SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________ SCHEDULE 14D-9 Solicitation/Recommendation Statement Pursuant to Section 14(d)(4) of the Securities Exchange Act of 1934 __________ ALLIED Group, Inc. ------------------------------------------------ (Name of Subject Company) ALLIED Group, Inc. ------------------------------------------------ (Name of Person(s) Filing Statement) Common Stock, No Par Value -------------------------- (Title of Class of Securities) 019220102 ------------------------------------------------ (CUSIP Number of Class of Securities) __________ GEORGE OLESON, ESQ. Vice President and Corporate Counsel ALLIED Group, Inc. 710 Fifth Avenue Des Moines, Iowa 50391-2000 (515) 280-4211 ----------------------------------------------- (Name, address and telephone number of person authorized to receive notice and communications on behalf of the person(s) filing) With a copy to: STEVEN OSTNER, ESQ. Debevoise & Plimpton 875 Third Avenue New York, New York 10022 (212) 909-6000 ITEM 1. SECURITY AND SUBJECT COMPANY. The name of the subject company is ALLIED Group, Inc., an Iowa corporation (the "Company"). The address of the principal executive offices of the Company is 701 Fifth Avenue, Des Moines, Iowa 50391-2000. The title of the class of equity securities to which this Statement relates is the common stock, no par value (the "Shares"), of the Company. ITEM 2. TENDER OFFER OF THE BIDDER. This Statement relates to the tender offer by Nationwide Mutual Insurance Company, an Ohio corporation ("Nationwide"), and Nationwide Group Acquisition Corporation, an Ohio corporation and a wholly-owned subsidiary of Nationwide ("Nationwide Sub" and, collectively with Nationwide, the "Bidder"), disclosed in a Tender Offer Statement on Schedule 14D-1, filed with the Securities and Exchange Commission (the "Commission") on May 19, 1998 (as the same may be amended from time to time, the "Schedule 14D-1"), to purchase up to 30,634,052 Shares, at a price of $47 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated May 19, 1998 (the "Offer to Purchase"), and the related Letter of Transmittal (which collectively constitute the "Offer"). According to the Schedule 14D-1, the address of the principal executive offices of each of Nationwide and Nationwide Sub is One Nationwide Plaza, Columbus, Ohio, 43215. ITEM 3. IDENTITY AND BACKGROUND. (a) The name and business address of the Company, which is the person filing this Statement, are set forth in Item 1 above, which information is incorporated herein by reference. (b) Nationwide, in addition to commencing the Offer has also proposed to the Board of Directors of ALLIED Mutual a merger of ALLIED Mutual into Nationwide, and has indicated its willingness to acquire all of the outstanding shares of common stock held by the public shareholders of ALLIED Life for $30 a share. Nationwide has also offered to distribute $110 million of cash to ALLIED Mutual's policyholders in connection with the merger. Certain of the directors and officers of the Company are also directors and/or officers of ALLIED Mutual and/or of ALLIED Life. A majority of the Company's directors Messrs, Carpenter, Colby, Jacobson, Taylor, Timmons and Willis (the "Unaffiliated Directors"), are not officers or directors of, or otherwise affiliated with, either ALLIED Mutual or ALLIED Life. Except as described herein or in Annex A hereto, which is incorporated herein by reference, there are no material contracts, agreements, arrangements or understandings or any actual or potential conflicts of interest between the Company or its affiliates and (i) any of the Company's executive officers, directors or affiliates or (ii) Bidder and its executive officers, directors or affiliates. Reference is made to the information contained under the captions "Compensation of the Members of the Board of Directors and the Outside Director Stock Purchase Plan," "Security Ownership of Directors and Executive Officers," "Board Compensation Committee Report on Executive Compensation" and "Compensation of Executive Officers" in the Company's proxy statement dated March 27, 1998 relating to the Company's 1998 Annual Meeting 2 of Stockholders (the "1998 Proxy Statement"), the relevant portions of which are filed as Exhibit 1 hereto and are incorporated herein by reference. ITEM 4. THE SOLICITATION OR RECOMMENDATION. (a)-(b) The Board of Directors of the Company acting on the unanimous recommendation of a committee (the "Committee") consisting of all of the Unaffiliated Directors has unanimously determined to recommend that shareholders do not tender their shares in response to the Offer at this time. The reasons for this determination are as follows: (i) Representatives of the Company have met with representatives of Nationwide during the last several days to determine the terms, if any, on which a negotiated transaction would be available. On June 1, Nationwide stated it was prepared to increase the per Share price of its Offer to $48.25 as part of a negotiated merger agreement, and also to reduce the amount of the termination fee that would be payable by the Company under certain circumstances pursuant to Nationwide's merger agreement. On June 1, as directed by the Board of Directors on the recommendation of the Committee, Morgan Stanley informed Nationwide that the Board was prepared in principle to recommend a transaction at that price and with the revised termination fee provision, subject to negotiation of an acceptable transaction agreement. (ii) Because negotiations with Nationwide concerning the proposed transaction agreement are ongoing, the Board of Directors, acting on the recommendation of the Committee, believes that it would be premature for shareholders to tender their Shares in response to the Offer at this time and recommends that Shareholders defer making a decision whether to tender while the Board and its advisors continue discussions with Nationwide and its advisors. A copy of a press release communicating the Board's position is filed as 3 hereto and is incorporated herein by reference. June 1, 1998 Background. On January 26, 1998, John E. Evans, Chairman of the Company, received a telephone call from Dimon R. McFerson, Chairman and Chief Executive Officer of Nationwide Insurance Enterprise. In the call, Mr. McFerson expressed Nationwide's interest in a possible transaction with the Company, ALLIED Mutual Insurance Company ("ALLIED Mutual") and ALLIED Life Financial Corporation ("ALLIED Life"; collectively with the Company and ALLIED Mutual, "ALLIED"). On January 28, 1998, at the request of Mr. McFerson, Mr. Evans, Douglas L. Andersen, President and Chief Executive Officer of the Company, and other 3 representatives of the Company met with representatives of Nationwide to discuss Nationwide's interest in acquiring each of the Company, ALLIED Mutual and ALLIED Life. After the January 28, 1998 meeting, Nationwide provided a draft confidentiality agreement to Mr. Andersen which did not include customary standstill provisions. On February 6, 1998, Mr. McFerson and Mr. Andersen engaged in further discussions by telephone regarding Nationwide's interest in acquiring the Company, ALLIED Mutual and ALLIED Life. Mr. McFerson requested that the Company, ALLIED Mutual and ALLIED Life agree to deal exclusively with Nationwide. Mr. Andersen informed Mr. McFerson that the ALLIED companies would not agree to deal exclusively with Nationwide, expressed concerns about the absence of an acceptable confidentiality agreement and other elements of Nationwide's proposal and stated that Nationwide's proposal could not be considered formally until it was received in writing by the Company, ALLIED Mutual and ALLIED Life. On February 10, 1998, the Company provided to Nationwide its own form of confidentiality agreement, executed by the Company, which included a customary standstill provision. Also, on February 10, 1998, Nationwide sent draft merger agreements to the Company, which provided for a transaction whereby Nationwide's wholly-owned subsidiaries would acquire the Company and ALLIED Life and Nationwide would merge with ALLIED Mutual. The draft merger agreements provided for the purchase of the Shares for $47 per Share and the purchase of all outstanding shares of ALLIED Life for $30 per share, subject to various conditions, including that the acquisition of all three ALLIED companies close simultaneously. The draft merger agreement with ALLIED Mutual provided for no distribution to ALLIED Mutual's policyholders. Each of the merger agreements included provisions requiring payment to Nationwide of termination fees, totaling $75 million in the aggregate, plus expenses of Nationwide in the event of the termination of the merger agreement under certain circumstances. On February 17, 1998, at a joint meeting of the Boards of Directors of the Company, ALLIED Mutual and ALLIED Life, Nationwide's proposal and proposed merger agreements were discussed. Following the joint Board meeting, a special meeting of the Board of Directors of the Company was convened. At that meeting it was noted that Nationwide's proposal was contingent on the consummation of transactions with all three ALLIED companies. The Board discussed the potential difficulty in obtaining approval from ALLIED Mutual policyholders and ALLIED Life shareholders, that the Company's employees and independent agents could perceive the proposal and change in control unfavorably and that the Company could suffer loss of business and disruption of its employee force. The Board noted that Nationwide's proposal included an exclusivity provision which restricted the Company from soliciting proposals from third parties and which limited the Board's ability to accept a superior offer from a third party for a period of 180 days. The Board also noted that Nationwide had refused to sign a confidentiality agreement with a standstill provision that would prevent it from making a hostile bid for a specified period of time after it had reviewed confidential documents of the Company. The Board discussed the 4 various regulatory approvals required before the acquisition could be approved and the uncertainty of obtaining those approvals. Finally, the Board noted that the substantial termination fees proposed by Nationwide presented additional risk to the Company. The Board determined that the proposal was not in the best interests of the Company and its shareholders and unanimously (with one member absent) determined that the proposal should be rejected. On February 19, 1998, at a special joint meeting of the Executive Committees of the Company, ALLIED Mutual and ALLIED Life, Mr. Andersen was authorized to advise Mr. McFerson that Nationwide's proposal had been rejected. On February 19, 1998, Nationwide sent to the Company a form of confidentiality agreement, signed on behalf of Nationwide and Nationwide Sub, which again did not contain the standstill provision and certain other items that the Company had proposed. On February 20, 1998, Mr. Andersen informed Mr. McFerson via telephone that the respective Boards of ALLIED had rejected Nationwide's proposal as presented. Later on February 20, 1998, Nationwide sent to the Company a letter indicating that Nationwide was withdrawing the executed confidentiality agreement that it had sent to the Company on February 19, 1998. On May 1, 1998, Mr. McFerson telephoned Mr. Evans to express that Nationwide wished to re-initiate contact with ALLIED. Mr. Evans indicated that Nationwide should speak with Mr. Andersen, but requested that Nationwide delay contacting Mr. Andersen for 30 days. On May 18, 1998, Mr. McFerson made an unannounced visit to the Company's Des Moines, Iowa offices and asked to see Mr. Andersen. However, Mr. Andersen and other executive officers of the Company were out of the country. Members of the Company's legal department met with Mr. McFerson, who stated that the purpose of his visit was to announce a tender offer for all the Shares. Mr. McFerson delivered three letters, addressed to each of the ALLIED companies, which letters were also publicly released by Nationwide, communicating the substance of the Offer. Also, on May 18, 1998, Nationwide and Nationwide Sub filed a complaint against the Company and its directors in the United States District Court for the Southern District of Iowa seeking, among other things, an order compelling the Company Board to approve the Offer and the Proposed Merger for purposes of Section 490.1110 (the "Business Combination Statute," which is further discussed under Item 8 below) of the Iowa Business Corporation Act (the "Iowa Corporation Act"). A copy of this complaint is filed as Exhibit 4 hereto and is incorporated by reference herein. 