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 March 31, 1998 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 May 1, 1998: 4,415,419 shares of Common Stock. This document contains 18 pages. PART I Item 1. Financial Statements ALLIED Life Financial Corporation and Subsidiaries Consolidated Balance Sheets March 31, December 31, 1998 1997 (In thousands) Assets Investments Fixed maturities available for sale, at fair value $ 802,514 $ 766,028 Equity securities at fair value 3,201 3,201 Mortgage loans on real estate 974 984 Policy loans 11,247 11,164 Other invested assets 2,832 3,014 Short-term investments, at cost 843 3,594 Total investments 821,611 787,985 Accrued investment income 12,486 10,988 Accounts receivable 662 912 Reinsurance ceded receivables 6,900 7,168 Deferred policy acquisition costs 87,465 84,188 Other assets 13,878 13,216 Total assets $ 943,002 $ 904,457 See accompanying Notes to Interim Consolidated Financial Statements. 1 ALLIED Life Financial Corporation Subsidiaries Consolidated Balance Sheets March 31, December 31, 1998 1997 (In thousands) Liabilities Policy liabilities Policyholder account balances Annuity contracts $ 530,131 $ 514,908 Universal life contracts 200,409 196,709 Other 8,064 7,732 Future policy benefits 40,300 38,124 Policy and contract claims 4,350 4,102 Other policyholder funds 3,313 1,778 786,567 763,353 Checks drawn in excess of bank balances 1,106 2,066 Current income taxes payable 831 23 Deferred income taxes 10,196 10,552 Indebtedness to affiliates (note 2) 2,784 3,638 Note payable (note 3) 17,800 6,360 Other liabilities (note 5) 8,569 4,308 Total liabilities 827,853 790,300 Stockholders' equity Preferred stock, no par value, issuable in series, authorized 7,500 shares 6.75% Series, authorized 2,440 shares, issued and outstanding of 2,331 in 1998 and 2,292 in 1997 25,289 24,869 ESOP Series, authorized 300 shares, issued and outstanding of 105 in 1998 and 101 in 1997 1,609 1,467 Common stock, no par value, $1 stated value, authorized 25,000 shares, issued and outstanding of 4,415 in 1998 and 4,398 in 1997 4,415 4,398 Additional paid-in capital 45,214 44,964 Retained earnings 29,990 29,404 Accumulated other comprehensive income 8,632 9,055 Total stockholders' equity 115,149 114,157 Total liabilities and stockholders' equity $ 943,002 $ 904,457 See accompanying Notes to Interim Consolidated Financial Statements. 2 ALLIED Life Financial Corporation and Subsidiaries Consolidated Statements of Income and Comprehensive Income Three Months Ended March 31, 1998 1997 (In thousands, except per share data) Revenues Insurance revenues Policyholder assessments on universal life contracts $ 5,720 $ 5,384 Surrender charges 937 619 Life insurance premiums 4,322 3,246 Other insurance income 2,084 1,224 Reinsurance premiums ceded (3,231) (2,298) Total insurance revenues 9,832 8,175 Investment income 13,743 12,683 Realized investment gains (losses) 165 (393) Other income 417 323 24,157 20,788 Benefits and Expenses Policyholder benefits Interest credited to policyholder account balances Annuity contracts 7,282 6,421 Universal life contracts 2,618 2,456 Other 73 126 Death benefits 3,198 2,807 Other policyholder benefits 2,476 1,205 Reinsurance recoveries (1,547) (288) Total policyholder benefits 14,100 12,727 Amortization of deferred policy acquisition costs 2,471 2,156 Commissions 1,309 872 Affiliated operating expenses 167 143 Other insurance operating expenses (note 5) 4,077 1,699 22,124 17,597 Income before income taxes 2,033 3,191 Income Taxes Current 820 754 Deferred (129) 310 691 1,064 Net Income 1,342 2,127 Unrealized holding gain arising during the period, net of deferred tax 424 (4,841) Comprehensive Income $ 1,766 $ (2,714) Net income applicable to common stock (diluted basis) $ 922 $ 1,707 Earnings Per Share Basic earnings per share $ 0.20 $ 0.38 Diluted earnings per share $ 0.20 $ 0.37 See accompanying Notes to Interim Consolidated Financial Statements 3 ALLIED Life Financial Corporation and Subsidiaries Consolidated Statements of Cash Flows Three Months Ended March 31, 1998 1997 (Dollars in thousands) Cash Flow From Operating Activities Net income $ 1,342 $ 2,127 Adjustments to reconcile net income to net cash provided by operating activities Policyholder assessments on universal life contracts (5,720) (5,383) Surrender charges (937) (619) Interest credited to policyholder account balances 10,279 9,003 Realized investment (gains) losses (165) 393 Change in Accrued investment income (1,498) (1,436) Reinsurance ceded receivables 267 115 Deferred policy acquisition costs (1,805) (1,942) Liabilities for future policy benefits 2,176 918 Policy and contract claims and other policyholder funds 1,783 1,151 Current income taxes 809 (751) Deferred income taxes (129) 739 Other, net 259 (2,656) Net cash provided by operating activities 6,661 1,659 Cash Flows from Investing Activities Purchase of fixed maturities held to maturity ---- (5,394) Maturities, calls, and principal reductions of fixed maturities held to maturity ---- 3,312 Purchase of