The majority of the real property occupied by the Company are owned or leased by ALLIED Mutual. A portion of the costs of the properties is paid by the Company. See "Relationship with ALLIED Mutual-Intercompany Operating Agreement." Management considers the properties to be adequate for its needs. The primary properties owned by ALLIED Mutual are the home office in Des Moines, Iowa, a data processing facility and claims center in Urbandale, Iowa, and regional offices in Denver, Colorado and Lincoln, Nebraska. The Santa Rosa, California regional office building is leased by ALLIED Mutual. The Company and its subsidiaries lease office space in Des Moines and Cedar Rapids, Iowa, Minneapolis, Minnesota, Lincoln, Nebraska, and Scottsdale, Arizona.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor to encourage companies to provide prospective information so long as it is identified as forward-looking and accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. Forward-looking statements are related to the plans and objectives of management for the future operations, economic performance, of projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items. In the following discussion and elsewhere in this report, statements containing words such as "expect," "anticipate," "believe," "goal," "objective," or similar words are intended to identify forward-looking statements. ALLIED Group, Inc. (ALLIED) undertakes no obligation to update such forward-looking statements, and it wishes to identify important factors that could cause actual results to differ materially from those projected in the forward-looking statements contained in the following discussion and elsewhere in this report. The risks and uncertainties that may affect the operations, performance, development, and results of ALLIED's business include but are not limited to the following: (1) heightened competition, particularly intensified price competition; (2) adverse state and federal legislation and regulations; (3) changes in interest rates causing a reduction of investment income; (4) general economic and business conditions which are less favorable than expected; (5) unanticipated changes in industry trends; (6) adequacy of loss reserves; (7) catastrophic events or the occurrence of a significant number of storms and wind and hail losses; and (8) other risks detailed herein and from time to time in ALLIED's other reports.
At December 31, 1996, The ALLIED Group Employee Stock Ownership Trust (ESOP Trust) owned 26.5% and ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company, controlled 18.3% of the outstanding voting stock of ALLIED.
The Board of Directors authorized a 3-for-2 stock split issuable November 29, 1996 to common stockholders of record on November 15, 1996. All fractional shares were paid in cash. All share and per share amounts included throughout this report have been restated to reflect the stock split.
Book value per share at December 31, 1996 increased to $17.39 from $16.16. The increase in book value was constrained by higher dividend payments, increased wind and hail losses, and the share repurchase program. The fair value of investments in fixed maturities was $17.1 million above amortized cost compared with $27.8 million above amortized cost at December 31, 1995. If the investments in fixed maturities were reported at amortized cost, book value per share at December 31, 1996 would have been $16.85 compared with $15.29 at December 31, 1995.
Revenues for the property-casualty segment increased to $515.7 million from $472 million for 1995. Direct earned premiums for the segment were $497.1 million for 1996 compared with $435.2 million one year earlier. Earned premiums increased 9.5% to $466.2 million from $425.8 million. The increase resulted primarily from growth in insurance exposure as well as a larger average premium per policy.
Pooled net written premiums (including ALLIED Mutual) totaled $767.2 million, a 10.8% increase over 1995 production. The average premium per policy for personal lines was up 4.6% to $613 while the policy count grew 8.7%. The average premium per policy for commercial lines increased 2.2% to $1,110, and policy count was up 4.3%. Earned premiums for the property-casualty segment were 66.8% personal lines and 33.2% commercial lines in 1996. The business mix for 1995 was 65.7% personal and 34.3% commercial lines.
Income before income taxes decreased 7% to $59.4 million from $63.9 million. The decrease was due primarily to higher losses and loss adjusting expenses in 1996, brought on by higher wind and hail losses in the second and third quarters.
The statutory combined ratio (after policyholder dividends) deteriorated to 97.7 from the 95.7 reported in 1995, primarily due to a 2.6-point increase in the loss and loss adjusting expense ratio. Higher wind and hail losses accounted for 2.2 points of the deterioration. The deterioration was partially offset by a 0.5-point reduction in the Company's underwriting expense ratio, achieved through improved efficiency and productivity. Wind and hail losses increased to $39.1 million from $28.7 million in 1995. The impact of wind and hail losses on the statutory combined ratio was 8.4 points for 1996 and 6.7 points for 1995. The 1996 underwriting gain (on a generally accepted accounting principles basis) was $9.9 million compared with $17.7 million for 1995.
