AMERICAN STATES FINANCIAL CORP, S-1/A, 1996-05-14

AMERICAN STATES FINANCIAL CORP
S-1/A, 1996-05-14
FIRE, MARINE & CASUALTY INSURANCE

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<PAGE> 1

Registration No. 333-2434

Filed with the Securities and Exchange Commission on May 14, 1996

================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 2

FORM S-1

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

AMERICAN STATES FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
INDIANA 6331 35-1976549
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code No.) Identification No.)

500 NORTH MERIDIAN STREET F. CEDRIC MCCURLEY
INDIANAPOLIS, INDIANA 46204 500 NORTH MERIDIAN STREET
(317) 262-6262 INDIANAPOLIS, INDIANA 46204
(317) 262-6262

(Address, including zip code, and (Address, including zip code, and
telephone number, including telephone number, including
area code, of registrant's principal area code, of agent for service)
executive officers)
Copy to:
DENNIS L. SCHOFF, ESQ. JOHN J. SABL, ESQ.
LINCOLN NATIONAL CORPORATION SIDLEY & AUSTIN
200 EAST BERRY STREET ONE FIRST NATIONAL PLAZA
FORT WAYNE, INDIANA 46802 CHICAGO, ILLINOIS 60603
</TABLE>

------------------------------------------

Approximate date of commencement of proposed sale to the public: As
promptly as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
---------------------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2

AMERICAN STATES FINANCIAL CORPORATION
------------------------------

CROSS REFERENCE SHEET
------------------------------

PURSUANT TO ITEM 501(B) OF REGULATION S-K
FOR REGISTRATION STATEMENTS ON FORM S-1
AND FORM OF PROSPECTUS

<TABLE>
<CAPTION>
ITEM IN FORM S-1 CAPTION IN PROSPECTUS
------------------------------------------ ---------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.... Forepart of Registration Statement; Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page
of Prospectus............................. Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors, and
Ratio of Earnings to Fixed Charges........ "Prospectus Summary;" "Risk Factors;" "The
Company"
4. Use of Proceeds........................... "Use of Proceeds"
5. Determination of Offering Price........... Front Cover Page of Prospectus;
"Underwriting"
6. Dilution.................................. "Dilution"
7. Selling Security Holders.................. Not Applicable
8. Plan of Distribution...................... Outside Front Cover of Prospectus;
"Prospectus Summary;" "Underwriting"
9. Description of Securities to be
Registered................................ "Prospectus Summary;" "Description of Capital
Stock;" "Shares Eligible for Future Sale"
10. Interests of Named Experts and Counsel.... "Legal Matters"
11. Information with Respect to the
Registrant................................ "Prospectus Summary;" "The Company;"
"Dividend Policy;" "Capitalization;"
"Selected Historical Financial and Operating
Data;" "Pro Forma Financial and Operating
Data;" "Management's Discussion and Analysis
of Financial Condition and Results of
Operations;" "Business;" "Management;"
"Certain Relationships and Related
Transactions;" "Securities Ownership;"
"Shares Eligible for Future Sale;" Index to
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED MAY 14, 1996

PROSPECTUS

10,000,000 SHARES

AMERICAN STATES
FINANCIAL CORPORATION
COMMON STOCK
------------------------

All 10,000,000 shares of Common Stock, no par value (the "Common Stock"),
are being offered hereby by American States Financial Corporation (the
"Company"). Of the shares of Common Stock offered hereby, 8,000,000 shares are
being offered in the United States and Canada by the U.S. Underwriters and
2,000,000 shares are being offered in a concurrent offering outside the United
States and Canada by the International Underwriters (collectively, the
"Offerings"). The price to the public and the underwriting discount per share
will be identical for both Offerings. See "Underwriting."

Prior to the Offerings, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price will
be between $23.00 and $25.00 per share of Common Stock. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.

After giving effect to the Offerings, Lincoln National Corporation
("Lincoln"), presently the sole shareholder of the Company, will hold
approximately 83% of the outstanding shares of Common Stock, assuming no
exercise of the Underwriters' over-allotment option.

The Common Stock has been approved for listing on the New York Stock
Exchange (the "NYSE"), subject to official notice of issuance, under the symbol
"ASX."

SEE "RISK FACTORS" AT PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.

<TABLE>
<CAPTION>
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=================================================================================================
</TABLE>

(1) The Company and Lincoln have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."

(2) Before deduction of expenses payable by the Company estimated at $ .

(3) The Company has granted to the several Underwriters an option, exercisable
within 30 days after the date of this Prospectus, to purchase a maximum of
1,500,000 additional shares of Common Stock, on the same terms as set forth
above, to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."

------------------------

The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale when, as and if issued to and accepted by them, and
subject to the approval of certain legal matters by counsel for the Underwriters
and certain other conditions. The Underwriters reserve the right to withdraw,
cancel, or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York on or about , 1996.

------------------------

MERRILL LYNCH & CO. GOLDMAN, SACHS & CO.
------------------------

The date of this Prospectus is , 1996.
<PAGE> 4

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all amendments,
exhibits and schedules thereto) on Form S-1 under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Common Stock offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the Rules and Regulations of the Commission, and to which reference is hereby
made. Statements made in the Prospectus regarding the contents of any document
are not necessarily complete. With respect to each such document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. The Registration
Statement may be inspected at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its Regional Offices located at 7 World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.

The Company will be subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file periodic reports and other
information with the Commission. Such information can be inspected and copied
after the Offerings at the public reference facilities maintained by the
Commission. The Common Stock has been approved for listing on the NYSE, subject
to official notice of issuance, under the symbol "ASX." Any such material also
will be available for inspection at the offices of the NYSE, 20 Broad Street,
New York, New York 10005.

The Company intends to distribute to all holders of the Common Stock annual
reports containing audited consolidated financial statements and a report
thereon by its independent auditors and quarterly reports containing unaudited
consolidated financial information for each of the first three quarters of each
year.
------------------------------

FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA
(THE "NORTH CAROLINA INSURANCE COMMISSIONER") NOR HAS THE NORTH CAROLINA
INSURANCE COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
------------------------------

IN CONNECTION WITH THE OFFERINGS THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and financial statements, including the
notes thereto, appearing elsewhere in this Prospectus. Unless the context
otherwise indicates, (i) the "Company" refers to American States Financial
Corporation and its wholly-owned, consolidated subsidiaries; (ii) "ASI" refers
to American States Insurance Company, the Company's sole direct wholly-owned
subsidiary, and its consolidated subsidiaries; and (iii) the "Subsidiaries" or
the "Insurers" refer to the direct and indirect subsidiaries of the Company,
which include ASI and its subsidiaries. Unless the context otherwise indicates,
the information contained in this Prospectus (a) gives effect to a $300 million
dividend of tax-exempt municipal securities from ASI to Lincoln National
Corporation, (b) gives effect to a recapitalization whereby ASI became a
wholly-owned subsidiary of the Company, (c) assumes that the Underwriters'
over-allotment option is not exercised and (d) uses generally accepted
accounting principles ("GAAP") for all financial data. See "Glossary of Selected
Insurance and Certain Defined Terms" for definitions of certain insurance and
other terms used herein.

