The personal auto statutory combined ratio improved to 96.5 for 1995 from 97.4
last year. The improvement was due to a 1.4-point decrease in the underwriting
expense ratio that more than offset the increase in the loss and loss settlement
expense ratio. The statutory combined ratio for the homeowners line was 99.2
compared with 107.4 for 1994. The impact of wind and hail losses on the
homeowners combined ratio increased slightly to 21.7 points from 21.5 points.
Results for the homeowners line were favorably affected by better pricing in
1995. Overall, the personal lines statutory combined ratio improved to 97.2 in
1995 from 99.8 in 1994. The statutory combined ratio for commercial lines
increased to 92.7 from 92.0 for the previous year.
Excess & Surplus Lines
Earned premiums increased to $29.7 million for 1995 from $25.8 million for 1994.
Net written premiums increased 13.2% to $30.6 million from $27 million. Direct
earned premiums were $37.2 million compared with $32.3 million. As of December
31, 1995, the segment's book of business was comprised of 2.4% personal lines
and 97.6% commercial lines. For 1994, the business mix was 2.8% personal and
97.2% commercial lines.
The statutory combined ratio (after policyholder dividends) was 102.2, which
produced an underwriting loss (on a generally accepted accounting principles
basis) of $855,000. The statutory combined ratio of 99.9 for 1994 resulted in an
underwriting loss of $218,000. The 1995 combined ratio increased primarily
because of a 20.4% increase in losses and loss settlement expenses (3.4-points
on the combined ratio).
Income before income taxes for 1995 decreased 3.2% to $4.8 million from $5
million. The decrease was primarily due to poor loss development. Realized
investment losses were $136,000 compared with losses of $24,000 for 1994.
Investment income increased 11.2% to $5.8 million from $5.2 million. Investment
income increased because a larger average balance of invested assets more than
offset a 10 basis-point decline in the pretax yield from last year's 6.8%.
Invested assets rose 21.2% from the previous year-end to $96.4 million at
December 31, 1995.
Noninsurance Operations
Revenues for ALLIED Group Mortgage Company (ALLIED Mortgage) decreased in 1995
to $17.9 million from $18.3 million in 1994. Growth in revenues was adversely
affected by a decrease in interest income due to a decline in the average
balance of mortgage loans held for sale in 1995. The mortgage servicing
portfolio was $3 billion at year-end 1995 and 1994. Income before income taxes
for ALLIED Mortgage was up 13.8% to $4.5 million from $4 million for 1994. The
increase was primarily the result of lower operating expenses.
Revenues for the data processing operations decreased 6% to $48.6 million from
$51.8 million in 1994. The operations reported a pretax loss of $618,000 for
1995 and a pretax profit of $3.9 million the previous year. The 1995 decreases
were primarily the result of a reduction in revenues generated from the
affiliated property-casualty segment. Fees for processing and product
maintenance services were lowered during the year to more closely approximate
cost for providing such services to that segment's companies.
Investments and Investment Income
The investment policy for the Company's insurance segments requires that the
fixed maturity portfolio be invested primarily in debt obligations rated
investment grade (BBB) or higher by Standard & Poor's Corporation or a
recognized equivalent at the time of acquisition. The policy also states that
equity securities are to be of United States and Canadian corporations listed on
24
established exchanges or publicly traded in the over-the-counter market.
Preferred stock is to be comprised primarily of issues rated at least A3/A- by
Standard & Poor's Corporation or Moody's. At December 31, 1995 the Company's
investment portfolio consisted almost exclusively of fixed income securities;
98.1% were rated investment securities or higher. The portfolios contained no
real estate or mortgage loans.
Invested assets were up 17.7% to $772.3 million from $655.9 million at year-end
1994. Fixed maturities at amortized cost increased 11.2%. In 1995, the Company
reclassified all fixed maturities in held to maturity to available for sale.
Therefore, all fixed maturities were marked to market at December 31, 1995. See
Investments section in note 1 of Notes to Consolidated Financial Statements.
Consolidated investment income increased 15% to $47.2 million from $41.1 million
in 1994. The increase was due primarily to a larger average balance of invested
assets. The tax-equivalent yield was down in 1995 to 7.8% compared with 7.9% one
year earlier. The aftertax yield for 1995 and 1994 was 5.1%.
At December 31, 1995, the Company held collateralized mortgage obligation (CMO)
investments with a carrying and fair value of $77.7 million. The Company's
investments in CMOs as of December 31, 1994 had a carrying value of $59.6
million (fair value of $57 million). Substantially all of the Company's CMO
investments are in planned amortization class bonds or sequential pay bonds with
anticipated durations of approximately five years at the time of acquisition.
The Company has not invested in the more volatile types of CMO products such as
companion or accrual (Z-bond) tranches. All of the Company's CMO investments
have an active secondary market; accordingly, their effect on the Company's
liquidity does not differ from that of other fixed income investments.
Income Taxes
The Company's effective income tax rate was 29.1% compared with 28.6% for 1994.
The income tax expense for 1995 rose to $21.5 million from $19.1 million due to
higher operating income and a smaller percentage of tax-exempt investment
income.
1994 COMPARED TO 1993
Consolidated revenues for 1994 were $507.4 million, up 5.2% over the $482.4
million reported for 1993. Though earned premiums grew 12% in 1994, the
percentage increase in revenues was constrained by the sale of the Company's
investment banking and asset management subsidiary in October of 1993.
Income before income taxes was up 17.5% to $66.7 million from $56.8 million for
1993 primarily because of improved underwriting results for the
property-casualty segment. The segment's operating income increased $13.3
million.
Net income for the year ended December 31, 1994 was up 19.3% to $47.6 million,
raising fully diluted earnings per share to $3.19 from $2.61. Fully diluted
earnings per share before net realized investment gains were $3.05 compared with
$2.55. Book value per share increased to $19.68 from $17.98.
Property-casualty
Revenues for the property-casualty segment increased to $431.1 million from
$384.6 million for 1993. Direct earned premiums for the segment were $383.5
million for 1994 compared with $328.5 million one year earlier. Earned premiums
increased 12.3% to $386.7 million from $344.3 million. The increase resulted
primarily from growth in insurance exposure and a larger average premium per
policy.
Pooled net written premiums (including ALLIED Mutual) totaled $632.8 million, an
11.3 % increase over 1993 production. The average premium per policy for
personal lines was up 3.8% to $567 while the policy count grew 8%. The average
premium per policy for commercial lines increased 4.5% to $1,065, and policy
count was up 4.8%. Earned premiums for the property-casualty segment were 65.4%
personal lines and 34.6% commercial lines. The business mix for 1993 was 65.5%
personal and 34.5% commercial.
25
Income before income taxes increased to $54.2 million from $40.9 million as a
result of the first statutory underwriting profit in seven years. Investment
income was $35.3 million compared with $33.5 million. The pretax yield on
invested assets was 6.6%, down from 7% due to a larger investment in tax-exempt
securities. Realized investment gains were $3 million compared with $1.3
million; the increase was from the sale of the segment's 20% interest in a
savings and loan holding company in 1994 for $9.4 million. The pretax gain of
$2.6 million from the sale generated an aftertax gain on a fully diluted basis
of $0.13 per share. Other income increased to $6.1 million from $5.5 million in
1993.
The statutory combined ratio (after policyholder dividends) improved to 97.1
from the 99.3 reported in 1993. Improvement was attributed to a 1.2-point
decrease in the underwriting expense ratio and a 1-point decrease in the loss
and loss settlement expense ratio. The decreases were the result of the
Company's continuing efforts to improve efficiency and productivity. Wind and
hail losses for 1994 increased to $24.4 million from $18.7 million in 1993;
their impact on the combined ratio worsened to 6.3 points from 5.4 points for
1993. The underwriting gain (on a generally accepted accounting principles
basis) was $9.8 million compared with a gain of $611,000 for 1993. On a fully
diluted basis, wind and hail losses increased $0.26 per share to $1.15 in 1994.
The personal auto statutory combined ratio improved to 97.4 for 1994 from 98.3.
The improvement was due to a 10.6% growth in earned premiums that outpaced the
increase in losses and loss settlement expenses. The statutory combined ratio
for the homeowners line was 107.4 compared with 109.1 for 1993. The impact of
the wind and hail losses on the homeowners combined ratio increased to 21.5
points from 17.9 points, but the increase was offset by lower loss settlement
and underwriting expenses. Overall, the personal lines statutory combined ratio
improved to 99.8 in 1994 from 100.8 in 1993. The statutory combined ratio for
commercial lines improved to 92.0 from 96.3.
Excess & Surplus Lines
Earned premiums increased 7.4% to $25.8 million for 1994 from $24 million. Net
written premiums increased 8.6% to $27 million from $24.9 million. Direct earned
premiums were $32.3 million compared with $30 million. As of December 31, 1994,
the segment's book of business was comprised of 2.8% personal lines and 97.2%
commercial lines. For 1993, the business mix was 3.5% personal and 96.5%
commercial.
The statutory combined ratio (after policyholder dividends) was 99.9, which
produced an underwriting loss (on a generally accepted accounting principles
basis) of $218,000. The statutory combined ratio of 96.1 for 1993 resulted in an
underwriting gain of $647,000. The 1994 combined ratio worsened primarily
because of a 16.4% increase in incurred losses resulting from higher than
anticipated one unusually large claim; the loss and loss settlement expense
ratio increased 2.5 points.
Income before income taxes for 1994 decreased 11% to $5 million from $5.6
million for 1993. Realized investment losses were $24,000 compared with gains of
$103,000. Investment income increased 7.7% to $5.2 million from $4.9 million
because a larger average balance of invested assets more than offset the decline
in the pretax yield to 6.8% from 7.2%. Invested assets rose 6% from the previous
year-end to $79.6 million at December 31, 1994.
Noninsurance Operations
Revenues for ALLIED Mortgage decreased slightly in 1994 to $18.3 million from
$18.4 million in 1993, adversely affected by a sharp decrease in marketing
revenues in an interest rate environment that experienced rising rates
throughout the year. In 1993, falling interest rates provided the market with an
abundance of mortgage loans to be purchased or originated at below-market prices
and allowed the mortgage loans to be sold on the secondary market at a premium.
The stability in revenues in 1994 was attributed primarily to an increase in
servicing fees that offset the decline in marketing revenues. The mortgage
servicing portfolio grew 19.3% to $3 billion from $2.5 billion at year-end 1993.
Income before income taxes for ALLIED Mortgage was up 16.5% to $4 million from
$3.4 million for 1993. The increase was primarily the result of fewer servicing
rights being written off due to the reduction in refinancing activities in 1994.
During 1993, lower interest rates increased the amount of servicing rights being
expensed as the underlying mortgages were repaid or refinanced.
26
Revenues increased 6.8% for the data processing operations to $51.8 million from
$48.4 million in 1993. Income before income taxes decreased 16.8% to $3.9
million in 1994 from $4.6 million. The decrease occurred because the growth in
operating expenses outpaced the increase in revenues. Higher operating expenses
were the result of expensing direct development costs.
Investments and Investment Income
Invested assets were up 8.1% to $655.9 million from $606.5 million at year-end
1993. The investment portfolios consisted of 99.6% investment grade securities
at December 31, 1994. The fair value of the Company's investment in fixed
maturities held to maturity was $13.2 million below amortized cost compared with
an excess of $18.8 million at December 31, 1993.
Consolidated investment income increased 5.2% to $41.1 million from $39 million
for 1993. The Company's pretax rate of return on invested assets was down to
6.5% from the previous year's 7.1%. The aftertax yield for 1994 was 5.1%
compared with 5.4%.
As of December 31, 1994, the Company held collateralized mortgage obligation
(CMO) investments with a carrying value of $59.6 million (fair value of $57
million). The Company's investments in CMOs as of December 31, 1993 had a
carrying value of $104 million (fair value of $105.6 million).
Income Taxes
The Company's effective income tax rate was 28.6% compared with 29.7% for 1993.
The increased tax-exempt income in 1994 was primarily responsible for the change
in the effective tax rate. The income tax expense for 1994 rose to $19.1 million
from $16.8 million due to higher operating income.
REGULATIONS
The NAIC's risk based capital (RBC) requirements were adopted by the NAIC in
1993 and call for property-casualty insurance companies to calculate and report
information under the RBC formula. It is anticipated the Iowa legislature will
enact the NAIC's proposal into law in 1996. The RBC formula uses the statutory
financial statements to calculate the minimum indicated capital level to support
asset (investment and credit) risk and underwriting (loss reserves, premiums,
and unearned premiums) risk. The subsidiaries' statutory financial statements
and counsel's interpretation of the RBC formula lead management to believe
capital levels are sufficient to support the level of risk inherent in Company
operations and are in excess of the minimums required.
The NAIC's model legislation to govern insurance company investments is in
development. An exposure draft was released in December of 1995, and the model
investment law may be adopted by the NAIC in 1996. The effect of the adoption by
the Iowa legislature is not expected to be significant to the Company.
California has been the source of approximately 25% of the pool's direct written
premiums for the past ten years. Proposition 103, approved by California voters
in 1988, provides for a rollback of rates on premiums collected in calendar year
1989 to the extent that the insurer's return on equity for each Proposition 103
line exceeded 10%. Since it was passed, Proposition 103 has been the subject of
a number of legal and regulatory proceedings for the purpose of clarifying the
scope and extent of insurers' rollback obligations. Management of the Company
continues to believe that the insurance subsidiaries will not be liable for any
material rollback of premiums.
LIQUIDITY AND CAPITAL RESOURCES
Substantial cash inflows are generated from premiums, pool administration fees,
investment income, and proceeds from maturities of portfolio investments. The
principal outflows of cash are payments of claims, commissions, premiums taxes,
operating expenses, income taxes, and the purchase of fixed maturities and
equity securities. In developing its strategy, the Company establishes a level
27
of cash and highly liquid short- and intermediate-term securities that, combined
with expected cash flow, is believed adequate to meet anticipated short-term and
long-term payment obligations.
In 1995, operating activities generated cash flows of $97.9 million; in 1994,
the total was $85.5 million; in 1993, the total was $91.6 million (including
$25.8 million from the 1993 change in the pool participation percentage and pool
administration). For each year, the primary source of funds was premium growth
in the Company's property-casualty insurance operations. Proceeds from the sale
of 1.6 million shares of common stock in the first quarter of 1993 accounted for
the majority of the $38.1 million generated from financing activities during
1993.
In each of the years, funds generated from operating activities were used
primarily to purchase investment grade fixed securities, accounting for the
majority of cash used in investing activities. The net cash used in investing
activities in 1995, 1994, and 1993 was $88.8 million, $69.5 million, and $128.8
million, respectively. In 1993, additional funds were generated from financing
activities and were used primarily to purchase investment grade fixed
maturities. In 1995, 1994, and 1993, the Company paid dividends of $13.5
million, $12.7 million, and $11.8 million, respectively.
In 1994, the Company also used funds to repurchase $6.4 million of common stock.
On February 11, 1994, the Company's Board of Directors approved a plan to
repurchase up to 250,000 shares of the Company's common stock on the open
market. The 250,000 shares were repurchased at an average cost of $25.44 per
share. The repurchase program was completed during November of 1994.
On December 14, 1994, the Company's Board of Directors approved the repurchase
of an additional 250,000 shares of the Company's common stock on the open
market. Through December 31, 1995, the Company had not repurchased any shares
under this program.
Management anticipates that short-term and long-term capital expenditures, cash
dividends, and operating cash needs will be met from existing capital and
internally generated funds. In 1994, additional funds of $9.4 million were
generated from the sale of the 20% interest in a savings and loan holding
company. As of December 31, 1995, the Company and its subsidiaries had no
material commitments for capital expenditures. Future debt and stock issuance
will be considered as additional capital needs arise. The method of funding will
depend upon financial market conditions.