The personal auto statutory combined ratio increased to 98.9 from 96.5 for 1995, reflecting a 2.8-point increase in the loss and loss adjusting expense ratio. The statutory combined ratio for the homeowners line was 102.4 compared with 99.2 for 1995. Wind and hail losses increased the homeowners combined ratio 23.6 points in 1996 and 21.7 points in 1995. Overall, the personal lines statutory combined ratio deteriorated to 99.8 from 97.2 in 1995. The statutory combined ratio for commercial lines increased to 93.5 from 92.7 for the previous year.
Income before income taxes for 1996 increased 66.4% to $8.1 million from $4.8 million. The increase was primarily due to favorable loss development.
Consolidated invested assets were up 6.1% to $819.6 million from $772.3 million at year-end 1995. Fixed maturities at amortized cost increased 6.7%. Consolidated investment income increased 4.2% to $49.2 million from $47.2 million in 1995. The increase was due primarily to a larger average balance of invested assets. The tax-equivalent yield was down in 1996 to 7.4% compared with 7.8% one year earlier. The aftertax yield for 1996 and 1995 was 4.8 and 5%, respectively.
Net income for the year ended December 31, 1995 was up 10% to $52.4 million, raising fully diluted earnings per share to $2.35 from $2.12. Fully diluted earnings per share before net realized investment gains were $2.33 for 1995 compared with $2.03 in 1994. Book value per share increased to $16.16 from $13.12.
Revenues for the property-casualty segment increased to $472 million from $431.1 million for 1994. Direct earned premiums for the segment were $435.2 million for 1995 compared with $383.5 million one year earlier. Earned premiums increased 10.1% to $425.8 million from $386.7 million. The increase resulted from growth in insurance exposures as well as higher rates.
The statutory combined ratio (after policyholder dividends) improved to 95.7 from the 97.1 reported in 1994. Improvement was attributed primarily to a 1.3-point decrease in the underwriting expense ratio. The decrease was the result of the Company's continuing efforts to improve efficiency and productivity. Wind and hail losses for 1995 increased to $28.7 million from $24.4 million in 1994. The impact of wind and hail losses on the statutory combined ratio was 6.7 points for the year ended December 31, 1995 and 6.3 points for 1994. The underwriting gain (on a generally accepted accounting principles basis) was $17.7 million compared with $9.8 million for 1994. On a fully diluted basis, the impact of wind and hail losses on the results of operations was $0.90 per share versus $0.77 in 1994.
The personal auto statutory combined ratio improved to 96.5 for 1995 from 97.4 for 1994. The improvement was due to a 1.4-point decrease in the underwriting expense ratio that more than offset the increase in the loss and loss adjusting expense ratio. The statutory combined ratio for the homeowners line was 99.2 compared with 107.4 for 1994. The impact of wind and hail losses on the homeowners combined ratio increased slightly to 21.7 points from 21.5 points. Results for the homeowners line were favorably affected by better pricing in 1995. Overall, the personal lines statutory combined ratio improved to 97.2 in 1995 from 99.8 in 1994. The statutory combined ratio for commercial lines increased to 92.7 from 92.0 for the previous year.
The statutory combined ratio (after policyholder dividends) was 102.2, which produced an underwriting loss (on a generally accepted accounting principles basis) of $855,000. The statutory combined ratio of 99.9 for 1994 resulted in an underwriting loss of $218,000. The 1995 combined ratio increased primarily because of a 20.4% increase in losses and loss adjusting expenses (3.4 points on the combined ratio).
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.
The insurance subsidiaries are subject to regulation and supervision by the states in which they are admitted to transact business. State insurance laws generally establish supervisory agencies with broad administrative and supervisory powers related to granting and revoking licenses to transact business, establishing guaranty fund associations, licensing agents, regulating premium rates for some lines of business, establishing reserve requirements, prescribing the form and content of required financial statements and reports, determining the reasonableness and adequacy of statutory capital and surplus, and regulating the type and amount of permitted investments.