THE COMPANY

The Company, through its Subsidiaries, underwrites property and casualty
insurance, concentrating on providing commercial insurance to small to
medium-sized businesses and preferred personal lines coverages to individuals.
Management believes that the Company is the second largest writer of property
and casualty insurance to businesses with fewer than 50 employees which,
according to the latest statistics of the United States Bureau of the Census,
comprise the fastest growing business segment in the United States economy.
Geographically, the Company focuses on those areas such as the Midwest and the
Pacific Northwest which have relatively modest exposure to catastrophe losses
and in which management believes insurers generally have been permitted to
manage risk selection and pricing without undue regulatory interference. To
efficiently service its distribution network of approximately 4,800 independent
agencies in this transaction-intensive target market, the Company makes
extensive use of technology. As a complement to its property and casualty
operations, the Company also markets life insurance through the same agency
network that distributes its property and casualty products.

The Insurers have underwritten property and casualty insurance since 1929
and life insurance since 1958. For 1995, property and casualty revenues were
$1,934 million and property and casualty net income was $163.8 million, while
life insurance revenues were $92 million and life insurance net income was $14.5
million. For the three months ended March 31, 1996, property and casualty
revenues were $490 million and property and casualty net income was $43.8
million, while life insurance revenues were $23 million and life insurance net
income was $3.1 million. At March 31, 1996, the consolidated assets of the
property and casualty Insurers were $5,040 million and the assets of American
States Life Insurance Company ("ASLIC"), the Company's indirect life insurance
subsidiary, were $565 million. As of March 31, 1996, the Company had
approximately 1.6 million property and casualty policies issued and $15.5
billion of life insurance in-force. One or more of the Insurers is licensed in
all 50 states and the District of Columbia.

Commercial lines operations, which generated $992 million, or 59%, of the
Company's property and casualty net premiums written in 1995, focus on small to
medium-sized businesses engaged in retail, wholesale, service, contracting and
other trade businesses with a relatively low concentration of manufacturing and
industrial operations. Unlike larger, more complex accounts, the lower insured
values typical of this target market reduce the importance of claim severity and
increase the importance of claim frequency as an underwriting consideration. The
average annual premium for all commercial business written by the Company is
approximately $1,500 per policy.

Personal lines operations, which generated $681 million, or 41%, of the
Company's property and casualty net premiums written in 1995, focus on the
preferred personal automobile and homeowners lines. Combined, these products
accounted for approximately 80% of the Company's personal lines business in
1995. In that year, the Company's personal automobile net premiums written were
$465 million and its homeowners net premiums written were $189 million.

3
<PAGE> 6

Life insurance operations, which accounted for approximately 8% of the net
income in 1995, focus on the sale of universal life and term life policies,
although the Company also writes whole life, individual annuities and disability
income policies.

The Company's strategy is to achieve earnings growth by focusing both on
profitable lines of business and favorable geographic areas. To further this
strategy, the Company took steps in late 1991 counter to the industry and
introduced an aggressive program called "New Directions" to improve its account
selection, risk evaluation and pricing. This included an emphasis on maintaining
and, when possible, expanding business in those product lines and regions which
have historically provided better than industry average results. At the same
time, product lines and regions with less profitable experience were
de-emphasized and relationships with under-performing agencies were terminated.
Approximately 50% of the Company's direct premiums written in property and
casualty insurance in 1995 came from the states of Illinois, Indiana, Kansas,
Michigan, Missouri, Ohio, Oregon and Washington, which comprise the most
significant part of the Company's target market, up from approximately 44% in
1991. In 1995, less than 11% of such direct premiums written came from
California and Florida, states which the Company deems to be less favorable for
profitable property and casualty business, down from 16% in 1991.

Primarily as a result of its focus and the impact of New Directions, the
Company's loss ratio, stated in accordance with Statutory Accounting Practices
("SAP"), improved from 71.6% for 1991 to 59.3% for 1995. For the last three,
five and ten years, the Company's average SAP combined ratios were 105.1%,
107.7% and 105.7%, respectively, compared with industry average combined ratios
of 107.3%, 109.3% and 108.3% for these periods. The SAP loss ratios and SAP
combined ratios are not materially different than such ratios computed pursuant
to GAAP.

In November, 1995, as a follow-up to New Directions, the Company announced
a realignment of its field structure designed to reduce expenses, contribute to
further improvement of the combined ratio, and enhance growth (the
"Realignment"). Under the Realignment, the Company will continue to provide
sales, claims, technology support or other agency and customer service functions
from approximately 225 locations; and, during 1996 and 1997, it will consolidate
the management of those functions and much of its underwriting from 20 division
offices into four regional offices, each responsible for a designated geographic
area. As part of the Realignment, the Company created 24 Field Executive
positions to maintain and enhance its working relationships with its agencies by
putting more decision-making authority in the field, close to, and readily
accessible by, the agents.

The Company intensively uses technology to write and service policies
efficiently, while at the same time providing superior service to agents and
customers. Its Interaction(TM) system is a proprietary, on-line system, used
both by agencies and the Company for automated policy rating, issuance, billing
and service support. Management believes this system provides a significant
competitive advantage. Approximately 94% of the agencies representing the
Company are "online" with Interaction(TM), and approximately 78% of all property
and casualty transactions are processed electronically. Management believes that
Interaction(TM) is beneficial to agents because it reduces their handling costs
on renewals, facilitates prompt issuance of new policies and promotes efficient
claims processing. Other automated and knowledge-based systems are also used in
claims settlement, the construction of customer information files for cross
selling purposes and the life insurance operations.

In addition to its focus on those eight Midwest and Pacific Northwest
states which comprise the most significant part of its target market, the
Company has also targeted a number of other states for increased marketing
efforts where management believes its presence and a favorable environment give
it potential for additional profitable growth. To promote growth in profitable
lines of business and favorable geographic areas, the Company has introduced an
enhanced agency bonus plan and targeted incentives. Any significant effect of
these new incentives and enhancements is not expected to be realized until the
second half of 1996 at the earliest. The Company has also recently developed the
Customer Information File. This relational database allows the Company and its
agencies to monitor products in-force for its customers and identify potential
needs, and allows the Company to support agencies in targeting customers where
cross-selling opportunities may exist.