fixed maturities available for sale (107,542) (39,755) Proceeds from sale of fixed maturities available for sale 60,346 28,223 Maturities, calls, and principal reductions of fixed maturities available for sale 12,647 3,610 Purchase of equity securities ---- (2,453) Proceeds from sale of equity securities ---- 1,023 Proceeds from repayment of mortgage loans 10 132 Change in policy loans, net (83) (333) Purchase of property, plant, and equipment (120) (362) Net cash used in investing activities (34,742) (11,997) Cash Flows from Financing Activities Change in checks drawn in excess of bank balances (960) (1,112) Deposits to policyholder account balances 31,595 25,032 Withdrawals from policyholder account balances (15,565) (17,623) Change in note payable, net 11,440 4,530 Change in note payable to affiliate (1,254) (135) Proceeds from issuance of stock, net 410 491 Dividends paid to stockholders (336) (297) Net cash provided by financing activities 25,330 10,886 Net (Decrease) Increase in Cash and Short-term Investments (2,751) 548 Cash and short-term investments at beginning of year 3,594 920 Cash and short-term investments at end of quarter $ 843 $ 1,468 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 and its subsidiaries on a consolidated basis (the Company). At March 31, 1998, ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated property-casualty insurance company, controlled 56% of the voting stock of ALLIED Life Financial Corporation 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, 1997. 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 March 31, 1998, the Company had a net investment balance in the intercompany fund of $711,000. 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. ALLIED Life Financial Corporation has a note payable with ALLIED Mutual. At March 31, 1998 the outstanding balance of the note payable was $2.3 million. (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 million. 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 March 31, 1998, borrowings on this line of credit agreement were $17.8 million at an interest rate of 5.91% per annum. All borrowings with the FHLB are secured by securities with a carrying value of $27.8 million. (4) New Accounting Standards In June of 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income." This statement establishes new rules for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The new rules require that all items that are recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS 130 on January 1, 1998. This statement requires revised and additional disclosures but will have no effect on the results of operations or the financial position of the Company. 5 ALLIED Life Financial Corporation and Subsidiaries Notes to Interim Consolidated Financial Statements (continued) In June of 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 131, "Disclosure about Segments of an Enterprise and Related Information." Under this statement, public companies will report financial and descriptive information about their operating segments. SFAS 131 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS 131 on January 1, 1998. This statement requires revised and additional disclosures but has no effect on the results of operations or the financial position of the Company. The Company considers its combined life insurance and annuity operations to be its only operating segment. (5) Litigation Reserve The Company announced in January, 1998 that a complaint had been filed by a policyholder of ALLIED Life Financial Corporation's principal subsidiary, ALLIED Life Insurance Company ("ALLIED Life"), in Superior Court in the State of California for the County of Los Angeles. The Complaint was cast as a class action and alleged that ALLIED Life fraudulently increased the cost of insurance rates charged to policyholders in breach of the terms of its universal life policies, its fiduciary obligation, and its obligations of good faith and fair dealing toward its policyholders and without adequate notice. The plaintiff, an insured under a universal life policy issued by ALLIED Life, seeks actual, consequential, and punitive damages in unspecified amounts as well as interest, attorney's fees, an accounting for moneys allegedly improperly charged to policyholders, and injunctive relief, on behalf of herself and all policyholders of ALLIED Life with similar universal life policies. While the outcome of the litigation remains uncertain, the Company has estimated that a reasonable range of cost with respect to this litigation, including attorney fees, would be, on an after tax basis, $700,000 to $1.5 million. Accordingly, in the first quarter of 1998, the Company recorded an after tax reserve in the amount of $1.3 million ($2.0 million pretax - included in Other insurance operating expenses), or $0.29 per share, in connection with the lawsuit. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking Information Management's estimates, beliefs and anticipations in the following discussion and in Note 5 of the Notes to Interim Financial Statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (Reform Act). Investors are cautioned that there are important factors that could cause actual results to differ materially from those in these forward-looking statements. These factors include, but are not limited to , (1) heightened competition, particularly intensified price competition, the entry of new competitors from the financial services sector, and the creation of new products by competitors; (2) adverse state and federal legislation and regulations, including federal tax laws affecting individuals, changes in the taxation of insurance companies, federal legislation allowing the entry of new competitors from the financial services sector, and the regulation of product design and the marketing of those products; (3) changes in interest rates causing a reduction of investment income; (4) general economic and business conditions that are less favorable than expected; (5) unanticipated changes in industry trends; and (6)inaccuracies in assumptions regarding future morbidity, persistency, morality, and interest rates, and other risks detailed herein and from time to time in the Company's other reports. 6 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, 1997. ALLIED Life Financial Corporation is an insurance holding company. 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 March 31, 1998 1997 (Dollars in thousands) Production information Life insurance Face amount in force Directly produced by agents Universal Life $ 4,535,419 $ 4,419,829 Term life 4,721,498 4,287,625 Whole life 51,892 49,198 9,308,809 8,756,652 Other 416,177 383,770 $ 9,724,986 $ 9,140,422 Face amount of new life insurance sold Directly produced by agents Universal Life $ 89,535 $ 157,639 Term life 298,754 272,187 Whole life 2,300 1,756 390,589 431,582 Other 1,807 1,774 $ 392,396 $ 433,356 Termination rate Universal Life 11.2% 6.8% Term life 16.5% 17.6% Annuities Account balance $ 530,131 $ 474,727 First-year annuity premiums $ 19,693 $ 14,024 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Life Insurance Operations (Continued) Three Months Ended March 31, 1998 1997 (Dollars in thousands) Profitability Investment income $ 13,724 $ 12,672 Interest credited on Annuities 7,282 6,421 Universal life 2,618 2,456 Other 73 126 Total interest expense 9,973 9,003 Investment spread 3,751 3,669 Fee income Universal life charges 6,498 5,838 Annuity surrender charges 159 165 Total fee income 6,657 6,003 Other insurance income 3,175 2,172 Adjusted insurance revenues 13,583 11,844 Other expenses Amortization of deferred policy acquisition costs (1) 2,385 2,436 Commissions 1,035 688 Other operating expenses 1,902 1,591 Administrative fees 182 121 Litigation reserve 2,000 ---- Total acquisition and operating expenses 7,504 4,836 Death benefits, net 1,983 2,326 Other policyholder benefits, net 2,145 1,398 Total other expenses 11,632 8,560 Income before income taxes and realized investment gains (losses) from insurance operations $ 1,951 $ 3,284 (1) Excludes amortization of deferred policy acquisition costs resulting from net realized investment gains (losses). RESULTS OF OPERATIONS Consolidated revenues for the three months ended March 31, 1998 were $24.2 million, a 16.2% increase over the $20.8 million reported for the first three months of 1997. Investment income rose 8.4% to $13.7 million from $12.7 million. The company had realized investment gains of $165,000 in 1998 while in 1997 it had realized investment losses of $393,000. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Operating income decreased to $2.0 million from $3.3 million for the three months ended 1998 and 1997, respectively. Net income decreased 36.9% to $1.3 million ($0.20 per share) from $2.1 million ($0.37 per share) for the same time periods. During the first quarter of 1998, the Company established a $1.3 million ($0.29 per share) after tax ($2.0 million pretax) reserve for potential litigation expenses. Operating earnings per share for the first three months of 1998 were $0.19 compared to $0.39 for the first three months of 1997. First quarter operating earnings prior to the reserve were $0.48 per share. 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 6.4% to $9.7 billion at March 31, 1998 from $9.1 billion at March 31, 1997. Growth was slowed by lower sales and a greater termination rate in relation to universal life insurance. The face amount of new life insurance sold directly by agents through March 31, 1998 decreased 9.5% to $390.6 million from $431.6 million through March 31, 1997. The primary factor was a 43.2% decrease in the face amount of new universal life insurance sold to $89.5 million from $157.6 million. The decrease was due to lower market interest rate levels that have reduced the attractiveness of the savings element of universal life products. Universal life account balances grew 7.3% to $200.4 million from $186.7 million. The universal life termination rate will continue to run higher than historic levels for 1998 and 1999, as a