The Company's mortgage banking subsidiary, ALLIED Mortgage, has separate credit
agreements to support its operations. Short-term and long-term notes payable to
nonaffiliated companies are used by ALLIED Mortgage to finance its mortgage
loans held for sale, to purchase servicing rights, and to purchase short-term
investments. These notes payable are not guaranteed by the Company. At December
31, 1995, ALLIED Mortgage had short-term borrowings of $22.5 million, which are
to be repaid through the subsequent sale of securities inventory. The amount of
short-term borrowings fluctuates daily depending on the level of inventory being
financed. Long-term borrowings amounted to $13.5 million to be repaid over the
next nine years. See note 8 of Notes to Consolidated Financial Statements. In
the normal course of its business, ALLIED Mortgage also makes commitments to buy
and sell securities that may result in credit and market risk in the event the
counterparty is unable to fulfill its obligation. See note 14 of Notes to
Consolidated Financial Statements.
Historically, the Company's insurance subsidiaries have generated sufficient
funds from operations to pay their claims. While the property-casualty and
excess & surplus lines insurance companies have maintained adequate investment
liquidity, they have in the past required additional capital contributions to
support premium growth. Industry and regulatory guidelines suggest that a
property-casualty insurer's annual net written premiums should not exceed
approximately 300% of statutory surplus. At December 31, 1995, the
property-casualty and excess & surplus lines segments' net written premiums were
171% and 110% of their statutory surplus, respectively. On February 18, 1993,
1.6 million shares of common stock were sold to the public at $24.67 per share;
the Company used the net proceeds to contribute $36.1 million to the
property-casualty subsidiaries and improve overall liquidity.
The Company relies primarily on dividends from its insurance subsidiaries to pay
preferred and common stock dividends to Company stockholders. State insurance
regulations restrict the maximum amount of dividends the property-casualty
subsidiaries can pay without prior regulatory approval. The maximum dividend
that the subsidiaries may pay without prior approval of the insurance
authorities is the greater of either 10% of the subsidiary's statutory capital
28
stock and surplus as of the preceding December 31 or net income of the preceding
calendar year. In 1996 the maximum amount legally available for distribution to
the Company without prior approval is $44.1 million.
The excess & surplus lines subsidiary is domiciled in Arizona and operates under
Arizona state laws. The maximum amount available for distribution as dividends
from the excess & surplus lines subsidiary is limited to the lesser of 10% of
stockholders' surplus as of the preceding December 31 or net investment income
of the pre year. The excess & surplus lines segment could pay $2.8 million in
1996 without prior notice to the insurance commissioner. The Company anticipates
that the excess & surplus lines segment will not pay dividends in 1996.
During 1995, the Company received dividend payments of $12 million from the
property-casualty subsidiaries and $974,000 from noninsurance subsidiaries.
During 1994 and 1993, the property-casualty subsidiaries made dividend payments
of $7.8 million and $7.7 million, respectively, to the Company; noninsurance
subsidiaries paid dividends of $1.1 million and $440,000, respectively.
Dividend payments to common stockholders totaled $6.3 million for the year ended
December 31, 1995, up from $5.4 million and $4.4 million in 1994 and 1993,
respectively. In 1995, 1994, and 1993, the Company paid dividends of $3.7
million, $3.8 million, and $3.9 million, respectively, on the ESOP Series. In
each year, the Company paid dividends of $3.5 million on the 6-3/4% Series
preferred stock.
At its March 5, 1996 meeting, the Board of Directors approved a first-quarter
1996 common stock dividend of $0.22 per share for payment to holders of record
on March 26. The dividend is $0.05 (29.4%) higher than the amount paid in the
fourth quarter of 1995.
On March 7, 1996, the ESOP Trust converted its shares of the ESOP Series to
approximately 4.4 million shares of common stock. The conversion increased the
number of shares outstanding to 13.9 million. Paying the first-quarter 1996
common stock dividends on the new shares of common stock held by the ESOP Trust
will increase the Company's dividend payments in the first quarter by $675,000.
If the $0.22 rate is approved by the Board each quarter of 1996, the annual
dividend payments will rise $939,000 as a result of the conversion of the ESOP
Series share to common stock. The impact is greatest in the first quarter
because the ESOP Trust will receive the full first-quarter dividend in addition
to the ESOP Series dividend for the two months prior to the conversion.
In 1990, the ESOP Trust issued notes totaling $35 million (ESOP obligations) to
acquire ESOP Series preferred stock for the Company's Employee Stock Ownership
Plan (ESOP). In March 1995, the ESOP Trust refinanced its notes with a Term
Credit Agreement and Guaranty (Agreement) with two separate commercial banks.
The Company guaranteed the ESOP Trust's obligations under the Agreement. See
note 9 of Notes to Consolidated Financial Statements. At December 31, 1995, the
balance of the obligations was $26.3 million. Company contributions plus
dividends on the ESOP Series preferred stock are used by the ESOP Trust to
service the ESOP obligations. Dividends and payments for the employee lease fees
from its subsidiaries are used by the Company to fund the amounts paid to the
ESOP Trust. The Company made contributions to the ESOP Trust of $733,000 in
1995, $35,000 in 1994, and $54,000 in 1993. The Company paid dividends of $2.8
million in 1995, 1994, and 1993, which were used for such debt service. In
connection with its ESOP guarantee of ESOP obligations, the Company is required
to maintain minimum stockholders' equity and to comply with certain other
financial covenants. See notes 9 and 15 of Notes to Consolidated Financial
Statements.
Insurance premiums are established before the amount of losses and loss
settlement expenses, or the extent to which inflation may affect such expenses,
is known. Consequently, the Company attempts to anticipate the impact of
inflation in establishing premiums. Inflation is implicitly considered in the
determination of reserves for losses and loss settlement expenses since portions
of the reserves are expected to be paid over extended periods of time. The
importance of continually reviewing reserves is even more pronounced in periods
of extreme inflation.
29
THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK
30
Item 8. Financial Statements and Supplementary Data
Management's Representation
The management of ALLIED Group, Inc. is responsible for the integrity and fair
presentation of the consolidated financial statements, related notes, and all
other information presented herein. The statements were prepared in accordance
with generally accepted accounting principles and include amounts that are based
on management's best estimates and judgements.
Management maintains a system of internal control designed to provide reasonable
assurance as to the integrity and reliability of the financial statements, the
protection of assets from unauthorized use or disposition, the prevention and
detection of fraudulent financial reporting, and the appropriate division of
responsibility. In addition, the Company's internal audit department
systematically reviews these controls, evaluates their adequacy and
effectiveness, and reports thereon. Management has considered internal audit
recommendations and those of KPMG Peat Marwick LLP and has in its opinion
responded appropriately to those recommendations. Management believes that as of
December 31,1995 the Company's system of internal control is adequate to
accomplish the objectives discussed herein.
The Company's financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The audit was conducted in accordance
with generally accepted auditing standards, which included a consideration of
the Company's system of internal control to the extent necessary to form an
independent opinion on the financial statements prepared by management.
The audit committee of the Board of Directors, composed solely of outside
directors, oversees management's discharge of its financial reporting
responsibilities. The committee meets periodically with management, internal
auditors, and representatives of KPMG Peat Marwick LLP to discuss auditing,
financial reporting and internal control matters. Both internal and independent
auditors have access to the audit committee without management's presence.
Jamie H. Shaffer
President (Financial)
31
Independent Auditors' Report
The Board of Directors and Stockholders
ALLIED Group, Inc.
We have audited the accompanying consolidated balance sheets of ALLIED Group,
Inc. and subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis. evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ALLIED Group, Inc.
and subsidiaries as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in note 1 of Notes to Consolidated Financial Statements, the
Company changed its method of accounting for investments in fixed maturities in
1993.
KPMG Peat Marwick LLP
Des Moines, Iowa
February 2, 1996 except for note 20,
which is as of March 7, 1996
32
ALLIED Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
December 31,
---------------------------------
1995 1994
-------------- --------------
Assets
Investments (note 2)
Fixed maturities (note 3)
Available for sale at fair value $ 754,547 $ 243,568
Held to maturity at amortized cost --- 401,717
Equity securities at fair value (note 3) 7,948 4,507
Short-term investments at cost (notes 3 and 4) 9,802 5,656
Other investments at equity 2 458
-------------- --------------
Total investments 772,299 655,906
Cash 1,465 1,541
Indebtedness from affiliates (note 4) --- 572
Accrued investment income 10,467 10,349
Accounts receivable 76,118 68,466
Current income taxes recoverable (note 17) 1,330 2,594
Reinsurance receivables for losses and loss settlement expenses 19,293 20,936
Mortgage loans held for sale (notes 2 and 8) 13,673 15,540
Deferred policy acquisition costs 41,688 38,269
Prepaid reinsurance premiums 6,784 6,381
Mortgage servicing rights (note 8) 35,705 36,981
Deferred income taxes (note 17) --- 9,100
Other assets 31,776 26,116
-------------- --------------
Total assets $ 1,010,598 $ 892,751
============== ==============
See accompanying Notes to Consolidated Financial Statements.
33
December 31,
---------------------------------
1995 1994
-------------- --------------
Liabilities
Losses and loss settlement expenses (notes 5 and 6) $ 341,864 $ 310,996
Unearned premiums 196,461 180,113
Outstanding drafts 3,708 13,309
Indebtedness to affiliates (note 4) 1,019 ---
Notes payable to nonaffiliates (notes 2 and 8) 35,965 41,541
Notes payable to affiliates (notes 2 and 4) 3,500 2,000
Guarantee of ESOP obligations (notes 2 and 9) 26,270 28,150
Deferred income taxes (note 17) 2,854 ---
Other liabilities (notes 14 and 16) 37,371 34,761
-------------- --------------
Total liabilities 659,012 610,870
-------------- --------------
Stockholders' equity
Preferred stock, no par value, issuable in series,
authorized 7,500 shares (note 10)
6-3/4% Series, 1,827 shares issued and outstanding 37,813 37,813
ESOP Series, issued and outstanding 2,993 shares
in 1995 and 3,154 shares in 1994 45,835 47,753
Common stock, no par value, $1 stated value, authorized
40,000 shares, issued and outstanding 9,445 shares
in 1995 and 9,000 shares in 1994 (notes 11 and 12) 9,445 9,000
Additional paid-in capital 104,596 98,926
Retained earnings (note 13) 159,470 119,752
Unrealized appreciation (depreciation) of investments
(net of deferred income tax (expense)
benefit of ($9,907) and $2,869) 18,335 (5,241)
Unearned compensation related to ESOP (note 9) (23,908) (26,122)
-------------- --------------
Total stockholders' equity 351,586 281,881
-------------- --------------
Commitments and contingent liabilities (notes 6 and 14)
Total liabilities and stockholders' equity $ 1,010,598 $ 892,751
============== ==============
See accompanying Notes to Consolidated Financial Statements.
34
ALLIED Group, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
Year ended December 31,
----------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
Revenues
Earned premiums (notes 4 and 6) $ 455,499 $ 412,518 $ 368,336
Investment income (note 3) 47,242 41,070 39,030
Realized investment gains (notes 3 and 7) 505 2,888 1,396
Income from affiliates (note 4) 5,285 4,737 5,478
Other income 44,234 46,151 68,202
-------------- -------------- --------------
552,765 507,364 482,442
-------------- -------------- --------------
Losses and expenses (note 4)
Losses and loss settlement expenses (notes 5 and 6) 317,940 286,944 258,918
Amortization of deferred policy acquisition costs 100,120 90,858 81,154
Other underwriting expenses 20,583 25,090 27,006
Other expenses 38,713 35,419 55,486
Interest expense (note 8) 1,561 2,354 3,121
-------------- -------------- --------------
478,917 440,665 425,685
-------------- -------------- --------------
Income before income taxes 73,848 66,699 56,757
-------------- -------------- --------------
Income taxes (note 17)
Current 22,293 17,499 18,421
Deferred (822) 1,575 (1,586)
-------------- -------------- --------------
21,471 19,074 16,835
-------------- -------------- --------------
Net income $ 52,377 $ 47,625 $ 39,922
============== ============== ==============
Net income applicable to common stock $ 45,160 $ 40,319 $ 32,502
============== ============== ==============
Earnings per share
Primary $ 4.91 $ 4.48 $ 3.68
============== ============== ==============
Fully diluted $ 3.52 $ 3.19 $ 2.61
============== ============== ==============
See accompanying Notes to Consolidated Financial Statements.
35
ALLIED Group, Inc. and Subsidiaries
Statements of Stockholders' Equity
(in thousands)
Year ended December 31,
----------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
Preferred stock, beginning of year $ 85,566 $ 87,125 $ 88,055
Issuance of shares of ESOP Series (note 10) 699 794 889
ESOP Series shares converted to
common shares (note 11) (2,617) (2,353) (1,819)
-------------- -------------- --------------
Preferred stock, end of year 83,648 85,566 87,125
-------------- -------------- --------------
Common stock, beginning of year 9,000 9,026 4,469
Issuance of shares of common stock (notes 11 and 12) 445 224 1,719
Repurchase of shares of common stock (note 11) --- (250) ---
Effect of 3-for-2 stock split --- --- 2,838
-------------- -------------- --------------
Common stock, end of year 9,445 9,000 9,026
-------------- -------------- --------------
Additional paid-in capital, beginning of year 98,926 101,541 57,810
Issuance of shares of common stock (notes 11 and 12) 5,670 3,258 46,569
Repurchase of shares of common stock (note 11) --- (6,110) ---
Effect of 3-for-2 stock split --- --- (2,838)
Other, net --- 237 ---
-------------- -------------- --------------
Additional paid-in capital, end of year 104,596 98,926 101,541
-------------- -------------- --------------
Retained earnings, beginning of year 119,752 83,922 54,902
Net income 52,377 47,625 39,922
Dividends paid on preferred stock (note 10) (7,217) (7,306) (7,421)
Dividends paid on common stock (note 11) (6,291) (5,396) (4,423)
Tax benefits attributable to tax deductible dividends
on unallocated shares of the ESOP 849 907 942
-------------- -------------- --------------
Retained earnings, end of year 159,470 119,752 83,922
-------------- -------------- --------------
Unrealized (depreciation) appreciation of investments,
beginning of year (5,241) 5,900 ---
Change in unrealized appreciation (depreciation), net 23,576 (11,141) 17
Cumulative effect of accounting change for
investments (note 1) --- --- 5,883
-------------- -------------- --------------
Unrealized appreciation (depreciation) of
investments, end of year 18,335 (5,241) 5,900
-------------- -------------- --------------
Unearned compensation related to ESOP,
beginning of year (26,122) (27,874) (29,221)
Cost of ESOP Series shares allocated 2,214 1,752 1,347
-------------- -------------- --------------
Unearned compensation related to ESOP,
end of year (23,908) (26,122) (27,874)
-------------- -------------- --------------
Total stockholders' equity $ 351,586 $ 281,881 $ 259,640
============== ============== ==============
See accompanying Notes to Consolidated Financial Statements.