Dividend payments to common stockholders totaled $12.2 million for the year ended December 31, 1996, up from $6.3 million and $5.4 million in 1995 and 1994, respectively. In 1996, 1995, and 1994, dividends paid on the ESOP Series Preferred Stock (ESOP Series) were $595,000, $3.7 million, and $3.8 million, respectively. In each year, dividends of $3.5 million on the 6-3/4% Series Preferred Stock were paid. The increase in dividends to common shareholders and the decrease in ESOP Series were due to the conversion of the ESOP Series completed on March 7, 1996 (see note 10 of the Notes to Consolidated Financial Statements for a further discussion of the conversion). Prior to the conversion, ALLIED and the ESOP Trustee entered into an agreement whereby ALLIED agrees to release additional shares held by the ESOP Trustee if the dividend paid on common stock is less than $0.20 per share per quarter, which calculates to $0.13 per share per quarter on a post-split basis. The agreement is in effect from March 7, 1996 through March 7, 2000. The agreement ensures that the allocated shares in the ESOP Trust receive at least the same amount of dividends that would have been paid on the ESOP Series had they not been converted to common stock.
ALLIED relies primarily on dividends from its insurance subsidiaries to pay preferred and common stock dividends to stockholders. The Iowa state insurance regulations restrict the maximum amount of dividends the property-casualty subsidiaries can pay without prior regulatory approval. The maximum dividend allowed is the greater of either 10% of the subsidiary's statutory capital stock and surplus as of the preceding December 31 or net income of the preceding calendar year. In 1997 the maximum amount legally available for distribution to ALLIED without prior approval is $52.6 million.
The excess & surplus lines subsidiary is domiciled in Arizona and operates under Arizona state laws. The maximum amount available for distribution as dividends from the excess & surplus lines subsidiary is limited to the lesser of 10% of stockholders' surplus as of the preceding December 31 or net investment income of the preceding year. The excess & surplus lines segment could pay $3.3 million in 1997 without prior notice to the insurance commissioner. ALLIED anticipates the excess & surplus lines segment will not pay dividends in 1997.
In 1990, the ESOP Trust issued floating rate notes totaling $35 million (ESOP obligations) to acquire ESOP Series stock for the Employee Stock Ownership Plan (ESOP). In March 1995, the ESOP Trust refinanced the notes pursuant to a Term Credit Agreement and Guaranty (Agreement) with two separate commercial banks. ALLIED guaranteed the ESOP Trust's obligations under the Agreement. See note 9 of Notes to Consolidated Financial Statements for a discussion of ESOP obligations. At December 31, 1996, the balance of the obligations was $24.4 million. Contributions plus dividends on leveraged shares held by the ESOP are used by the ESOP Trust to service the ESOP obligations. Dividends and payments for the employee lease fees from its subsidiaries are used by ALLIED to fund the amounts paid to the ESOP Trust. ALLIED made contributions to the ESOP Trust of $529,000 in 1996, $733,000 in 1995, and $35,000 in 1994. ALLIED paid dividends of $3.5 million in 1996, $2.8 million in 1995, and $2.8 million in 1994, which were used for such debt service. In connection with its guarantee of ESOP obligations, ALLIED is required to maintain minimum stockholders' equity and to comply with certain other financial covenants.
Management maintains a system of internal control designed to provide reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use of disposition, the prevention and detection of fraudulent financial reporting, and the appropriate division of responsibility. In addition, the Company's internal audit department systematically reviews these controls, evaluates their adequacy and effectiveness, and reports thereon. Management has considered internal audit recommendations and those of KPMG Peat Marwick LLP and has in its opinion responded appropriately to those recommendations. Management believes that as of December 31, 1996 the Company's system of internal control is adequate to accomplish the objectives discussed herein.
The 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, 1996 and 1995 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ALLIED Group, inc. and subsidiaries as of December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles.
ALLIED Group, Inc. and Subsidiaries Statements of Cash Flows (in thousands)
At year-end 1996, the ALLIED Group Employee Stock Ownership Trust (ESOP Trust) owned 26.5% and ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company, controlled 18.3% of the outstanding voting stock of ALLIED.
Investments in fixed maturities where there is the positive intent and ability to hold to maturity are classified as held to maturity and carried at cost adjusted for amortization of premium or discount. Amortization of premiums and discounts on mortgage-backed securities incorporates a prepayment assumption to estimate the securities' expected lives. Except for declines that are other than temporary, changes in fair value are not reflected in the financial statements. Investments in fixed maturities that may be sold prior to maturity and are not bought and held principally for the purpose of selling in the near term are segregated into an available for sale portfolio and are carried at fair value. Unrealized appreciation and depreciation of securities classified as available for sale are excluded from income and reported as a separate component of stockholders' equity net of deferred income taxes.
