Allied Life Financial: 10-Q Filing UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 Commission File Number 0-22404 ALLIED Life Financial Corporation (Exact name of registrant as specified in its charter) Iowa (State or other jurisdiction of incorporation or organization) 42-1406716 (I.R.S. Employer Identification No.) 701 Fifth Avenue, Des Moines, Iowa (Address of principal executive offices) 50391-2003 (Zip Code) 515-280-4211 (Registrant's telephone number, including area code) 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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate the number of outstanding shares of each of the issuer's classes of common stock, as of August 1, 1997: 4,370,251 shares of Common Stock. This document contains 20 pages. PART I Item 1. Financial Statements ALLIED Life Financial Corporation and Subsidiaries Consolidated Balance Sheets June 30, December 31, 1997 1996 Assets Investments Fixed maturities Held to maturity at amortized cost (fair value $0 in 1997 and $205,347,823 in 1996 - see note 6) $ -------- $199,208,835 Available for sale, at fair value (amortized cost $708,160,687 in 1997 and $492,686,241 in 1996 - see note 6) 720,280,862 500,289,070 Equity securities at fair value 9,142,696 6,406,552 Mortgage loans on real estate 1,122,363 1,456,688 Policy loans 10,768,311 10,306,724 Other invested assets 3,385,835 3,751,415 Short-term investments, at cost 1,916,342 919,687 Total investments 746,616,409 722,338,971 Accrued investment income 10,051,650 9,738,060 Accounts receivable 1,013,995 607,737 Reinsurance ceded receivables 5,609,167 5,786,434 Current income taxes recoverable 895,894 ------- Deferred policy acquisition costs 93,417,549 92,417,588 Other assets 7,648,636 4,710,933 Total assets $865,253,300 $835,599,723 See accompanying Notes to Interim Consolidated Financial Statements. 1 ALLIED Life Financial Corporation Subsidiaries Consolidated Balance Sheets June 30, December 31, 1997 1996 Liabilities Policy liabilities Policyholder account balances Annuity contracts $484,568,954 $467,504,991 Universal life contracts 189,825,970 182,726,695 Other 7,920,753 8,846,156 Future policy benefits 35,440,924 33,473,558 Policy and contract claims 3,390,163 3,735,623 Other policyholder funds 2,205,490 1,575,995 723,352,254 697,863,018 Checks drawn in excess of bank balances 2,481,037 3,163,318 Current income taxes payable -------- 940,576 Deferred income taxes 4,529,434 8,008,946 Indebtedness to affiliates 3,902,488 2,188,068 Note payable (note 2) 18,880,000 20,470,000 Other liabilities 3,487,949 3,024,175 Total liabilities 756,633,162 735,658,101 Stockholders' equity Preferred stock, no par value, issuable in series, authorized 7,500,000 shares 6.75% Series, authorized 2,440,000 shares, issued and outstanding of 2,216,650 in 1997 and 2,143,691 in 1996 24,050,652 23,259,047 ESOP Series, authorized 300,000 shares, issued and outstanding 107,329 in 1997 and 93,982 in 1996 1,569,554 1,327,186 Common stock, no par value, $1 stated value, authorized 25,000,000 shares, issued and outstanding 4,368,832 in 1997 and 4,497,238 in 1996 4,368,832 4,497,238 Additional paid-in capital 44,559,376 46,596,171 Retained earnings 25,178,711 21,751,088 Unrealized appreciation of investments, net 8,893,013 2,510,892 Total stockholders' equity 108,620,138 99,941,622 Total liabilities and stockholders' equity $865,253,300 $835,599,723 See accompanying Notes to Interim Consolidated Financial Statements. 2 ALLIED Life Financial Corporation and Subsidiaries Consolidated Statements of Income Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 Revenues Insurance revenues Policyholder assessments on universal life contracts $ 5,429,777 $ 5,086,608 $ 10,813,215 $ 10,253,908 Surrender charges 605,655 567,911 1,224,749 1,196,371 Life insurance premiums 3,651,607 3,212,473 6,897,777 6,045,360 Other insurance income 1,352,938 886,819 2,576,636 1,692,247 Reinsurance premiums ceded (2,452,590) (2,203,904) (4,750,409) (4,267,624) Total insurance revenues 8,587,387 7,549,907 16,761,968 14,920,262 Investment income 12,851,595 11,936,957 25,534,722 23,686,874 Realized investment gains (losses) 140,436 (60,290) (252,319) (144,474) Other income 338,873 270,109 662,014 558,095 21,918,291 19,696,683 42,706,385 39,020,757 Benefits and Expenses Policyholder