36
ALLIED Group, Inc. and Subsidiaries
Statements of Cash Flows
(in thousands)
Year ended December 31,
----------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
Cash flows from operating activities
Net income $ 52,377 $ 47,625 $ 39,922
Adjustments to reconcile net income to net cash
provided by operating activities
Losses and loss settlement expenses 30,868 31,140 32,508
Unearned premiums, net 15,945 17,575 18,817
Deferred policy acquisition costs (3,419) (3,861) (4,080)
Accounts receivable, net (6,009) (13,151) (20,873)
Depreciation and amortization 9,583 6,576 10,463
Realized investment gains (505) (2,888) (1,396)
Mortgage loans held for sale, net (1,529) 9,944 15,005
Indebtedness with affiliates 1,591 1,815 (1,118)
Accrued investment income (118) (992) (1,236)
Other assets (6,644) (15,386) (15,796)
Cost of ESOP Series shares allocated 2,214 1,752 1,347
Income taxes
Current 1,264 (81) (1,001)
Deferred (822) 1,575 (1,586)
Other, net 3,109 3,902 (5,157)
-------------- -------------- --------------
97,905 85,545 65,819
Cash provided from the change in the reinsurance
pooling agreement (note 4) --- --- 25,778
-------------- -------------- --------------
Net cash provided by operating activities 97,905 85,545 91,597
-------------- -------------- --------------
Cash flows from investing activities
Purchase of fixed maturities
Available for sale (184,600) (91,722) (18,473)
Held to maturity --- (104,233) (219,912)
Purchase of equity securities (4,819) (814) (3,778)
Purchase of equipment (7,794) (5,653) (4,942)
Sale of fixed maturities
Available for sale 48,012 26,606 20,142
Held to maturity (note 3) --- 5,733 ---
Maturities, calls, and principal reductions of
fixed maturities
Available for sale 36,456 34,532 ---
Held to maturity 25,510 54,825 79,548
Sale of equity securities 2,072 215 ---
Short-term investments, net (4,146) 1,263 3,215
Sale of subsidiary (note 7) --- --- 14,304
Sale of other investment (note 7) --- 9,395 ---
Sale of equipment 470 358 1,094
-------------- -------------- --------------
Net cash used in investing activities (88,839) (69,495) (128,802)
-------------- -------------- --------------
Cash flows from financing activities
Notes payable to nonaffiliates, net (2,180) 380 1,800
Notes payable to affiliates, net 1,500 (1,500) (153)
Issuance of preferred stock 699 794 889
Issuance of common stock 3,498 1,129 46,469
Repurchase of common stock --- (6,360) ---
Dividends paid to stockholders, net of
income tax benefit (12,659) (11,795) (10,902)
-------------- -------------- --------------
Net cash (used in) provided by financing activities (9,142) (17,352) 38,103
-------------- -------------- --------------
Net (decrease) increase in cash (76) (1,302) 898
Cash at beginning of year 1,541 2,843 1,945
-------------- -------------- --------------
Cash at end of year $ 1,465 $ 1,541 $ 2,843
============== ============== ==============
See accompanying Notes to Consolidated Financial Statements.
37
ALLIED Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(1) Summary Of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
ALLIED Group, Inc. (the Company) and its property-casualty, excess & surplus
lines, and noninsurance subsidiaries on a consolidated basis.
The Company's property-casualty segment operates through three subsidiaries:
AMCO Insurance Company (AMCO), ALLIED Property and Casualty Insurance Company
(ALLIED Property and Casualty), and Depositors Insurance Company (Depositors),
which underwrite personal lines (primarily automobile and homeowners) and small
commercial lines. The property-casualty segment operates exclusively in the
United States and primarily in central and western states. Iowa and California
accounted for 23.3% and 24%, respectively, of 1995 direct written premiums. The
property-casualty segment markets its products through three distribution
systems: independent agencies, exclusive agencies, and direct response. The
property-casualty segment accounted for 85.4% of 1995 consolidated revenues.
Western Heritage Insurance Company (Western Heritage) is the excess & surplus
lines subsidiary, which primarily underwrites commercial lines. The excess &
surplus lines segment operates exclusively in the United States. In 1995 the
segment accounted for 6.4% of consolidated revenues.
The noninsurance subsidiaries are ALLIED Group Mortgage Company (ALLIED
Mortgage), Dougherty Dawkins, Inc. and subsidiaries (Dougherty Dawkins) through
October 29, 1993, ALLIED Group Information Systems, Inc. (AGIS), The Freedom
Group, Inc. (Freedom Group), Midwest Printing Services, Ltd., ALLIED Group
Leasing Corporation, and ALLIED General Agency Company.
At year-end 1995 the ALLIED Group Employee Stock Ownership Trust (ESOP Trust)
owned 26.9% of the outstanding voting stock of the Company. ALLIED Mutual
Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance
company, controlled 18% of the voting stock of the Company.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP), which differ in some respects
from those followed in reports to insurance regulatory authorities. The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. All significant intercompany balances and transactions have been
eliminated. Certain amounts in the financial statements for prior years have
been reclassified to conform to the current year's presentation.
Investments
In compliance with Statement of Financial Accounting Standards (SFAS) 115,
"Accounting for Certain Investments in Debt and Equity Securities," investments
in fixed maturities where there is the positive intent and ability to hold to
maturity are classified as held to maturity and carried at cost adjusted for
amortization of premium or discount. Amortization of premiums and discounts on
mortgage-backed securities incorporates a prepayment assumption to estimate the
securities' expected lives. Except for declines that are other than temporary,
changes in fair value are not reflected in the financial statements. Investments
in fixed maturities that may be sold prior to maturity and are not bought and
38
held principally for the purpose of selling in the near term are segregated into
an available for sale portfolio and are carried at fair value. Unrealized
appreciation and depreciation of securities classified as available for sale are
excluded from income and reported as a separate component of stockholders'
equity net of deferred income taxes.
In conjunction with the adoption of SFAS 115 on December 31, 1993, the Company
reclassified certain securities totaling $199,618 to securities available for
sale from securities held to maturity. The reclassification increased
stockholders' equity by $5,883 net of deferred income taxes.
In November of 1995, the Financial Accounting Standards Board (FASB) issued an
implementation guide entitled, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," which
included transition guidelines that permitted the Company to reassess the
appropriateness of its classification of all securities held at November 30,
1995; reassessment was to be completed no later than December 31, 1995. Prior to
the deadline, the Company reclassified $359,409 of securities held to maturity
to securities available for sale. The reclassification increased unrealized
appreciation of investments by $7,727 net of deferred income taxes.
The carrying values of all investments in fixed maturities are reviewed on an
ongoing basis. If this review indicates that a decline in fair value below cost
is other than temporary, the Company's carrying value in the investment is
reduced to its estimated realizable value and a specific write-down is taken.
Such reductions in carrying value are recognized as realized losses and charged
to income. Realized gains and losses on disposition of investments are based on
specific identification of the investments sold.
Equity securities are carried at fair value with any unrealized appreciation and
depreciation reported net of deferred income taxes as a separate component of
stockholders' equity. All short-term investments are recorded at cost, which
approximates fair value. Other investments are reported using the equity method.
Other investments at December 31, 1995 and 1994 included a 20% ownership in
Black Hawk Holding Company (Black Hawk), an abstract and title holding company.
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. Derivatives are used to hedge
against well defined market and interest rate risks. The Company has entered
into an interest rate swap agreement to reduce its exposure to interest rate
risk associated with its guarantee of ESOP obligations. ALLIED Mortgage enters
into futures, options, and cash markets to limit its exposure to market risk on
mortgage loans held for sale.
Property-casualty and Excess & Surplus Lines
Premiums are recognized as revenue ratably over the terms of the respective
policies. Unearned premiums are calculated on the monthly pro rata basis.
Amounts paid for ceded reinsurance premiums are reported as prepaid reinsurance
premiums and amortized over the remaining contract period in proportion to the
amount of insurance protection provided. Premiums receivable from policyholders
and agents are recorded at cost less an allowance for doubtful accounts.
Policy acquisition costs such as commissions, premium taxes, and certain other
underwriting and agency expenses that vary with and are directly related to the
production of business have been deferred. Such deferred policy acquisition
costs are being amortized as premium revenue is recognized. The method followed
in computing deferred policy acquisitions costs limits the amount of such
deferred costs to their estimated realizable value, which gives effect to the
premium to be earned, related investment income, losses and loss settlement
expenses, and certain other costs expected to be incurred as the premium is
earned.
Liabilities for losses are based upon case-basis estimates of reported losses,
estimates of unreported losses based upon prior experience adjusted for current
trends, and estimates of losses expected to be paid under assumed reinsurance
39
contracts. Liabilities for loss settlement expenses are provided by estimating
expenses expected to be incurred in settling the claims provided for in the loss
reserve. Changes in estimates are reflected in current operating results (note
5).
Ceded reinsurance amounts with unaffiliated reinsurers relating to reinsurance
receivables for paid and unpaid losses and loss settlement expenses and prepaid
reinsurance are reported on the balance sheets on a gross basis. Amounts ceded
to ALLIED Mutual relating to the affiliated reinsurance pooling agreement and
the property catastrophe reinsurance agreement have not been grossed up because
the contracts provide that receivables and payables may be offset upon
settlement.
The liabilities for losses and loss settlement expenses are considered adequate
to cover the ultimate cost of losses and claims incurred to date net of
estimated salvage and subrogation recoverable. Since the provisions are
necessarily based on estimates, the ultimate liability may be more or less than
such provisions.
Noninsurance Operations
Mortgage loans held for sale by ALLIED Mortage are reported at the lower of cost
or fair value on an aggregate basis. The fair value calculation includes
consideration of all open positions, outstanding commitments from investors,
related fees paid, and unrealized gains and losses from open options and
financial futures contracts. Loan origination fees and certain direct costs
related to loan origination are deferred and recognized at the time the related
loans are sold. In the normal course of business, ALLIED Mortgage protects its
position in mortgages by taking positions in options, futures, and cash markets.
Market risk exists in the event of fluctuations in market prices on the unhedged
portions of mortgage loans held for sale and outstanding commitments.
Effective January 1, 1995, ALLIED Mortgage adopted SFAS 122, "Accounting for
Mortgage Servicing Rights, an Amendment of FASB Statement No. 65." Accordingly,
ALLIED Mortgage recognizes as separate assets the rights to service mortgage
loans for others, whether acquired through purchases or loan originations.
Capitalized mortgage servicing rights are assessed periodically for impairment
based on the fair value of those rights. ALLIED Mortgage stratifies its mortgage
servicing portfolio on the basis of certain risk characteristics, including loan
type and note rate, and determines fair value based upon the present value of
estimated future cash flows. Impairment is recognized through a valuation
allowance for each impaired stratum. The total valuation allowance for
capitalized mortgage servicing rights was $1,368 as of December 31, 1995. The
fair value of capitalized mortgage servicing rights as of December 31, 1995 was
approximately $40,186. Capitalized mortgage servicing rights are amoritzed over
twelve years using the straight-line method, which management believes
approximates the realization of the related net servicing income. Amortization
of servicing rights for the years ended December 31, 1995, 1994, and 1993 was
$4,728, $3,507, and $6,033, respectively. The adoption of SFAS 122 did not have
a material effect on the financial statements. Prior to adoption of SFAS 122,
the Company capitalized only the costs related to purchased mortgage servicing
rights.
Depreciation and Amortization
Equipment and software are included in other assets at cost less accumulated
depreciation and amortization. For financial reporting purposes, depreciation
and amortization are provided primarily on the straight-line basis over the
estimated useful lives of the assets, ranging from two to seven years.
Accelerated depreciation methods are utilized for income tax purposes.
Retirement Plan Costs
The amount of compensation cost related to The ALLIED Group Employee Stock
Ownership Plan (ESOP) is based on the cost of the shares allocated to
participants plus interest expense incurred related to the debt of the ESOP
reduced by dividends paid used to service the ESOP's debt (the shares allocated
40
method). The income tax benefit for the tax deductibility of dividends paid on
unallocated shares of the ESOP available for debt service is included as a
direct addition to retained earnings.
Stock-based Compensation
The FASB issued SFAS 123, "Accounting for Stock-Based Compensation," in October
of 1995. SFAS 123 specifies a fair value method of accounting for stock-based
compensation plans and recognizes compensation cost over the vesting period of
the option granted. An entity is permitted to determine its net income by
continuing to apply Opinion 25, "Accounting for Stock Issued to Employees," but
must comply with the disclosure requirements of SFAS 123. SFAS 123 is required
to be adopted for fiscal years beginning after December 15, 1995. The Company
will adopt the disclosure requirements of SFAS 123 for the year ended December
31, 1996 but will continue to account for stock-based compensation plans under
Opinion 25.
Income Taxes
Deferred income taxes reflect the impact of temporary differences between the
tax basis of assets and liabilities and the reported amounts of those assets and
liabilities for financial reporting purposes. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Income tax expense provisions increase or decrease in the
same period in which a change in tax rates is enacted.
Earnings per Share
Primary earnings per share calculations are computed after net income is reduced
by the amount of dividends paid on the Company's preferred stock and divided by
the weighted average of common stock and common stock equivalents outstanding
during the period. Securities that are in substance equivalent to common stock
(primarily stock options) are referred to as common stock equivalents.
Fully diluted earnings per share calculations are based on the weighted average
number of shares of common stock and common stock equivalents outstanding for a
period and the assumed conversion of the ESOP Series convertible preferred stock
into common stock. Net income is reduced by dividends on the 6-3/4% Series
preferred stock and by the additional costs for the ESOP resulting from the
assumed replacement of the convertible preferred stock dividends with common
stock dividends net of the related income taxes.
Cash Flows
For purposes of reporting cash flows, changes in notes payable issued by ALLIED
Mortgage to purchase mortgage loans held for sale are included in cash flows
from operating activities.
41
(2) Fair Value of Financial Instruments
The estimated fair value amounts have been determined by using available market
information and appropriate valuation methods. The estimates presented herein
are not necessarily indicative of the amounts that would be realized in a
current market exchange, and the use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
Fixed maturities (available for sale and held to maturity)--The estimated fair
value is based upon the quoted market prices for the same or similar issues or
from independent pricing services (note 3).
Equity securities--The estimated fair value is based upon the quoted market
prices where available or from independent pricing services (note 3).
Short-term investments--Due to their short-term nature, their carrying amount
approximates fair value.
Mortgage loans held for sale--The fair value is estimated using quoted market
prices and includes commitments to extend credit and forward sales commitments
(note 14).
Excess servicing rights--The fair value represents the present value of
estimated future servicing revenues in excess of normal servicing revenues over
the assumed life of the servicing portfolio.
Notes payable to affiliates and nonaffiliates--Due to the short maturity of the
short-term notes payable, carrying value approximates fair value. The fair value
of the long-term notes payable is estimated using current rates available for
similar issues (notes 4 and 8).
Guarantee of ESOP obligations--Due to its floating interest rate, the guarantee
approximates its fair value (note 9).
Interest rate swap agreement (derivative)--The fair value reflects the estimated
amount the Company would pay to terminate the contract at year-end, thereby
taking into account the current unrealized gains or losses of the open contract.
Dealer quotes are available for the Company's derivative (note 9).
Other financial instruments--Due to their short-term nature, their carrying
amount approximates fair value.
42
The following table presents the carrying value and estimated fair value of the
financial instruments at December 31, 1995 and 1994.
1995 1994
---------------------------- ----------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
------------ ------------ ----------- ------------
Fixed maturities - available for sale $ 754,547 $ 754,547 $ 243,568 $ 243,568
Fixed maturities - held to maturity --- --- 401,717 388,486
Equity securities 7,948 7,948 4,507 4,507
Short-term investments 9,802 9,802 5,656 5,656
Mortgage loans held for sale 13,673 13,673 15,540 15,540
Excess servicing rights 538 538 559 559
Notes payable to nonaffiliates (35,965) (36,364) (41,541) (39,145)
Notes payable to affiliates (3,500) (3,500) (2,000) (2,000)
Guarantee of ESOP obligations (26,270) (26,270) (28,150) (28,150)
Interest rate swap agreement --- (1,052) --- (405)
The estimated fair values presented herein are based on pertinent information
available to management as of December 31, 1995 and 1994. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since those dates; current estimates of fair value
may differ significantly from the amounts presented herein.
43
(3) Investments
Following is a schedule of amortized costs and estimated fair values of
investments in fixed maturities and equity securities as of December 31, 1995
and 1994. The estimated fair values for fixed maturities and equity securities
are based on quoted market prices for the same or similar issues or from
independent pricing services.