5 Later on May 18, 1998, the Company issued a press release stating that the Board would review the Offer and requesting shareholders not to tender their Shares until they have been advised of the Board's position with respect to the Offer. A copy of the press release is filed as Exhibit 5 hereto and is incorporated by reference herein. On May 19, 1998, the Directors of the Company convened by conference call to discuss the Offer. At the recommendation of the Unaffiliated Directors, the Directors authorized the retention of Morgan Stanley as the Company's financial advisor concerning the Offer or any other acquisition transaction. Also on May 19, Nationwide delivered two letters to the Company requesting that the Company provide Nationwide with a list of the Company's shareholders. The Company delivered letters to Nationwide, dated May 21, 1998 and May 22, 1998, advising Nationwide that, as permitted by law, the Company was electing to deliver the Bidder's tender offer materials to the Company's shareholders rather than provide Nationwide with a shareholder list. On May 22, 1998, the Company's Board received a letter from Nationwide stating that Nationwide intended to file a proxy statement that proposes to call a special meeting of shareholders of the Company for the purpose of removing the members of the Board and electing new directors who support the Offer. On May 27, 1998, the Board of the Company met with management and the Company's financial and legal advisors. The Board authorized the Committee to conduct or supervise negotiations, if any, with Nationwide or with any other party, on behalf of the Company; to make recommendations to the Board as to any proposed transaction; to consult with ALLIED Mutual and ALLIED Life and their financial advisors; and to give instructions to Morgan Stanley. Following the meeting of the Board, the Committee met with the Company's financial and legal advisors to discuss the Offer and the Company's response. The Committee authorized Morgan Stanley to contact Nationwide's financial advisor, who had expressed an interest in meeting, to discuss the possibility of a mutually acceptable negotiated transaction. On May 28, 1998, the Company, Nationwide and Nationwide Sub entered into an agreement as to the confidentiality of settlement discussions on or before June 2, 1998 regarding the litigation filed by Nationwide. A copy of the confidentiality agreement is filed as Exhibit 6 hereto and is incorporated by reference herein. Beginning on May 28, 1998, representatives of Morgan Stanley (consulting with and under the supervision of the Committee) and representatives of Nationwide's financial advisor met on several occasions to discuss the terms of the Offer and whether a negotiated transaction could be achieved. On June 1, Nationwide stated that it was prepared to increase the per Share price of its Offer to $48.25 as part of a negotiated merger agreement, and also to reduce the amount of the termination fee that would be payable under certain circumstances pursuant 6 to Nationwide's proposed merger agreement. On June 1, as directed by the Board of Directors on the unanimous recommendation of the Committee, Morgan Stanley informed Nationwide that the Board determined that it was prepared in principle to recommend a transaction at that price and with the revised termination fee provisions, subject to negotiation of an acceptable transaction agreement. Discussions between representatives of the Company and representatives of Nationwide are ongoing at this time regarding the terms of a mutually acceptable transaction agreement. ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. Pursuant to an engagement letter, dated May 22, 1998, the Company has retained Morgan Stanley to render financial advisory services to the Company in connection with Nationwide's proposal and such other matters as may be agreed upon by the Company and Morgan Stanley. The Company has agreed to pay Morgan Stanley: (i) an initial advisory fee of $250,000, payable immediately, and an additional advisory fee of $75,000 per month for any month after an initial two- month advisory period (collectively, the "Advisory Fees"); (ii) a fee of $1,000,000 (the "Opinion Fee"), which becomes payable upon delivery by Morgan Stanley of an opinion (whether oral or written, as requested by the Company) to the Board of Directors of the Company or its shareholders in connection with the Offer or any alternate transaction; and (iii) a final fee (the "Conclusion Fee") of $6,000,000 (less the Advisory Fees and Opinion Fee) upon the first occurrence of any of the following events: (a) Nationwide withdraws its Offer, (b) twelve months from the date of the engagement letter, if no change of control (as defined in the engagement letter) of the Company has occurred, or (c) the Company is involved in an acquisition transaction or otherwise experiences a change of control prior to that time. The Company has also agreed to reimburse Morgan Stanley for its reasonable out-of-pocket expenses, including reasonable fees and expenses of counsel, and to indemnify Morgan Stanley and certain related persons against certain liabilities in connection with their engagement including liabilities under the federal securities laws. The Company has retained Abernathy MacGregor Frank ("Abernathy") as public relations adviser and Innisfree M&A Incorporated ("Innisfree") to assist the Company with its communications to stockholders with respect to, and to provide other services to the Company in connection with, the Offer. The Company will pay Abernathy and Innisfree reasonable and customary compensation for their respective services, and will reimburse Abernathy and Innisfree for their reasonable out-of-pocket expenses incurred in connection therewith. Except as described above, neither the Company nor any person acting on its behalf has employed, retained or compensated any other person to make solicitations or recommendations to security holders on its behalf with respect to the Offer. 7 ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES. (a) Except as described in Annex B hereto, which is incorporated by reference herein, there have been no transactions in the Shares during the past 60 days by the Company or, to the best knowledge of the Company, by any executive officer, director, affiliate or subsidiary of the Company. (b) To the best knowledge of the Company, no executive officer, director, affiliate or subsidiary of the Company has any present intention to tender any Shares pursuant to the Offer. The foregoing statement does not include any Shares over which, or with respect to which, any such executive officer, director or affiliate acts in a fiduciary or representative capacity or is subject to the instructions of a third party with respect to such decision to tender. ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY. (a) - (b) See the response to Item 4, concerning discussions between the Company and Nationwide to discuss the possibility of a mutually acceptable negotiated transaction involving the acquisition by Nationwide of the Company. As of the date hereof, there have been contacts with third parties as to their possible interest in acquiring or merging with the Company, but negotiations regarding potential transactions with third parties have not yet commenced. Except as stated in the preceding two sentences, no negotiation is being undertaken or is underway by the Company in response to the Offer which relates to or would result in: (i) an extraordinary transaction such as a merger or reorganization, involving the Company or any subsidiary of the Company; (ii) a purchase, sale or transfer of a material amount of assets by the Company or any subsidiary of the Company; (iii) a tender offer for or other acquisition of securities by or of the Company; or (iv) any material change in the present capitalization or dividend policy of the Company. The Board has determined, by resolution adopted at the Board meeting on June 1, 1998, that disclosure of the substance of negotiations concerning, or the possible terms of, or potential parties to, any such transactions or proposals prior to an agreement in principle with respect thereto would jeopardize continuation of such negotiations and has directed that no such disclosure be made unless and until such agreement in principle or a definitive agreement has been reached. 8 ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED. Insurance Law Matters. The Company, which is incorporated in Iowa, directly or through its subsidiaries, owns three property-casualty insurance companies domiciled in Iowa and one excess and surplus lines insurance company domiciled in Arizona. Accordingly, the acquisition of Shares pursuant to the Offer may require filings with, and approvals of, state insurance regulatory authorities (the "Insurance Commissions" or "Insurance Commissioners") under the respective insurance codes (the "Insurance Codes") of Iowa and Arizona as well as Ohio, the domiciliary state of Nationwide. The Insurance Codes of Iowa and Arizona and the rules that have been promulgated thereunder each contain provisions applicable to the acquisition of "control" of a domestic insurer, including a presumption of control that arises from the ownership of ten percent (10%) or more of the voting securities of a domestic insurer or of a person that controls a domestic insurer. Generally, any person seeking to acquire voting securities, such as the Shares, in an amount that would result in such person controlling, directly or indirectly, a domestic insurer must, together with any person ultimately controlling such person, file with the relevant Insurance Commissioner certain information concerning the acquisition of control (generally known as a "Form A") and send a copy of each Form A to the domestic insurer. On the date of the Offer, Nationwide and Nationwide Sub made Form A filings with the Insurance Commissions of Arizona and Iowa and sent copies thereof to the relevant domestic insurer. In both Iowa and Arizona, the Form A filings trigger public hearing requirements and commence statutory periods within which decisions must be rendered approving or disapproving the acquisition of control of the Company by Nationwide and Nationwide Sub The periods within which hearings must be commenced or decisions rendered generally do not begin until the relevant Insurance Commissioner has deemed the Form A filing complete. The Insurance Commissioner has discretion to request that additional information be furnished before it deems the Form A filing complete. The Insurance Codes provide certain statutory standards for the approval or the disapproval of the acquisition of control of the Company. However, the Insurance Codes also permit the Insurance Commissioners discretion in determining whether such standards have been met. The Insurance Commissioner has discretion to request that Nationwide and Nationwide Sub furnish additional information before such Insurance Commissioner deems the Form A filing complete. The Iowa and Arizona Insurance Codes both provide that a public hearing must be commenced within thirty (30) days after the Form A is filed and that the relevant Insurance Commissioner must make the determination within thirty (30) days after the conclusion of such hearing. 9 The Iowa and Arizona Insurance Codes both generally require the relevant Insurance Commissioner to approve the application for the acquisition of control unless the Insurance Commissioner determines, after a public hearing, that such application should be disapproved on one or more prescribed regulatory grounds. The Iowa and Arizona Insurance Codes also contain provisions providing generally for judicial review of an Insurance Commissioner's order. On May 21, 1998, the Iowa Department of Insurance provided to the Company notice of a hearing to be held on June 9, 1998 with respect to the Form A approval. No notice of a hearing has been provided by the Arizona Department of Insurance. The Company is reviewing the Form A's filed by Nationwide in both Iowa and Arizona and, depending on the outcome of ongoing discussions with Nationwide, may seek to reschedule the hearing scheduled for June 9, 1998 and may seek discovery in connection with the Form A's in both Arizona and Iowa. State Corporation Law Requirements In the Offer to Purchase, Nationwide has stated its intention, as soon as practicable following consummation of the Offer, to seek to have the Company consummate a merger with Nationwide Sub with the Company continuing as the surviving corporation (the "Proposed Merger"), pursuant to which each then remaining Share outstanding (other than Shares owned by Nationwide or any of its wholly owned subsidiaries, Shares held in the treasury of the Company, and Shares held by shareholders who perfect any appraisal rights under the Iowa Corporation Act) would be converted into the right to receive $47.00 net per Share in cash. The Proposed Merger, including its timing and details, is subject to, among other things, the provisions of the Iowa Corporation Act, including the Business Combination Statute. In general, under the Iowa Corporation Act and the Company Articles (as defined below), the approval of the Company's Board and the affirmative vote of the holders of a majority of the outstanding Shares and the shares of 6 3/4% Series Preferred Stock of the Company (including any shares owned by Nationwide or Nationwide Sub), voting together as a single class, would be required to approve the Proposed Merger. The Business Combination Statute generally provides that an Iowa corporation may not engage in a "Business Combination," defined to encompass a variety of transactions including mergers, with an "Interested Shareholder," defined generally as a person that is the owner of ten percent (10%) or more of the outstanding voting stock of the corporation, for three years after the shareholder became an Interested Shareholder, unless (a) the Business Combination is approved by the corporation's board before the shareholder becomes an Interested Shareholder, (b) the Interested Shareholder, upon consummation of the transaction which resulted in the shareholder becoming an Interested Shareholder, owned at least eighty-five percent (85%) of the voting shares of the corporation, excluding those shares owned by officers and directors, or (c) after the shareholder becomes an Interested Shareholder, the Business Combination is approved 10 by the corporation's board and authorized by the affirmative vote of at least two-thirds of the voting stock, excluding that of the Interested Shareholder. Pending Litigation In addition to the litigation filed by Nationwide and described in the response to Item 4, the following litigation is pending that relates to the Offer or that is otherwise significant. On May 21, 1998, a class action on behalf of all shareholders of the Company was filed in Iowa District Court in and for Polk County, Iowa. Plaintiffs seek to compel the Company to consider the Offer