4
<PAGE> 7

The Company was incorporated on February 5, 1996, to serve as the holding
company for ASI. Prior to the Offerings, ASI will declare and distribute to
Lincoln a dividend of $300 million, consisting primarily of tax-exempt municipal
securities (the "Dividended Assets"). Following the distribution of the
Dividended Assets by ASI to Lincoln, Lincoln will transfer all of the
outstanding shares of ASI to the Company in exchange for 50,000,000 shares of
the Company's Common Stock. Concurrently with the transfer of the ASI stock, the
Company will assume $100 million of Lincoln debt (the "Assumed Debt") and will
issue a $200 million note to Lincoln (the "Term Note"). (The (i) transfer by
Lincoln of all of the outstanding shares of ASI to the Company in exchange for
50,000,000 shares of the Company's Common Stock, (ii) assumption of the Assumed
Debt, and (iii) issuance of the Term Note are hereinafter collectively referred
to as the "Recapitalization").

THE OFFERINGS

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<S> <C>
Common Stock offered hereby:
U.S. Offering.................... 8,000,000 shares
International Offering........... 2,000,000 shares
----------
Total......................... 10,000,000 shares
==========

Common Stock outstanding:
Before the Offerings............. 50,000,000 shares
After the Offerings.............. 60,000,000 shares

Use of proceeds.................... The Company intends to contribute approximately $150
million of the net proceeds from the Offerings to ASI to
enable it to invest in taxable securities for its
investment portfolio to replace the Dividended Assets
distributed to Lincoln, which consist primarily of
tax-exempt municipal securities. Approximately $75
million of the net proceeds from the Offerings will be
retained by the Company for general corporate purposes.
See "Use of Proceeds."

Dividend policy.................... The Company intends to pay an initial quarterly cash
dividend of $.21 per share commencing in the third
quarter of 1996. Thereafter, the Company expects to pay
regular quarterly cash dividends on its Common Stock,
subject to certain regulatory constraints. See "Dividend
Policy."

New York Stock Exchange symbol..... ASX
</TABLE>

5
<PAGE> 8

SUMMARY FINANCIAL AND OPERATING INFORMATION

The following table presents certain selected consolidated historical and
pro forma financial information of the Company. The consolidated statement of
operations data set forth below for each of the five years in the period ended
December 31, 1995, and the three-month periods ended March 31, 1995 and 1996,
and the consolidated balance sheet data at December 31, 1991, 1992, 1993, 1994,
and 1995, and at March 31, 1995 and 1996, were derived from consolidated
financial statements of the Company. The table should be read in conjunction
with the Consolidated Financial Statements and the notes thereto, and the pro
forma information, included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS ENDED
AS OF AND FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- ----------- -------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Premiums............................ $2,177.9 $2,064.7 $1,855.1 $1,746.0 $ 1,746.4 $ 438.7 $ 424.0
Net investment income............... 254.7 266.2 266.8 260.5 266.6 66.5 68.3
Realized gain on investments........ 107.6 65.4 149.9 19.9 41.0 27.2 21.1
Loss on operating properties(1)..... -- -- -- -- (28.4) -- --
------- ------- ------- ------- ------- ------- -------
Total revenues.................. 2,540.2 2,396.3 2,271.8 2,026.4 2,025.6 532.4 513.4
Benefits and settlement expenses.... 1,756.5 1,683.4 1,386.3 1,272.0 1,242.3 305.4 323.6
Commissions......................... 377.3 359.3 323.0 296.9 291.5 72.1 71.9
Operating and administrative
expenses.......................... 212.3 219.4 217.6 208.2 236.8 59.1 51.2
Taxes, licenses and fees............ 57.0 62.4 52.1 49.0 45.9 12.0 11.9
------- ------- ------- ------- ------- ------- -------
Total benefits and expenses..... 2,403.1 2,324.5 1,979.0 1,826.1 1,816.5 448.6 458.6
------- ------- ------- ------- ------- ------- -------
Income before federal income taxes
and cumulative effect of
accounting change................. 137.1 71.8 292.8 200.3 209.1 83.8 54.8
Net income...................... $ 126.7 $ 105.8 $ 206.2 $ 184.6 $ 178.3 $ 65.5 $ 46.9
CONSOLIDATED BALANCE SHEET DATA:
Total investments and cash.......... $4,115.3 $4,288.1 $4,641.0 $4,152.3 $ 4,442.9 $4,265.8 $ 4,401.6
Total assets........................ 5,213.1 5,569.8 5,777.8 5,419.3 5,539.2 5,475.4 5,605.3
Policy liabilities and accruals..... 3,463.1 3,801.7 3,677.6 3,603.7 3,546.8 3,605.4 3,646.3
Debt................................ 5.1 5.0 5.0 -- -- -- --
Total liabilities................... 3,742.4 4,082.8 4,065.6 3,950.7 3,870.5 3,900.1 3,997.6
Shareholder's equity................ 1,470.7 1,487.0 1,712.2 1,468.6 1,668.7 1,575.3 1,607.7
CONSOLIDATED PRO FORMA DATA:
Net income(2)....................... $ 151.7 $ 40.3
Net income per share(3)............. 2.53 .67
Earnings before realized gain on
investments, loss on operating
properties and estimated
Realignment implementation costs,
net of federal income taxes
(NON-GAAP DATA)(4)................ 162.4 26.6
Total assets(5)..................... 5,464.2 5,530.3
Debt(5)............................. 300.0 300.0
Shareholders' equity(5)............. 1,293.7 1,232.7
Book value per share(3)............. 21.56 20.55
PROPERTY AND CASUALTY STATUTORY RATIOS
AND DATA(6):
Loss ratio.......................... 71.6% 70.9% 63.8% 61.1% 59.3% 57.9% 64.9%
Loss adjustment expense ratio....... 9.8 10.6 11.4 11.8 11.8 12.0 11.5
Underwriting expense ratio.......... 29.0 30.6 31.7 31.6 32.3 32.6 31.7
Policyholder dividend ratio......... 0.4 0.4 0.2 0.1 0.2 0.1 0.2
------- ------- ------- ------- ------- ------- -------
Company combined ratio............ 110.8% 112.5% 107.1% 104.6% 103.6% 102.6% 108.3%
Industry combined ratio(7).......... 108.8% 115.8% 106.9% 108.5% 106.4% 104.0% N/A
Statutory capital and surplus(8).... $1,050.1 $1,038.2 $1,068.4 $ 980.7 $ 1,011.0 $ 990.6 $ 998.6
Net premiums written to surplus
(annualized)...................... 2.0x 1.9x 1.6x 1.7x 1.7x 1.7x 1.6x
</TABLE>

6
<PAGE> 9

- -------------------------
(1) Represents an allowance for losses on the contemplated sale of operating
properties used for division offices, resulting from the Realignment. See
Note 15 to the Consolidated Financial Statements included elsewhere herein.