Gross Gross Estimated
Amortized unrealized unrealized fair
1995 cost gains losses value
------------ ------------ ------------ ------------
Fixed maturities
Available for sale
U.S. Treasury securities $ 79,653 $ 2,493 $ 1 $ 82,145
U.S. Government corporations and agencies 8,186 440 --- 8,626
Obligations of states and political subdivisions 273,822 11,098 280 284,640
Foreign governments 2,091 70 --- 2,161
Corporate securities and public utilities 167,540 6,089 22 173,607
Mortgage-backed securities 195,434 8,017 83 203,368
------------ ------------ ------------ ------------
Totals $ 726,726 $ 28,207 $ 386 $ 754,547
============ ============ ============ ============
Equity securities $ 7,527 $ 486 $ 65 $ 7,948
============ ============ ============ ============
1994
Fixed maturities
Available for sale
U.S. Treasury securities $ 92,540 $ 12 $ 3,935 $ 88,617
U.S. Government corporations and agencies 3,936 114 --- 4,050
Obligations of states and political subdivisions 40,219 227 1,252 39,194
Corporate securities and public utilities 46,919 136 1,198 45,857
Mortgage-backed securities 68,196 208 2,554 65,850
------------ ------------ ------------ ------------
251,810 697 8,939 243,568
------------ ------------ ------------ ------------
Held to maturity
U.S. Treasury securities $ 19,258 $ 117 $ 323 $ 19,052
U.S. Government corporations and agencies 1,581 26 --- 1,607
Obligations of states and political subdivisions 245,779 1,617 11,107 236,289
Foreign governments 2,115 --- 149 1,966
Corporate securities and public utilities 75,733 521 1,483 74,771
Mortgage-backed securities 57,251 19 2,469 54,801
------------ ------------ ------------ ------------
401,717 2,300 15,531 388,486
------------ ------------ ------------ ------------
Totals $ 653,527 $ 2,997 $ 24,470 $ 632,054
============ ============ ============ ============
Equity securities $ 4,375 $ 198 $ 66 $ 4,507
============ ============ ============ ============
44
The table below presents the amortized cost and estimated fair value of fixed
maturities at December 31, 1995 by contractual maturity. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized fair
cost value
-------------- --------------
Due in 1 year or less $ 40,527 $ 40,813
Due after 1 year through 5 years 210,295 218,052
Due after 5 years through 10 years 264,377 275,699
Due after 10 years 16,093 16,615
-------------- --------------
531,292 551,179
Mortgage-backed securities 195,434 203,368
-------------- --------------
Totals $ 726,726 $ 754,547
============== ==============
The following table presents for the years ended December 31, 1995, 1994, and
1993 the gross realized gains and losses by portfolio included in the proceeds
from calls, principal reductions, and sales of fixed maturities.
1995 1994 1993
---------- ------------ -----------
Available for sale
Gross realized gains $ 957 $ 621 $ 507
Gross realized losses (910) (138) ---
---------- ------------ -----------
47 483 507
---------- ------------ -----------
Held to maturity
Gross realized gains 54 8 1,050
Gross realized losses (1) (246) (161)
---------- ------------ -----------
53 (238) 889
---------- ------------ -----------
Net realized gains $ 100 $ 245 $ 1,396
========== ============ ===========
There were no sales or transfers from the held to maturity portfolio in 1995 and
1993. For the year ended December 31, 1994, gross realized losses of the held to
maturity portfolio included a realized loss of $195 on the sale of an
investment. The investment had an amortized cost of $4,937 and was disposed of
due to the significant downgrade of the issuer's credit rating in 1994.
Additionally, the Company sold from the held to maturity portfolio an investment
with an amortized cost of $1,001 for a realized loss of $10. There were no
transfers in 1994.
As required by law, fixed maturities and short-term investments were on deposit
with various insurance regulatory authorities at December 31, 1995 and 1994
amounting to $10,487 and $10,583, respectively.
As of December 31, 1995 and 1994, there were no investments that were non-income
producing for the previous twelve months.
45
A summary of net investment income for the years ended December 31, 1995, 1994,
and 1993 follows:
1995 1994 1993
------------ ------------ -----------
Interest on fixed maturities $ 47,160 $ 40,760 $ 37,646
Dividends on equity securities 167 220 99
Interest on short-term investments 665 367 548
Equity earnings in unconsolidated subsidiaries 11 555 2,027
Other, net 20 54 104
------------ ------------ -----------
Total investment income 48,023 41,956 40,424
Investment expense 584 703 1,161
Interest expense 197 183 233
------------ ------------ -----------
Net investment income $ 47,242 $ 41,070 $ 39,030
============ ============ ===========
A summary of net realized investment gains (losses) and net changes in
unrealized appreciation (depreciation) of investments for the years ended
December 31, 1995, 1994, and 1993 follows:
1995 1994 1993
------------ ------------ -----------
Net realized investment gains (losses)
Fixed maturities
Available for sale $ 47 $ 483 $ 507
Held to maturity 53 (238) 889
Equity securities 405 (3) ---
Other investments (note 7) --- 2,646 ---
------------ ------------ -----------
505 2,888 1,396
------------ ------------ -----------
Net changes in unrealized appreciation (depreciation) of investments
Fixed maturities
Available for sale 36,063 (17,293) 9,026
Held to maturity 13,231 (32,016) (493)
Equity securities 289 104 29
------------ ------------ -----------
49,583 (49,205) 8,562
------------ ------------ -----------
Net realized investment gains (losses) and changes in
unrealized appreciation (depreciation) of investments $ 50,088 $ (46,317) $ 9,958
============ ============ ===========
46
(4) Transactions With Affiliates
The property-casualty segment and ALLIED Mutual participate in a reinsurance
pooling agreement. The pooling agreement provides that AMCO (pool administrator)
assumes from the pool participants premiums, losses, allocated loss settlement
expenses, commissions, premium taxes, service charge income, and dividends to
policyholders. Then the pool participants assume from AMCO an amount of this
pooled property-casualty business equal to their participation in the pooling
agreement. AMCO pays certain underwriting expenses, unallocated loss settlement
expenses, and premium collection expenses for all of the pool participants and
receives a fee equal to a specified percentage of premiums as well as a
contingent fee based on the attainment of certain combined ratios from each of
the pool participants. AMCO charges each of the participants 12.85% of written
premiums for underwriting services, 7.25% of earned premiums for unallocated
loss settlement expenses, and 0.75% of earned premiums for premium collection
services. The administrative fees are subject to renegotiation during the term
of the agreement upon at least five years' notice. AMCO received pool
administrative fees of $55,721, $50,449, and $44,920 from ALLIED Mutual in 1995,
1994, and 1993, respectively. The term of the pooling agreement extends to
December 31, 2004, after which it can be terminated by participating parties
upon five years' notice. All changes to the pooling agreement must be approved
by the coordinating committee of the Board of Directors.
The reinsurance pooling agreement was amended January 1, 1993 to increase the
property-casualty segment's participation to 64% from 60% in 1992. ALLIED Mutual
transferred cash of $16,240 to the property-casualty segment to fund the
additional net underwriting liabilities assumed. The pooling agreement was also
amended January 1, 1993 to change the pool administrator from ALLIED Mutual to
AMCO. As a result of becoming pool administrator, AMCO assumed $9,538 in certain
underwriting liabilities and received a corresponding amount of cash from ALLIED
Mutual. See note 6 for discussion of reinsurance transactions between the
Company's property-casualty subsidiaries and ALLIED Mutual.
Pursuant to the terms of the Intercompany Operating Agreement, the Company
leases employees to its subsidiaries and ALLIED Mutual and certain of its
subsidiaries. Each company that leases employees is charged a fee based upon
costs incurred for salaries, related benefits, taxes, and expenses associated
with the employees it leases. The Company received revenues of $2,490, $2,415,
and $3,204 for employees leased to affiliates for the years ended December 31,
1995, 1994, and 1993, respectively, which are included in income from affiliates
and in eliminations and other under segment information.
The Intercompany Operating Agreement between the Company and ALLIED Mutual also
provides for the continued availability of office space, marketing services,
agency forces, and computer and other facilities. Expenses are charged to the
Company based on specific identification or, if undeterminable, the expenses are
allocated on the basis of cost and time studies that are updated annually. The
agreement extends through December 31, 2004, after which it may be terminated on
two years' notice given after December 31, 2002 by either ALLIED Mutual or the
Company.
Included in income from affiliates are revenues of $2,795, $2,322, and $2,274
relating to data processing services provided by AGIS to ALLIED Mutual and its
subsidiaries for the years ended December 31, 1995, 1994, and 1993,
respectively.
ALLIED Mutual participates with a nonaffiliated reinsurance company in a
property catastrophe reinsurance agreement to cover the property-casualty
segment's share of pooled losses. In 1995, 1994, and 1993, the coverage was
$5,000 in excess of $5,000. ALLIED Mutual's and the reinsurance company's
respective participation in such agreement was 90% and 10% in 1995, 1994, and
1993. Related premiums paid by the property-casualty segment to ALLIED Mutual
were $2,330 in 1995, $1,866 in 1994, and $1,478 in 1993. There were recoveries
of $2,586, $2,217, and $1,400 from ALLIED Mutual in 1995, 1994, and 1993,
respectively.
All expenses incurred on the Company's behalf by its affiliates have been
reflected in the accompanying financial statements. Management believes the
costs incurred by its affiliates and allocated to the Company are reasonable and
would not be materially different than if they had been incurred from a
nonaffiliated third party. The aforementioned transactions result in
intercompany balances that are created during the normal course of business and
are settled on a monthly basis.
47
The Company and its affiliates deposit their excess cash into a short-term
investment fund. The fund was established to concentrate short-term cash in a
single account to maximize yield. AID Finance Services, Inc., a wholly owned
subsidiary of ALLIED Mutual, is the administrator of the fund. At December 31,
1995 and 1994, the Company had $7,773 and $4,021, respectively, invested in the
fund. The Company also had several unsecured notes payable to the fund at
December 31, 1995 totaling $3,500. Interest rates ranged from 5.9% to 8.8%, and
the notes mature in January of 1996. At December 31, 1994 the Company had two
unsecured notes payable to the investment fund totaling $2,000.
The Company paid interest to affiliates of $127, $123, and $484 in 1995, 1994,
and 1993, respectively.
(5) Losses and Loss Settlement Expenses
The following table sets forth the reconciliation of beginning and ending
reserves for losses and loss settlement expenses for the years indicated.
Reinsurance recoverables on unpaid losses and loss settlement expenses are
included on the consolidated balance sheets within reinsurance receivables for
losses and loss settlement expenses. The following table includes
property-casualty and excess & surplus lines losses and loss settlement expense
reserves.
Year ended December 31,
---------------------------------------------
1995 1994 1993
------------ ----------- ------------
Reserves for losses and loss settlement expenses at beginning of year $ 310,996 $ 279,856 $ 243,276
Less reinsurance recoverables 18,322 11,806 15,305
------------ ----------- ------------
Net reserves for losses and loss settlement expenses at beginning of year 292,674 268,050 227,971
------------ ----------- ------------
Incurred losses and loss settlement expenses
Provision for insured events of current year 315,956 288,574 262,772
Increase (decrease) in provisions for insured events of prior years 1,984 (1,630) (3,854)
------------ ----------- ------------
Total incurred losses and loss settlement expenses 317,940 286,944 258,918
------------ ----------- ------------
Payments
Losses and loss settlement expenses attributable to
insured events of current year 169,254 151,479 138,926
Losses and loss settlement expenses attributable to
insured events of prior years 116,421 110,841 91,848
Adjustment to beginning of the year reserves resulting from
the change in the reinsurance pool participation percentage --- --- (11,935)
------------ ----------- ------------
Total payments 285,675 262,320 218,839
------------ ----------- ------------
Net reserves for losses and loss settlement expenses at end of year 324,939 292,674 268,050
Plus reinsurance recoverables 16,925 18,322 11,806
------------ ----------- ------------
Reserves for losses and loss settlement expenses at end of year $ 341,864 $ 310,996 $ 279,856
============ =========== ============
The reserving process relies on the basic assumption that past experience,
adjusted for the effect of current developments and likely trends, is an
appropriate basis for predicting future events. Reserve amounts are necessarily
based on management's informed estimates; as other data becomes available and is
reviewed, these estimates and judgments are revised, resulting in increases and
decreases to existing reserves. As a result of changes in estimates of insured
48
events in prior years, the provision for losses and loss settlement expenses
increased $1,984 in 1995 and decreased $1,630 and $3,854 in 1994 and 1993,
respectively. Development for losses and loss settlement expenses on prior years
is immaterial to the financial statements taken as a whole.
As of January 1, 1993, the property-casualty subsidiaries' underwriting accounts
were adjusted to reflect their increased participation in the pool. The
property-casualty subsidiaries received cash and securities for the transfer of
reserves from ALLIED Mutual as of January 1, 1993. There was no income statement
effect from this transaction as the amount received was offset by the increase
in the reserves. Because the reserves transferred were necessarily based upon
estimates, subsequent changes in the estimates are reflected in current
operating results.
In establishing reserves, management considers exposure the Company may have to
environmental claims. Because reported claim activity levels are minimal and the
emphasis of the Company's property-casualty business is primarily on personal
lines and small commercial business, management believes exposure to material
liability on such claims to be remote as of December 31, 1995. The Company
continues to monitor legal developments as they relate to the Company's exposure
to environmental claims.
(6) Reinsurance
The property-casualty and excess & surplus lines subsidiaries cede insurance to
other insurers in the ordinary course of business for the purpose of limiting
their maximum loss exposure through diversification of their risks. See note 4
for discussion of reinsurance contracts with ALLIED Mutual. Reinsurance
contracts do not relieve the Company from its obligations to policyholders as
the primary insurer. Failure of reinsurers to honor their obligations could
result in losses to the Company; consequently, allowances are established for
amounts deemed uncollectible. The Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies. As of
December 31, 1995, reinsurance receivables and prepaid reinsurance premiums
associated with three nonaffiliated reinsurers aggregated approximately $14,675,
which represented a significant portion of the total prepaid reinsurance
premiums and reinsurance receivables for losses and loss settlement expenses.
The property-casualty subsidiaries also assume insurance as members of various
pools and associations.
The effect of reinsurance on premiums written and earned and losses and loss
settlement expenses incurred for the years ended December 31, 1995, 1994, and
1993 was as follows:
1995 1994 1993
------------ ----------- ------------
Direct written premiums $ 494,462 $ 436,988 $ 382,070
Assumed from nonaffiliates 8,572 8,667 8,072
Net (ceded to) assumed from ALLIED Mutual (6,151) 8,793 27,030
Ceded to nonaffiliates (25,439) (24,356) (22,062)
------------ ----------- ------------
Net written premiums $ 471,444 $ 430,092 $ 395,110
============ =========== ============
Direct earned premiums $ 472,407 $ 415,767 $ 358,492
Assumed from nonaffiliates 8,831 8,536 7,682
Net (ceded to) assumed from ALLIED Mutual (703) 11,863 23,729
Ceded to nonaffiliates (25,036) (23,648) (21,567)
------------ ----------- ------------
Net earned premiums $ 455,499 $ 412,518 $ 368,336
============ =========== ============
Direct losses and loss settlement expenses $ 335,779 $ 303,318 $ 249,941
Assumed from nonaffiliates 5,889 5,821 7,372
Net (ceded to) assumed from ALLIED Mutual (14,648) (9,450) 6,807
Ceded to nonaffiliates (9,080) (12,745) (5,202)
------------ ----------- ------------
Net losses and loss settlement expenses incurred $ 317,940 $ 286,944 $ 258,918
============ =========== ============
49
(7) Dispositions
On June 1, 1994, the Company completed the sale of its investment in MidAmerica
Financial Corporation (MidAmerica) for $9,395. The 20% interest in MidAmerica
was acquired for investment purposes and was reported in other investments. The
pretax gain of $2,646 is included in realized investment gains for 1994 in the
consolidated statements of income.
On October 29, 1993, the Company completed the sale of its investment banking
and asset management subsidiary, Dougherty Dawkins, for $14,304. The results of
operations through the closing date are reflected in the Company's consolidated
income statements. The pretax loss on this transaction was $894 and is included
in other expenses in the consolidated statements of income.
(8) Notes Payable to Nonaffiliates
The short-term notes payable to nonaffiliated companies include line of credit
agreements used by ALLIED Mortgage primarily to finance its mortgage loans held
for sale. At December 31, 1995 and 1994, ALLIED Mortgage had borrowed $22,465
and $24,361, respectively, under the terms of mortgage loan warehousing
agreements with three different commercial banks; the agreements expires in
April and May of 1996. Under the terms of the agreements, ALLIED Mortgage can
borrow up to the lesser of $67,000 or 98% of the mortgage credit borrowing base,
which includes related sublines. At December 31, 1995, the outstanding
borrowings of ALLIED Mortgage under these line of credit agreements were secured
by mortgage loans held for sale of $13,673, mortgage servicing rights on loans
with a principal balance of $2,796,696, and foreclosure loans of $3,904.