result of higher expected lapses on the Champion Universal Life product which was sold in 1993 and 1994. About 50% of the Champion business was sold at a low term-like premium level, which increases to a more normal permanent life insurance premium level beginning after the fifth policy anniversary date. This block of business is expected to lapse at a higher rate as the customer is required to pay the higher premium levels. The minimum premium level Champion product was originally priced with a higher expected 6th year lapse ratio. The Company has an active conservation program to retain the minimum premium Champion business, which includes offering term life insurance products or a low minimum premium universal life policy. The face amount of new term life insurance sold directly by agents increased 9.8% to $298.8 million through March 31, 1998 from $272.2 million through March 31, 1997. ALLIED Life continues to sell mainly ten and twenty-year guaranteed premium policies within this product line. First-year annuity premiums increased 40.4% to $19.7 million through March 31, 1998 from $14 million through March 31, 1997. ALLIED Life's sales of indexed annuities remained strong throughout the quarter. Total annuity account balances increased 11.7% to $530.1 million at March 31, 1998 from $474.7 million at March 31, 1997. Adjusted insurance revenues increased 14.7% to $13.6 million for the first three months of 1998 from $11.8 million for the first three months of 1997. The growth in policyholder account balances permitted invested assets, on a cost basis, to increase 9.0% to $791.4 million at March 31, 1998 from $726.1 million at March 31, 1997, allowing investment income to increase by 8.3%. ALLIED Life's return on invested assets through March 31, 1998 decreased to 7.22% from 7.27% through March 31, 1997. Investment spread for the first three months of 1998 and 1997 grew to $3.8 million from $3.7 million. Annual average interest-credited rates on universal life contracts decreased to 5.28% from 5.32% and on annuities increased to 5.57% from 5.45%. Amortization of deferred policy acquisition costs for the first three months of 1998 and 1997 remained at $2.4 million. Other operating expenses increased 19.5% to $1.9 million from $1.6 million. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Death benefits net of reinsurance for the first three months of 1998 and 1997 decreased 14.8% to $2.0 million ($0.21 per share after tax) from $2.3 million ($0.24 per share after tax). Other policyholder benefits net of reinsurance increased 53.5% to $2.1 million from $1.4 million due to increases in reserves for single premium immediate annuities. In January, 1998 a lawsuit was filed by a policyholder of ALLIED Life related to a universal life insurance policy DAC tax (see note 5 to Notes to Interim Consolidated Financial Statements). The outcome of the litigation remains uncertain but the Company established a reserve of $2.0 million ($1.3 million after tax) to cover potential expenses related to the lawsuit. ALLIED Life's operating income through March 31, 1998 and 1997 decreased 40.6% to $2.0 million from $3.3 million. The decrease is due primarily to the litigation reserve the Company established. YEAR 2000 ISSUE The Company is aware of the problems associated with the programming code in existing computer systems as the millennium (year 2000) approaches. The year 2000 problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two-digit year value to 00. Computer systems must properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company has assessed its computer systems as they relate to the year 2000 issue. The Company has formulated a plan which management believes will resolve the issue. This plan is being updated and revised as additional information becomes available. The Company believes it has sufficient internal and external resources to implement the plan. The Company believes that testing of the systems will be finalized before the year 2000 and should not have a significant effect on the Company's ability to conduct business in a reasonable fashion. At this time anticipated expenses for year 2000 compliance are not expected to be material. LIQUIDITY AND CAPITAL RESOURCES Consolidated Life insurance companies generally produce a positive cash flow from operations. Cashflow adequacy is measured by the companies' liquidity. Management believes 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 first quarter 1998. Cash inflows were at levels sufficient to provide the grounds necessary to meet its obligations. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 three months of 1998 the Company operations provided cash inflows of $6.7 million and financing activities provided cash inflows of $25.3 million. For the first three months of 1997 it was $1.7 million and $10.9 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 performs cash-flow testing of its assets and liabilities under various scenarios to evaluate 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 by management 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 first quarter of 1998, the Company paid cash dividends on common stock of $309,000. ALLIED Life paid to the Company dividends of $563,000 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, 1999. 