Mortgage loans held for sale by ALLIED Mortgage are reported at the lower of cost or fair value on an aggregate basis. The fair value calculation includes consideration of all open positions, outstanding commitments from investors, related fees paid, and unrealized gains and losses from open options and financial futures contracts. Loan origination fees and certain direct costs related to loan origination are deferred and recognized at the time the related loans are sold. In the normal course of business, ALLIED Mortgage protects its position in mortgages by taking positions in options, futures, and cash markets. Market risk exists in the event of fluctuations in market prices on the unhedged portions of mortgage loans held for sale and outstanding commitments.
ALLIED Mortgage recognizes as separate assets the rights to service mortgage loans for others, whether acquired through purchases or loan originations. Capitalized mortgage servicing rights are assessed periodically for impairment
The amount of compensation cost related to The ALLIED Group Employee Stock Ownership Plan (ESOP) is based on the cost of the shares allocated to participants plus interest expense incurred related to the debt of the ESOP reduced by dividends paid used to service the ESOP's debt (the shares allocated method). The income tax benefit for the tax deductibile dividends paid on unallocated shares of the ESOP available for debt service is included as a direct addition to retained earnings.
The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) 121,"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are
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.
Fixed maturities--The estimated fair value is based upon the quoted market prices for the same or similar issues or from independent pricing services (note 3).
Equity securities--The estimated fair value is based upon the quoted market prices where available or from independent pricing services (note 3).
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).
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).
Following is a schedule of amortized costs and estimated fair values of investments in fixed maturities and equity securities as of December 31, 1996 and 1995. The estimated fair values for fixed maturities and equity securities are based on quoted market prices for the same or similar issues or from independent pricing services.
The following table presents the gross realized gains and losses by portfolio included in the proceeds from calls, principal reductions, and sales of fixed maturities for the years ended December 31, 1996, 1995, and 1994.
In November of 1995, the Company reclassified $359.4 million of fixed maturities as held to maturity to available for sale. The reclassification increased unrealized appreciation of investments by $7.7 million net of deferred income taxes, and was permitted under the implementation guide issued by the FASB, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities."
For the year ended December 31, 1994, gross realized losses of the held to maturity portfolio included a realized loss of $195,000 on the sale of an investment. The investment had an amortized cost of $4.9 million and was disposed of due to the significant downgrade of the issuer's credit rating in 1994. Additionally, the Company sold from the held to maturity portfolio an investment with an amortized cost of $1 million for a realized loss of $10,000. There were no transfers in 1994.
As required by law, fixed maturities and short-term investments were on deposit with various insurance regulatory authorities, amounting to $10.5 million at December 31, 1996 and $10.5 million at year-end 1995.
A summary of net realized investment gains (losses) and net changes in unrealized appreciation (depreciation) of investments for the years ended December 31, 1996, 1995, and 1994 follows:
The property-casualty segment and ALLIED Mutual participate in a reinsurance pooling agreement. The pooling agreement provides that AMCO (pool administrator) assumes from the pool participants premiums, losses, allocated loss adjusting expenses, commissions, premium taxes, service charge income, and dividends to policyholders. Then the pool participants assume from AMCO an amount of this pooled property-casualty business equal to their participation in the pooling agreement. AMCO pays certain underwriting expenses, unallocated loss adjusting expenses, and premium collection expenses for all of the pool participants and receives a fee equal to a specified percentage of premiums as well as a contingent fee based on the attainment of certain combined ratios from each of the pool participants. AMCO charges each of the participants 12.85% of written premiums for underwriting services, 7.25% of earned premiums for unallocated loss adjusting expenses, and 0.75% of earned premiums for premium collection services. The administrative fees are subject to renegotiation during the term of the agreement upon at least five years' notice. AMCO received pool administrative fees of $61.3 million, $55.7 million, and $50.4 million from ALLIED Mutual in 1996, 1995, and 1994, respectively. The pooling agreement extends through December 31, 2004, after which it can be terminated by the participating parties upon five years' notice. Changes to the pooling agreement must be approved by the coordinating committee of the Board of Directors.
The Intercompany Operating Agreement between the Company and ALLIED Mutual also provides for the continued availability of office space, marketing services, agency forces, and computer and other facilities. Expenses are charged to the Company based on specific identification or, if undeterminable, the expenses are allocated on the basis of cost and time studies that are updated annually. The agreement extends through December 31, 2004, after which it may be terminated on two years' notice given after December 31, 2002 by either ALLIED Mutual or the Company.