Interest rates applicable to these borrowing arrangements vary with the level of
investable deposits maintained at the respective commercial banks.
During 1993, ALLIED Mortgage entered into an agreement with a life insurance
company for $15,000 of 8.4% senior secured notes due September 1, 2004. The
notes are secured by mortgage servicing rights and are payable in equal annual
installments of $1,500 every September 1; interest is payable semiannually. At
December 31, 1995 and 1994, the outstanding balance was $13,500 and $15,000,
respectively.
The Federal Home Loan Bank of Des Moines provides a $3,000 committed credit
facility through a line of credit agreement with AMCO that expires March 6,
1996. Interest on any outstanding borrowings is payable at an annual rate equal
to the federal funds unsecured rate for federal reserve member banks. The
Company had no outstanding balance as of December 31, 1995. At December 31,
1994, there was an outstanding balance of $2,180.
The Company paid interest to nonaffiliates of $1,569, $2,249, and $2,442 in
1995, 1994, and 1993, respectively.
(9) Guarantee of ESOP Obligations
On July 12, 1990, the ESOP Trust issued Remarketed Floating Rate Notes (FRN)
totaling $35,000 with a final maturity of July 12, 2005. The proceeds from the
FRN were used to acquire Series A ESOP Convertible Preferred Stock. Effective
March 13, 1995, the ESOP Trust refinanced its $28,150 of FRN under the terms of
a Term Credit Agreement and Guaranty (Credit Agreement) with two separate
commercial banks. The loans mature July 12, 2005, and interest rates applicable
to the borrowings are adjusted at the beginning of each interest period. The
interest periods may be one, three, or six months at the discretion of the ESOP
Trust.
The Company has guaranteed on an unsecured basis the ESOP Trust's reimbursement
obligations under the Credit Agreement. The Company's guarantee has been
recorded in the consolidated balance sheets as a liability under the caption,
"Guarantee of ESOP obligations." At December 31, 1995 and 1994, the Company had
an outstanding guarantee of principal of $26,270 and $28,150, respectively. The
Company contributions to the ESOP Trust plus dividends on leveraged shares held
by the ESOP Trust are used to meet interest and principal payments on the notes.
As principal payments are made, the recorded ESOP guarantee is reduced.
50
The interest rate on the Credit Agreement resets at the beginning of each
interest period, and the ESOP Trust's interest expense is included as a
component of the Company's ESOP expense. The Company is party to an interest
rate swap agreement with a broker-dealer to reduce the financial statement
impact of fluctuations in the Credit Agreement interest rate. The interest rate
swap transactions generally involve the exchange of fixed and floating rate
interest payments without the exchange of the underlying principal amount. As of
December 31, 1995, the amount of principal covered under the swap agreement was
$19,760 with a fixed interest rate of 7.4%. The amount of principal covered
under the swap agreement reduces over time; the final swap maturity date is
December 12, 1997. During 1995, the actual Credit Agreement interest rate ranged
from 6% to 6.8%. During 1994 and 1993, the actual FRN interest rates ranged from
2.9% to 6.3% and 2.8% to 3.3%, respectively. Though nonperformance of the
broker-dealer is not expected, the Company is exposed to credit loss should such
an event occur.
The Credit Agreement includes various financial and operating covenants with
which the Company must comply. The covenants include the maintenance of certain
contractual relationships with ALLIED Mutual, continued ownership of certain
subsidiaries, limitations on the issuance of security interests in certain
assets, maintenance of various financial ratios, and minimum net equity
requirements.
(10) Preferred Stock
The Company is authorized to issue 7,500,000 shares of preferred stock without
par value. The preferred stock may be issued from time to time by the Board of
Directors in one or more series with such dividend rights, conversion rights,
voting rights, redemption provisions, liquidation preferences, and other rights
and restrictions as the Board of Directors may determine.
6-3/4% Series
The 6-3/4% Series preferred stock (6-3/4% Series), issued to ALLIED Mutual at a
value of $28.50 per share, is perpetual, nonconvertible, voting, and cumulative
with respect to dividends. The 6-3/4% Series has no preemptive rights and is not
registered or traded. Upon any transfer by ALLIED Mutual, the 6-3/4% Series is
callable under certain conditions and becomes nonvoting. It ranks on a parity
with the ESOP Series. Each share of the 6-3/4% Series has 1-1/2 votes. The
annual dividend rate is 6-3/4% of the liquidation preference of $28.50 ($1.92
per share) and is payable quarterly.
The Company entered into a Stock Rights Agreement with ALLIED Mutual to grant
both parties certain rights in terms of registration, transfer, voting, board
nominations, and other matters. Pursuant to the Stock Rights Agreement executed
July 5, 1990, ALLIED Mutual is entitled to nominate for election to the
Company's Board of Directors a number of director nominees that most closely
approximates the same percentage of the total number of members of the Company's
Board of Directors as is equal to ALLIED Mutual's percentage ownership of the
total number of shares of Company voting stock.
ESOP Series
As of December 31, 1995, a commercial bank acting on behalf of the ESOP
participants as the trustee for the ESOP Trust (Trustee) was the holder of
2,992,710 shares of ESOP Convertible Preferred Stock that had been issued in
series (collectively, ESOP Series). In 1995, the ESOP Trust purchased 13,426
shares of Series D for $54.00 per share. In 1994 the ESOP Trust purchased 22,223
shares of ESOP Series for $37.12 per share: 9,247 shares of Series C and 12,976
shares of Series D.
The Trustee is entitled to vote the ESOP Series on all matters submitted to a
vote of the holders of the common stock of the Company, voting together with the
holders of common stock and the 6-3/4% Series as one class. The ESOP Trust
generally provides that each ESOP participant is entitled to direct the Trustee
how to vote (or whether to tender or exchange) the shares of ESOP Series
allocated to the participant's account. Each share of the ESOP Series is
convertible into 1-1/2 shares of common stock and has 1-1/2 votes, subject to
antidilution adjustments.
51
The ESOP Series ranks senior to the common stock as to the payment of dividends
and has an annual dividend of $1.20 per share paid on a monthly basis. In the
event of a liquidation of the Company, the Trustee of the ESOP Series is
entitled to receive $15 per share plus accrued dividends prior to any
distribution to the holders of common stock.
The ESOP Series is redeemable at the option of the Company any time after three
years from issuance and under specified circumstances prior thereto. The
redemption price is $15 per share plus a premium in the first ten years after
issuance that reduces in equal annual increments from 8% in the first year to 0%
in the eleventh year. The Company, solely at its discretion, has the option to
issue common stock, cash, or a combination thereof for any redemption price.
Upon notice of redemption, the Trustee, acting in its fiduciary capacity, may
elect to convert the ESOP Series to common stock prior to redemption.
The ESOP Series has no preemptive rights and is not registered or traded. Upon
any transfer by the Trustee, the ESOP Series is automatically converted into
shares of the Company's common stock. See note 20 for discussion of the
conversion of ESOP Series to common stock subsequent to year-end 1995.
(11) Common Stock
The Company has reserved 750,000 shares of common stock for issuance under the
ALLIED Group, Inc. Employee Stock Purchase Plan (ESPP). The ESPP is available to
full-time employees who meet minimum age and service requirements. The
participants in the ESPP purchase Company common stock on a monthly basis and
pay 85% of the fair market value of the shares issued under the plan. During
1995, 26,498 shares were issued at a weighted average price per share of $24.59.
During 1994 and 1993, 27,603 and 70,203 shares were issued at a weighted average
price of $22.36 and $22.62, respectively. At December 31, 1995, 282,490 shares
were available for issuance.
The Company has reserved 1,350,000 shares of common stock to be issued through
the ALLIED Group, Inc. Dividend Reinvestment and Stock Purchase Plan. Any
stockholder of record may participate in the plan and have cash dividends
reinvested in additional shares of Company common stock. The plan also provides
for optional cash payments. Shares of common stock purchased under the plan may
be either original issue shares or open market shares, such determination to be
made at the discretion of the Company. The number of shares purchased by the
plan participants is based upon fair market value on the dividend payment date.
During 1995, 42,705 shares, puchased on the open market, were issued at a
weighted average price per share of $30.01. During 1994 and 1993, 50,305 and
35,043 shares were issued at the weighted average prices per share of $26.06 and
$27.39, respectively. At December 31, 1995, 626,941 shares were available for
issuance.
The Company has reserved 375,000 shares of common stock for issuance under the
ALLIED Group, Inc. Outside Director Stock Purchase Plan. Under the plan,
participants pay 85% of the fair value of the shares issued and the remainder is
paid proportionally by the Company and/or the other companies within the ALLIED
Group to which the director fees were allocated. Only nonemployee directors of
the Company and its affiliates may participate in this plan. Shares of common
stock may be purchased only on the purchase dates: the last business day of June
and December. During 1995, 4,197 shares were issued at a weighted average price
per share of $31.75. During 1994 and 1993, 5,231 and 4,530 shares were issued at
a weighted average price of $24.85 and $24.98, respectively. At December 31,
1995, 355,816 shares were available for issuance.
The Company has reserved 250,000 shares of common stock for issuance under the
ALLIED Life Employee Stock Purchase Plan. The Company receives fair market value
for the shares issued under the plan. During 1995, 2,005 shares were issued at a
weighted average price per share of $28.76. During 1994 and 1993, 309 and 47
shares were issued at a weighted average price per share of $26.30 and $26.44,
respectively. At December 31, 1995, 247,639 shares were available for issuance.
52
The Company awarded 13,311 shares of restricted stock to key employees, and 406
of such shares were cancelled in 1995. The restricted shares were awarded under
the ALLIED Group, Inc. Long-Term Management Incentive Plan (note 12).
During 1994, the Company repurchased and cancelled 250,000 shares of its common
stock on the open market at an average cost of $25.44 per share. The repurchase
was approved by the Board of Directors in the first quarter of 1994, implemented
pursuant to Rule 10b-18 under the Securities Exchange Act of 1934, and completed
on November 17, 1994.
On December 14, 1994, the Company's Board of Directors approved a plan to
repurchase 250,000 shares of the Company's common stock on the open market also
pursuant to Rule 10b-18. The actual number of shares repurchased is dependent
upon market conditions, and the plan may be suspended at the Company's
discretion. The Company has no present intention to cause its shares to be
delisted or deregistered as a result of this repurchase program. The Company did
not repurchase any shares under this plan through December 31, 1995.
During 1995, 1994, and 1993, 174,960, 110,956, and 94,124 ESOP Series shares
were converted to 262,440, 166,434, and 141,186 shares of common stock,
respectively. The Company has reserved 5,950,524 shares of common stock for
conversion of the ESOP Series.
On February 18, 1993, 2,587,500 shares of common stock were sold to the public
at $24.67 per share. The Company received $37,600 in proceeds (net of
underwriting discount and expenses) from the sale of 1,612,500 shares. The
remaining 975,000 shares were sold by ALLIED Mutual.
The dividend rate per common share was $0.68, $0.60, and $0.51 for 1995, 1994,
and 1993, respectively.
(12) Long-Term Incentive Plans
The ALLIED Group, Inc. Restated and Amended Stock Option Plan (Option Plan) and
the ALLIED Group, Inc. Nonqualified Stock Option Plan (Nonqualified Plan) had
675,000 and 225,000 shares of common stock, respectively, reserved for issuance
to certain key employees of ALLIED Group, Inc. and subsidiaries. Both plans are
nonqualified stock option plans as defined by the Internal Revenue Code. The
period for granting options under these plans expired on August 5, 1995. During
1995, 30,000 and 40,000 options were granted under the Option Plan and the
Nonqualified Plan, respectively, at an exercise price of $27.50 per share. The
options expire ten years after the date of grant. During 1995, 33,135 shares
were deregistered under the Nonqualified Plan.
The Company deregistered 103,955 shares under the ALLIED Group Executive Equity
Incentive Plan (Equity Plan) during 1994. The Company had reserved 525,000
shares of common stock for issuance under the terms of the Equity Plan. The
Equity Plan is a nonqualified stock option plan as defined by the Internal
Revenue Code, with eligibility granted only to certain key employees of the
Company and its affiliated companies. The optionees pay $0.67 of the per share
option price upon exercise; the balance of the exercise price is paid by the
company that leases the employee. At December 31, 1995, 14,460 options were
outstanding and exercisable under the Equity Plan. There are no shares available
to grant any additional options under the Equity Plan, and the options currently
outstanding expire on December 31, 1997.
Under the Freedom Group Incentive Plan (Freedom Plan), the Company had reserved
270,000 shares of authorized but unissued common stock. The Freedom Plan is a
nonqualified stock option plan as defined by the Internal Revenue Code. Three
key employees were granted options to purchase up to 270,000 shares of the
Company's common stock. The optionees pay $0.67 of the per share option price
upon exercise; the balance of the exercise price is to be paid by Freedom Group.
On April 30, 1993, the participants were vested in 54,000 stock options and the
remaining 216,000 unvested shares were deregistered. At year-end 1995, 18,000
vested options remained unexercised.
During 1994, the Company reserved 600,000 shares of common stock for issuance to
key employees of the Company and its affiliates under the ALLIED Group, Inc.
Long-Term Management Incentive Plan (Incentive Plan). Under the Incentive Plan,
53
shares of common stock are available for grant until December 31, 2003 as
incentive and nonqualified stock options (collectively, Options), stock
appreciation rights (SARs), and restricted stock. The Options, SARs, and
restricted stock were issued to vest two years after the grant date at a rate of
25% per year and expire ten years after the date of grant. Options, SARs, and
restricted stock prices are based upon the fair market value as of the date of
grant. During 1995, 60,000 Options and 7,667 SARs were granted at $27.63 per
share. At December 31, 1995, 452,522 shares were available for award under the
Incentive Plan.
A summary of the status of the Company's stock option plans as of December 31,
1995, 1994, and 1993 and changes during the years ending on those dates is
presented below:
1995 1994 1993
-------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------ ---------- ------------- ---------- ------------ ----------
Outstanding at beginning of year 402,164 $ 17.45 395,001 $ 16.58 938,263 $ 7.71
Granted 130,000 27.56 63,000 24.30 180,000 26.34
Exercised (137,004) 9.41 (32,000) 8.32 (225,480) 7.80
Cancelled (16,923) 11.17 (23,837) 27.06 (497,782) 7.62
------------ ------------- ------------
Outstanding at end of year 378,237 $ 24.11 402,164 $ 17.45 395,001 $ 16.58
============ ============= ============
Options exercisable at end of year 46,971 191,165 215,001
============ ============= ============
The issuance of SARs and restricted stock under the Incentive Plan reduces the
number of Options available for future issuance. During 1995, 13,311 shares of
restricted stock were awarded at $27.38 per share, and 406 restricted shares
were cancelled. At December 31, 1995, 12,671 restricted shares were outstanding.
The following table shows SAR activity for the years ended December 31, 1995 and
1994:
1995 1994
--------------------------- --------------------------
Weighted Weighted
Number average Number average
of SARs price of SARs price
------------- ---------- ------------ ----------
Outstanding at beginning of year 8,000 $ 24.34 --- $ ---
Granted 7,667 27.63 8,500 24.34
Exercised (1,000) 24.25 --- ---
Cancelled --- --- (500) 24.25
------------- ------------
Outstanding at end of year 14,667 $ 26.07 8,000 $ 24.34
============= ============
54
(13) Retained Earnings
Retained earnings of the property-casualty and excess & surplus lines
subsidiaries available for distribution as dividends are limited by law to the
amount of statutory unassigned surplus as of the date the dividend is authorized
or paid. The maximum dividend the property-casualty subsidiaries may pay without
prior approval of the state of Iowa (state of domicile) insurance regulatory
authorities is the greater of either 10% of the property-casualty statutory
capital stock and surplus as of the preceding December 31 or statutory net
income of the preceding calendar year. The amount legally available for
distribution from the property-casualty segment in 1996 to the Company without
regulatory approval is $44,121. The maximum dividend the excess & surplus lines
subsidiary may pay without prior approval of the state of Arizona (state of
domicile) insurance regulatory authorities is the lesser of either 10% of the
statutory capital stock and surplus as of the preceding year or net investment
income of the preceding year. The maximum amount legally available for
distribution in 1996 without regulatory approval is $2,777.
