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DES MOINES, Iowa-An insurance industry newsletter's charges of self-dealing by the management of an Iowa mutual insurer is sparking denials from the company and a review of its transactions by Iowa regulators.

Schiff's Insurance Observer, a New York-based newsletter, charged in a lengthy article last month that the management of Allied Mutual Insurance Co. engineered a restructuring that damaged the mutual and its policyholders while benefiting Allied Group Inc., a publicly traded entity originally formed as the mutual's downstream holding company.

In the process, Allied Mutual officers-who also run Allied Group-reaped huge benefits for themselves in the form of Allied Group stock options, the newsletter charged.

David Schiff, the Insurance Observer's writer and publisher, is taking his allegations a step further: He also announced plans to wage a proxy fight for a seat on Allied Mutual's board of directors, where he says he would reverse a series of transactions that allegedly gutted the insurer and that he would distribute at least $385 million to policyholders.

"Allied Mutual is like a pile of oily rags (the hazard we were warned of in Insurance 101): it's an explosion waiting to happen. That's why I can overthrow the board," Mr. Schiff wrote.

In a terse response, the Allied companies said the charges are "totally without merit" and that "Allied has always been meticulous in its transactions, and our board and management have used the leading financial consultants, legal advisers and accountants to render opinions on our decisions."

Asked about the charge that management has enriched itself at the expense of the mutual, Douglas Andersen, chief executive officer of Allied Mutual and Allied Group, said management's stock options "are variable and depend on the performance of the stock. . .if the stock doesn't do well, the options are not of value."

Terri Vaughan, Iowa insurance commissioner, noted that the solvency of the Allied companies is not in dispute. She added, though, that the Insurance Division is reviewing the transactions in question-which occurred between 1985 and 1994 and were previously approved by Iowa regulators-and is taking the matter "very seriously."

The Iowa department also is researching legal questions related to Mr. Schiff's planned proxy fight, including whether he is entitled to a list of Allied Mutual's policyholders, Ms. Vaughan said.

Meanwhile, the Allied Mutual imbroglio may become another case study in the debate over mutual insurance company restructurings.

"It raises important questions," including the "inherent conflict of interest" confronting managers of both a policyholder-owned mutual and a shareholder-owned stock affiliate, said Robert Lange, Nebraska insurance commissioner and chairman of the National Assn. of Insurance Commissioners' mutual holding company working group.

Such companies may be connected by a web of intercompany transactions, management agreements and other deals, he noted.

"Every time that happens, it's going to raise the question of fairness to the mutual company," Mr. Lange said. "That cloud is always over that arrangement, it seems to me."

The web of intercompany deals in Allied Mutual's case was complicated indeed and worked almost exclusively to the benefit of stock affiliate Allied Group, according to Mr. Schiff's article.

Formed in 1929, Allied Mutual writes small commercial property/casualty business along with a larger volume of homeowners and auto risks. In 1974, it formed Allied Group, a downstream holding company that remained wholly owned until 1985, when the mutual sold a 21% stake in Allied Group in a public offering.

Over the next several years, Allied management, led by Chairman and former CEO John Evans, executed a series of transactions that reduced Allied Mutual "to little more than a spectral shell, done in by its doppelganger, Allied Group," Mr. Schiff's newsletter charges.

Mr. Schiff says these included deals that allegedly:

Gradually reduced Allied Mutual's ownership of Allied Group on terms that favored the stock company. From 1990 to 1992, for example, Allied Group sold a life insurance unit and issued non-convertible preferred stock to Allied Mutual in exchange for a large part of the mutual's stake in Allied Group-a stake that would prove far more valuable as Allied Group's stock price skyrocketed.

Gradually increased Allied Group's share of the companies' generally profitable pooled business to 64% in 1997 from 38% in 1985.

Transferred management of the pool in 1993 from Allied Mutual to an Allied Group subsidiary, which then made a profit on fees it charged the mutual for administration.

Throughout this period, the Allied companies' management received stock options ultimately worth millions of dollars as Allied Group prospered, allegedly at the mutual's expense, Mr. Schiff charges.