(2) Pro forma net income for the year ended December 31, 1995 and for the three
months ended March 31, 1996 reflect the impact of investment income
decreasing by $14.3 and $3.5 million, respectively, representing the
interest yield on $300 million of tax-exempt municipal securities (the
Dividended Assets), interest expense increasing by $20.1 and $5.0 million,
respectively, representing the interest on the debt assumed and issued and
the tax effect on the foregoing of $(7.8) and $(1.9), respectively. The pro
forma net income does not include investment earnings from the proceeds
from the Offerings. Based on an assumed initial public offering price of
$24.00 per share, the net proceeds to the Company (after deduction of
estimated underwriting discounts and offering expenses) would be
approximately $225 million. Assuming these proceeds were invested in risk
free investments, the investment income of the Company on a pro forma basis
would be increased by $13.7 and $3.4 million for the year ended December
31, 1995 and for the three months ended March 31, 1996 and net income would
be increased by $8.9 and $2.2 million, respectively.

(3) Based on 60,000,000 shares outstanding.

(4) Represents net income before (i) realized gain on investments of $41.0 and
$21.1 million for the year ended December 31, 1995 and the three months
ended March 31, 1996, respectively, net of federal income taxes of $19.5
and $10.0, respectively; (ii) the $28.4 million loss on operating
properties in 1995, net of federal income taxes of $9.9 million and (iii)
the estimated Realignment implementation costs accrued in 1995 of $21.1
million, net of federal income taxes of $7.4 million. The cumulative effect
of the foregoing items were $10.7 and ($13.7), respectively ($.18 and
($.23) per share, respectively). The net effect of these amounts are
included to assist the reader in analyzing the Company's results of
operations by showing the effect of the listed items. The resulting amounts
are not intended to represent net income prepared in accordance with GAAP.

(5) Pro forma data reflect the impact of the distribution of $300 million of
Dividended Assets, the assumption of $100 million of debt, the issuance of
$200 million of debt and the receipt of estimated net proceeds of $225
million from the Offerings.

(6) Company statutory data have been derived from the financial statements of
the Company's insurance subsidiaries prepared in accordance with SAP and
filed with insurance regulatory authorities. The loss, loss adjustment
expense, underwriting expense, policyholder dividend and Company combined
ratios are not materially different than such ratios computed pursuant to
GAAP.

(7) The ratios presented are after policyholder dividends. Industry averages
for 1991 through 1994 are from A.M. Best Company, Inc. ("A.M. Best")
Aggregates & Averages Property-Casualty (1995 edition). The industry
combined ratio for 1995 is a published estimate from A.M. Best.

(8) Includes life statutory capital and surplus of ASLIC.

(9) Represents net income before (i) realized gain on investments, net of
federal income taxes of $36.6, $22.2, $53.5, $7.0 and $19.5 million in
1991, 1992, 1993, 1994 and 1995, respectively, and $10.0 and $7.4 million
for the three months ended March 31, 1995 and 1996, respectively, (ii) the
$28.4 million loss on operating properties in 1995, net of federal income
taxes of $9.9 million, (iii) the estimated Realignment implementation costs
accrued in 1995 of $21.1 million, net of federal income taxes of $7.4
million, and (iv) the cumulative effect of a change in accounting in 1993.
The net effect of these amounts are included to assist the reader in
analyzing the Company's results of operations by showing the effect of the
listed items. The resulting amounts are not intended to represent net
income prepared in accordance with GAAP.

(10) Amounts shown represent dividends declared on ASI stock, which were paid to
Lincoln. Future ASI dividends are anticipated to be less than historic
levels. ASI also declared $.2 million and $.1 million in dividends on
publicly held preferred stock in 1991 and 1992, respectively. This stock
was called and retired in 1992.

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<PAGE> 10

RISK FACTORS

Prospective purchasers of shares of Common Stock should carefully read the
entire Prospectus. Ownership of the Common Stock involves certain risks.
Purchasers should consider, among other things, the following risk factors.

ADEQUACY OF LOSS RESERVES

The Subsidiaries are required to maintain reserves to cover their estimated
ultimate liability for losses and loss adjustment expense ("LAE") with respect
to reported claims and incurred but not yet reported ("IBNR") claims. These
reserves are estimates involving actuarial and statistical projections of what
the Company expects will be the cost of ultimate settlement and administration
of such claims, based on facts and circumstances then known, estimates of future
trends in claim severity and other variable factors, such as inflation and
changing judicial theories of liability. The inherent uncertainties of
estimating insurance reserves are greater for certain types of property and
casualty insurance lines (such as reinsurance and liability coverage for
asbestos and environmental losses) where long periods of time elapse before a
definitive determination of the ultimate loss may be made, than for other lines
(such as property insurance) in which claims are reported and settled much more
quickly. The Company does not discount its reserves to recognize the time value
of money. There can be no assurance that ultimate losses will not exceed the
Company's loss reserves and have a material adverse effect on the Company's
results of operations and financial condition.

The Company's ongoing business consists primarily of businessowners,
commercial multi-peril, commercial automobile and workers' compensation
insurance written for small to medium-sized businesses and preferred personal
automobile and homeowners insurance. For these product lines, claims generally
are reported and settled within a reasonably short period of time, except for
certain types of claims, such as environmental and construction defect claims.
Also, because the Company's ongoing business has a relatively low concentration
of policies relating to manufacturing and industrial operations, management
believes that the Company's exposure to environmental liability, including
asbestos, with respect to its ongoing business is relatively small compared to
the property and casualty industry as a whole.

Certain of the Company's reserves are for assumed reinsurance business
which the Company commenced writing in 1964 and discontinued marketing in 1993.
The inherent uncertainties of estimating reserves are greater with respect to
reinsurance than for primary insurance due to the diversity of the development
patterns among different types of reinsurance contracts, the necessary reliance
on ceding companies for information regarding reported claims, differing
reserving practices among ceding companies and significant periods of time which
elapse between the occurrence of an insured loss and the reporting of the loss
to the reinsurer. The Company's reinsurance business included assumption of
primary insurance written on manufacturers of asbestos products and large U.S.
corporations which have become the subject of asbestos and environmental damage
and remediation claims. Of the Company's total property and casualty reserves,
net of reinsurance, at December 31, 1995, $210.3 million, or 9.5%, was
attributable to the Company's reinsurance business. Approximately 60% of the
Company's reserves for its reinsurance business at December 31, 1995, consisted
of reserves for environmental and asbestos claims. The Company's paid losses and
allocated LAE on claims for its reinsurance business were $62.6 million in 1993,
$30.6 million in 1994 and $19.3 million in 1995. The Company's paid losses on
asbestos and environmental claims from its reinsurance business were $4.0
million in 1993, $5.3 million 1994 and $6.8 million in 1995.