Included in income from affiliates are revenues of $2.4 million, $2.8 million, and $2.3 million for the years ended December 31, 1996, 1995, and 1994, respectively, relating to data processing services provided by the Company to ALLIED Mutual and its subsidiaries under a Management Information Services Agreement. Effective March 1, 1996, the agreement was amended and certain personnel previously providing computer-related services to a certain affiliate were employed by the affiliate. As a result, fees paid for services provided by such employees prior to the amendment date are now paid directly by the affiliate.
The Company paid interest to affiliates of $270,000, $127,000, and $123,000 in 1996, 1995, and 1994, respectively.
The following table sets forth the reconciliation of beginning and ending reserves for losses and loss adjusting expenses for the years indicated. Reinsurance recoverables on unpaid losses and loss adjusting expenses are included on the consolidated balance sheets within reinsurance receivables for losses and loss adjusting expenses. The following table includes property-casualty and excess & surplus lines reserves for losses and loss adjusting expenses.
The reserving process relies on the basic assumption that past experience, adjusted for current developments and likely trends, is an appropriate basis for predicting future events. Reserve amounts are necessarily based on management's informed estimates; as other data becomes available and is reviewed, these estimates and judgments are revised, resulting in increases and decreases to existing reserves. As a result of changes in estimates of insured events in
The effect of reinsurance on premiums written and earned and losses and loss adjusting expenses incurred for the years ended December 31, 1996, 1995, and 1994 was as follows:
On June 1, 1994, the Company completed the sale of its investment in a savings and loan holding company for $9.4 million. The 20% interest was acquired for investment purposes and was reported in other investments. The pretax gain of $2.6 million is included in realized investment gains for 1994 in the consolidated statements of income.
ALLIED Mortgage entered into an agreement with a life insurance company for $15 million of 8.4% senior secured notes due September 1, 2004. The notes are secured by mortgage servicing rights and are payable in equal annual installments of $1.5 million every September 1; interest is payable semiannually. At December 31, 1996 and 1995, the outstanding balance was $12 million and $13.5 million, respectively.
The Federal Home Loan Bank of Des Moines provides a $3 million committed credit facility through a line of credit agreement with AMCO that expires March 1, 1997. Interest on any outstanding borrowings is payable at an annual rate equal to the federal funds unsecured rate for federal reserve member banks. The Company had no outstanding balance as of December 31, 1996 and December 31, 1995.
The Credit Agreement includes various financial and operating covenants with which ALLIED must comply. The covenants include the maintenance of certain contractual relationships with ALLIED Mutual, continued ownership of certain subsidiaries, limitations on the issuance of security interests in certain assets, maintenance of various financial ratios, and minimum net equity requirements.
On March 7, 1996, the commercial bank acting on behalf of the ESOP participants as the trustee for the ESOP Trust (Trustee) converted all of its shares of ESOP Convertible Preferred Stock (ESOP Series) to shares of common stock. The ESOP Series shares were convertible into 2-1/4 common shares and had 2-1/4 votes, subject to anti-dilution adjustments. In 1995 the ESOP Trust purchased 13,426 shares of ESOP Series for $54.00 per share of Series D. In 1994 the ESOP Trust purchased 22,223 shares of ESOP Series for $37.12 per share: 9,247 shares of Series C and 12,976 shares of Series D.
ALLIED has reserved 375,000 shares of common stock for issuance under the ALLIED Life Employee Stock Purchase Plan. ALLIED receives fair market value for the shares issued under the plan. During 1996, 556 shares were issued at a weighted average price per share of $26.71. During 1995 and 1994, 3,008 and 464 shares were issued at a weighted average price per share of $19.17 and $17.53, respectively. At December 31, 1996, 370,903 shares were available for issuance.
During 1996, ALLIED canceled 664,500 shares of its common stock repurchased on the open market at an average cost of $24.87 per share. No shares were repurchased in 1995. During 1994, ALLIED canceled 375,000 shares of its common stock repurchased on the open market at an average cost of $16.96 per share.
During 1995 and 1994, 174,960 and 110,956 ESOP Series shares were converted to 393,660 and 249,651 shares of common stock, respectively.