The following table includes selected information for the Company's insurance
subsidiaries as determined in accordance with accounting practices prescribed or
permitted by insurance regulatory authorities:
As of December 31, 1995 1994
------------ ------------
Statutory capital and surplus
Property-casualty $ 257,845 $ 233,407
============ ============
Excess & surplus lines $ 27,770 $ 23,896
============ ============
Year ended December 31, 1995 1994 1993
------------ ------------ ------------
Statutory net income
Property-casualty $ 41,995 $ 40,699 $ 22,052
============ ============ ============
Excess & surplus lines $ 2,773 $ 3,047 $ 3,484
============ ============ ============
(14) Commitments and Contingent Liabilities
The Company leases data processing equipment and certain office facilities under
operating leases expiring in various years through 2003. Rental expense amounted
to $2,587, $3,845, and $3,817 for the years ended December 31, 1995, 1994, and
1993, respectively. For each of the next five years and in the aggregate as of
December 31, 1995, these are the minimum future rental payments under
noncancellable operating leases having remaining terms in excess of one year:
1996 $ 982
1997 1,022
1998 906
1999 768
2000 644
Subsequent to 2000 306
------------
Total $ 4,628
============
In the normal course of business, ALLIED Mortgage grants mortgage loan
commitments to borrowers, subject to normal loan underwriting standards. As of
December 31, 1995, ALLIED Mortgage had granted loan commitments of approximately
$39,500, including floating rate commitments of $12,600. To hedge loan
commitments, ALLIED Mortgage may enter into options, futures, or cash delivery
55
contracts. As of December 31, 1995, ALLIED Mortgage had commitments to sell
mortgage securities totaling approximately $27,000 and no outstanding options.
In connection with these commitments to buy and sell mortgages, ALLIED Mortgage
is exposed to credit risk in the event the counterparty is unable to fulfill its
contractual obligations.
Although loans serviced for others are not on the accompanying balance sheets,
ALLIED Mortgage does have credit risk associated with the mortgage servicing
portfolio. As the loan servicer, ALLIED Mortgage is required to process
delinquent loans through the foreclosure process, thereby incurring certain
direct expenses which generally are, but may not be, reimbursed. At December 31,
1995, ALLIED Mortgage had sold loans totaling approximately $20,500 while
retaining recourse risk. ALLIED Mortgage established allowances for losses in
connection with these various risks, which totaled $1,476 and $1,495 at December
31, 1995 and 1994, respectively. These allowances are included in other
liabilities on the accompanying balance sheets.
California was the source of 24% of the pool's direct written premiums in 1995.
Proposition 103, approved by California voters in 1988, provides for a rollback
of rates on premiums collected in calendar year 1989 to the extent that the
insurer's return on equity for each Proposition 103 line exceeded 10%. Since it
was passed, Proposition 103 has been the subject of a number of legal and
regulatory proceedings for the purpose of clarifying the scope and extent of
insurers' rollback obligations. Management of the Company continues to believe
that the insurance subsidiaries will not be liable for any material rollback of
premiums.
The Company is party to various lawsuits arising in the normal course of
business. Management believes the resolution of these lawsuits will not have a
material adverse effect on its financial condition or its results of operations.
(15) Employee Retirement Plan
The ESOP established by ALLIED Group, Inc. covers all of its employees who meet
age and service requirements. Shares of ESOP Series preferred stock are
allocated annually to each employee's account pursuant to a formula and held in
trust until the employee's termination, retirement, or death. As shares of ESOP
Series preferred stock are allocated to participants, the cost of such shares is
expensed and deducted from "Unearned compensation related to ESOP" included in
stockholders' equity.
The Company's ESOP expense was $2,682 in 1995, $1,780 in 1994, and $1,529 in
1993. Of those respective amounts, $65, $30, and $37 were included in the
employee lease fee received from affiliates pursuant to the terms of the
Intercompany Operating Agreement for the years ended December 31, 1995, 1994,
and 1993, respectively.
During 1995, 1994, and 1993, the ESOP Trust received $2,782, $2,782, and $2,783,
respectively, from dividends on the ESOP Series used to service debt on the ESOP
obligations and to purchase stock for participants. ALLIED Group, Inc. made ESOP
contributions of $733 in 1995, $35 in 1994, and $54 in 1993. Interest incurred
on the ESOP debt, which is included as a component of ESOP expense, was $1,831,
$1,225, and $918 in 1995, 1994, and 1993, respectively. The ESOP shares as of
December 31, 1995 and 1994 were as follows:
1995 1994
------------ ------------
Allocated shares 1,254,784 1,297,657
Unallocated shares 1,737,926 1,856,587
------------ ------------
Total ESOP shares 2,992,710 3,154,224
============ ============
56
(16) Other Postretirement Benefit Plan
In addition to the ESOP, the Company sponsors a health care plan that provides
postretirement medical benefits to full-time employees who meet age and service
requirements. The plan is contributory with retiree contributions adjusted
annually, and it contains other cost-sharing features such as deductibles and
coinsurance. The Company's policy is to fund the cost of medical benefits in
amounts determined at the discretion of management.
The following table presents the plan's postretirement benefit obligations as of
December 31, 1995 and 1994 reconciled with the plan's funded status and the
amount recognized in the Company's consolidated balance sheets:
1995 1994
----------- ------------
Accumulated postretirement benefit obligation
Retirees $ (3,170) $ (2,690)
Other fully eligible plan participants (620) (560)
Other active plan participants (2,470) (2,440)
----------- ------------
Obligation at year-end (6,260) (5,690)
Plan assets --- ---
----------- ------------
Funded status (6,260) (5,690)
Unrecognized transition obligation 4,100 4,340
Unrecognized net loss (gain) 50 (20)
Fourth-quarter payments 70 80
----------- ------------
Accrued postretirement benefit liability at year-end $ (2,040) $ (1,290)
=========== ============
A 7.5% weighted average discount rate was used to determine the accumulated
postretirement benefit obligation at December 31, 1995 and 1994.
Net periodic postretirement benefit cost for the years ended December 31, 1995,
1994, and 1993 included the following:
1995 1994 1993
------------ ----------- ------------
Service cost $ 350 $ 360 $ 270
Interest cost 420 390 380
Return on assets --- --- ---
Amortization of transition obligation 240 240 240
------------ ----------- ------------
Net periodic postretirement benefit cost $ 1,010 $ 990 $ 890
============ =========== ============
For measurement purposes, a 9% annual rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) was assumed for 1996; the
rate was assumed to decrease in equal annual increments to 5% by the year 2000
and to remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation by
approximately $430 and the aggregate of the service and interest cost components
of net periodic postretirement benefit cost by approximately $40.
57
(17) Income Taxes
Total income taxes for the years ended December 31, 1995, 1994, and 1993 were
allocated as follows:
1995 1994 1993
---------- ---------- ----------
Net income $ 21,471 $ 19,074 $ 16,835
---------- ---------- ----------
Stockholders' equity
Unrealized appreciation (depreciation) of investments 12,776 (6,036) 3,168
Tax-deductible dividends paid on unallocated ESOP Series shares (849) (907) (942)
Tax-basis compensation expense in excess of amounts recognized
for financial reporting purposes from the exercise of stock options (1,064) (175) (3,791)
---------- ---------- ----------
10,863 (7,118) (1,565)
---------- ---------- ----------
Total $ 32,334 $ 11,956 $ 15,270
========== ========== ==========
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995 and
1994 relate to the following:
1995 1994
----------- -----------
Deferred tax assets
Loss and loss settlement expense reserve discounting $ 13,540 $ 12,194
Unrealized depreciation of investments --- 2,869
Unearned premium reserve 13,277 12,161
Deferred compensation 2,187 2,054
Other 1,790 1,078
----------- -----------
Total gross deferred tax assets 30,794 30,356
Less valuation allowance --- ---
----------- -----------
Net deferred tax assets 30,794 30,356
----------- -----------
Deferred tax liabilities
Deferred policy acquisition costs (14,591) (13,394)
Mortgage servicing rights (3,497) (2,745)
Unrealized appreciation of investments (9,907) ---
Deferred software development and fees (3,106) (2,448)
Other (2,547) (2,669)
----------- -----------
Total gross deferred tax liabilities (33,648) (21,256)
----------- -----------
Net deferred tax (liabilities) assets $ (2,854) $ 9,100
=========== ===========
Since adoption of SFAS 109 on January 1, 1993, there has not been a valuation
allowance for deferred income tax assets. In assessing the realization of
deferred tax assets, management considers whether it is more likely than not
that the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers primarily tax planning strategies and the scheduled
reversal of deferred tax liabilities in making this assessment and believes it
is more likely than not the Company ultimately will realize the benefits of the
deductible differences recognized at December 31, 1995.
The actual income tax expense for the years ended December 31, 1995, 1994, and
1993 differed from the expected tax expense (computed by applying the federal
corporate tax rate of 35% to income before income taxes). The difference was
primarily a result of investment income exempt from federal income tax, which
decreased tax expense by $4,504, $4,630, and $3,445 in 1995, 1994, and 1993,
respectively.
58
Included in income tax expense is state income tax expense of $402, $456, and
$956 for the years ended December 31, 1995, 1994, and 1993, respectively. The
Company paid federal and state income taxes of $19,117, $16,702, and $14,525 in
1995, 1994, and 1993, respectively.
The IRS is currently examining the 1992 income tax return. Any proposed
adjustments are not expected to have a material impact on the Company's
financial condition or results of operations.
(18) Segment Information
The Company's operations include two major segments: property-casualty and
excess & surplus lines. Their principal products, services, revenues, income
before income taxes, assets, depreciation and amortization, and capital
expenditures are identified by segment.
Property-casualty--Predominantly private passenger automobile, homeowners, and
small commercial lines of insurance.
Excess & surplus lines--Primarily commercial casualty and commercial property
lines of insurance coverages that standard insurers are unable or unwilling to
provide.
Eliminations and other--Eliminations between segments plus other noninsurance
operations not reported as segments (including investment services, data
processing, and employee lease fees from affiliates).
At or for the year ended December 31, 1995 1994 1993
------------- ----------- ------------
Revenues (1)
Property-casualty $ 472,034 $ 431,110 $ 384,613
Excess & surplus lines 35,356 31,003 28,985
Eliminations and other (2) 45,375 45,251 68,844
------------- ----------- ------------
Total $ 552,765 $ 507,364 $ 482,442
============= =========== ============
Income before income taxes
Property-casualty $ 63,883 $ 54,186 $ 40,902
Excess & surplus lines 4,840 4,999 5,618
Eliminations and other (2) 5,125 7,514 10,237
------------- ----------- ------------
Total $ 73,848 $ 66,699 $ 56,757
============= =========== ============
Assets
Property-casualty $ 847,401 $ 749,760 $ 675,194
Excess & surplus lines 122,200 105,722 96,543
Eliminations and other 40,997 37,269 83,788
------------- ----------- ------------
Total $ 1,010,598 $ 892,751 $ 855,525
============= =========== ============
Depreciation and amortization
Property-casualty $ 851 $ 281 $ ---
Excess & surplus lines 58 58 ---
Other (2) 8,674 6,237 10,463
------------- ----------- ------------
Total $ 9,583 $ 6,576 $ 10,463
============= =========== ============
Capital expenditures
Property-casualty $ 3,390 $ 1,161 $ ---
Excess & surplus lines 131 16 ---
Other (2) 4,273 4,476 4,942
------------- ----------- ------------
Total $ 7,794 $ 5,653 $ 4,942
============= =========== ============
(1) Including realized investment gains or losses.
(2) Including the results of Dougherty Dawkins' operations through the sale
date of October 29, 1993. Its results are also reflected in the Company's
consolidated income statements. The loss on the sale is reported in
eliminations and other.
59
(19) Unaudited Interim Financial Information
Quarter ended March 31 June 30 September 30 December 31
------------- ------------ ------------ -----------
1995 Operating Summary
Earned premiums $ 109,481 $ 111,583 $ 115,768 $ 118,667
============= ============ ============ ===========
Investment income $ 11,275 $ 11,664 $ 12,396 $ 11,907
============= ============ ============ ===========
Realized investment gains $ 15 $ 248 $ (24) $ 267
============= ============ ============ ===========
Total revenues $ 132,276 $ 134,686 $ 140,159 $ 145,644
============= ============ ============ ===========
Losses and expenses $ 115,016 $ 116,772 $ 121,143 $ 125,986
============= ============ ============ ===========
Net income $ 12,384 $ 12,756 $ 13,405 $ 13,831
============= ============ ============ ===========
Fully diluted earnings per share
Net income $ .83 $ .86 $ .90 $ .93
============= ============ ============ ===========
1994 Operating Summary
Earned premiums $ 97,817 $ 102,277 $ 104,762 $ 107,662
============= ============ ============ ===========
Investment income $ 9,614 $ 10,420 $ 10,347 $ 10,689
============= ============ ============ ===========
Realized investment gains $ 391 $ 2,683 $ 30 $ (215)
============= ============ ============ ===========
Total revenues $ 119,734 $ 127,351 $ 127,100 $ 133,180
============= ============ ============ ===========
Losses and expenses $ 103,663 $ 107,885 $ 111,984 $ 117,133
============= ============ ============ ===========
Net income $ 11,471 $ 13,836 $ 10,813 $ 11,505
============= ============ ============ ===========
Fully diluted earnings per share
Net income $ .76 $ .94 $ .72 $ .77
============= ============ ============ ===========
Caution should be exercised in comparing the results of consecutive quarters.
(20) Subsequent Event
On March 7, 1996, the ESOP Trust converted all of its shares of ESOP Series to
4,402,797 shares of common stock. The conversion increased the number of common
shares outstanding to approximately 13,949,000 shares.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
60
PART III
Item 10. Directors and Executive Officers of the Registrant
The information under the caption "Directors and Executive Officers" in the 1996
Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
The information under the caption "Compensation of Executive Officers" in the
1996 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Security Ownership of Directors and Executive
Officers" in the 1996 Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions and Relationships" in
the 1996 Proxy Statement is incorporated herein by reference.
61
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of Financial Statements and Schedules.
Form 10-K
Page(s)
---------
1. Financial Statements.
Independent Auditors' Report. 31
Consolidated Balance Sheets as of December 31, 1995
and 1994. 32 to 33
Consolidated Statements of Income for the Years ended
December 31, 1995, 1994 and 1993. 34
Statements of Stockholders' Equity for the Years ended
December 31, 1995, 1994 and 1993. 35
Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1994 and 1993. 36
Notes to Consolidated Financial Statements. 37 to 59
2. Schedules.
Report of Independent Auditors on Schedules. 68
I - Summary of Investments-Other Than Investments
in Related Parties. 69
II - Condensed Financial Information of Registrant 70 to 73
III - Supplementary Insurance Information. 74
IV - Reinsurance. 75
VI - Supplemental Information. 76
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements and notes thereto.
3. Executive Compensation Plans and Arrangements.
Long-term Management Incentive Compensation Plan for 1991
(Incorporated by reference to Exhibit 10.3 to the Company's September
30, 1993 Form 10-Q on file with the Commission), Exhibit 10.3.
Long-term Management Incentive Compensation Plan for 1992
(Incorporated by reference to Exhibit 10.4 to the Company's September
30, 1993 Form 10-Q on file with the Commission), Exhibit 10.4.
62
Short-term and Long-term Management Incentive Compensation Plans for
1993 (Incorporated by reference to Exhibit 10.5 to the Company's
September 30, 1993 Form 10-Q on file with the Commission), Exhibit
10.5.
ALLIED Group, Inc. Restated and Amended Stock Option Plan
(Incorporated by reference to Exhibit 10.19 to the Company's December
31, 1992 Form 10-K on file with the Commission), Exhibit 10.18.
