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.
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).
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.
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.
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.
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 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 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.
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.
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.
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).
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 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.
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.
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
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.
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.
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.
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.
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.
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.
Des Moines, Iowa February 2, 1996 except for note 20, which is as of March 7, 1996
ALLIED Group, Inc. and Subsidiaries Consolidated Statements of Income (in thousands, except per share data)
ALLIED Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (dollars in thousands, except per share data)
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.
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.
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
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 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.
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.
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
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.
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.
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.
The amount of compensation cost related to The ALLIED Group Employee Stock Ownership Plan (ESOP) is based on the cost of the shares allocated to participants plus interest expense incurred related to the debt of the ESOP reduced by dividends paid used to service the ESOP's debt (the shares allocated
method). The income tax benefit for the tax deductibility of dividends paid on unallocated shares of the ESOP available for debt service is included as a direct addition to retained earnings.
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.
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.
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.
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).
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.
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.
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.
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.
A summary of net investment income for the years ended December 31, 1995, 1994, and 1993 follows:
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.
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.
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.
The Company paid interest to affiliates of $127, $123, and $484 in 1995, 1994, and 1993, respectively.
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.
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
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.
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 Company paid interest to nonaffiliates of $1,569, $2,249, and $2,442 in 1995, 1994, and 1993, respectively.
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.
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.
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 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 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.
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.
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.
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:
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:
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 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:
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 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.
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:
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 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.
(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.