or, in the alternative, to recover damages caused by an alleged breach of the fiduciary duty owed by the Board of Directors to its shareholders. A copy of this complaint is filed as Exhibit 7 hereto and is incorporated by reference herein. On December 31, 1997, a complaint was filed by Mary M. Rieff, a policyholder of ALLIED Mutual, in the Iowa District Court in and for Polk County Iowa, against the Company and certain other individuals who are or were officers and/or directors of ALLIED Mutual and the Company. The complaint, an alleged policyholder derivative action brought on behalf of ALLIED Mutual, asserts, among other things, (a) that the defendants were responsible for the - inappropriate transfer of ALLIED Mutual's corporate assets, the seizure of certain corporate opportunities, and the implementation of an improper de facto demutualization without informing or compensating policyholders or receiving the appropriate approval from regulatory authorities; (b) that this allegedly - wrongful demutualization began on or about January 1, 1985 and was accomplished through transfers of ALLIED Mutual's assets to the Company and to the individual defendants for inadequate consideration; (c) that the individual defendants - breached fiduciary duties owed to ALLIED Mutual, wasted its corporate assets, and intentionally interfered with its contracts, prospective business advantage, and business relationships; and (d) that the defendants improperly transferred - substantial ownership of and control over the Company and ALLIED Mutual's insurance business. The complaint further asserts that as a result of the foregoing, ALLIED Mutual and its policyholders have suffered damages in excess of 11 $500 million. The complaint requests an accounting of the assets allegedly wrongfully transferred to the Company and compensation to ALLIED Mutual for the value of such assets, for the seizure of corporate opportunities, and for the de factor demutualization of ALLIED Mutual. The complaint also asks for certain other relief, including attorneys' fees and costs, equitable relief and interest, and restitution for any assets wrongfully transferred or conveyed. A copy of this complaint is filed as Exhibit 8 hereto and is incorporated by reference herein. On June 1, 1998, the plaintiff filed a motion seeking to enjoin the defendant directors of ALLIED Mutual from considering, negotiating or approving any transaction on behalf of ALLIED Mutual with Nationwide or any third party because of alleged conflicts of interest of the members of the Board of Directors of ALLIED Mutual. A copy of the motion is filed as Exhibit 2 hereto and incorporated herein by reference. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS. Exhibit 1 Pages 7-8, 10-12 and 14-16 of the Company's Proxy Statement, dated March 27, 1998, in connection with the May 5, 1998 Annual Meeting of Stockholders. Exhibit 2 Motion filed in Rieff v. ALLIED Group in the Iowa District Court in and for Polk County on June 1, 1998./*/ Exhibit 3 Text of Press Release issued by the Company on June 2, 1998./*/ Exhibit 4 Complaint filed by Nationwide and Nationwide Sub in the United States District Court for the Southern District of Iowa on May 18, 1998. Exhibit 5 Text of Press Release issued by the Company on May 18, 1998. Exhibit 6 Confidentiality Agreement, dated May 28, 1998, among the Company, Nationwide and Nationwide Sub Exhibit 7 Complaint filed in Brickell v. Andersen in the Iowa District Court in and for Polk County on May 21, 1998. Exhibit 8 Complaint filed in Rieff v. Allied Group in the Iowa District Court in and for Polk County on December 31, 1997. Exhibit 9 Amended and Restated ALLIED Group Intercompany Operating Agreement, dated August 25, 1993, by and among ALLIED Mutual Insurance Company, ALLIED Group, Inc., ALLIED Life Financial Corporation and certain of their subsidiaries. - ------------------ * to be filed by amendment. 12 Exhibit 10 First Amendment, dated November 1, 1993, to Amended and Restated ALLIED Group Intercompany Operating Agreement by and among ALLIED Mutual Insurance Company, ALLIED Group, Inc., ALLIED Life Financial Corporation and certain of their subsidiaries. Exhibit 11 Second Amendment, dated May 16, 1994, to Amended and Restated ALLIED Group Intercompany Operating Agreement by and among ALLIED Mutual Insurance Company, ALLIED Group, Inc., ALLIED Life Financial Corporation and certain of their subsidiaries. Exhibit 12 Third Amendment, dated December 15, 1994, to Amended and Restated ALLIED Group Intercompany Operating Agreement by and among ALLIED Mutual Insurance Company, ALLIED Group, Inc., ALLIED Life Financial Corporation and certain of their subsidiaries. Exhibit 13 Second Amended and Restated Reinsurance Pooling Agreement, dated December 14, 1992, by and between ALLIED Mutual Insurance Company, AMCO Insurance Company, ALLIED Property and Casualty Insurance Company and Depositors Insurance Company. Exhibit 14 First Amendment to Second Amended and Restated Reinsurance Pooling Agreement, dated February 18, 1993, by and between ALLIED Mutual Insurance Company, AMCO Insurance Company, ALLIED Property and Casualty Insurance Company and Depositors Insurance Company. Exhibit 15 Second Amendment to Second Amended and Restated Reinsurance Pooling Agreement, dated December 13, 1994, by and between ALLIED Mutual Insurance Company, AMCO Insurance Company, ALLIED Property and Casualty Insurance Company and Depositors Insurance Company. Exhibit 16 Third Amendment to Second Amended and Restated Reinsurance Pooling Agreement, dated May 5, 1998, by and between ALLIED Mutual Insurance Company, AMCO Insurance Company, ALLIED Property and Casualty Insurance Company and Depositors Insurance Company. 13 Exhibit 17 Amended and Restated Management Information Services Agreement, dated January 24, 1997 (to be effective March 1, 1996), by and among AMCO Insurance Company, ALLIED Group Information Systems, Inc., ALLIED Mutual Insurance Company, ALLIED Group, Inc., ALLIED General Agency Company, ALLIED Group Mortgage Company, ALLIED Group Leasing Corporation, ALLIED Life Financial Corporation, ALLIED Life Insurance Company, ALLIED Life Brokerage Agency, ALLIED Group Merchant Banking Corporation, ALLIED Group Insurance Marketing Company, The Freedom Group, Inc., and Midwest Printing Services, Ltd. Exhibit 18 First Amendment, dated February 24, 1997, to Amended and Restated Management Information Services Agreement. Exhibit 19 The ALLIED Group Joint Marketing Agreement, dated August 30, 1993, by and between ALLIED Life Insurance Company, ALLIED Mutual Insurance Company, AMCO Insurance Company, ALLIED Property and Casualty Insurance Company, and Depositors Insurance Company. Exhibit 20 First Amendment to the ALLIED Group Joint Marketing Agreement, dated November 1, 1993, by and between ALLIED Life Insurance Company, ALLIED Mutual Insurance Company, AMCO Insurance Company, ALLIED Property and Casualty Insurance Company, and Depositors Insurance Company. Exhibit 21 Stock Rights Agreement, dated July 5, 1990, by and between ALLIED Mutual Insurance Company and ALLIED Group, Inc. Exhibit 22 First Amendment, dated November 11, 1992, to the Stock Rights Agreement by and between ALLIED Mutual Insurance Company and ALLIED Group, Inc. Exhibit 23 Agency Agreement, dated September 1, 1991, by and between Allied Group Insurance Marketing Company, Depositors Insurance Company, and AMCO Insurance Company. 14 Exhibit 24 Amendment, dated February 1, 1992, to the Agency Agreement relating to the addition of ALLIED Property and Casualty Insurance Company as a party thereto. Exhibit 25 Addendum A to the Agency Agreement, attached to the Agency Agreement effective January 1, 1994. Exhibit 26 Intercompany Cash Concentration Fund Agreement, effective as of April 24, 1995, by and among AID Finance Services, Inc. ALLIED Mutual Insurance Company, ALLIED Group, Inc., AMCO Insurance Company, ALLIED Property and Casualty Insurance Company, Depositors Insurance Company Western Heritage Insurance Company, ALLIED Group Leasing Corporation, ALLIED Group Information Systems, Inc., Midwest Printing Services, Ltd., The Freedom Group, Inc., ALLIED General Agency Company, ALLIED Life Financial Corporation, ALLIED Life Insurance Company, ALLIED Group Merchant Banking Corporation, ALLIED Life Brokerage Agency, Inc., ALLIED Group Insurance Marketing Company and ALLIED Group Medical Plan Trust. Exhibit 27 Aggregate Catastrophe Excess of Loss Reinsurance Agreement, dated May 15, 1997, by and among AMCO Insurance Company, ALLIED Property and Casualty Insurance Company, Depositors Insurance Company, Motor Club of Iowa Insurance Company, and General Reinsurance Corporation and ALLIED Mutual Insurance Company (the Subscribing Reinsurers). Exhibit 28 Severance Pay Plan, dated May 30, 1998 of the Company. Exhibit 29 Form of Severance Agreement. Exhibit 30 Amendment, dated June 1, 1998 to the Company's Employee Stock Ownership Plan. Exhibit 31 Consulting Agreement, dated December 14, 1994 by and between John E. Evans and ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED Life Financial Corporation. Exhibit 32 First Amendment to Consulting Agreement, dated December 18, 1996 by and between John E. Evans and ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED Life Financial Corporation. Exhibit 33 Second Amendment to Consulting Agreement, dated May 13, 1997, by and between John E. Evans and ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED Life Financial Corporation. Exhibit 34 Third Amendment to Consulting Agreement, date March 24, 1998, by and between John E. Evans and ALLIED Group, Inc., ALLIED Mutual Insurance Company, and ALLIED Life Financial Corporation. 15 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Statement is true, complete and correct. Dated: June 2, 1998 ALLIED GROUP, INC. By: /s/ Sally J. Malloy --------------------------- Name: Sally J. Malloy Title: Corporate Secretary 16 ANNEX A Certain Transactions and Relationships Intercompany Operating Agreement The Company and its subsidiaries are parties to an Intercompany Operating Agreement ("IOA") with ALLIED Life, ALLIED Mutual, and each of their respective subsidiaries. The following summary of the IOA is qualified in its entirety by reference to the full text of the IOA and the amendments thereto, copies of which are filed as Exhibits 9 through 12 hereto and are incorporated herein by reference. The IOA provides for the sharing of employees, office space, agency forces, data processing, and other services and facilities. The IOA extends through December 31, 2004 and continues thereafter subject to any party providing two years notice that such party intends to cease participation. The Company leases to ALLIED Mutual and its subsidiaries (except for ALLIED Life) the employees utilized in their operations for a fee and reimbursement of personnel costs based on certain allocation methods. The Company is obligated to provide the entire requirements for employees to ALLIED Mutual and its subsidiaries (other than ALLIED Life), but ALLIED Mutual reserves the right to hire employees independently rather than leasing them from the Company. The Company has the right to determine the compensation and benefits of all leased employees. However, if the Company wishes to adopt or amend any employee benefit plan or program and pass on the increased costs thereof with respect to employees leased by ALLIED Mutual, it must obtain the approval of ALLIED Mutual (or a joint Compensation Committee consisting of directors of the Company and ALLIED Mutual). The IOA contains a covenant not to compete that binds each of the Company, ALLIED Life, and ALLIED Mutual not to engage in a business that competes with the products or markets of any other party or such party's subsidiaries for the term of the IOA and five years thereafter. Any disputes regarding the use of occupancy of facilities or the terms on which property is leased or used are to be referred to the Coordinating Committee, consisting of two directors of each of the Company, ALLIED Mutual and ALLIED Life, for resolution. Decisions of the Coordinating Committee must be unanimous and are binding on the parties. If an issue is not resolved by the Coordinating Committee, it will be submitted to arbitration. In such arbitration, each party to the dispute selects one arbitrator, and if such dispute involves only two parties, such arbitrators select third arbitrator. During 1997, the Company received revenues of $2.6 million for employees leased to ALLIED Mutual and certain of ALLIED Mutual's subsidiaries, substantially all of which represented cost reimbursement. The IOA also provides for the leasing by ALLIED Mutual to the Company of substantially all of the office space utilized by the Company and the provision of data processing services by the Company to ALLIED Mutual and its subsidiaries. The Company paid to ALLIED Mutual rent expense for office space of $3.6 million for the year ended December 31, 1997. ALLIED Mutual, the Company, and ALLIED Life share agency forces as well as other services and facilities. Pooling Agreement ALLIED Mutual and the Company's three property-casualty subsidiaries, AMCO Insurance Company ("AMCO"), ALLIED Property and Casualty Insurance Company ("ALLIED Property and Casualty") and Depositors Insurance Company ("Depositors"), are parties to a reinsurance pooling agreement in which the Company's subsidiaries in the aggregate were 64% participants in 1997. The following summary of the Pooling Agreement is qualified in its entirety by reference to the full text of the Pooling Agreement and the amendments thereto, copies of which are filed as Exhibits 13 through 16 hereto and are incorporated herein by reference. The Pooling Agreement provides that ALLIED Mutual, ALLIED Property and Casualty, and Depositors cede to AMCO (the pool administrator) premiums, losses, allocated