benefits Interest credited to policyholder account balances Annuity contracts 6,437,051 6,056,648 12,621,285 11,857,101 Universal life contracts 2,487,882 2,348,317 5,180,694 4,723,579 Other 89,299 87,572 215,430 171,769 Death benefits 2,077,940 1,724,322 4,884,466 4,363,397 Other policyholder benefits 1,338,757 2,075,341 2,543,556 3,432,601 Reinsurance recoveries (95,301) (847,120) (383,373) (1,982,775) Total policyholder benefits 12,335,628 11,445,080 25,062,058 22,565,672 Amortization of deferred policy acquisition costs 2,556,992 2,109,686 4,712,923 3,842,280 Commissions 1,011,805 807,240 1,884,297 1,476,571 Affiliated operating expenses 158,027 286,429 301,443 609,585 Other insurance operating expenses 1,838,973 1,407,346 3,538,051 2,841,367 17,901,425 16,055,781 35,498,772 31,335,475 Income before income taxes 4,016,866 3,640,902 7,207,613 7,685,282 Income Taxes Current 1,917,763 1,405,807 2,242,379 2,474,868 Deferred (579,841) (229,000) 159,488 49,019 1,337,922 1,176,807 2,401,867 2,523,887 Net Income $ 2,678,944 $ 2,464,095 $ 4,805,746 $ 5,161,395 Net income applicable to common stock $ 2,252,448 $ 2,066,844 $ 3,959,753 $ 4,372,859 Earnings Per Common Share $ 0.51 $ 0.45 $ 0.89 $ 0.95 Weighted average number of common shares outstanding 4,446,153 4,635,778 4,473,721 4,634,490 See accompanying Notes to Interim Consolidated Financial Statements 3 ALLIED Life Financial Corporation and Subsidiaries Consolidated Statements of Cash Flows Six Months Ended June 30, 1997 1996 Cash Flow From Operating Activities Net income $ 4,805,747 $ 5,161,395 Adjustments to reconcile net income to net cash provided by operating activities Policyholder assessments on universal life contracts (10,813,215) (10,253,908) Surrender charges (1,224,749) (1,196,371) Interest credited to policyholder account balances 18,017,409 16,752,449 Realized investment losses 252,319 144,471 Change in Accrued investment income (313,590) (512,610) Reinsurance ceded receivables 177,267 2,252,163 Deferred policy acquisition costs (3,540,922) (4,386,713) Liabilities for future policy benefits 1,967,366 2,400,213 Policy and contract claims and other policyholder funds 284,035 (1,068,787) Income taxes Current (1,836,470) 1,751,951 Deferred 159,488 49,022 Other, net (1,335,610) (458,680) Net cash provided by operating activities 6,599,075 10,634,595 Cash Flows from Investing Activities Purchase of fixed maturities held to maturity (7,593,891) (18,090,047) Maturities, calls, and principal reductions of fixed maturities held to maturity 8,022,208 33,366,232 Purchase of fixed maturities available for sale (99,272,578) (86,967,282) Proceeds from sale of fixed maturities available for sale 71,303,779 30,467,664 Maturities, calls, and principal reductions of fixed maturities available for sale 11,035,484 15,799,671 Purchase of equity securities (3,045,556) (1,013,190) Proceeds from sale of equity securities 1,145,911 -------- Proceeds from repayment of mortgage loans 334,550 92,420 Change in other invested assets -------- (4,145,000) Change in policy loans, net (461,588) (626,574) Purchase of property, plant and equipment (1,713,325) (337,181) Net cash used in investing activities (20,245,006) (31,453,287) Cash Flows from Financing Activities Change in checks drawn in excess of bank balances (682,282) (603,165) Deposits to policyholder account balances 55,295,645 47,710,920 Withdrawals from policyholder account balances (38,099,295) (25,644,914) Change in note payable, net (1,590,000) 325,000 Change in note payable from affiliates 2,227,869 -------- Proceeds from issuance of stock, net 555,287 348,133 Repurchase of stock (2,478,131) -------- Dividends paid to stockholders (586,507) (511,797) Net cash provided by financing activities 14,642,586 21,624,177 Net Increase in Cash and Short-term Investments 996,655 805,485 Cash and short-term investments at beginning of year 919,687 721,612 Cash and short-term investments at end of quarter $ 1,916,342 $ 1,527,097 See accompanying Notes to Interim Consolidated Financial Statements 4 ALLIED Life Financial Corporation and Subsidiaries Notes to Interim Consolidated Financial Statements (1) Summary of Significant Accounting Policies The accompanying consolidated financial statements include the accounts of ALLIED Life Financial Corporation (the