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 March 31, 1998, the Company had outstanding borrowings of $17.8 million under the line of credit agreements and $2.3 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 March 31, 1998, 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 6. Exhibits and Reports on Form 8-K (a) Exhibit 10.12 - Federal Home Loan Bank Open Line of Credit Application and Terms Agreement dated February 28, 1998 with ALLIED Life Insurance Company. Exhibit 11 - Statement re Computation of Per Share Earnings. Exhibit 27 - Financial Data Schedule Exhibit 10.47 - Third Amendment To Consulting Agreement (b) The Company filed two reports on Form 8-K during the first quarter ended March 31, 1998. Items Financial Date Reported Statements Filed Item 5 -- Other None January 5, 1998 Item 5 -- Other None January 29, 1998 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: May 13, 1998 By: /s/ Wendell P. Crosser Wendell P. Crosser, Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) 12 OPEN LINE OF CREDIT APPLICATION AND TERMS AGREEMENT APPLICATION ALLIED Life Insurance Company ("Member") hereby applies to the Federal Home Loan Bank of Des Moines ("Bank") for an Open Line of Credit commitment beginning on the date of approval and ending one year from the date of approval,("Ending Date") in the amount of 25,000,000 TERMS 1. Member, through its authorized representative may request funds by telephone advice up to the approved Open Line of Credit limit. Funds will be available upon advice. 2. The interest rate on advances funded under the Open Line of Credit will be set and charged daily on the outstanding advance amount. The interest amount will be deducted daily by the Bank from the member's demand account. 3. Advances funded under the Open Line of Credit will be available aier the approval date and will mature on the Ending Date. 4. Member represents and warrants that the Open Line of Credit amount requested does not exceed 15% of assets. 5. The Bank shall have no obligation to make any advance under the Open Line of Credit unless the Bank is satisfied as to Member's continued creditworthiness and compliance with the terms of the Agreement for Advances, Pledge and Security Agreement ("AAPSA"). If adverse facts develop which make the member ineligible for Bank advances, the member must provide the Bank with immediate written notification of its ineligibility and the Bank may cancel this commitment. 6. The fee for this Open Line of Credit commitment equals .05% times the amount of the comrnitment. This fee will be charged to the member's demand account on the date this application is approved by the Bank. 13 7. This Application and Terms Agreement, if approved by the Bank will constitute the Agreement between Member and Bank as to the Open Line of Credit and will be wholly incorporated into and become a part of the AAPSA. By signing this agreement, member hereby accepts the terms hereof. ALLIED Life Insurance Company Date February 28,1998 Member By:/s/ Wendell P. Crosser By:/s/ Tim J. Callahan Wendell P. Crosser Tim J. Callahan Typed Name of Signer Typed Name of Signer Vice President & Treasurer Investment Accounting Supervisor Title Title FOR FHLB USE Date Approved: 03-13-98 FEDERAL HOME LOAN BANK OF DES MOINES Expiration Date 03-12-99 By: /s/ Marc S. Johnson Amount Approved: $25,000,000 By:/s/ Jerry R. Ferguson Commitment Number 980313A Cormmitment Fee $12,500 14 THIRD AMENDMENT TO CONSULTING AGREEMENT THIS AMENDMENT is made this 24th day of March, 1998, 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, and May 13, 1997, 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 March 1, 1998, Section III of the Consulting Agreement is amended by deleting "$180,000" and replacing it with "$120,000". 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 15 Exhibit 11 ALLIED Life Financial Corporation and Subsidiaries COMPUTATION OF PER SHARE EARNINGS For the three months ended March 31, 1998 and 1997 1998 1997 (In thousands, except per share data) Numerator Net income $ 1,342 $ 2,127 Preferred stock dividends (447) (419) Numerator for basic earnings per share - income available to common stockholders 895 1,708 Effect of diluted securities Convertible preferred stock dividends 27 27 Numerator for diluted earnings per share - income available to common stockholders after assumed conversion $ 922 $ 1,735 Denominator Denominator for basic earnings per share - weighted average shares 4,405 4,502 Effect of dilutive securities Stock options 30 33 Convertible preferred stock 110 109 Dilutive potential common shares 140 142 Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 4,545 4,644 Basic earnings per share $ 0.20 $ 0.38 Diluted earnings per share $ 0.20 $ 0.37 16 -----END PRIVACY-ENHANCED MESSAGE----