loss settlement expenses, commissions, premium taxes, service charge income, and dividends to policyholders and assume from AMCO an amount of the pooled property-casualty business equal to their participation in the pooling agreement. The agreement provides that AMCO will pay certain underwriting expenses, unallocated loss settlement expenses, and premium collection expenses for all of the pool participants and receive a fee equal to a specified percentage of premiums. AMCO currently charges each of the other pool participants 12.85% of written premiums for underwriting services, 7.25% of earned premiums for unallocated loss settlement expenses, and 0.75% of earned premiums for premium collection services. During 1997, ALLIED Mutual paid AMCO $71 million in fees under the pooling agreement. A-2 In the event of a change of control of the Company, ALLIED Mutual may, in its sole discretion at any time after such change of control, (i) terminate the Pooling Agreement as well as the MIS Agreement and IOA upon six months' notice to the Company, AMCO, APC and Depositors, (ii) extend the term of all three agreements for up to 10 additional years beyond December 31, 2004 upon six months' notice to the Company, AMCO, APC and Depositors, or (iii) allow the agreements to continue in effect. A change of control is any event whereby a person, group or entity unaffiliated with the Company or ALLIED Mutual acquires the ownership of 50% or more of the voting stock of the Company. The Pooling Agreement is not assignable. In the event of a change of control (whenever ownership of 50% or more of the voting stock of ALLIED Life is acquired by a nonaffiliated party) of ALLIED Life, either the Company or ALLIED Mutual may (i) terminate the IOA and the MIS Agreement (as defined below) on 6 months notice to ALLIED Life, (ii) extend the term of both agreements for up to 10 years beyond December 31, 2004 upon six months' notice, or (iii) allow the agreements to remain in effect without change. In the event of a change of control (whenever ownership of 50% or more of the voting stock of the Company is acquired by a nonaffiliated party) of the Company, ALLIED Mutual may (i) terminate all three of the IOA, the Pooling Agreement (as defined below), and the MIS Agreement on six months' notice to the party with respect to which a change of control takes place, (ii) extend the term of all three agreements for up to 10 years beyond December 31, 2004 upon six months' notice, or (iii) allow the agreements to remain in effect without change. ALLIED Life enjoys the same rights of termination on a change of control of the Company with respect to the IOA and the MIS Agreement. Management Information Services Agreement The Company, ALLIED Mutual, ALLIED Life, and other affiliated companies are parties to a Management Information Services Agreement ("MIS Agreement") with AMCO, whereby AMCO provides certain computer services, printing, equipment leasing, and mail and communication services to affiliates on a fee basis. The following summary of the MIS Agreement is qualified in its entirety by reference to the full text of the MIS Agreement and the amendments thereto, copies of which are filed as Exhibits 17 and 18 hereto and are incorporated herein by reference. The agreement terminates on December 31, 2004 and has an extension provision similar to that in the IOA described above. Any disputes under this agreement are to be referred to the Coordinating Committee for resolution. Decisions of the Coordinating Committee must be unanimous and are binding on the parties. If an issue is not resolved by the Coordinating Committee, it will be submitted to arbitrators for resolution. For the year 1997, amounts paid to AMCO and certain subsidiaries of the Company by ALLIED Mutual, ALLIED Life and their subsidiaries under the MIS Agreement were $2.5 million. A-3 In the event of a change of control of ALLIED Life, either the Company or Mutual may, in its sole discretion at any time after such change of control, (i) terminate the MIS Agreement and IOA upon six months' notice to ALLIED Life, (ii) extend the term of the MIS Agreement and IOA for up to 10 additional years beyond December 31, 2004 upon six months' notice to ALLIED Life, or (iii) allow the agreements to continue in effect. A change of control is any event whereby a person, group or entity unaffiliated with ALLIED Life or ALLIED Mutual acquires the ownership of 50% or more of the voting stock of ALLIED Life. In the event of a change of control of the Company, ALLIED Mutual may, in its sole discretion at any time after such change of control, (i) terminate the Pooling Agreement, the MIS Agreement and IOA upon six months' notice, (ii) extend the term of all three agreements for up to 10 additional years beyond December 31, 2004 upon six months' notice to the Company, AMCO, ALLIED Property and Casualty and Depositors, or (iii) allow the agreements to continue in effect. ALLIED Life enjoys the same rights with respect to the MIS Agreement and the IOA in the event of a change of control of the Company. A change of control is any event whereby a person, group or entity unaffiliated with the Company or ALLIED Mutual acquires the ownership of 50% or more of the voting stock of the Company. Joint Marketing Agreement AMCO, ALLIED Property and Casualty, and Depositors are parties to the ALLIED Group Joint Marketing Agreement ("JMA") with ALLIED Mutual and ALLIED Life Insurance Company ("ALIC"). The following summary of the JMA is qualified in its entirety by reference to the full text of the JMA and the amendments thereto, copies of which are filed as Exhibits 19 and 20 hereto and are incorporated herein by reference. The JMA requires ALLIED Mutual and the Company's property-casualty subsidiaries to promote to their customers and agents the sale of the products of ALIC. The JMA provides for payment by ALIC to AMCO (as pool administrator for the property-casualty companies) of an annual access fee of $100,000 plus an annual new production incentive fee ("NPIF"), calculated based on the percentage increase from the preceding year's production credit premiums for ALIC produced by the independent property-casualty agencies representing ALLIED Mutual, AMCO, ALLIED Property and Casualty, and Depositors ("ALLIED agencies"). The annual NPIF is not payable unless production credit premiums increase by at least 10% over the prior year and is capped at an increase of 25% over the prior year. For the year ended December 31, 1997, the fee incurred by ALIC under the JMA totaled $100,000. The JMA also provides for joint systems development, including joint data bases of customers and agents, multiple account billing systems, marketing plans and promotions, and other systems to be developed. Development costs are to be allocated on a mutually agreeable basis reflecting projected and actual utilization of the systems. The JMA continues to the year 2008 and continues thereafter subject to termination on two years notice given by any party. The JMA contains a non- compete provision structured along product lines which are applicable during the term of the JMA and for a period of ten years thereafter. The non-compete provision prevents A-4 ALLIED Mutual and the property-casualty subsidiaries of the Company, directly or indirectly through any subsidiary, affiliate, joint venture or partnership from selling life insurance or annuities in the states where ALIC now sells these life products (or on termination of the JMA, any states where the life insurance and annuity products are sold by ALIC). ALLIED Mutual and the property-casualty subsidiaries, which are not licensed to sell life insurance or annuity products, do not operate in all the states in which ALIC operates. The JMA non-compete provision also prevents ALIC from offering property-casualty products in states in which ALLIED Mutual and the property-casualty subsidiaries of the Company now operate. In the event of a change of control of ALIC or ALLIED Life (whenever ownership of 50% or more of the voting stock is acquired by a nonaffiliated party), the Company, ALLIED Mutual, or any of the Company's property-casualty subsidiaries may (i) terminate it upon six months' notice; (ii) extend the term for up to ten additional years beyond 2008; or (iii) allow the JMA to continue in effect without change. Those three rights are also given to ALIC in the event of a change of control of the Company, any of its property-casualty subsidiaries or ALLIED Mutual. Disputes are to be resolved by the Coordinating Committee. Decisions of the Coordinating Committee must be unanimous and are binding on the parties. If the Coordinating Committee fails to resolve an issue, it would be submitted to arbitration. In such arbitration, one arbitrator will be appointed jointly by ALLIED Mutual and the Company's property-casualty subsidiaries and a second arbitrator will be appointed by ALLIED Life. Both arbitrators so selected will jointly select a third arbitrator. Other Arrangements and Transactions The Company and ALLIED Mutual are parties to a Stock Rights Agreement which expires in 2005. Under the Stock Rights Agreement, ALLIED Mutual is entitled to nominate and the Company is required to use its best efforts to cause the election or retention of a number of members of the Company's Board of Directors in proportion to ALLIED Mutual's percentage ownership of the total number of shares of the Company's voting stock outstanding at the time of nomination. In addition, the Company is required to elect to its Executive Committee at least one Company director who has been nominated by ALLIED Mutual but who is not an officer or employee of ALLIED Mutual, and the Company must limit the number of directors serving on the Executive Committee to five at any time. The Stock Rights Agreement restricts the ability of ALLIED Mutual to grant proxies to other than affiliated individuals and to solicit other stockholders of the Company. ALLIED Mutual has incidental registration rights and three demand registration rights with respect to the 6-3/4% Preferred. The preceding summary of the Stock Rights Agreement is qualified in its entirety by reference to the full text of the Stock Rights Agreement and the amendment thereto, copies of which are filed as Exhibits 21 and 22 hereto and are incorporated herein by reference. A-5 The Company and its affiliates pool their excess cash into a short-term investment fund 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 December 31, 1997, the Company had several unsecured notes payable totalling $5.9 million, bearing interest rate at 8.8%. The Company and its affiliates pay to AID Finance Services, Inc. a management fee (5 basis points of invested assets) which is offset against investment income. At December 31, 1997, $8.3 million was invested in the fund by the Company and its subsidiaries, which is carried as a short-term investment. Interest earned by the Company and its subsidiaries from the fund during 1997 was $477,000. Interest expense paid to AID Finance Services, Inc. during 1997 amounted to $424,000. The preceding summary of the Intercompany Cash Concentration Fund Agreement is qualified in its entirety by reference to the full text of the Intercompany Cash Concentration Fund Agreement, a copy of which is filed as Exhibit 26 hereto and is incorporated herein by reference. ALLIED Group Insurance Marketing Company ("AGIMC"), a wholly-owned subsidiary of AID Finance Services, Inc., markets insurance products for the Company's property-casualty subsidiaries on a commission basis pursuant to an Agency Agreement. The Company's share of commissions paid to AGIMC was $3.7 million for the year ending December 31, 1997. The Agency Agreement and amendments thereto are filed as Exhibits 23 through 25 hereto and are incorporated herein by reference. The Company paid premiums to ALLIED Life for term life insurance on the Company's employee group in the amount of $468,000 in 1997. The property-casualty subsidiaries of the Company paid premiums to ALLIED Mutual in the amount of $2.9 million in 1997 for ALLIED Mutual's participation in a reinsurance agreement with General Re-Insurance Company. There were recoveries from ALLIED Mutual in the amount of $2 million. The reinsurance agreement for 1997 is filed as Exhibit 27 hereto and is incorporated by reference herein. On December 31, 1997, State Street Bank and Trust Company, as the ESOP Trustee, purchased for the ESOP Trust 18,865 shares of Common Stock from the Company for $540,000. AMCO administers many of the bank accounts for the affiliated ALLIED companies. During the fiscal year 1997, AMCO issued checks in payment of certain transactions between affiliated ALLIED companies and the companies of certain directors of the Company. During 1997, ALLIED Mutual, as owner of the ALLIED office buildings, paid $214,000 for construction services to Taylor Ball, of which John P. Taylor, a director of the Company, is CEO and Chairman. It is anticipated that in 1998 ALLIED Mutual will continue to use the construction services of Taylor Ball and A-6 that AMCO will issue the checks on behalf of ALLIED Mutual in payment for the construction services. During the year ended December 31, 1997, ALLIED Mutual, the Company, and its subsidiaries paid $1 million in fees and media costs to J.D. Evans & Associates, of which Julie Evans (daughter of John E. Evans) is a stockholder. Donald S. Willis, a Director of the Company, is a majority stockholder of Willis and Moore, Inc., a general insurance agency. During 1997, ALLIED Mutual, AMCO, ALLIED Property and Casualty, and Depositors paid $233,000 in property- casualty commissions and profit share to Willis and Moore, Inc. These commissions and profit share were paid on the same basis and terms as those paid to unrelated agencies. During 1997, directors and executive officers of the Company purchased