Company) and its subsidiaries on a consolidated basis. At June 30, 1997, ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company, controlled 56% of the voting stock of the Company and the ALLIED Life Financial Corporation Employee Stock Ownership Trust owned 2%. The remainder was owned by public stockholders. The accompanying interim consolidated financial statements should be read in conjunction with the following notes and with the Notes to Consolidated Financial Statements included in the ALLIED Life Financial Corporation's Annual Report on 10K for the year ended December 31, 1996. The interim consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) and include all adjustments which are in the opinion of management necessary for a fair presentation of the results for the interim periods. In the opinion of management, all such adjustments are of a normal and recurring nature. All significant intercompany balances and transactions have been eliminated. (2) Transactions with Affiliates The Company and its affiliates pool their excess cash pursuant to the Intercompany Cash Concentration Fund Agreement. The fund, administered by AID Finance Services, Inc. (an affiliate of the Company), also issues short-term loans (30 days or less) to affiliated companies in accordance with the current intercompany borrowing policy. At June 30, 1997, the Company had an investment balance in the intercompany fund of $1,659,941. Pursuant to the Agreement, AID Finance Services, Inc. receives a management fee of 5 basis points which the fund participants pay in the form of an additional 0.05% in the interest rate for borrowings and a 0.05% reduction in the interest rate on invested funds. The Company has a note payable with ALLIED Mutual. At June 30, 1997 the outstanding balance of the note payable was $3,845,217. (3) Note Payable to Nonaffiliates ALLIED Life Insurance Company, a wholly owned subsidiary, has a line of credit agreement with the Federal Home Loan Bank (FHLB) to make available borrowings of $25,000,000. Interest is payable at either an adjustable interest rate with the interest rate set and charged daily on the outstanding advance amount or at a fixed rate with the interest rate set at issuance. As of June 30, 1997, borrowings on this line of credit agreement were $18,880,000 at an interest rate of 5.75% per annum. All borrowings with the FHLB are secured by securities with a carrying value of $29,747,880. (4) New Accounting Standard In February 1997, the Financial Accounting Standards Board (FASB) Issued Statement of Financial Accounting Standards (SFAS) 128, "Earnings Per Share". SFAS 128 supersedes Opinion 15, "Earnings Per Share"and specifies the 5 ALLIED Life Financial Corporation and Subsidiaries Notes to Interim Consolidated Financial Statements (continued) computation, presentation, and disclosure requirements for earnings per share (EPS). It replaces the presentation of primary EPS and fully diluted EPS with basic EPS and diluted EPS. Basic EPS includes weighted common shares outstanding and excludes all dilutive securities. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stocks were exercised or converted into common stock. Diluted EPS is computed similarly to fully diluted EPS under APB 15. Statement 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Management has determined that the implementation will not have a material effect on its earnings per share calculations. (5) Stock Repurchase Program Effective May 13, 1997, the Board of Directors approved a stock repurchase program to acquire up to 150,000 shares of the Company common stock on the open market pursuant to rule 10b-18 under the Securities Exchange Act of 1934. The Company completed the program during the second quarter of 1997 and repurchased and cancelled 150,000 shares at an average cost of $16.52 per share. (6) Transfer of Securities to Available For Sale Effective May 13, 1997, the Company transferred its remaining securities classified as held to maturity ($196 million) to available for sale. In accordance with SFAS 115 the Company now carries all of its securities at fair value and as a result a $1.2 million increase to stockholders' equity was made. The Company made the transfer to allow for more flexibility with regards to selling securities from its investment portfolio. The Company has no intent of putting future purchases in the held to maturity portfolio. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The following analysis of the consolidated results of operations and financial condition of the Company should be read in conjunction with the interim consolidated financial statements and related footnotes included elsewhere herein, and with the Company's Annual Report on Form 10-K for the year ended December 31, 1996. ALLIED Life Financial Corporation is an insurance holding company formed by ALLIED Mutual Insurance Company (ALLIED Mutual) in 1993. The financial statements include the accounts of ALLIED Life Insurance Company (ALLIED Life), ALLIED Life Brokerage Agency, Inc. (ALBA), and ALLIED Group Merchant Banking Corporation (AGMB). ALLIED Life accounts for substantially all of the Company's operations and sells primarily universal life insurance, term life insurance, and annuity products. The following table reflects ALLIED Life's production information and pretax operating results excluding realized investment gains (losses) and related amortization of deferred policy acquisition costs for the periods indicated. Life Insurance Operations Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (Dollars in thousands) Production information Life insurance Face amount in force Directly produced by agents Universal Life $ 4,485,388 $ 4,244,770 Term life 4,468,907 3,758,407 Whole life 50,630 49,392 9,004,925 8,052,569 Other 378,839 386,416 $9,383,764 $8,438,985 Face amount of new life insurance sold Directly produced by agents Universal Life $ 141,707 $ 88,742 $ 299,346 $ 187,068 Term life 358,491 366,919 630,678 660,752 Whole life 2,723 1,182 4,479 2,159 502,921 456,843 934,503 849,979 Other 1,475 6,858 3,249 11,205 $ 504,396 $ 463,701 $ 937,752 $ 861,184 Termination rate Universal Life 6.4% 6.5% 6.6% 6.8% Term life 16.5% 17.5% 16.9% 17.6% Annuities Account balance $ 484,569 $ 433,197 First-year annuity premiums $ 18,933 $ 16,830 $ 32,957 $ 26,097 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Life Insurance Operations (Continued) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (Dollars in thousands) Profitability Investment income $ 12,840 $ 11,924 $ 25,512 $ 23,663 Interest credited on Annuities 6,437 6,057 12,858 11,857 Universal life 2,488 2,348 4,944 4,724 Other 89 87 215 171 Total interest expense 9,014 8,492 18,017 16,752 Investment spread 3,826 3,432 7,495 6,911 Fee income Universal life charges 5,831 5,500 11,669 11,185 Annuity surrender charges 204 155 369 265 Total fee income 6,035 5,655 12,038 11,450 Other insurance income 2,552 1,895 4,724 3,470 Adjusted insurance revenues 12,413 10,982 24,257 21,831 Other expenses Amortization of deferred policy acquisition costs (1) 2,486 2,131 4,922 3,893 Renewal commissions 805 591 1,493 1,159 Other operating expenses 1,857 1,664 3,569 3,261 Total acquisition and operating expenses 5,148 4,386 9,984 8,313 Death benefits, net 1,968 1,371 4,294 2,874 Other policyholder benefits, net 1,353 1,582 2,751 2,939 Total other expenses 8,469 7,339 17,029 14,126 Income before income taxes and realized investment gains (losses) from insurance operations $ 3,944 $ 3,643 $ 7,228 $ 7,705 (1) Excludes excess amortization of deferred policy acquisition costs resulting from net realized investment gains (losses). RESULTS OF OPERATIONS Consolidated revenues for the six months ended June 30, 1997 were $42.7 million, a 9.5% increase over the $39 million reported for the first six months of 1996. The increase was primarily attributable to higher insurance revenues, which rose 12.3% to $16.8 million from $14.9 million. Investment income rose 7.8% to $25.5 million from $23.7 million. For the second quarter only, consolidated revenues grew 11.3% to $21.9 million in 1997 from $19.7 million in 1996. This was due primarily to the 13.7% increase in insurance revenues. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Operating income decreased 6.8% to $7.3 million from $7.8 million for the six months ended 1997 and 1996, respectively. Net income decreased 6.9% to $4.8 million ($0.89 per common share) from $5.2 million ($0.95 per common share) for the same time periods. Operating earnings per common share for the first six months of 1997 were $0.90 compared to $0.96 for the first six month of 1996. For the second quarter only, operating income increased 7.3% to $3.9 million from $3.7 million. Net income increased to $2.7 million ($0.51 per common share) from $2.5 million ($0.45 per common share) for the same time periods. Operating earnings per common share for the second quarter of 1997 were $0.50 compared to $0.45 for the second quarter of 1996. Life Insurance Operations The following analysis of life insurance operations should be read with reference to the preceding tables. Total life insurance in force grew 11.2% to $9.4 billion at June 30, 1997 from $8.4 billion at June 30, 1996. The increase was due to improved policy retention and life insurance sales. The face amount of new life insurance sold directly by agents through June 30, 1997 increased 9.9% to $934.5 million from $850 million through June 30, 1996. The primary factor was a 60% increase in the face amount of new universal life insurance sold to $299.3 million from $187.1 million. For the second quarter only, the face amount of new universal life insurance sold increased 59.7% to $141.7 million from $88.7 million. Universal life policyholder account balances were up 8.4% to $189.8 million from $172.5 million . The face amount of new term life insurance sold directly by agents decreased 4.6% to $630.7 million through June 30, 1997 from $660.8 million through June 30, 1996. For the second quarter only, the face amount of new term life insurance sold decreased 2.3% to $358.5 million from $366.9 million. ALLIED Life continues to sell mainly ten and twenty-year term policies within this product line. First-year annuity premiums increased 26.3% to $33 million through June 30, 1997 from $26.1 million through June 30, 1996. For the second quarter only, first year annuity premiums increased 12.5% to $18.9 million from $16.8 million. The total annuity account balance increased 11.9% to $484.6 million at June 30, 1997 from $433.2 million at June 30, 1996. The increases in sales of universal life insurance and annuity premiums are the result of the improved agent recruiting efforts of the Company. Year to date they have signed 854 net new producer contracts, a 134% increase over 1996's year to date total of 365. Term life insurance sales were slightly down as the market for this product line remains price competitive. Adjusted insurance revenues increased 11.1% to $24.3 million for the first six months of 1997 from $21.8 million for the first six months of 1996. The growth in life insurance in force and policyholder account balances permitted invested assets, on a cost basis, to increase 9.6% to $732.4 million at June 30, 1997 from $668 million at June 30, 1996, allowing investment income to increase by 7.8%. ALLIED Life's return on invested assets through June 30, 1997 decreased to 7.26% from 7.43% through June 30, 1996. The decrease was due to the fact that ALLIED Life was reinvesting maturing investments at lower interest rates. Investment spread for the first six months of 1997 and 1996 grew to $7.5 million from $6.9 million. For the second quarter only, the investment spread grew to $3.8 million from $3.4 million. Annual average interest credited rates on 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) universal life contracts decreased to 5.30% from 5.49% and on annuities decreased to 5.41% from 5.62%. The ratio of investment spread to investment income increased to 29.4% from 29.2% despite the volatile interest rate environment. This increase is evidence of ALLIED Life's ability to adjust interest credited to policyholder accounts to reflect trends in investment earnings. Amortization of deferred policy acquisition costs for the first six months of 1997 and 1996 increased 26.4% to $4.9 million from $3.9 million. For the second quarter only, amortization of deferred policy acquisition costs increased 16.6% to $2.5 million from $2.1 million. Other operating expenses increased 9.5% to $3.6 million from $3.3 million. For the second quarter only, other operating expenses increased 11.6% to $1.9 million from $1.7 million. Operating expenses grew as a result of agent recruiting, and overall growth. Death benefits net of reinsurance for the first six months of 1997 and 1996 increased 49.4% to $4.3 million ($0.47 per common share) from $2.9 million ($0.32 