ALLIED Group, Inc. Nonqualified Stock Option Plan (Incorporated by
reference to Exhibit 10.20 to the Company's December 31, 1992 Form
10-K on file with the Commission), Exhibit 10.19.
ALLIED Group, Inc. Outside Director Stock Purchase Plan (Incorporated
by reference to Exhibit 10.21 to the Company's December 31, 1992 Form
10-K on file with the Commission), Exhibit 10.20.
ALLIED Group, Inc. Executive Equity Incentive Plan (Incorporated by
reference to Exhibit 10.22 to the Company's December 31, 1992 Form
10-K on file with the Commission), Exhibit 10.21.
The ALLIED Group Employee Stock Ownership Plan, Amended and Restated,
dated September 27, 1994 (Incorporated by reference to Exhibit 10.27
to the Company's September 30, 1994 Form 10-Q on file with the
Commission), Exhibit 10.27.
First Amendment to The ALLIED Group Employee Stock Ownership Plan,
dated March 7, 1995 (Incorporated by reference to Exhibit 10.50 to
the Company's March 31, 1995 Form 10-Q on file with the Commission),
10.29.
Second Amendment to The ALLIED Group Employee Stock Ownership Plan,
dated May 15, 1995 (Incorporated by reference to Exhibit 10.51 to the
Company's June 30, 1995 Form 10-Q on file with the Commission),
10.30.
ALLIED Group Mortgage Company Nonqualified Stock Option Plan
(Incorporated by reference to Exhibit 10.28 of the Company's
Registration Statement on Form S-3 filed with the Commission on
February 2, 1993, Registration No. 33-55714), Exhibit 10.35.
Short-term Management Incentive Plans for 1993 (Incorporated by
reference to Exhibit 10.39 to the Company's December 31, 1993 Form
10-K on file with the Commission), Exhibit 10.39.
ALLIED Group Short Term Management Incentive Plan for 1994
(Incorporated by reference to Exhibit 10.40 to the Company's June 30,
1994 Form 10-Q on file with the Commission), Exhibit 10.40.
ALLIED Group, Inc. Long-Term Management Incentive Plan (Incorporated
by reference to Exhibit 10.42 to the Company's March 31, 1994 Form
10-Q on file with the Commission), Exhibit 10.42.
Consulting Agreement between John E. Evans and ALLIED Group, Inc.,
ALLIED Mutual Insurance Company, and ALLIED Life Financial
Corporation (Incorporated by reference to Exhibit 10.48 to the
Company's December 31, 1994 Form 10-K on file with the Commission),
Exhibit 10.48.
ALLIED Group Short Term Management Incentive Plan for 1995
(Incorporated by reference to Exhibit 10.49 to the Company's December
31, 1994 Form 10-K on file with the Commission), Exhibit 10.49.
ALLIED Group Short Term Management Incentive Plan for 1996, Exhibit
10.52.
(b) Reports on Form 8-K.
None.
63
(c) Exhibits.
NOTE: See "Index to Exhibits" on page number 78, which discloses the
specific page numbers for the exhibits included in this Form 10-K.
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession.
2.2 Stock Rights Agreement between ALLIED Mutual Insurance Company
and ALLIED Group, Inc. dated July 5, 1990 (Incorporated by
reference to Exhibit 2.4 to the Company's July 1, 1990 Form
8-K on file with the Commission).
2.3 First Amendment to Stock Rights Agreement between ALLIED
Mutual Insurance Company and ALLIED Group, Inc. (Incorporated
by reference to Exhibit 2.5 to the Company's September 30,
1992 Form 10-Q on file with the Commission).
3. Articles of incorporation and bylaws.
3.1 Amended and Restated Articles of Incorporation of the Company
as of December 22, 1989 (Incorporated by reference to Exhibit
3.1 to the Company's December 31, 1989 Form 10-K on file with
the Commission).
3.2 Articles of Amendment dated May 26, 1993 of the Amended and
Restated Articles of Incorporation (Incorporated by reference
to Exhibit 3.10 of the Company's June 30, 1993 From 10-Q on
file with the Commission).
3.3 Bylaws of the Company as of July 9, 1991 (Incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-2 filed with the Commission on July 9,
1991, Registration No. 33-40995).
3.4 Amendment to Bylaws of the Company as of March 3, 1992
(Incorporated by reference to Exhibit 3.6 to Company's
December 31, 1992 Form 10-K on file with the Commission).
3.5 Amendment to Bylaws of the Company as of October 14, 1993
(Incorporated by reference to Exhibit 3.5 to Company's
December 31, 1993 Form 10-K on file with the Commission).
3.6 Certificate of Designations, defining the rights of holders of
Series A ESOP Convertible Preferred Stock of ALLIED Group,
Inc. (Incorporated by reference to Exhibit 4.1 to the
Company's July 1, 1990 Form 8-K on file with the Commission).
3.7 Certificate of Designations, defining the rights of holders of
Series B ESOP Convertible Preferred Stock of ALLIED Group,
Inc. (Incorporated by reference to Exhibit 4.3 to the
Company's December 31, 1990 Form 10-K on file with the
Commission).
3.9 Certificate of Designations, defining the rights of holders of
6-3/4% Series Preferred Stock of ALLIED Group, Inc.
(Incorporated by reference to Exhibit 3.7 to Company's
November 2, 1992 Form 8-K on file with the Commission).
3.10 Certificate of Designations, defining the rights of holders of
Series D ESOP Convertible Preferred Stock of ALLIED Group,
Inc. (Incorporated by reference to Exhibit 3.8 to the
Company's Registration Statement on Form S-3 filed with the
Commission on February 2, 1993, Registration No. 33-55714).
64
3.11 Articles of Correction for the Certificate of Designations
defining the rights of holders of Series D ESOP Convertible
Preferred Stock of ALLIED Group, Inc. (Incorporated by
reference to Exhibit 3.9 to the Company's Registration
Statement on Form S-3 filed with the Commission on February 9,
1993, Registration No. 33-55714).
3.12 Amendment to Bylaws of the Company as of December 14, 1994,
(Incorporated by reference to Exhibit 3.12 to the Company's
December 31, 1994 Form 10-K on file with the Commission).
4. Instruments defining the rights of security holders including
indentures.
4.6 Stock Purchase Agreement between ALLIED Group, Inc. and State
Street Bank and Trust Company, dated December 31, 1993
(Incorporated by reference to Exhibit 4.6 of the Company's
December 31, 1993 Form 10-K on file with the Commission).
4.7 Agreement between ALLIED Group, Inc. and State Street Bank and
Trust Company, dated March 7, 1996.
4.8 Stock Purchase Agreement between ALLIED Group, Inc. and State
Street Bank and Trust Company dated December 30, 1994.
4.9 Stock Purchase Agreement between ALLIED Group, Inc. and State
Street Bank and Trust Company dated December 29, 1995.
10. Material contracts.
10.3 Long-term Management Incentive Compensation Plan for 1991
(Incorporated by reference to Exhibit 10.3 to the Company's
September 30, 1993 Form 10-Q on file with the Commission).
10.4 Long-term Management Incentive Compensation Plan for 1992
(Incorporated by reference to Exhibit 10.4 to the Company's
September 30, 1993 Form 10-Q on file with the Commission).
10.5 Short-term and Long-term Management Incentive Compensation
Plans for 1993 (Incorporated by reference to Exhibit 10.5 to
the Company's September 30, 1993 Form 10-Q on file with the
Commission).
10.7 Amended and Restated Management Information Services Agreement
between ALLIED Group Information Systems, Inc. and certain of
its affiliated companies.
10.10 Amended and Restated Reinsurance Pooling Agreement between
ALLIED Mutual Insurance Company and certain of its affiliated
companies (Incorporated by reference to Exhibit 10.7 to the
Company's December 31, 1989 Form 10-K on file with the
Commission).
10.11 Amendment to Amended and Restated Reinsurance Pooling
Agreement between ALLIED Mutual Insurance Company and certain
of its affiliated companies as of March 28, 1990 (Incorporated
by reference to Exhibit 10.11 to the Company's March 31, 1990
Form 10-Q on file with the Commission).
10.12 Amendment to Amended and Restated Reinsurance Pooling
Agreement between ALLIED Mutual Insurance Company and the
Company's property-casualty insurance subsidiaries
(Incorporated by reference to Exhibit 10.19 to the Company's
December 31, 1991 Form 10-K on file with the Commission).
65
10.13 Fourth Amendment to Amended and Restated Reinsurance Pooling
Agreement between ALLIED Mutual Insurance Company and the
Company's property-casualty insurance subsidiaries
(Incorporated by reference to Exhibit 10.33 to the Company's
September 30, 1992 Form 10-Q on file with the Commission).
10.14 Second Amended and Restated Reinsurance Pooling Agreement
between ALLIED Mutual Insurance Company and the Company's
property-casualty insurance subsidiaries (Incorporated by
reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-3 filed with the Commission on December
15, 1992, Registration No. 33-55714).
10.15 First Amendment to the Second Amended and Restated Reinsurance
Pooling Agreement between ALLIED Mutual Insurance Company and
the Company's property-casualty insurance subsidiaries
(Incorporated by reference to Exhibit 10.43 to the Company's
March 31, 1993 Form 10-Q on file with the Commission).
10.16 Amended and Restated ALLIED Group Intercompany Operating
Agreement between the Company and its affiliated companies
dated August 25, 1993 and amendment thereto dated November 1,
1993 (Incorporated by reference to Exhibit 10.14 to the
Company's September 30, 1993 Form 10-Q on file with the
Commission).
10.17 ALLIED Group, Inc. Federal Income Tax Sharing Agreement.
10.18 ALLIED Group, Inc. Restated and Amended Stock Option Plan
(Incorporated by reference to Exhibit 10.19 to the Company's
December 31, 1992 Form 10-K on file with the Commission).
10.19 ALLIED Group, Inc. Nonqualified Stock Option Plan
(Incorporated by reference to Exhibit 10.20 to the Company's
December 31, 1992 Form 10-K on file with the Commission).
10.20 ALLIED Group, Inc. Outside Director Stock Purchase Plan
(Incorporated by reference to Exhibit 10.21 to the Company's
December 31, 1992 Form 10-K on file with the Commission).
10.21 ALLIED Group, Inc. Executive Equity Incentive Plan
(Incorporated by reference to Exhibit 10.22 to the Company's
December 31, 1992 Form 10-K on file with the Commission).
10.22 Agency Agreement between ALLIED Group Insurance Marketing
Company and Depositors Insurance Company, AMCO Insurance
Company, and ALLIED Property and Casualty Insurance Company
(Incorporated by reference to Exhibit 10.17 to the Company's
December 31, 1991 Form 10-K on file with the Commission).
10.27 The ALLIED Group Employee Stock Ownership Plan, Amended and
Restated, dated September 27, 1994 (Incorporated by reference
to Exhibit 10.27 to the Company's September 30, 1994 Form 10-Q
on file with the Commission).
10.28 The ALLIED Group Employee Stock Ownership Trust (Incorporated
by reference to Exhibit 10.27 to the Company's March 31, 1991
Form 10-Q on file with the Commission).
10.29 First Amendment to The ALLIED Group Employee Stock Ownership
Plan, dated March 7, 1995 (Incorporated by reference to
Exhibit 10.50 to the Company's March 31, 1995 Form 10-Q on
file with the Commission).
10.30 Second Amendment to The ALLIED Group Employee Stock Ownership
Plan, dated May 15,1995 (Incorporated by reference to Exhibit
10.51 to the Company's June 30, 1995 Form 10-Q on file with
the Commission).
66
10.32 Term Credit Agreement and Guaranty between ALLIED Group, Inc.,
ALLIED Group Employee Ownership Trust, Bank of Montreal, and
Norwest Bank Iowa, N.A. (Incorporated by reference to Exhibit
10.29 to the Company's March 31, 1995 Form 10-Q on file with
the Commission).
10.33 First Amendment to the Term Credit Agreement and Guaranty,
dated October 12, 1995. (Incorporated by reference to Exhibit
10.30 to the Company's September 30, 1995 Form 10-Q on file
with the Commission).
10.35 ALLIED Group Mortgage Company Nonqualified Stock Option Plan
(Incorporated by reference to Exhibit 10.28 of the Company's
Registration Statement on Form S-3 filed with the Commission
on February 2, 1993, Registration No. 33-55714).
10.37 Stock Purchase Agreement between ALLIED Group, Inc. and
Michael E. Dougherty and Dougherty Dawkins, Inc. (Incorporated
by reference to Exhibit 10.38 to the Company's June 30, 1993
Form 10-Q on file with the Commission).
10.38 The ALLIED Group Marketing Agreement between the Company's
property-casualty subsidiaries and certain of its affiliated
companies dated August 25, 1993 and amendment thereto dated
November 1, 1993 (Incorporated by reference to Exhibit 10.39
to the Companies September 30, 1993 Form 10-Q on file with the
Commission).
10.39 Short-term Management Incentive Plan for 1993 (Incorporated by
reference to Exhibit 10.39 to the Company's December 31, 1993
Form 10-K on file with the Commission).
10.40 ALLIED Group Short Term Management Incentive Plan for 1994
(Incorporated by reference to Exhibit 10.40 to the Company's
June 30, 1994 Form 10-Q on file with the Commission).
10.42 ALLIED Group, Inc. Long-Term Management Incentive Plan
(Incorporated by reference to Exhibit 10.42 to the Company's
March 31, 1994 Form 10-Q on file with the Commission).
10.44 Second Amendment to Amended and Restated ALLIED Group
Intercompany Operating Agreement dated May 16, 1994
(Incorporated by reference to Exhibit 10.42 to the Company's
June 30, 1994 Form 10-Q on file with the Commission).
10.45 Second Amendment to the ALLIED Group Marketing Agreement
between the Company's property-casualty subsidiaries and
certain of its affiliated companies, dated August 25, 1994
(Incorporated by reference to Exhibit 10.45 to the Company's
September 30, 1994 Form 10-Q on file with the Commission).
10.46 Third Amendment to Amended and Restated ALLIED Group
Intercompany Operating Agreement (Incorporated by reference to
Exhibit 10.46 to the Company's December 31, 1994 Form 10-K on
file with the Commission).
67
10.47 Second Amendment to Amended and Restated Reinsurance Pooling
Agreement (Incorporated by reference to Exhibit 10.47 to the
Company's December 31, 1994 Form 10-K on file with the
Commission).
10.48 Consulting Agreement between John E. Evans and ALLIED Group,
Inc., ALLIED Mutual Insurance Company, and ALLIED Life
Financial Corporation (Incorporated by reference to Exhibit
10.48 to the Company's December 31, 1994 Form 10-K on file
with the Commission).
10.49 ALLIED Group Short Term Management Incentive Plan for 1995
(Incorporated by reference to Exhibit 10.49 to the Company's
December 31, 1994 Form 10-K on file with the Commission).
10.50 Intercompany Cash Concentration Fund Agreement, dated April
24, 1995 (Incorporated by reference to Exhibit 10.52 to the
Company's June 30, 1995 Form 10-Q on file with the Commission)
10.51 Amendment to the Nonqualified Stock Option Plan, dated October
20, 1995 (Incorporated by reference to Exhibit 10.53 to the
Company's September 30, 1995 Form 10-Q on file with the
Commission).
10.52 ALLIED Group Short Term Management Incentive Plan for 1996.
10.53 Property Special Catastrophe Excess Contract.
11. Statement re computation of per share earnings.
21. Subsidiaries of the Registrant.
23. Consent of Independent Auditors.
27. Financial Data Schedule
28P. Information from Reports Furnished to State Insurance Regulatory
Authorities.
(d) Financial Statements required by Regulation S-X which are excluded from the
Annual Report to Stockholders by Rule 14a-3(b)(1).
None.