insurance or obtained residential mortgages from the Company or its subsidiaries on terms comparable to those offered in the normal course of business to nonaffiliated customers. In addition, corporations of which Company directors are executive officers purchased insurance from the Company's subsidiaries and ALLIED Mutual in the ordinary course of business during 1997. Amendment to Employee Stock Ownership Plan On June 1, 1998, the Board of Directors of the Company, acting upon the recommendation of the Compensation Committee of the Board, amended the ALLIED Group Employee Stock Ownership Plan ("ESOP") to provide that participants in the ESOP (including executive officers) will be fully vested in their accounts upon the occurrence of a "Change in Control" (as defined below) and to clarify that surplus assets following such a Change in Control will generally be allocated based on the same formula applicable to employer contributions. The amendment to the ESOP is filed as Exhibit 30 hereto and is incorporated by reference herein. For purposes of the foregoing, a "Change in Control" shall be deemed to have occurred upon the first to occur of the following: (i) Any person other than (a) a trustee or other fiduciary holding securities under an employee benefit plan of the Company, (b) a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, or (c) ALLIED Mutual, is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities; or A-7 (ii) During any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board plus any new Director (a) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the Directors at the beginning of the period or whose election or nomination for election was previously so approved or (b) whose nomination for election by the Company's shareholders was made pursuant to the Stock Rights Agreement between the Company and ALLIED Mutual, cease for any reason to constitute a majority thereof; or (iii) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation (and such merger or consolidation is in fact consummated), other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least eighty percent (80%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets , provided that such merger, consolidation, liquidation, sale or disposition, as the case may be, is actually consummated. Amendment to John Evans Consulting Agreement The consulting agreement between the Company, ALLIED Mutual, ALLIED Life and John Evans, which is described in the 1998 Proxy Statement, was amended on March 24,1998 to provide for a decrease in the annual compensation payable to Mr. Evans from $180,000 to $120,000. Such annual compensation is consideration for consulting services rendered by Mr. Evans and is prorated among the Company, ALLIED Mutual and ALLIED Life. The consulting agreement and the amendments thereto are filed as Exhibits 31 to 34 hereto and are incorporated herein by reference. Change of Control Provisions in Long-Term Management Incentive Plan As discussed in the 1998 Proxy Statement, the Company maintains a Long-Term Management Incentive Plan (the "Long-Term Plan") which provides for the award of stock options, stock appreciation rights ("SAR's") and shares of restricted stock. On March 10, 1998, the following option grants were made to executive officers of the Company: Douglas L. Andersen - 25,000 options, W. Kim Austen - 7,500 options, Steven A. Biggi - 15,000 options, Marla J. Franklin - 8,000 options, James J. Hachenbucher - 10,000 options, Michael D. Holmes - 15,000 options, Steven P. Larsen - 15,000 options, Charles H. McDonald - 5,000 options, Michael L. Pollard - 12,000 options, Stephen S. Rasmussen - 18,000 options, Scott E. Reddig - 10,000 options, A-8 Jamie H. Shaffer - 15,000 options, Edward E. Sullivan - 10,000 options and Kirt A. Walker - 7,500 options. Additionally, on May 30, 1998, Paul J. Curran was granted 5,000 shares of restricted stock pursuant to the Long-Term Plan. The Long-Term Plan provides that upon a change of control (as defined in the Long- Term Plan), all options and SAR's shall become immediately exercisable, and any restriction periods and restrictions imposed on restricted stock will lapse. Amendment to Stock Option Plans On May 30, 1998, the Compensation Committee of the Company's Board of Directors, seeking to provide parallel treatment of employee stock options upon a change in control, determined that it would interpret the Company's Restated and Amended Stock Option Plan and Nonqualified Stock Option Plan (together, the "Option Plans") in the same manner as the Long Term Plan with respect to a change in control. On June 1, 1998, the Board of Directors approved and ratified the action of the Compensation Committee. Severance Plan and other Agreements On May 30, 1998, the Compensation Committee of the Company's Board of Directors, following publication of the Offer and after consideration of the potentially destabilizing effects of the pendency of such proposal on the morale and retention of Company employees, approved the adoption by the Company of a severance policy applicable to the Company's salaried and hourly employees and approved the entry by the Company into separate severance agreements (the "Severance Agreements") with executives and certain other employees of the Company. On June 1, 1998, the Board of Directors approved and ratified these actions of the Compensation Committee. The following is a summary of the ALLIED Group, Inc. Severance Pay Plan (the "Severance Pay Plan"). This summary is qualified in its entirety by reference to the full text of the Severance Plan, a copy of which is filed as Exhibit 28 hereto and is incorporated herein by reference. The Severance Plan provides for certain benefits to eligible employees following an involuntary termination of employment or Company-approved resignation. The benefits consist of a lump sum payment equal to one week's base salary for each full calendar year of employment and continuation of health benefits for approximately the same period as is used to calculate the lump sum payment. Benefit continuation terminates when the employee becomes eligible to receive benefits from another employer. An employee is not eligible to receive severance benefits if his termination of employment is due to death, transfer of employment to an affiliate or successor of the Company or for "Cause." "Cause" is generally defined as with respect to the termination of an eligible employee's employment with the Company, termination (or deemed termination) because the employee has consistently failed to function as required by Company A-9 standards. In the event an employee's employment terminates for any reason and the plan administrator subsequently determines that Cause for termination existed at the time the employee's employment terminated, such employee shall be deemed to have been terminated for Cause. Enhanced benefits are provided to employees who are terminated, whose employment has been adversely affected, or who resign with the Company's approval following a change in control (as defined above). The enhanced benefits consist of an additional lump sum payment equal to employee's base salary for a period equal to the greater of three months or from the date of termination of employment through the first anniversary of the change in control, benefit continuation for the additional period, and outplacement services to be provided at the expense of the Company. The Severance Agreement, the form of which is filed as Exhibit 29 hereto and is incorporated herein by reference, generally provides that in the event of any involuntary termination or constructive termination of employment (including a material reduction in responsibilities, a reduction in base pay or incentive compensation opportunities or a involuntary relocation) within the two year period following a change in control an employee who is a party to such an agreement would receive, in lieu of any other severance, a lump sum payment equal to one year's base pay plus the employee's highest bonus over the preceding two years and benefit continuation for eighteen months following the termination of employment (or until the employee becomes eligible for benefits under new employer). For a small number of employees, the benefit would be a lump sum severance payment equal to two times annual base salary plus the employee's highest bonus over preceding two years and benefit continuation for eighteen months following the termination of employment (or until the employee becomes eligible for benefits under new employer). In the event that such severance payments would subject the employee to an excise tax imposed under section 4999 of the Internal Revenue Code of 1986, as amended, the amount of the severance otherwise payable will generally be reduced to avoid the imposition of such excise tax. The Company has offered Severance Agreements that provide for a severance equal to two times the employee's base salary and higher bonus over the preceding two years to the following executive officers of the Company: Douglas L. Andersen, Michael D. Holmes, and Stephen S. Rasmussen. The Company has also offered such agreements to six other employees, who are not executive officers. The Company has offered Severance Agreements that provide for a severance equal to the employee's base salary and higher bonus over the preceding two years to the following officers and other senior executives of the Company: Cheryl M. Critelli, Paul J. Curran, Marla J. Franklin, Sally Malloy, Charles H. McDonald, George T. Oleson, and Jamie H. Shaffer. The Company has also offered such agreements to 34 other employees, who are not executive officers. A-10 The Company has calculated that the maximum aggregate lump sum that could be payable pursuant to all of the Severance Agreements described above (including non-executive officers), assuming termination of each of these individuals, is approximately $9.2 million. A-11 ANNEX B ITEM 6(a) (i) The Company. In response to a sharp decline in the market price of the Company's Shares following the announcement on May 5, 1998 of changes to its Pooling Agreement, the Company announced an increase in its previously authorized stock repurchase program. Between May 7, 1998 and May 14, 1998, the Company repurchased in the open market an aggregate of 557,600 Shares pursuant to its previously announced stock repurchase program on the date, in the amounts and at the prices listed below: Date of Purchase Number of Shares Price per Share Total May 7, 1998 125,000 $26.0000 $3,256,250.00 May 8, 1998 25,000 $26.1875 $ 655,937.50 May 8, 1998 100,000 $26.0000 $2,605,000.00 May 11, 1998 25,000 $27.0000 $ 676,250.00 May 11, 1998 51,000 $27.0000 $1,379,550.00 May 12, 1998 164,100 $27.1250 $4,459,417.50 May 13, 1998 29,000 $27.6250 $ 802,575.00 May 13, 1998 16,600 $27.6634 $ 460,042.44 May 14, 1998 21,900 $27.4977 $ 603,294.63 The Company has not purchased any Shares since May 14, 1998. (ii) ALLIED Group, Inc.'s Executive Officers and Directors. On April 23, 1998, Charles H. McDonald, Vice President of the Company, sold 9,000 Shares at a price of $31.6806 per Share. On April 24, 1998, Mr. McDonald sold 2,000 Shares at a price of $31.5625 per Share. On April 27, 1998, Mr. McDonald sold 1,000 Shares at a price of $31.5000 per Share. On April 28, 1998, Steve A. Biggi, Regional Vice President of certain subsidiaries, exercised outstanding stock options to acquire 3,936 Shares at a price per Share that ranged between $10.778 and $17.889 and sold 1,968 Shares the same day at a price per Share of $31.4375. He exercised 843 cash-only SARs with exercise prices of from $10.778 to $17.889 and a fair market value of $31.563. On April 29, 1998, W. Kim Austen, Regional Vice President of certain subsidiaries, exercised outstanding stock options to acquire 15,184 Shares at a price per Share that ranged between $10.7778 and $17.8889 and sold 12,684 Shares the same day at a price per Share of $30.7147. He exercised 844 cash-only SARs at exercise prices of from $10.778 to $17.8889 and a fair market value of $30.7813. On May 7, 1998, Douglas L. Andersen, Chief Executive Officer and President of the Company acquired 474 Shares at a price of $26.6875 per Share. On May 11, 1998, Jamie H. Shaffer, Senior Vice President and Chief Financial Officer of the Company, acquired 500 Shares at a price of $27.00 per Share. On May 12, 1998, Harold S. Carpenter, a Director of the Company, acquired 10,000 Shares at a price of $27.1875 per Share. On May 13, 1998, Michael D. Holmes, Vice President of the Company, exercised outstanding stock options to acquire 5,625 Shares at a price per Share of $17.1667. On May 14, 1998, Harold S. Carpenter, a Director of the Company, acquired 5,000 Shares at a price of $27.5000 per Share. (iii) Employee Stock Purchase Plan Other transactions include regular on-going acquisitions through the Company's Employees Stock Purchase Plan. B-2 Exhibit 1 Charles I. Colby, age 70, has been a Director of the Company since 1993. Mr. Colby had been a Director of ALLIED Mutual from 1971 to 1991. Since 1984, Mr. Colby has been Chairman of the Board of Colby Properties, which is in the business of real estate development. Mr. Colby is a member of the Board of Directors of West Des Moines State Bank. Harold S. Evans, age 69, has been a Director of the Company since 1974 and of ALLIED Mutual since 1965. Mr. Evans also serves on the Board of Directors of AMCO, ALLIED Property and Casualty, Depositors, and ALLIED Life Financial Corporation. He was employed by Aluminum Company of America beginning in 1955, serving as Group Vice President-International until his retirement in 1989. Mr. Evans is a brother of John E. Evans, Chairman of the Board and a Director of the Company. Meetings and Committees of the Board of Directors During 1997, there were five meetings of the Board of Directors. All directors attended more