per common share). For the second quarter only, death benefits net of reinsurance increased 43.5% to $2 million ($0.21 per common share) from $1.4 million ($0.16 per common share). Other policyholder benefits net of reinsurance decreased 6.4% to $2.8 million from $2.9 million. For the second quarter only, they decreased 14.4% to $1.4 million from $1.6 million. ALLIED Life's operating income through June 30, 1997 and 1996 decreased 6.2% to $7.2 million from $7.7 million. For the second quarter only, operating income increased 8.3% to $3.9 million from $3.6 million. For the year and quarter to date the Company has experienced higher death benefits and amortization of deferred policy acquisition costs. For the quarter, these were offset by higher investment spread and adjusted insurance revenues and lower increases in other policyholder benefits. LIQUIDITY AND CAPITAL RESOURCES Consolidated Life insurance companies generally produce a positive cash flow from operations. Its adequacy is measured by the companies' liquidity. There should be sufficient cash to meet benefit obligations to policyholders and normal operating expenses as they are incurred and sufficient excess to help meet future policy benefit payments and to write new business. ALLIED Life's liquidity position continued to be favorable for the second quarter 1997. Cash inflows were at levels sufficient to provide the grounds necessary to meet its obligations. The Company's cash inflows consist primarily of deposits to policyholder account balances, income from sales, maturities and calls of investments, and repayments of investment principal. The Company's cash outflows primarily are related to policyholder account withdrawals, investment purchases, policy acquisition costs, policyholder benefits, and current operating expenses. These outflows typically are met from normal annual premium and net investment cash inflows. For the first six months of 1997 the Company operations provided cash inflows of $6.6 million and financing activities provided cash inflows of $14.6 million. For the first six months of 1996 it was $10.6 million and $21.6 million, respectively. These inflows were used primarily to increase the Company's fixed maturity investment portfolio. Matching the investment portfolio maturities to the cash flow demands of the insurance coverages being provided is an important consideration. The Company continually monitors benefit and claims statistics to project future cash requirements. As part of this monitoring process, the Company performs cash-flow testing of its assets and liabilities under various scenarios to evaluate 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) the adequacy of reserves. In developing its investment strategy, the Company establishes a level of cash and securities that when combined with expected net cash inflows from operations, maturities of fixed-maturity investments, principal payments on mortgage-backed securities, and its insurance products is believed to be adequate to meet anticipated short-term and long-term benefit and expense payment obligations. A source of cash flows for the holding company is dividend payments from ALLIED Life. Through the second quarter of 1997, the Company paid cash dividends on common stock of $532,000. ALLIED Life paid to the Company dividends of $875,000 to fund the Company's dividend requirements and its note payment on the indebtedness to affiliates. The Company has a line of credit agreement that provides additional liquidity. The agreement makes $25 million available through March 13, 1998. Interest is payable at a current rate upon issuance. From time to time, the Company has also borrowed funds from its affiliates on an arms-length basis. At June 30, 1997, the Company had outstanding borrowings of $18.8 million under the line of credit agreements and $3.8 million from affiliates. Management anticipates that funds to meet the Company's short-term and long-term capital expenditures, cash dividends, and operating cash needs will come from existing capital and internally generated funds and believes the total is adequate to meet expected cash obligations. As of June 30, 1997, the Company had no material commitments for capital expenditures. As additional capital needs arise, the Company will consider taking