68
REPORT OF INDEPENDENT AUDITORS ON SCHEDULES
The Board of Directors and Stockholders
ALLIED Group, Inc.:
Under date of February 2, 1996 we reported on the consolidated balance sheets of
ALLIED Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1995, as
contained in the 1995 Annual Report. As reported in Note 1 to the consolidated
financial statements, the Company changed its method of accounting for
investments in 1993. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related consolidated
financial statement schedules listed in Part IV, Item 14(a)2. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Des Moines, Iowa
February 2, 1996
69
ALLIED Group, Inc. and Subsidiaries
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1995
Amount at
Market which shown in
Type of investment Cost value the balance sheet
------------------ --------------- --------------- -----------------
Fixed maturities - bonds
U.S. Government and government
agencies and authorities $ 244,165,971 $ 254,337,128 $ 254,337,128
States, municipalities, and
political subdivisions 273,822,087 284,640,205 284,640,205
Foreign governments 2,090,501 2,160,580 2,160,580
All other corporate bonds 206,647,060 213,408,867 213,408,867
--------------- --------------- ---------------
Total fixed maturities 726,725,619 $ 754,546,780 754,546,780
===============
Equity securities 7,527,302 $ 7,948,517 7,948,517
===============
Other long-term investments 1,840 1,840
Short-term investments 9,801,481 9,801,481
--------------- ---------------
Total investments $ 744,056,242 $ 772,298,618
=============== ===============
70
ALLIED Group, Inc. and Subsidiaries
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
December 31, 1995 and 1994
Assets 1995 1994
--------------- ---------------
Cash $ --- $ 164,912
Indebtedness from affiliates 4,768,770 3,429,295
Accrued investment income 72,518 65,853
Short-term investments 6,021,020 2,520,286
Fixed maturities -- Available for sale at fair value
(amortized cost $8,976,639 and $5,896,422) 9,080,124 5,279,682
Equity securities at fair value (cost $1,790,896 and $1,799,700) 2,071,834 1,883,963
Investment in subsidiaries at equity (note 1) 362,026,479 300,515,572
Current income taxes recoverable 79,129 269,597
Deferred income taxes 110,152 ---
Other assets 551,593 686,604
--------------- ---------------
Total assets $ 384,781,619 $ 314,815,764
=============== ===============
Liabilities
Guarantee of ESOP obligations $ 26,270,000 $ 28,150,000
Deferred income taxes --- 173,358
Other liabilities 6,926,145 4,611,710
--------------- ---------------
Total liabilities 33,196,145 32,935,068
--------------- ---------------
Stockholders' Equity
Preferred stock, no par value, issuable in series, authorized
7,500,000 shares; issued and outstanding 4,819,932 shares
in 1995 and 4,981,466 in 1994 83,647,674 85,565,516
Common stock, no par value, $1 stated value, authorized
40,000,000 shares; issued and outstanding 9,444,646 in
1995 and 8,999,661 in 1994 9,444,646 8,999,661
Additional paid-in capital 104,595,912 98,926,297
Retained earnings 159,469,625 119,752,032
Unrealized appreciation (depreciation) of investments (net
of deferred income tax (expense) benefit of $(9,906,744)
and $2,868,709) 18,335,633 (5,240,883)
Unearned compensation related to ESOP (23,908,016) (26,121,927)
--------------- --------------------
Total stockholders' equity 351,585,474 281,880,696
--------------- ---------------
Total liabilities and stockholders' equity $ 384,781,619 $ 314,815,764
=============== ===============
See accompanying Notes to Condensed Financial Statements
71
ALLIED Group, Inc. and Subsidiaries
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1995, 1994, and 1993
1995 1994 1993
-------------- -------------- --------------
Revenues
Equity in undistributed earnings of subsidiaries (note 1) $ 38,478,651 $ 38,772,373 $ 32,398,744
Dividends received from subsidiaries (note 1) 12,985,307 8,866,550 8,169,554
Employee leasing income 93,265,042 83,265,394 83,941,836
Realized investment losses 405,654 (43,024) ---
Investment income 654,489 452,030 491,885
Other income 47,621 53,018 57,386
-------------- -------------- --------------
145,836,764 131,366,341 125,059,405
-------------- -------------- --------------
Expenses
Salaries, benefits, payroll taxes and other
employee leasing costs 91,929,248 82,177,291 81,826,843
Operating expenses 1,375,281 2,067,786 2,297,743
Interest expense 4,014 24,060 808,117
-------------- -------------- --------------
93,308,543 84,269,137 84,932,703
-------------- -------------- --------------
Income from operations before income taxes 52,528,221 47,097,204 40,126,702
Income tax (benefit) expense 151,392 (527,792) 204,281
-------------- -------------- --------------
Net income $ 52,376,829 $ 47,624,996 $ 39,922,421
============== ============== ==============
See accompanying Notes to Condensed Financial Statements.
72
ALLIED Group, Inc. and Subsidiaries
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994, and 1993
1995 1994 1993
-------------- --------------- --------------
Cash flows from operating activities:
Net income $ 52,376,829 $ 47,624,996 $ 39,922,421
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed earnings (38,478,651) (38,772,373) (32,398,744)
Realized investment losses (405,654) 43,024 ---
Indebtedness from affiliates (1,339,475) (1,359,725) (5,406,842)
Accrued investment income (6,665) 19,629 (63,760)
Cost of ESOP Series shares allocated 2,213,911 1,751,994 1,347,539
Income taxes:
Current 190,468 2,110,615 (1,702,670)
Deferred (656,689) 597,191 (23,427)
Other, net 529,635 1,272,665 6,016,967
-------------- --------------- --------------
Net cash provided by operating activities 14,423,709 13,288,016 7,691,484
-------------- --------------- --------------
Cash flows from investing activities:
Investments in subsidiaries 539 350 (49,382,962)
Sale of subsidiary --- --- 14,303,671
Purchase of fixed maturities
Available for sale (3,276,014) (16,030,000) (8,491,352)
Held to maturity --- --- (1,260,199)
Purchase of equity securities (1,630,622) (813,638) (1,203,172)
Short-term investments, net (3,500,734) 199,744 1,284,155
Sale of fixed maturities--available for sale --- 7,487,290 512,892
Maturities, calls, and principal reductions
of fixed maturities
Available for sale 235,608 10,564,855 ---
Held to maturity --- 1,244,960 ---
Sale of equity securities 2,045,080 214,660 ---
-------------- --------------- --------------
Net cash provided by (used in) investing activities (6,126,143) 2,868,221 (44,236,967)
-------------- --------------- --------------
Cash flows from financing activities:
Issuance of preferred stock 699,559 794,133 889,470
Issuance of common stock 3,497,199 1,128,345 46,469,119
Repurchase of common stock --- (6,360,128) ---
Dividends paid to stockholders, net of income tax benefit (12,659,236) (11,795,038) (10,901,459)
-------------- --------------- --------------
Net cash (used in) provided by financing activities (8,462,478) (16,232,688) 36,457,130
-------------- --------------- --------------
Net decrease in cash (164,912) (76,451) (88,353)
Cash beginning of year 164,912 241,363 329,716
-------------- --------------- --------------
Cash end of year $ --- $ 164,912 $ 241,363
============== =============== ==============
See accompanying Notes to Condensed Financial Statements.
73
ALLIED Group, Inc. and Subsidiaries
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of ALLIED Group,
Inc. and its subsidiaries.
(1) The Company's investment in subsidiaries, undistributed earnings of
subsidiaries, and dividends received from subsidiaries are shown by segment
below:
Property- Excess &
casualty Surplus Other Total
---------------- --------------- --------------- ---------------
Year ended
December 31, 1995
Investment in subsidiaries $ 293,167,247 $ 37,291,129 $ 31,568,103 $ 362,026,479
Equity in undistributed
earnings of subsidiaries $ 33,655,150 $ 3,516,974 $ 1,306,527 $ 38,478,651
Dividends received from
subsidiaries $ 12,011,307 $ --- $ 974,000 $ 12,985,307
Year ended
December 31, 1994
Investment in subsidiaries $ 239,722,727 $ 31,341,143 $ 29,451,702 $ 300,515,572
Equity in undistributed
earnings of subsidiaries $ 31,614,854 $ 3,634,920 $ 3,522,599 $ 38,772,373
Dividends received from
subsidiaries $ 7,799,550 $ --- $ 1,067,000 $ 8,866,550
Year ended
December 31, 1993
Investment in subsidiaries $ 217,048,558 $ 28,991,799 $ 26,291,417 $ 272,331,774
Equity in undistributed
earnings of subsidiaries $ 22,081,768 $ 4,049,891 $ 6,267,085 $ 32,398,744
Dividends received from
subsidiaries $ 7,729,354 $ --- $ 440,200 $ 8,169,554
74
ALLIED Group, Inc. and Subsidiaries
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
Years ended December 31, 1995, 1994, and 1993
Reserves for Amortization
Deferred losses and Losses of deferred Other
policy loss Net and loss policy under-
acquisition settlement Unearned Premiums investment settlement acquisition writing Premiums
Segments costs expenses premiums earned income expenses costs expenses written
-------- ----------- ------------ ---------- --------- ---------- ---------- ------------ ---------- ----------
(in thousands)
1995
Property-casualty $ 38,846 $ 285,385 $ 180,217 $ 425,838 $ 39,110 $ 295,583 $ 93,684 $ 18,859 $ 440,838
Excess & Surplus 2,842 56,479 16,244 29,661 5,830 22,357 6,436 1,724 30,606
Other operations --- --- --- --- 2,302 --- --- --- ---
Eliminations --- --- --- --- --- --- --- --- ---
---------- ----------- ---------- --------- ---------- ---------- ------------ ---------- ----------
Consolidated $ 41,688 $ 341,864 $ 196,461 $ 455,499 $ 47,242 $ 317,940 $ 100,120 $ 20,583 $ 471,444
========== =========== ========== ========= ========== ========== ============ ========== ==========
1994
Property-casualty $ 35,546 $ 260,420 $ 164,938 $ 386,732 $ 35,279 $ 268,376 $ 85,081 $ 23,466 $ 403,066
Excess & Surplus 2,723 50,576 15,175 25,786 5,242 18,568 5,777 1,659 27,026
Other operations --- --- --- --- 549 --- --- --- ---
Eliminations --- --- --- --- --- --- --- (35) ---
---------- ----------- ---------- --------- ---------- ---------- ------------ ---------- ----------
Consolidated $ 38,269 $ 310,996 $ 180,113 $ 412,518 $ 41,070 $ 286,944 $ 90,858 $ 25,090 $ 430,092
========== =========== ========== ========= ========== ========== ============ ========== ==========
1993
Property-casualty $ 31,952 $ 233,508 $ 148,255 $ 344,322 $ 33,471 $ 242,196 $ 75,751 $ 25,764 $ 370,218
Excess & Surplus 2,455 46,348 13,575 24,014 4,867 16,722 5,403 1,242 24,892
Other operations --- --- --- --- 1,661 --- --- --- ---
Eliminations --- --- --- --- (969) --- --- --- ---
---------- ----------- ---------- --------- ---------- ---------- ------------ ---------- ----------
Consolidated $ 34,407 $ 279,856 $ 161,830 $ 368,336 $ 39,030 $ 258,918 $ 81,154 $ 27,006 $ 395,110
========== =========== ========== ========= ========== ========== ============ ========== ==========
75
ALLIED Group, Inc. and Subsidiaries
SCHEDULE IV
REINSURANCE
Years ended December 31, 1995, 1994, and 1993
Percentage
Ceded Assumed of amount
Gross other from other Net assumed to
amount companies companies (1) amount net
-------------- --------------- ------------------ --------------- --------------
(in thousands)
1995
Premiums:
Property-casualty $ 435,223 $ 265,571 $ 256,186 $ 425,838 60.2%
Excess & surplus lines 37,184 7,523 --- 29,661 ---
-------------- --------------- ------------------ ---------------
Total premiums $ 472,407 $ 273,094 $ 256,186 $ 455,499 56.2%
============== =============== ================== ===============
1994
Premiums:
Property-casualty $ 383,510 $ 242,490 $ 245,712 $ 386,732 63.5%
Excess & surplus lines 32,257 6,471 --- 25,786 ---
-------------- --------------- ------------------ ---------------
Total premiums $ 415,767 $ 248,961 $ 245,712 $ 412,518 59.6%
============== =============== ================== ===============
1993
Premiums:
Property-casualty $ 328,530 $ 415,752 $ 431,544 $ 344,322 125.3%
Excess & surplus lines 29,961 5,947 --- 24,014 ---
-------------- --------------- ------------------ ---------------
Total premiums $ 358,491 $ 421,699 $ 431,544 $ 368,336 117.2%
============== =============== ================== ===============
(1) See note 6 of Notes to Consolidated Financial Statements for additional
information on amounts assumed from ALLIED Mutual Insurance Company in
accordance with the affiliated reinsurance pooling agreement.
76
ALLIED Group, Inc. and Subsidiaries
SCHEDULE VI
SUPPLEMENTAL INFORMATION
Years ended December 31, 1995, 1994, and 1993
Losses and loss
Discount settlement expenses
if any incurred related to Paid losses
deducted ---------------------------------- and loss
from Current Prior settlement
Segment reserves year years expenses
------- --------------- --------------- -------------- ---------------
(in thousands)
1995
Property-casualty $ --- $ 294,176 $ 1,407 $ 270,373
Excess & surplus lines --- 21,780 577 15,302
--------------- --------------- -------------- ---------------
Total $ --- $ 315,956 $ 1,984 $ 285,675
=============== =============== ============== ===============
1994
Property-casualty $ --- $ 271,723 $ (3,347) $ 245,416
Excess & surplus lines --- 16,851 1,717 16,904
--------------- --------------- -------------- ---------------
Total $ --- $ 288,574 $ (1,630) $ 262,320
=============== =============== ============== ===============
1993
Property-casualty $ --- $ 247,211 $ (5,014) $ 203,228
Excess & surplus lines --- 15,561 1,160 15,611
--------------- --------------- -------------- ---------------
Total $ --- $ 262,772 $ (3,854) $ 218,839
=============== =============== ============== ===============
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLIED Group, Inc.
(Registrant)
Date: March 5, 1996 By /s/ Jamie H. Shaffer
-------------------------------------
Jamie H. Shaffer
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
By: /s/ Douglas L. Andersen By: /s/ Jamie H. Shaffer By: /s/ John E. Evans
- -------------------------------------- ------------------------------------- --------------------------------
Douglas L. Andersen Jamie H. Shaffer John E. Evans
President (Property-casualty) President (Financial) and Treasurer Chairman of the Board
March 5, 1996 March 5, 1996 and Director
March 5, 1996
By: /s/ James W. Callison By: By: /s/ Charles I. Colby
- -------------------------------------- ------------------------------------- --------------------------------
James W. Callison Harold S. Carpenter Charles I. Colby
Director Director Director
March 5, 1996 March 5, 1996 March 5, 1996
By: /s/ Harold S. Evans By: /s/ Richard O. Jacobson By: /s/ John P. Taylor
- -------------------------------------- ------------------------------------- --------------------------------
Harold S. Evans Richard O. Jacobson John P. Taylor
Director Director Director
March 5, 1996 March 5, 1996 March 5, 1996
By: /s/ William E. Timmons By: /s/ Donald S. Willis
- -------------------------------------- -------------------------------------
William E. Timmons Donald S. Willis
Director Director
March 5, 1996 March 5, 1996
78
ALLIED Group, Inc. and Subsidiaries
INDEX TO EXHIBITS
Exhibit
Number Item Page
4.7 Agreement between ALLIED Group, Inc. and State Street Bank and Trust Company, 79
dated March 7, 1996.
4.8 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust 83
Company, dated December 31, 1994.
4.9 Stock Purchase Agreement between ALLIED Group, Inc. and State Street Bank and Trust 99
Company, dated December 31, 1995.
10.7 Amended and Restated Management Information Services Agreement between ALLIED 115
Group Information Systems, Inc. and certain of its affiliated companies dated
January 1, 1995
10.17 ALLIED Group, Inc. Federal Income Tax Sharing Agreement 142
10.52 ALLIED Group Short Term Management Incentive Plan for 1996 148
10.53 Property Special Catastrophe Excess Contract 156
11 Statement re Computation of Per Share Earnings 169
21 Subsidiaries of the Registrant 170
23 Consent of Independent Auditors 171
27 Financial Data Schedule 172
28P Information from Reports Furnished to State Insurance Regulatory Authorities 173