There are significant additional uncertainties in estimating the amount of
reserves required for environmental, asbestos and construction defect claims.
Among these uncertainties are a lack of historical data, long reporting delays,
and complex, unresolved legal issues regarding policy coverage and the extent
and timing of any such contractual liability. Courts have reached different and
sometimes inconsistent conclusions as to when the loss occurred, what claims are
covered, under what circumstances the insurer has an obligation to defend, how
policy limits are determined and how policy exclusions are applied and
interpreted. Management believes these legal issues are not likely to be
resolved in the near future. The Company's paid losses on asbestos and
environmental claims for all lines of business, including reinsurance, were
$11.7 million in 1993, $13.9 million in 1994 and $13.9 million in 1995. The
Company had total reserves for such claims at

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<PAGE> 11

December 31, 1993, 1994 and 1995, of $200.7, $198.2 and $241.2 million,
respectively. The Company's paid losses and allocated LAE on construction defect
claims for all lines of business were $23.0 million in 1993, $29.7 million in
1994 and $39.2 million in 1995. The Company had total reserves for such claims
at December 31, 1993, 1994 and 1995, of $114.8, $173.9 and $245.5 million,
respectively.

The Company's results of operations benefited materially in 1994 and 1995,
as a result of reductions in the estimated amounts of reserves needed to settle
prior years' claims, with such benefit being most significant in 1994. The
overall favorable reserve development in both 1994 and 1995 was the result of
improving trends, both industry-wide and related to the Company's New Directions
initiatives, as well as enhancements made in the claim evaluation process. These
favorable developments were mainly attributable to the Company's core book of
ongoing business and its reserving philosophy consistently applied over many
years. The conditions and trends which have caused this positive reserve
development in the past may not necessarily occur in the future, and there can
be no assurance that earnings will continue to benefit from positive reserve
developments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Reserves for Losses and Loss
Adjustment Expense."

CYCLICALITY AND VARIABILITY OF THE PROPERTY AND CASUALTY INSURANCE INDUSTRY

Although the property and casualty insurance industry has historically been
highly cyclical, management of the Company believes that variability within each
product line has become more pronounced than industry-wide cyclicality. Premium
rate levels are related to the availability of insurance coverage, which varies,
among other things, according to the level of surplus in the industry. The level
of surplus in the industry varies with returns on invested capital and
regulatory barriers to withdrawal of surplus. Surplus levels have increased in
recent years due in part to capital gains in the investment portfolios of many
insurers. Increases in surplus have generally been accompanied by increased
price competition among property and casualty insurers. The industry's
profitability can also be affected significantly by fluctuations in interest
rates and other changes in the investment environment which affect market prices
of insurance companies' investment portfolios and the income from those
investments, inflationary pressures that affect the size of losses and judicial
decisions affecting insurers. The demand for property and casualty insurance can
also vary, generally rising as the overall level of economic activity increases
and falling as such activity decreases. Many of the factors which have resulted
in the current downturn in the property and casualty insurance industry
continue, and the Company cannot predict if or when the market conditions for
the property and casualty insurance industry will improve.

CATASTROPHE LOSSES; NATURAL PERIL LOSSES

Property and casualty insurers are subject to claims arising from
catastrophes which may have a significant impact on their results of operations
and financial condition. The Company has experienced, and can be expected to
experience in the future, catastrophe losses which may materially impact its
results and condition. Catastrophe losses can be caused by various events,
including hurricanes, earthquakes, tornadoes, wind, hail, fires, riots and
explosions, and their incidence and severity are inherently unpredictable. The
extent of losses from catastrophes is a function of two factors: the total
amount of insured exposure in the area affected by the event and the severity of
the event. Most catastrophes are localized to small geographic areas; hurricanes
and earthquakes, however, have the potential to cause significant damage over a
wide area. The Company seeks to reduce its exposure to catastrophe losses
through the purchase of reinsurance, the selection of geographic areas in which
it focuses its marketing efforts, and the management of the concentration of
risk in geographic areas. While it is seldom that any single event is of
sufficient magnitude to trigger coverage under the Company's reinsurance
treaties, a multiplicity of catastrophes could, in the aggregate, have a
material adverse effect on its financial condition or results of operations. It
is also possible that catastrophes could have an adverse effect on the Company's
reinsurers. An event or series of events which render uncollectible any amounts
due from its reinsurers could have a material adverse effect on the Company.

The Company's results of operations and financial condition have been, and
may be expected to be, affected from time to time by losses caused by what it
classifies as "natural perils." Within that term, the Company includes all
losses caused by wind, hail, water (including freezing water) and earthquake,
regardless of whether such losses result from a "catastrophe," as classified by
the Property Claims Service Division of

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<PAGE> 12

American Insurance Services Group, Inc., an insurance industry body. Because of
the geographic area within which much of its marketing effort is focused, the
Company may be more exposed to losses of this type than many of its competitors.
It is seldom that any single natural peril loss is of sufficient magnitude to
materially affect the Company's results. It is possible, however, that a
multiplicity of such events, all or some of which do not qualify as
catastrophes, may, in the aggregate, be material to the Company's results of
operations. For example, the frequency and severity of storms and freezes during
the winter of 1996 adversely affected the Company's results for the first
quarter of 1996.

REALIGNMENT OF FIELD OPERATIONS

In November, 1995, the Company announced the Realignment designed to reduce
expenses, contribute to further improvement of the combined ratio, and enhance
growth. Under the Realignment, the Company will continue to provide sales,
claims, technology support or other agency and customer service functions from
approximately 225 locations; and, during 1996 and 1997, it will consolidate the
management of those functions and much of its underwriting from 20 division
offices into four regional offices, each responsible for a designated geographic
area. As part of the Realignment, the Company created 24 Field Executive
positions to maintain and enhance its working relationships with its agencies by
putting more decision-making authority in the field, close to, and readily
accessible by, the agents. Notwithstanding the addition of the Field Executives,
it is possible that some of the Company's agencies will view the Realignment as
demonstrating a lessened commitment to certain geographic areas. It is also
possible that the Realignment may not achieve its goals. The result may be a
deterioration in the Company's relationships with some agencies and a reduction
in the amount of business produced by these agencies. See "The Company --
Strategy," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview" and "Business -- Strategy -- Expense Control;
Realignment."