than seventy-five percent of the aggregate committee and Board meetings during 1997. The Board has established Executive, Audit, Investment, Compensation, and Coordinating Committees. The Company does not have a standing nominating committee, and the functions that are normally performed by such a committee are carried out by the Executive Committee. The Executive Committee will consider nominees recommended by stockholders. Such recommendations for nominees for election of the 1999 Annual Meeting should be submitted in writing to the Executive Committee in care of the Secretary of the Company, 701 Fifth Avenue, Des Moines, Iowa 50391-2000, no later than February 4, 1999. The Executive Committee members are John E. Evans, James W. Callison, Harold S. Evans, and Douglas L. Andersen. The Executive Committee has the authority, with certain exceptions, to exercise the powers of the full Board of Directors. The Board of Directors reviews and approves the minutes of all meetings of the Executive Committee. The Executive Committee met five times in 1997. The Audit Committee members consist of outside directors John P. Taylor and Donald S. Willis. The Committee selects and retains the Company's independent certified public accountants and approves the staffing and budgets of the Company's internal audit department. Both the internal auditors and the independent certified public accountants periodically meet with the Audit Committee and have access to the members of the Committee. The Audit Committee met two times in 1997. C. Fred Morgan, a member of the ALLIED Mutual Board of Directors, sits as a nonvoting representative of ALLIED Mutual on the Audit Committee. The Investment Committee is a committee authorized to direct and approve investment activities of the Company. The members of the Investment Committee are John E. Evans, Harold S. Evans, James W. Callison, Charles I. Colby, and Douglas L. Andersen. The Investment Committee met eight times in 1997. The Compensation Committee of the Board has the authority to establish all compensation and benefits for all of the executive officers and employees of the Company and its subsidiaries. The members of the Compensation Committee, Harold S. Evans, James W. Callison, and Charles I. Colby, met five times in 1997. The Coordinating Committee is a committee responsible for matters involving actual or potential conflicts of interest, if and when they arise, between the Company, ALLIED Mutual, and ALLIED Life Financial Corporation. The Company's members of the committee, Donald S. Willis and Harold S. Carpenter, are outside directors of the Company who are not members of the Board of Directors of ALLIED Mutual or ALLIED Life Financial Corporation. The Coordinating Committee met one time in 1997. Compensation of the Members of the Board of Directors and the Outside Director Stock Purchase Plan Directors who are not officers or employees of the Company received an annual retainer in 1997 of $20,000 plus expenses incurred in attending Board meetings. Directors were also paid $1,000 per Board meeting and $750 per committee meeting. Directors who are executive officers of the Company do not receive any fees in addition to their remuneration as officers. The annual retainer is split among the Company, ALLIED Mutual, and ALLIED Life Financial Corporation for James W. Callison, Harold S. Evans, and John E. Evans (each of whom are also directors of ALLIED Mutual and ALLIED Life Financial Corporation), and many of the meeting fees are also split for these three individuals in the 8 event the companies have meetings on the same day. In addition, Donald S. Willis receives from the Company $750 per committee meeting for sitting as a Company representative and nonvoting member of the ALLIED Mutual Contributions Committee. The Company's directors who are not employees or officers of the Company may elect to receive all or a portion of their director fees in the form of Common Stock obtained under the ALLIED Group, Inc. Outside Director Stock Purchase Plan ("Director Purchase Plan"). Under the Director Purchase Plan, a participant may purchase Common Stock with a fair market value of no more than $25,000 per calendar year. The price per share paid to the Company is 100% of the fair market value of shares of Common Stock. The director fees that are withheld are applied to 85% of the price per share, with the remainder being paid proportionally by the Company and/or other ALLIED companies to whom the participant's director fees are allocated. A participant may not dispose of the Common Stock purchased under the Director Purchase Plan for a period of one year from the purchase date. An Administrative Committee composed of employee directors of the Company administers the Director Purchase Plan. During 1997, the following directors participated in the Director Purchase Plan purchasing the number of shares and receiving the dollar value of discount for all shares purchased as indicated: Harold S. Carpenter, 924 shares, $3,746; John E. Evans, 952 shares, $3,750; Richard O. Jacobson, 920 shares, $3,747; John P. Taylor, 924 shares, $3,746; William E. Timmons, 333 shares, $1,368; and Donald S. Willis, 156 shares, $640. John E. Evans has a Consulting Agreement with the Company, ALLIED Mutual, and ALLIED Life Financial Corporation pursuant to which he performs certain consulting services for the companies until such agreement is terminated by Mr. Evans or the companies. Mr. Evans is to be paid an annual fee which is to be prorated among the Company, ALLIED Mutual, and ALLIED Life Financial Corporation. The annual fee was $250,000 for the first six months or 1997 and $180,000 for the latter six months. The Company's portion of the fee for 1997 was $172,365. ALLIED Mutual agreed to nominate Mr. Evans for re-election to the Board of Directors of the Company in accordance with ALLIED Mutual's nomination rights under this Stock Rights Agreement between ALLIED Mutual and the Company. Executive Officers In addition to Douglas L. Andersen, the following are the executive officers of the Company and its subsidiaries. Stephen S. Rasmussen, age 45, has been Executive Vice President since March 3, 1998 and had been Senior Vice President of the Company since 1995. He serves in a similar capacity in each of ALLIED Mutual, AMCO, ALLIED Property and Casualty, and Depositors. Mr. Rasmussen had previously been Vice President of underwriting of ALLIED Mutual, AMCO, ALLIED Property and Casualty, and Depositors since 1986. He has been employed by ALLIED Mutual since 1974 holding a variety of underwriting and managerial positions. Jamie H. Shaffer, age 54, has been Senior Vice President and Chief Financial Officer of the Company, ALLIED Mutual, AMCO, ALLIED Property and Casualty, and Depositors since 1997. He has been President (Financial) of the Company since 1994. Since 1978, Mr. Shaffer has served as Treasurer of the Company, ALLIED Mutual, AMCO, ALLIED Property and Casualty, and Depositors. Mr. Shaffer joined ALLIED Mutual in 1971. Marla J. Franklin, age 51, has been Vice President of the Company and Vice President of Human Resources of ALLIED Mutual, AMCO, ALLIED Property and Casualty, and Depositors since 1994. Previously, Mr. Franklin was Assistant Vice President of Human Resources having been with ALLIED since 1973. Michael D. Holmes, age 40, has been Vice President of Information Systems for ALLIED Mutual, AMCO, ALLIED Property and Casualty, and Depositors since 1996. Mr. Holmes served as Vice President of Emerging Technologies for AmerUs Mutual Life Insurance Company from 1995 until 1996. Previously, Mr. Holmes served in various management positions in the information systems area with ALLIED since 1983. Steven P. Larsen, age 41, has been Vice President of Claims of ALLIED Mutual, AMCO, ALLIED Property and Casualty, and Depositors since 1993. Mr. Larsen joined ALLIED in 1991 as Assistant Vice President-Claims Legal. Previously, he was employed by United Services Automobile Association as Claims Counsel since 1985. Charles H. McDonald, age 59, has been Vice President of the Company since 1990 and was named Vice President of Communications in 1994 for ALLIED Mutual, AMCO, ALLIED Property and Casualty, and Depositors. He had been Vice President of Human Resources from 1979 to 1994. His employment in personnel and employee relations commenced with ALLIED Mutual in 1973. 10 SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS As of February 28, 1998, the directors, the executive officers named in the Summary Compensation Table, and the directors and executive officers as a group beneficially owned shares of Common Stock as set forth below. The issued and outstanding Common Stock and 6-3/4% Preferred as of February 28, 1998 were 30,549,314 shares and 1,827,222 shares, respectively. Amount and Nature of Percent Voting Name of Beneficial Owner Beneficial Ownership (1) of Class (1) Percentage ------------------------ ------------------------ ------------ ---------- John E. Evans 866,219 1.2% 1.0% James W. Callison 26,542 - - Harold S. Carpenter 67,795 (4) - - Charles I. Colby 23,349 (5) - - Harold S. Evans 47,994 (6) - - Richard O. Jacobson 9,974 - - John P. Taylor 22,202 - - William E. Timmons 13,898 - - Donald S. Willis 30,952 - - Douglas L. Andersen 224,430 (2) (3) - - Stephen E. Rasmussen 103,069 (2) (3) - - Jamie H. Shaffer 196,083 (2) (3) - - Steve A. Biggi 67,643 (2) (3) - - Scott E. Reddig 1,811 - - All directors and executive officers as a group (24 persons) 1,664,270 (2) (3) (4) (5) (6) 5.4% 4.6% - --------- (1) Except as noted, all persons have sole voting and investment power with respect to the shares reported; asterisks indicate ownership of less than 1%. (2) Includes the following number of shares that are also reported as beneficially owned by the ESOP Trustee: Mr. Andersen, 56,301 shares; Mr. Rasmussen, 29,961 shares; Mr. Shaffer, 58,161 shares; Mr. Biggi, 14,086 shares; Mr. Reddig, 1,244 shares; and all executives as a group 345,588 shares. Allocated shares are voted by the ESOP Trustee in accordance with the direction of the ESOP participant. Generally, unallocated shares and allocated shares as to which no direction is made by the participant are voted by the ESOP Trustee in the same percentage as the allocated shares as to which directions are received by the ESOP Trustee. (3) Includes the following number of shares which the following persons have the right to acquire within 60 days of February 28, 1998 pursuant to stock options granted under the ALLIED Group, Inc. Restated and Amended Stock Option Plan. ALLIED Group, Inc. Nonqualified Stock Option Plan, and ALLIED Group, Inc. Long-Term Management Incentive Plan: Mr. Andersen, 47,623 shares; Mr. Rasmussen, 13,688 shares; Mr. Shaffer, 23,436 shares; Mr. Biggi, 7,308 shares; and all executive officers as a group, 244,363 shares. (4) Includes 57,375 shares of Common Stock owned by Superior Gas and Chemical, Inc. (5) Includes 15,750 shares of Common Stock owned by Charles I. Colby & Ruth Colby Trust #1, Ruth Colby Trust A, and Charles I. Colby and Ruth Colby Family Trust, each of which Charles I. Colby is Trustee and Beneficiary. (6) Includes 34,266 shares of Common Stock owned by the Bethany Foundation, a nonprofit corporation, of which Harold S. Evans is President. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors of the Company (the "Committee") is responsible for establishing and administering the compensation policies which govern annual compensation, stock ownership programs, and employee benefit programs for the executive officers as well as other employees of the Company and its subsidiaries. 11 Compensation Criteria In making compensation determinations, the Committee considers and endeavors to obtain the following goals: 1) attract and obtain highly qualified and motivated executive officers and employees, 2) encourage and reward achievement of annual and long-term financial goals and operating plans of the Company, and 3) encourage executive officers and employees to become stockholders with interests aligned with those of other stockholders. The Committee's policy with regard to the compensation of executive officers is to meet the foregoing goals through a combination of base salary, annual bonus, stock ownership, and other benefits with a particular focus on encouraging executive officers to attain individual performance goals that are designed to favorably impact overall Company performance. Compensation Components The basic components of Compensation for executive officers, including those individuals listed in the Summary Compensation Table, are in four areas: Base Salary: The Committee sets salary ranges annually which are intended to reflect the median level of base pay for comparable positions at companies of similar size and complexity. The Committee reviews salary survey data provided by independent survey consultants and information provided by the Standard and Poor's property-casualty insurance segment. Based on the scope and responsibility of the position in the survey compared to the scope and responsibility of the position at the Company, the Committee determines whether the officer's salary range should be set at, above, or below the median level of the industry. To determine the level of a specific salary within its range, the Committee considers management input regarding the officer's length of service in the position, experience, and management skills in handling short and long range issues. In addition, the Committee reviews the officer's performance during the prior year measured against predetermined corporate and individual plans and objectives approved by the Board. Annual Bonus: The Committee believes that a significant portion of annual cash compensation for the executive officers should be variable ("at risk") and tied to the Company's financial results. The Short Term Management Incentive