on additional debt or issuing equity. Specific methods for meeting such needs will depend upon financial market conditions at the time. 11 PART II Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Stockholders was held on May 13, 1997. (b) Harold S. Evans and George D. Milligan were elected to serve as directors of the Company for a term of three years which expires in 2000. Current directors whose terms expire in 1998 are James W. Callison and Dennis H. Kelly, Jr. A current director whose term expires in 1999 is John E. Evans. (c) With respect to the voting on the election of directors: For Withheld Broker Non Votes Harold S. Evans 5,984,490 1,164 0 George D. Milligan 5,984,490 1,164 0 (d) None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 10.41 - Amendment Dated June 12, 1997 to the ALLIED Life Financial Corporation Short Term Management Incentive Plan Exhibit 10.42 - Second Amendment dated May 13, 1997 to Consulting Agreement between John E. Evans and ALLIED Group, Inc., ALLIED Mutual Insurance Company,and ALLIED Life Financial Corporation. Exhibit 10.43 - Promissory Note dated June 26, 1997 between ALLIED Mutual Insurance Company and ALLIED Life Financial Corporation. Exhibit 10.44 - 1997 Incentive Plan ALLIED Life Vice President Marketing Exhibit 11 - Statement re Computation of Per Share Earnings. Exhibit 27 - Financial Data Schedule (b) There were no reports filed on Form 8-K during the second quarter of 1997. SIGNATURES Pursuant to the requirements 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 Life Financial Corporation (Registrant) Date: August 14, 1997 By: /s/ Wendell P. Crosser Wendell P. Crosser, Vice President and Treasurer Principal Financial Officer and Principal Accounting Officer) 12 AMENDMENT DATED JUNE 12, 1997 ALLIED LIFE FINANCIAL CORPORATION SHORT TERM MANAGEMENT INCENTIVE PLAN The ALLIED Life Financial Corporation Short Term Management Incentive Plan (the "Plan") was amended by the Compensation Committee of the Board of Directors of ALLIED Life Financial Corporation on June 12, 1997 to reflect the change set forth below. Capitalized terms used herein shall have the meaning as assigned thereto in the Plan. Change in Exhibit A. Exhibit A of the Plan is amended by the replacement of the Growth goals as follows: Threshold Goal Maximum Growth 7.5% 10.25% 13.5% 13 SECOND AMENDMENT TO CONSULTING AGREEMENT This Amendment is made this 13th day of May, 1997, by and between John E. Evans ("Evans") and ALLIED Group, Inc. ("AGI"), ALLIED Mutual Insurance Company ("Mutual"), and ALLIED Life Financial Corporation ("ALFC"). AGI, Mutual, and ALFC shall be known collectively as "ALLIED". Whereas, on December 14, 1994, ALLIED and Evans entered into a Consulting Agreement setting forth the services which Evans was to render to ALLIED following his retirement. Whereas, on December 18, 1996, ALLIED and Evans amended the Consulting Agreement; Whereas, the parties desire to amend the Consulting Agreement as set forth herein; Now, therefore, in consideration of the foregoing, and of the mutual covenants set forth below and other valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Effective June 1, 1997, Section III of the Consulting Agreement is amended by deleting "$250,000" and replacing it with "$180,000". 2. All other terms and conditions remain in full force and effect. In witness whereof, the parties hereto have caused this Agreement to be executed as of the day and year above first written. ALLIED Mutual Insurance Company By:/s/ John E. Evans By: /s/ Douglas L.Andersen John E. Evans Douglas L. Andersen,Presdent ALLIED Group, Inc. ALLIED Life Financial Corporation By:/s/ Douglas L. Andersen By:/s/ Samuel J. Wells Douglas L. Andersen, Presedent Samual J. Wells, President 14 PROMISSORY NOTE No. 01306297 Des Moines, Iowa June 26, 1997 $2,500,000 For value received, the undersigned promises to pay, to the order of ALLIED Mutual Insurance Company at its office in Des Moines, Iowa the sum of Two Million Five Hundred Thousand Dollars, with interest thereon payable August 26, 1997 at the rate of 6.05% per annum from June 26, 1997. All interest computed for the actual number of days elapsed (with no penalty for prepayment and with a pro rata refund on any unearned finance charge) under the commercial method on the basis of a360 