COMPETITION; RATINGS

The property and casualty insurance industry is diverse and highly
competitive on the basis of both price and service. The Company competes with
other stock insurers, mutual insurance companies and other underwriting
organizations. The factors influencing insurance purchasing decisions by the
Company's customers in the small to medium-sized business market which the
Company targets include price, breadth of coverage, reputation of the agency,
reputation of the Company, service, financial strength and ratings. Agencies are
motivated by many of these same considerations and also by the level of agency
compensation, the ease with which transactions may be effected and the personal
relationships among agency and insurer personnel.

The Company competes against other property and casualty companies,
including direct writers and other independent agency companies, seeking to
write business in its target markets, including other companies utilizing the
same independent agencies which represent the Company. In the Midwest and
Pacific Northwest, particularly in the market for those small to medium-sized
businesses the Company targets, regional carriers are the most significant
competitors. In the personal lines market, direct writers are the Company's
major competitors. Some of the Company's competitors are larger than the Company
and have significantly greater resources than the Company.

A significant factor in an insurer's ability to compete is its rating by
A.M. Best. Each of the Company's property and casualty Subsidiaries has an "A+"
(Superior) rating from A.M. Best and its life insurance Subsidiary has an "A"
(Excellent) rating from A.M. Best. There can be no assurance that these ratings
will not be reduced or withdrawn because of factors, including material losses,
which may or may not be within the control of the Company. See "Business --
Ratings."

CONTROL BY LINCOLN; CERTAIN CONTINUING RELATIONSHIPS WITH LINCOLN AND ITS
AFFILIATES; CONFLICTS OF INTEREST

The Company is a wholly-owned subsidiary of Lincoln, and after completion
of the Offerings, Lincoln will own approximately 83% of the outstanding Common
Stock. Lincoln will have the power to control the Company, to elect its Board of
Directors and to approve any action requiring shareholder approval, including

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<PAGE> 13

adopting amendments to the Company's articles of incorporation and approving or
disapproving mergers or sales of all or substantially all of the assets of the
Company. Because Lincoln has the ability to elect the Board of Directors of the
Company, it will be able to effectively control all of the Company's policy
decisions. As long as Lincoln is majority shareholder of the Company, third
parties will not be able to obtain control of the Company through purchases of
Common Stock not owned by Lincoln.

Of the nine directors of the Company, two are employees of the Company, two
are employees of Lincoln, one is the former Chief Executive Officer of ASI and a
former director of Lincoln and four are outside directors. Directors and
officers of the Company and Lincoln may have conflicts of interest with respect
to certain matters affecting the Company, such as potential business
opportunities and business dealings between the Company and Lincoln and its
affiliated companies. See "Management -- Directors and Executive Officers of the
Company."

Lincoln currently intends to maintain ownership of at least 80% of the
Company's Common Stock. The Company will be unable to raise equity capital by
issuing additional shares of Common Stock unless Lincoln agrees to that
issuance. In addition, if Lincoln or the Company ever sold significant amounts
of shares of the Common Stock in the public market, those sales might have an
adverse effect on the market price of the Common Stock. Either a sale by Lincoln
of some of its shares of Company Common Stock or Lincoln's consent to the
Company's issuance of additional shares of Common Stock could cause Lincoln's
ownership in the Company to fall below 80% (a "Deconsolidation"), resulting in
the loss of the ability of the Company and its domestic subsidiaries to join
with Lincoln and its domestic business units in the filing of a consolidated
federal income tax return. However, due to the transfer of the Dividended Assets
by ASI to Lincoln prior to the Offerings and the resulting repositioning of the
Company's investment portfolio, management of the Company does not believe that
a Deconsolidation would cause the Company to suffer any material adverse effect
from the alternative minimum tax. Nevertheless, there can be no assurance that a
Deconsolidation would not have the effect of materially increasing the Company's
tax liabilities. See "Certain Relationships and Related Transactions -- Tax
Sharing and Indemnification Agreements," for a discussion of certain effects on
the Company of this consolidation and the federal income tax allocation
agreement to which the Company is a party, and "Business -- Investments."

Currently, Lincoln does not market property and casualty insurance products
which compete with products sold by the Company; and Lincoln currently has no
intention, either short-term or long-term, of engaging in property and casualty
business of the type conducted by the Company. However, there are no
restrictions on the activities in which Lincoln may engage. Management believes
that Lincoln and ASI historically have not competed to any significant degree in
the sale of life insurance products primarily because they use different
distribution channels and target different market segments. There can be no
assurance, however that the Company will not encounter competition from Lincoln
in the future or that actions by Lincoln or its affiliates will not inhibit the
Company's growth strategy. See "Certain Relationships and Related Transactions
- -- Control by Lincoln; Potential Conflicts with Lincoln."

Conflicts of interest between the Company and Lincoln could arise with
respect to business dealings between them, including potential acquisitions of
businesses or properties, the issuance of additional securities, the election of
new or additional directors, and the payment of dividends by the Company. The
Company has not instituted any formal plan or arrangement to address potential
conflicts of interest that may arise between the Company and Lincoln. The
Company, however, intends to seek the approval of its disinterested directors
for any future business transactions between the Company and Lincoln. See
"Certain Relationships and Related Transactions -- Control by Lincoln; Potential
Conflicts with Lincoln."

INVESTMENTS

Since a substantial portion of the Company's revenues are generated from
its invested assets, the performance of its investment portfolio materially
affects the Company's financial condition and results of operations. If the
transfer of the Dividended Assets is given pro forma effect as of March 31,
1996, 49.7% of the Company's investment portfolio would have consisted of
tax-exempt municipal securities as of such date. Certain risks are inherent in
connection with tax-exempt municipal securities and other debt securities,

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<PAGE> 14

including loss upon default and price volatility in reaction to changes in
interest rates and general market factors. In addition, the value of the
Company's portfolio could be adversely affected by any change in the Internal
Revenue Code of 1986, as amended (the "Code"), which would reduce or eliminate
benefits related to the exemption from federal income taxation for income
derived from tax-exempt municipal securities. See "Business -- Investments."

REGULATION AND LEGAL PROCEEDINGS

The Insurers are subject to comprehensive regulation by government agencies
in the states in which they operate. The nature and extent of that regulation
vary from jurisdiction to jurisdiction, but typically involve prior approval of
the acquisition of control of an insurance company or of any company controlling
an insurance company, regulation of certain transactions entered into by an
insurance company with any of its affiliates, limitations on dividends, approval
or filing of premium rates and policy forms for many lines of insurance,
solvency standards, minimum amounts of capital and surplus which must be
maintained, limitations on types and amounts of investments, restrictions on the
size of risks which may be insured by a single company, limitation of the right
to cancel or non-renew policies in some lines, regulation of the right to
withdraw from markets or agencies, licensing of insurers and agents, deposits of
securities for the benefit of policyholders, reporting with respect to financial
condition, and other matters. In addition, state insurance department examiners
perform periodic financial and market conduct examinations of insurance
companies. Such regulation is generally intended for the protection of
policyholders rather than security holders. No assurance can be given that
future legislative or regulatory changes will not adversely affect the Company.