Compensation Plan (the "Short Term Plan") is administered by the Committee which annually establishes goals for profit and growth. Depending upon attainment of Short Term Plan goals, executive officers may receive a bonus amount equal to 12-19% of base salary if the minimum profit goal is attained, and up to 48-75% of base salary if both profit and growth goals are maximized. Profit is based on consolidated net income or profit center net income as appropriate for measuring the participant's overall contribution to the Company's success. Growth is measured in direct written premiums for the property-casualty companies (excluding Western Heritage and crop-hail business). The profit and growth goals are established annually by the Committee. Goals are set to exceed expected profit and growth performance of the industry. The potential total award is weighted toward profit: 75% of the award may come from profit goal attainment and 25% from growth attainment. No incentive for growth is given if the minimum profit target is not met. The Committee may use its discretion to modify a portion of a participant's award, either upward or downward, based on management's recommendation of the participant's contribution to the achievement of goals. Stock Ownership: The Committee believes that a fundamental goal of executive compensation is to encourage and create opportunities for long-term executive stock ownership. Stock ownership guidelines for officers were established by the Committee in 1994. Over a period of ten years, the following ownership levels of Company Common Stock should be attained: President 150,000 - 200,000 shares Senior Vice Presidents 100,000 - 150,000 shares Key Vice Presidents 75,000 - 100,000 shares Other Executive Officers 30,000 - 50,000 shares The Long-Term Management Incentive Plan (the "Long-Term Plan") provides for the award of stock options (nonqualified and incentive stock options), stock appreciation rights ("SARs"), and shares of restricted stock. The Committee 12 encourages ownership of Company stock through the grant of options to participants in the Long-Term Plan. In determining who will participate and the amount of awards, the Committee selects key management employees, and based on their position, salary, performance, and previous grants, the Committee determines the amount of awards to be given to each participant. Generally, the amount increases with the level of position. The Committee intends to make grants on an annual basis and establish a vesting schedule at each grant date. The 1997 option grants vest in 33-1/3% increments on the third, fourth, and fifth anniversary of the grant date. In 1997, 240,000 options were awarded to 33 participants, and 555,969 shares remain available for award. Employee Benefits: The Company offers benefit plans such as vacation, medical, life and disability insurance to executive officers on the same basis as offered to all employees. In keeping with the Company's commitment to align employee interests with those of stockholders, employees may acquire shares of stock through the Employee Stock Purchase Plan ("ESPP"), and all eligible employees are allocated shares through the Employee Stock Ownership Plan ("ESOP"). The ESPP allows employees to purchase stock at 85% of its fair market value, and the ESOP is discussed in note 5 to the Summary Compensation Table in this Proxy Statement. Executive officers are eligible for these programs on the same basis as other employees. CEO's Compensation Mr. Andersen participates in the compensation program described above and has a significant portion of his total compensation at-risk. In March, 1997 Mr. Andersen was elected Chief Executive Officer of the Company and received a 16% increase in base salary. In 1997, he received 15,000 shares subject to option, which adjusted for the stock split in November 1997, amounts to 22,500 shares subject to option. Mr. Andersen led the Company toward excellent financial results in 1997 and received a bonus award of $166,036 for that performance. Tax Deductibility of Executive Compensation Section 162(m) of the Internal Revenue Code (the "Code") generally limits to $1 million per individual per year the federal income tax deduction for compensation paid by a publicly-held company to the company's chief executive officer and its other four highest paid executive officers. Compensation that qualifies as performance-based compensation for purposes of Section 162(m) is not subject to the $1 million deduction limitation. Options and stock appreciation rights granted under the Long-Term Plan satisfy the requirements for performance-based compensation. The Committee presently does not intend to seek to qualify other components of the Company's incentive compensation for executive officers as performance-based compensation under Section 162(m) of the Code, such as the Short Term Plan. However, the Committee currently does not anticipate that any executive officer will be paid compensation from the Company in excess of $1 million in any year (including amounts that do not qualify as performance-based compensation under the Code), and accordingly, the Committee anticipates that all amounts paid as executive compensation will be deductible by the Company for federal income tax purposes. COMPENSATION COMMITTEE James W. Callison Charles I. Colby Harold S. Evans 14 COMPENSATION OF EXECUTIVE OFFICERS All employees are directly employed by the Company. The Company leases employees to all of its subsidiaries and to ALLIED Mutual and certain of its subsidiaries. The following table shows the compensation earned by the CEO and the four most highly compensated officers of the Company for services rendered in all capacities to the Company, its subsidiaries, and to ALLIED Mutual and its subsidiaries. Summary Compensation Table Long-Term Compensation --------------------------------- Annual Compensation Awards ------------------------ --------------------------------- Restricted Securities Stock Underlying All Other Name and Principal Position Year Salary (1) Bonus (2) Awards (3) Options/SARs (4) Compensation (5) - --------------------------- ---- --------- --------- ---------- ---------------- ---------------- Douglas L. Andorsen 1997 $318,930 $166,036 -0- 22,500 $61,200 President, CEO, and Director 1996 279,594 -0- $11,900 15,750 27,000 of Company, AMCO, ALLIED 1995 260,000 108,754 22,200 38,250 21,000 Property and Casualty, Depositors, and ALLIED Mutual Stephen S. Rasmussen 1997 $180,847 $ 70,000 -0- 15,000 $67,600 Executive Vice President of 1996 169,825 -0- $10,750 11,250 30,375 Company, AMCO, ALLIED 1995 158,000 50,026 19,700 33,001 23,625 Property and Casualty, Depositors, and ALLIED Mutual Jamie H. Shaffer 1997 $229,362 $117,602 -0- 18,000 $57,600 Senior Vice President, 1996 219,132 -0- $13,000 15,750 30,375 Treasurer, and CFO of 1995 200,000 83,662 24,900 60,750 23,625 Company, AMCO, ALLIED Property and Casualty, Depositors, and ALLIED Mutual Steve A. Biggi 1997 $157,750 $ 89,040 -0- 15,000 $57,600 Regional Vice President 1996 148,260 84,643 $ 9,000 7,875 30,375 of AMCO, ALLIED Property 1995 145,385 -0- 16,500 5,625 23,625 and Casualty, Depositors and ALLIED Mutual Scott E. Reddig 1997 $145,038 $ 53,400 -0- 6,000 $35,605 Vice President of AMCO, 1996 19,953(6) -0- -0- 22,500 -0- ALLIED Property and Casualty, 1995 -0- -0- -0- -0- -0- Depositors, and ALLIED Mutual - --------- (1) Includes amounts deferred at the election of the officer pursuant to the Company's Savings and Investment Plan (401(k)). (2) Amounts were earned in the year indicated but paid in the following year under the ALLIED Group Short Term Management Incentive Compensation Plan. (3) Awards of restricted stock were made to satisfy obligations under the Long- term Management Incentive Compensation Plan (also known as the Performance Unit Plan) which was discontinued in 1994. For the three-year performance period ending in 1995 and 1996, shares of 15 restricted stock were awarded to satisfy prorated cash awards to which the participants were entitled. The restricted stock vests 25% per year beginning the second year after the award. Dividends are paid on the restricted stock awarded to participants. The number and value of the aggregate restricted stock holdings at the end of 1997 are as follows (using a market value of $29.72 per share): Mr. Andersen, 1,989 shares valued at $57,124; Mr. Rasmussen, 1,777 shares valued at $51,035; Mr. Shaffer, 2,215 shares valued at $63,615; and Mr. Biggi, 1,488 shares valued at $42,735. (4) The number of reported options and SARs reflect the 3-for-2 stock split in November 1997. See "Option/SAR Grants in Last Fiscal Year" for a description of the terms and conditions of the option grants. (5) Amounts are deferred compensation and reflect contributions made by the Company under The ALLIED Group Employee Stock Ownership Plan ("ESOP") which is a defined contribution retirement plan covering all eligible Company employees. The amount of employer contribution is based on a percentage of annual pay (capped at $160,000) and calculated as follows: less than 6 years of service, 6% of pay; 6 years but less than 11 years; 7% of pay; 11 years but less than 21 years, 8% of pay; and for 21 years or more, 9% of pay. In 1995, 1996, and 1997, employees participating in the ESOP received an additional 75%, 125%, and 300%, respectively, increased stock allocation to their accounts. In 1997, Mr. Rasmussen received cash dividends on the ESOP shares purchased with funds transferred from the terminated retirement plan in the amount of $6,624. (6) Mr. Reddig began employment with the Company on November 11, 1996. In 1996, he received $21,600 in perquisites, the majority of which were for moving expenses. Option/SAR Grants in Last Fiscal Year The following table summarizes certain information regarding options granted during 1997 to the named executive officers and reflects the November 1997 3-for-2 stock split. Potential Individual Grants Realizable Value at ------------------------------- Assumed Annual Number of % of Total Rates of Stock Price Securities Options/SARs Appreciation Underlying Granted to Exercise or for Option Term (2) Options/SARs Employees in Base Expiration --------------------- Name Granted (1) Fiscal Year Price (5/ ) Date 5% 10% - -------------------- -------------- ------------ ----------- ---------- -------- -------- Douglas L. Andersen 22,600 options 9.4% $22.9167 3/21/2007 $324.274 $821,775 Stephen S. Rasmussen 15,000 options 6.3% $22.9167 3/21/2007 $216,183 $547,650 Jamie W. Shaffer 18,000 options 7.5% $22.9167 3/21/2007 $250,419 $657,420 Steve A. Biggi 15,000 options 6.3% $22.9167 3/21/2007 $216,183 $547,850 Scott E. Reddig 6,000 options 2.5% $22.9167 3/21/2007 $ 86,479 $219,140 - ---------------- (1) These options will vest and become exercisable as follows: 33-1/3% as of 3/21/2000; 66-2/3% as of 3/21/2001; and 100% as of 3/21/2002. (2) These amounts represent assumed rates of stock price appreciation of 5% and 10% which are specified in applicable federal securities regulations. The actual value, if any, an executive officer may realize depends on the market value of the Common Stock at a future date. There is no assurance that the value realized by an executive officer will be at or near the values set forth in the table. 16 Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option Values The following table summarizes certain information regarding options exercised during 1997 and presents the value of unexercised options and SARs held at December 31, 1997. The SARs entitle the participant to receive payment from the Company solely in cash. Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/SARs Options/SARs at TY-End at FY-End (1) Shares Acquired Exercisable (E)/ Exercisable (E)/ Name on Exercise Value Realized (1) Unexercisable (U) Unexercisable (U) - -------------------- --------------- -------------------- ---------------------- ------------------------- Douglas L. Andersen 6,149 $138,891 options/$73,148 SARS 30,001 (E)/ 75,440 (U) $473,245 (E)/5 1,144,141 (U) Stephen S. Rasmussen 3,949 $ 71,685 options/$11,983 SARS -0- (E)/ 60,564 (U) $ -0- (E)/5 780,104 (U) Jamie H. Shaffer 4,149 $154,651 options/$35,170 SARS -0- (E)/ 94,505 (U) $ -0- (E)/5 780,104 (U) Steve A. Biggi -0- $ -0- options/$ -0- SARS 3,435 (E)/ 29,910 (U) $ 67,279 (E)/5 292,202 (U) Scott E. Reddig -0- $ -0- options/$ -0- SARS -0- (E)/ 20,500 (U) $ -0- (E)/5 244,735 (U) - ----------- (1) Values are calculated by determining the difference between the fair market value of the Common Stock and the exercise price of the options and SARs on the exercise date or at fiscal year end, as appropriate. The fair market value (average of the high and low as reported on The New York Stock Exchange) as of December 31, 1997 was $29.72 per share. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's executive officers and directors and persons who own more than 10% of a registered class of the Company's equity securities file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based on a review of the reports, during the fiscal year ended December 31, 1997, all Section 16(a) filing requirements applicable to its officers, directors, and greater than 10% beneficial owners were complied with. CERTAIN TRANSACTIONS AND RELATIONSHIPS Intercompany Operating Agreement The Company and its subsidiaries are parties to an Intercompany Operating Agreement ("IOA") with ALLIED Life Financial Corporation ("ALFC"), ALLIED Mutual, and each of their respective subsidiaries. The IOA provides for the sharing of employees, office space, agency forces, data processing, and other services and facilities. The IOA extends through December 31, 2004 and continues thereafter subject to any party providing two years notice that such party intends to cease participation. In the event of a change of control (whenever ownership of 50% or more of the voting stock of the Company or ALFC is acquired by a nonaffiliated party) of the Company or ALFC, the other party or ALLIED Mutual may (i) terminate it upon six months notice; (ii) extend the term for up to ten additional years beyond 2004; or (iii) allow the IOA to continue in effect without change. The Company leases to ALLIED Mutual and its subsidiaries (except for ALFC) the employees utilized in their operations for a fee and reimbursement of personnel costs based on certain allocation methods. The Company is obligated to provide the entire requirements for employees to ALLIED Mutual and its subsidiaries (other than ALFC), but ALLIED Mutual reserves the right to hire employees independently rather than leasing them from the Company. The Company has the right to determine the compensation and benefits of all leased employees. However, if the Company wishes to adopt or amend any employee benefit plan or program and pass on the increased costs thereof with respect to employees leased by ALLIED Mutual, it must obtain the approval of Exhibit 4 ================================================================================ UNITED STATES DISTRICT COURT SOUTHERN IOWA DISTRICT OF - -------------------------------------------------------------------------------- NATIONWIDE MUTUAL INSURANCE COMPANY and NATIONWIDE ACQUISITION CORP., SUMMONS IN A CIVIL ACTION (Plaintiffs), CASE NUMBER: V. ALLIED GROUP, INC., and ALLIED MUTUAL INSURANCE, DOUGLAS L. ANDERSEN, JOHN E. EVANS, HAROLD S. EVANS, JAMES W. CALLISON, HAROLD S. CARPENTER, CHARLES I. COLBY, RICHARD O. JACOBSON, JOHN P. TAYLOR, WILLIAM E. TIMMONS, DONALD S. WILLIS, C. FRED MORGAN, and JAMES D. KIRKPATRICK, (Defendants). TO: (Name and Address of Defendants) ALLIED GROUP, INC. Jamie H. Schaffer, Registered Agent 701 5th Avenue Des Moines, IA 50309 YOU ARE HEREBY SUMMONED and required to file with the Clerk of this Court and serve upon PLAINTIFF'S ATTORNEY (name and address) Harold N. Schneebeck, Esq. BROWN, WINICK, GRAVES, GROSS, BAKERVILLE & SCHOENEAU, P.L.C. Two Ruan Center Suite #1100 601 Locust Street Des Moines, Iowa 50309 an answer to the complaint which is herewith served upon you, within twenty (20) days after service of this summons upon you, exclusive of the day of service. If you fail to do so, judgment by default will be taken against you for the relief demanded in the complaint. [STAMP APPEARS HERE] ___________________________________ ______________________________ CLERK DATE ___________________________________ BY DEPUTY CLERK IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF IOWA CENTRAL DIVISION Nationwide Mutual Insurance ) Company and Nationwide Group ) Acquisition Corporation, ) ) Plaintiffs, ) ) V. ) Case Number ____________ ) Allied Group, Inc., Allied Mutual ) Insurance Company, Douglas L. ) Andersen, John E. Evans, ) Harold S. Evans, James W. ) Callison, Harold S. Carpenter, ) Charles I. Colby, Richard O. ) Jacobson, John P. Taylor, ) William E. Timmons, Donald S. ) Willis, C. Fred Morgan, ) and James D. Kirkpatrick, ) ) Defendants. ) COMPLAINT --------- Plaintiffs, Nationwide Mutual Insurance Company ("Nationwide") and Nationwide Group Acquisition Corporation ("Nationwide Acquisition"), by their undersigned attorneys, allege upon knowledge with respect to themselves and their own acts, and upon information and belief as to other matters, as follows: NATURE OF THE ACTION -------------------- 1. Plaintiffs seek an injunction, inter alia, prohibiting those ----- ---- individual defendants who are members of the board of directors of defendant Allied Group, Inc. ("Allied Group"), from breaching their fiduciary duties and violating the securities laws of the state of Iowa by entrenching themselves and their management and denying the shareholders of Allied Group their right to decide for themselves upon the future of the company they own. In particular, Allied Group's board has caused Allied Group to rebuff Nationwide's offer to purchase the common shares and the preferred stock of Allied Group at a substantial premium. Allied Group's board has done so in derogation of its duty to place the interests of the shareholders above those of the board members. In addition, plaintiffs seek an injunction that would prohibit those individual defendants who are members of the Board of Directors of defendant Allied Mutual Insurance Company ("Allied Mutual"), an affiliate of Allied Group, from engaging in certain acts in assistance of the Allied Group board's wrongful actions. PARTIES ------- 2. Plaintiff Nationwide is an Ohio mutual insurance company with its principal place of business in Columbus, Ohio. Nationwide owns 4.9% of the stock of defendant Allied Group. Formed in 1925, Nationwide and its affiliated entities are engaged in selling a variety of insurance products, including personal auto and homeowners policies. Nationwide sells these products primarily through an exclusive career agency force, mainly in the eastern and central states. In 1997, Nationwide wrote approximately $5 billion of insurance premiums and had a net income in excess of $1.6 billion. Since 1982, one of Nationwide's affiliate companies has been Farmland Mutual Insurance Company, located in Des Moines, Iowa. 3. Plaintiff Nationwide Acquisition is an Ohio corporation with its principal place of business in Columbus, Ohio. Nationwide 2 TO COME 3 9. Defendant James W. Callison is a director of both Allied Group and Allied Mutual, and is not a citizen of the state of Ohio. 10. Defendant Harold S. Carpenter is a director of Allied Group, and is not a citizen of the state of Ohio. 11. Defendant Charles I. Colby is a director of Allied Group, and is not a citizen of the state of Ohio. 12. Defendant Richard O. Jacobson is a director of Allied Group, and is not a citizen of the state of Ohio. 13. Defendant John P. Taylor is a director of Allied Group, and is not a citizen of the state of Ohio. 14. Defendant William B. Timmons is a director of Allied Group, and is not a citizen of the state of Ohio. 15. Defendant Donald S. Willis is a director of Allied Group, and is not a citizen of the state of Ohio. 16. Defendant C. Fred Morgan is a director of Allied Mutual, and is not a citizen of the state of Ohio. 17. Defendant James D. Kirkpatrick is a director of Allied Mutual, and is not a citizen of the state of Ohio. JURISDICTION AND VENUE ---------------------- 18. This court has jurisdiction pursuant to 28 U.S.C. (S)(S) 1332(a) and 2201. The amount in controversy exceeds $75,000, exclusive of interest and costs. 19. Venue is proper in this district pursuant to 28 U.S.C. (S) 1391(a) and (c). 4 SCHEME OF ALLIED GROUP'S BOARD TO ENTRENCH ITSELF ------------------------------------------------- 20. The individual defendant directors of Allied Group have participated in a long-standing scheme to entrench themselves at the expense of Allied Group's shareholders. 21. As part of this scheme, Allied Group and Allied Mutual have certain interlocking executive officers. Also, at all times relevant, three directors of Allied Group have been directors of Allied Mutual. Additionally, Douglas L. Andersen, president of Allied Group, is a director of Allied Mutual. Thus, four of the six members of Allied Mutual's board are also officers or directors of Allied Group. Evans has dominated and controlled the actions of the boards of directors of both Allied Group and Allied Mutual. 22. For the sole purpose of entrenching Allied Group's board, Allied Group and Allied Mutual entered into a written Stock Rights Agreement dated July 5, 1990 (the "Stock Rights Agreement" or "Agreement"). Pursuant to Article I of this Agreement, Allied Group agreed to use its best efforts to cause the election and retention of a number of Allied Mutual nominees as members of Allied Group's board. Under the Stock Rights Agreement, Allied Mutual may nominate a number of directors in proportion to that percentage of voting securities held by Allied Mutual. Allied Mutual is the only shareholder of Allied Group that receives this special treatment. Absent this Agreement, Allied Mutual would be in the position of every other shareholder, i.e., without Allied - - Group board's guaranteed support for its nominees. 5 23. As a result of this arrangement and the interlocking boards, the board of Allied Group has perpetuated itself while diluting the voting rights of the shareholders of Allied Group. 24. Allied Group and Allied Mutual have acted pursuant to the Stock Rights Agreement and have accordingly placed three of Allied Mutual's candidates on the board of Allied Group. ALLIED'S USE OF THE PREFERRED STOCK AS AN ENTRENCHMENT DEVICE ------------------------------------------------------------- 25. As noted above (paragraph 5), Allied Mutual owns all of the Preferred Stock of Allied Group. The Certificate of Designations -- 6 3/4% of Series Preferred Stock of Allied Group provides in paragraph 3(c) and 3(d) as follows: (c) In the event the Company shall, at any time, declare or pay any dividend on its common stock or on its voting Preferred Stock of any series (herein referred to as "voting stock"), payable in shares of its voting stock, or effect a subdivision or combination of the outstanding shares of its voting stock (by reclassification or otherwise than by payment of a dividend in shares of voting stock) either (i) the Company shall take all comparable action necessary to preserve the relative voting power of the holders of the 6 3/4% Preferred Stock outstanding by subdividing or combining the outstanding shares of 6 3/4% Preferred Stock, or otherwise; or (ii) each outstanding share of 6 3/4% Preferred Stock outstanding shall thereafter have that number of votes which is equal to the number of votes which the holder of an outstanding share of voting stock on which such dividend was paid or which was so subdivided or combined held immediately after the payment of such dividend or the subdivision or combination of such share. 6 (d) In the event of any assignment, transfer, or other disposition of shares of 6 1/4% Preferred Stock to any person other than [Allied] Mutual Insurance Company ("[Allied] Mutual") or an affiliate or successor corporation to [Allied] Mutual, the shares of 6 1/4% Preferred Stock so disposed, upon such disposition and without any further action by the Company or the holder thereof, shall become non-voting, and no such person or entity receiving the disposed of shares shall have any of the voting powers ascribed to shares of 6 1/4% Preferred Stock hereunder except as may be required by law. Whenever the 6 1/4% Preferred Stock is non-voting, pursuant to the preceding sentence, in the event that Dividends shall remain unpaid for more than six quarterly periods, the holder shall thereafter, commencing with the Company, be entitled to elect one director to the board of directors of the Company, upon notice to the Company sufficient to permit its compliance with all regulatory requirements. Certificates representing shares of 6 1/4% Preferred Stock shall be legended to reflect the provisions of this Section 3(d). 26. Through Allied Mutual's control of the Preferred Stock and the interlocking boards of directors of Allied Group and Allied Mutual, the board of Allied Group wields a virtually unassailable power to control nearly twenty percent of the voting shares of Allied Group. This power has been granted with the intention of protecting the interests of the Allied Group board. The enhanced voting power of the Preferred Stock vanishes upon transfer, at which time the Preferred Stock becomes non-voting altogether. In effect the Allied Group board controls a large block of its own voting stock. There is no legitimate business purpose to the aforesaid voting arrangement, and it serves only further to entrench the Allied Group board. 7 ALLIED GROUP'S AMENDMENT TO ITS BY-LAWS TO LIMIT SHAREHOLDER RIGHTS TO CALL A SPECIAL MEETING ----------------------------------------------------- 27. In furtherance of the scheme to entrench the Allied Group board, on December 18, 1997, the board amended the Allied Group by-laws to provide that special meetings of the stockholders may be called only by the holders of at least fifty percent of all of the votes entitled to be cast on any issue proposed to be considered at the meeting. Prior to this amendment, a special meeting of shareholders could be called by the holders of ten percent of such votes. The amendment prevents minority shareholders from challenging the already entrenched position of Allied Group's board. There is no legitimate business purpose to this change in Allied Group's by-laws. It serves only to entrench Allied Group's board to the detriment of its shareholders, including Nationwide. NATIONWIDE'S OFFER TO ALLIED GROUP ---------------------------------- 28. In the last half of 1997, Nationwide engaged in an analysis of Allied Group based upon then available public information. Nationwide concluded that Allied Group provided a unique opportunity for expanding Nationwide's property and casualty business both geographically and by use of Allied Group's distribution system. Consequently, Nationwide concluded that it should initiate discussions with Allied Group about the possibility of a friendly merger. 29. On or about January 26, 1998 Dimon R. McFerson ("McFerson"), Chairman of Nationwide, contacted Evans to discuss Nationwide's interest in acquiring all of the outstanding voting 8 securities of Allied Group. A meeting between McFerson and Evans and certain members of Allied Group's management was scheduled for later that week. 30. On or about January 28, 1998, McFerson and other members of Nationwide's management met with Evans and certain members of senior management of Allied Group in Des Monies, Iowa. At that meeting, Nationwide made an all cash offer to purchase the common stock of Allied Group for $47 per share, subject to Nationwide receiving all necessar