day year. Principal and interest not paid when due shall draw interest at the rate of 1 1/2 % per month during any period of delinquency. ALLIED Life Financial Corporation By:/s/ Wendell P. Crosser Wendell P. Crosser, Vice President & Treasurer 15 1997 INCENTIVE PLAN ALLIED LIFE VICE PRESIDENT MARKETING PURPOSE The purpose of the plan is to emphasize attainment of 1997 production goals. ELIGIBILITY Joe Ross, the Vice President Marketing will be eligible to participate in the plan based on goals. COMPENSATION In addition to Base Salary, the participant will be eligible for the following: 1. Monthly A production incentive will be paid monthly as earned according to the following: 1.75% of all net PCPs above the 1996 adjusted monthly total. 2. Quarterly PCP Growth will be measured quarterly against the previous year's same quarter. Growth thresholds will be established each year. Incentive compensation will be paid in accordance with the attained PCP growth increase as follows: PCP Growth Percent Bonus Dollars 120% over same quarter 1996 $ 5,000 125% over same quarter 1996 $10,000 130% over same quarter 1996 $15,000 Any quarterly bonus that is missed by not reaching the minimum growth level may be recaptured at year-end by attaining the minimum growth percent level for the entire year. Any quarterly bonus paid out during the year will be netted against the year-end bonus payable. 3. Annually PCP growth will be measured against the previous year's total. Incentive compensation will be paid in accordance with the attained PCP growth increase as follows. 16 PCP Growth Percent Bonus Dollars 120% over 1996 total $20,000 125% over 1996 total $40,000 130% over 1996 total $60,000 DEFINITIONS "Net Production Credit Premiums" - PCPs personally produced by agents, general agents, regional supervisors, and regional managers, MGAs, LGAs who are coded under the participant's supervision will qualify for attainment of goal and for bonus purposes. PCP credit will be allowed for split business; i.e., business which is credit both to the life producer and the agent. EMPLOYMENT To be eligible for the bonus, the participant must be an employee of ALLIED as of the date of distribution. Nothing contained herein modifies or alters the fact that employment with ALLIED is on an at will basis. This means that you or ALLIED can terminate your employment relationship at any time for any reason. ADMINISTRATION Annual goals will be set by The President of ALLIED Life Insurance Company. The bonus will be pro-rated if the participant is in the position less than the full year. Pro-ration will be based on each full week in the position. Participants who are promoted or transferred or who leave ALLIED will not receive the benefit of any changes which occur after the effective date of departure, including adjustments to goal, business transactions or changes in the Plan. The amount paid, if any, in accordance with the settlement analysis prepared by ALLIED will represent a full and final settlement of all bonuses due and/or which were to become due. ALLIED reserves the right to make changes to this Plan at any time including, but not limited to, changes in goals, products, fee, salaries, draws, bonus amounts, prices, contract terms, commissions schedules, discount rates, crediting or debiting provisions, administration provisions, and other provisions. Resolution of all questions concerning interpretation of this plan shall be the exclusive province of ALLIED. 17 Exhibit 11 ALLIED Life Financial Corporation and Subsidiaries Computation of Per Share Earnings Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 Primary Net income $ 2,678,944 $ 2,464,095 $ 4,805,746 $5,161,395 Preferred stock dividends (426,496) (397,251) (845,993) (788,536) Adjusted net income $ 2,252,448 $ 2,066,844 $ 3,959,753 $4,372,859 Earnings per share $ 0.51 $ 0.45 $ 0.89 $ 0.95 Weighted average number of common shares outstanding 4,446,153 4,635,778 4,473,721 4,634,490 Fully Diluted Net income $ 2,678,944 $ 2,464,095 $ 4,805,746 $5,161,395 Preferred stock dividends (426,496) (397,251) (845,993) (788,536) Adjusted net income $ 2,252,448 $ 2,066,844 $ 3,959,753 $4,372,859 Earnings per share $ 0.51 $ 0.45 $ 0.89 $ 0.95 Weighted average number of common shares outstanding 4,446,153 4,635,778 4,473,721 4,634,490 End