All of the states in which the property and casualty Insurers operate
impose some restrictions on their ability to cancel or nonrenew policies. Most
of those restrictions are limited to personal lines and require notice to
policyholders prior to nonrenewal or cancellation. Generally, the right of
cancellation may be exercised only for specified reasons, while nonrenewal is
permitted at the option of the insurer, provided that the notice informs the
insured of the reason for the insurer's action. In some jurisdictions, however,
the right of an insurer to terminate its relationship with an insured is much
more narrowly limited; these limitations vary from state to state and among
lines of business and their cumulative effect is to limit the flexibility of
insurers to react quickly as market conditions change.

An increasing number of states restrict the freedom of insurers to withdraw
from markets or substantially reduce their writings in one or more product
lines. These restrictions typically require prior notice to the insurance
department and the implementation of an approved plan for the orderly withdrawal
from the state or line of business. The insurance department normally has a
great deal of discretion in deciding whether to approve such a plan.

Certain aspects of the relationship between an insurer and its agents are
regulated. In particular, certain states limit an insurance company's right to
terminate contracts with independent agents by imposing a required
rehabilitation period or extending the period during which the insurer must
continue doing business with an agent whose contract has been cancelled. These
legal and regulatory restrictions may have an adverse effect on the
profitability of various lines of insurance.

The Subsidiaries are routinely involved in pending or threatened legal
proceedings. Such proceedings sometimes involve alleged breaches of contract,
torts (including bad faith and fraud claims) and miscellaneous other causes of
action. Some of the pending litigation includes claims for punitive damages in
addition to compensatory damages and other relief. While the aggregate dollar
amounts involved in these legal proceedings cannot be determined with certainty,
the amounts at issue could have a significant effect on the Company's results of
operations. However, based upon information presently available and in light of
legal and other defenses available to the Company and its Subsidiaries,
management does not believe that any of these routine proceedings will have a
material adverse effect on the financial condition or results of operations of
the Company.

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<PAGE> 15

Brought in the United States District Court for the Western District of
Missouri, the plaintiffs seek to represent themselves and a putative class of
similarly situated persons in the State of Missouri. The relief sought includes
unspecified compensatory damages, punitive damages and attorneys' fees. While it
is too early to evaluate the plaintiffs' specific allegations, management
believes, based upon current information, that the Insurers' underwriting, sales
and marketing practices have complied in all material respects with the
applicable requirements of both state and federal law. The involved Insurers
intend to vigorously defend this action.

HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS

The Company, a holding company whose principal asset is the capital stock
of ASI, relies primarily on dividends from ASI to meet its obligations for
payment of interest and principal on outstanding debt obligations, dividends to
shareholders and corporate expenses. ASI's ability to pay dividends to the
Company in the future will depend on the amount of its statutory surplus,
earnings and regulatory restrictions. The insurance holding company laws of
Indiana regulate the distribution of dividends and other payments to the Company
by its principal Subsidiaries, including ASI. The laws of that state define as
"extraordinary" any dividend or distribution which, together with all other
dividends and distributions to shareholders within the preceding twelve months,
exceed the greater of (i) 10% of statutory surplus as of the end of the
preceding year or (ii) the prior year's net income if the insurer is a property
and casualty insurer or the prior year's net gain from operations if the insurer
is a life insurer. "Extraordinary" dividends and distributions may not be paid
without the prior approval of the Indiana Commissioner of Insurance or until the
Commissioner has been given thirty days prior notice and has not disapproved
within that period. The Indiana Department of Insurance must receive notice of
all dividends, whether "extraordinary" or not, within 5 business days after they
are declared. Dividends which are not "extraordinary" may not be paid until ten
days after the Indiana Department of Insurance receives notice of their
declaration. After taking into account the one-time dividend of $300 million
consisting of the Dividended Assets to be paid by ASI to Lincoln prior to the
Offerings, ASI will not be able to pay any additional dividends to the Company
for the twelve month period commencing on the date such dividend is paid (the
"Twelve Month Period"), without notifying the Indiana Commissioner of Insurance
and giving the Commissioner 30 days within which to object. Regulatory
restrictions on the ability of ASI to pay dividends or make other payments to
the Company could affect the Company's ability to pay dividends and service its
debt. The Company intends to retain approximately $75 million of the proceeds
from the Offerings for general corporate purposes, including the funding during
the Twelve Month Period of its regular cash dividends, debt service obligations
and other general corporate obligations. See "The Company," "Use of Proceeds"
and "Dividend Policy." No assurance can be given that there will not be further
regulatory actions restricting the ability of ASI and its insurance subsidiaries
to pay dividends or that amounts retained by the Company from the net proceeds
from the Offerings will be sufficient to pay dividends and meet other
obligations.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offerings, 50,000,000 shares of Common Stock held by
Lincoln will continue to be "restricted shares" as defined in Rule 144 under the
Securities Act. Such shares may not be resold in the absence of registration
under the Securities Act or exemptions from such registration, including, among
others, the exemption provided by Rule 144 under the Securities Act. As an
affiliate of the Company, Lincoln is subject to certain volume restrictions on
the sale of shares of Common Stock. The Company and Lincoln have agreed not to
sell or otherwise dispose of any shares of Common Stock or securities
convertible into or exercisable for Common Stock for a period of 120 days after
the date of this Prospectus without the prior written consent of the
representatives of the Underwriters. See "Underwriting."

No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock in the public market, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock. If such sales reduce the market price

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<PAGE> 16

of the Common Stock, the Company's ability to raise additional capital in the
equity markets could be adversely affected.

NO PRIOR PUBLIC MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offerings, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing on the NYSE,
subject to official notice of issuance, under the symbol "ASX," there can be no
assurance that an active trading market will develop or be sustained. The
initial public offering price of the Common Stock is determined solely through
negotiations among the Company, Lincoln and representatives of the Underwriters
based on several factors and does not necessarily reflect the market price of
the Common Stock after these Offerings or the price at which Common Stock may be
sold in the public market after these Offerings. In addition, factors such as
quarterly variations in the Company's financial results, announcements by the
Company or others and developments affecting the Company could cause the market
price of the Common Stock to fluctuate significantly. See "Underwriting."