ALLIED has granted stock options to key employees under four nonqualified plans as defined by the Internal Revenue Service: the ALLIED Group, Inc. Restated and Amended Stock Option Plan (Option Plan), the ALLIED Group, Inc. Nonqualified Stock Option Plan (Nonqualified Plan), the ALLIED Group Executive Equity Incentive Plan (Equity Plan), and the Freedom Group Incentive Plan (Freedom Plan). No options remain to be granted under the plans, and during 1996 all Equity Plan options were exercised. Upon exercise of the stock options under each plan, ALLIED receives an amount equal to the common stock's fair market value at the grant date. The options vest at various times and must be exercised ten years after the date of grant.
In addition, ALLIED has reserved 900,000 shares of common stock for issuance to key employees under the ALLIED Group, Inc. Long-Term Management Incentive Plan (Incentive Plan). Under the Incentive Plan, shares of common stock are available for grant until December 31, 2003 as incentive and nonqualified stock options (collectively, Options), SARs, and restricted stock. The Options, SARs, and restricted stock begin to vest two years after the date of grant. Options, SARs, and restricted stock prices are based upon the fair market values as of the date of grant.
A summary of stock option activity and prices for 1996, 1995, and 1994 is presented below:
The Company applies APB 25 and related interpretations in accounting for its stock-based compensation plans, as permitted by SFAS 123. Accordingly, no compensation cost for the Company's stock option plans has been recognized in the accompanying financial statements. Compensation cost of $386,000, $167,000, and $24,000 was recognized in 1996, 1995, and 1994, respectively, under ALLIED's other stock-based compensation plans. Had compensation cost been determined based on the fair market value at the grant date of the stock option plans in accordance with SFAS 123, the Company's net income and earnings per share could have been reduced to the pro forma amounts presented in the following table:
In 1996, 1995, and 1994, ALLIED paid dividends of $16.3 million, $13.5 million, and $12.7 million, respectively.
Retained earnings of the property-casualty and excess & surplus lines subsidiaries available for distribution as dividends are limited by law to the amount of statutory unassigned surplus as of the date the dividend is authorized or paid. The maximum dividend the property-casualty subsidiaries may pay without prior approval of the state of Iowa (state of domicile) insurance regulatory authorities is the greater of either 10% of the property-casualty statutory capital stock and surplus as of the preceding December 31 or statutory net income of the preceding year. The maximum amount legally available for distribution from the property-casualty segment in 1997 to ALLIED without regulatory approval is $52.6 million. The maximum dividend the excess & surplus lines subsidiary may pay without prior approval of the state of Arizona (state of domicile) insurance regulatory authorities is the lesser of either 10% of the statutory capital stock and surplus as of the preceding year or net investment income of the preceding year. The maximum amount legally available for distribution in 1997 without regulatory approval is $3.3 million.
The following table includes selected information for ALLIED's insurance subsidiaries as determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities:
The Company leases data processing equipment and certain office facilities under operating leases expiring in various years through 2003. Rental expense amounted to $2.6 million, $2.6 million, and $3.8 million for the years ended December 31, 1996, 1995, and 1994, respectively. At December 31, 1996, future minimum lease payments under operating leases amounted to $13.2 million: $2.5 million in 1997, $2.4 million in 1998, $2.3 million in 1999, $869,000 in 2000, $401,000 in 2001, and $4.7 million in later years.
The Company's ESOP expense was $1 million in 1996, $2.7 million in 1995, and $1.8 million in 1994. Of those respective amounts, $14,000, $65,000, and $30,000 were included in the employee lease fee received from affiliates pursuant to the terms of the Intercompany Operating Agreement for the years ended December 31, 1996, 1995, and 1994, respectively.
In addition to the ESOP, ALLIED sponsors a health care plan that provides postretirement medical benefits to full-time employees who meet age and service requirements. The plan is contributory with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles and coinsurance. ALLIED's policy is to fund the cost of medical benefits in amounts determined at the discretion of management.
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 relate to the following:
Since adoption of SFAS 109, there has not been a valuation allowance for deferred income tax assets. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the recognition of future taxable income during the periods in which those temporary differences become deductible. Management considers tax planning strategies and the scheduled reversal of deferred tax liabilities in making this assessment and believes it is more likely than not the Company ultimately will realize the benefits of the deductible differences recognized at December 31, 1996.
The Company's principal products, services, revenues, income before income taxes, assets, depreciation and amortization, and capital expenditures are identified by segment.
Property-casualty--Predominantly private passenger automobile, homeowners, and small commercial lines of insurance.