DILUTION

Based on an assumed initial public offering price per share of $24.00 and
after deduction of estimated underwriting discounts and expenses payable by the
Company in connection with the Offerings, the Company's tangible book value per
share of Common Stock as of March 31, 1996, after giving effect to the
transactions set forth in "Capitalization," would be $18.85. Accordingly,
purchasers of Common Stock offered hereby would suffer immediate dilution in
tangible book value per share of $5.15. See "Dilution."

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THE COMPANY

The Insurers have underwritten property and casualty insurance since 1929
and life insurance since 1958. For 1995, property and casualty revenues were
$1,934 million and property and casualty net income was $163.8 million, while
life insurance revenues were $92 million and life insurance net income was $14.5
million. For the three months ended March 31, 1996, property and casualty
revenues were $490 million and property and casualty net income was $43.8
million, while life insurance revenues were $23 million and life insurance net
income was $3.1 million. At March 31, 1996, the consolidated assets of the
property and casualty Insurers were $5,040 million and the assets of ASLIC, the
Company's indirect life insurance subsidiary, were $565 million. As of March 31,
1996, the Company had approximately 1.6 million property and casualty policies
issued and $15.5 billion of life insurance in-force. One or more of the Insurers
is licensed in all 50 states and the District of Columbia.

The Company's strategy is to achieve earnings growth by focusing both on
profitable lines of business and favorable geographic areas. To further this
strategy, the Company took steps in late 1991 counter to the industry and
introduced an aggressive program called "New Directions" to improve its account
selection, risk evaluation and pricing. This included an emphasis on maintaining
and, when possible, expanding business in those product lines and regions which
have historically provided better than industry average results. At the same
time, product lines and regions with less profitable experience were
de-emphasized and relationships with under-performing agencies were terminated.
Approximately 50% of the Company's direct premiums written in property and
casualty insurance in 1995 came from the states of Illinois, Indiana, Kansas,
Michigan, Missouri, Ohio, Oregon and Washington, which comprise the most
significant part of its target market, up from approximately 44% in 1991. In
1995, less than 11% of such direct premiums written came from California and
Florida, states which the Company deems to be less favorable for profitable
property and casualty business, down from 16% in 1991.

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Primarily as a result of its focus and the impact of New Directions, the
Company's SAP loss ratio improved from 71.6% for 1991 to 59.3% for 1995. For the
last three, five and ten years, the Company's average SAP combined ratios were
105.1%, 107.7% and 105.7%, respectively, compared with industry average combined
ratios of 107.3%, 109.3% and 108.3% for these periods.

The Company intensively uses technology to write and service policies
efficiently, while at the same time providing superior service to agents and
customers. Its Interaction(TM) system is a proprietary, on-line system, used
both by agencies and the Company for automated policy rating, issuance, billing
and service support. Management believes this system provides a significant
competitive advantage. Approximately 94% of the agencies representing the
Company are "on-line" with Interaction,(TM) and approximately 78% of all
property and casualty transactions are processed electronically. Management
believes that Interaction(TM) is beneficial to agents because it reduces their
handling costs on renewals, facilitates prompt issuance of new policies and
promotes efficient claims processing. Other automated and knowledge based
systems are also used in claims settlement, the construction of customer
information files for cross selling purposes and the life insurance operations.

ASI writes property and casualty insurance. Of ASI's six subsidiaries, five
are also writers of property and casualty insurance: (i) American Economy
Insurance Company ("AEIC"), (ii) American States Preferred Insurance Company
("ASPIC"), (iii) American States Insurance Company of Texas ("AST"), (iv)
Insurance Company of Illinois ("ICI") and (v) American States Lloyds Insurance
Company ("Lloyds"). ASI's sixth subsidiary, ASLIC, writes life insurance. ASI,
AEIC, ASPIC and ASLIC are Indiana corporations, AST and Lloyds are Texas
corporations, and ICI is an Illinois corporation. One or more of the property
and casualty Insurers is licensed in every state and the District of Columbia.
ASLIC is licensed in the District of Columbia and all states except New York.
ASI and three of the other property and casualty Insurers participate in the
American States Pool, which is a reinsurance mechanism that enables each
participant to achieve identical underwriting results by combining its business
with that of the others and then sharing pro rata in the aggregate results.
Current members and their present participations are: ASI - 63%; AEIC - 32%;
ASPIC - 4%; and ICI - 1%. Both AST and Lloyds are 100% reinsured by ASI, which
is the lead company in the pool.

The Company was incorporated on February 5, 1996, to serve as the holding
company for ASI. Prior to the Offerings, ASI will declare and distribute to
Lincoln the $300 million of Dividended Assets, consisting primarily of
tax-exempt municipal securities. Following the distribution of the Dividended
Assets by ASI to Lincoln, Lincoln will transfer all of the outstanding shares of
ASI to the Company in exchange for 50,000,000

16
<PAGE> 19

shares of the Company's Common Stock. Concurrently with the transfer of the ASI
stock, the Company will assume the $100 million of Assumed Debt and will issue
the $200 million Term Note to Lincoln.

The Company is an Indiana corporation and has its principal executive
offices at 500 North Meridian Street, Indianapolis, Indiana 46204. Its telephone
number is (317) 262-6262.

USE OF PROCEEDS

Based on an assumed initial public offering price of $24.00 per share, the
net proceeds to the Company from the sale of Common Stock in the Offerings
(after deduction of estimated underwriting discounts and offering expenses
payable by the Company in connection therewith) are estimated to be
approximately $225 million (approximately $259 million if the Underwriters'
over-allotment option is exercised in full). The Company intends to contribute
approximately $150 million (approximately $184 million if the Underwriters'
over-allotment option is exercised in full) of such net proceeds to ASI to
enable it to invest in taxable securities for its investment portfolio to
partially replace the Dividended Assets. See "The Company." Approximately $75
million of the net proceeds from the Offerings will be retained by the Company
for general corporate purposes, including the funding of its regular cash
dividends, debt service obligations and other general corporate obligations
during the Twelve Month Period. Until utilized for such purposes, the net
proceeds from the Offerings retained by the Company will be invested in
short-term, interest bearing, investment-grade securities. See "The Company" and
"Dividend Policy."

DIVIDEND POLICY

The Board of Directors of the Company has adopted a policy of declaring
regular quarterly cash dividends of $.21 per share on the Common Stock,
commencing in the third quarter of 1996. The declaration and payment of
dividends is at the discretion of the Board of Directors, and the timing and
amount of dividends, if any, will depend upon, among other things, the results
of the Company's operations, its statutory surplus, its financial condition,
cash requirements, future prospects, regulatory restrictions on the payment of
dividends by its Subsidiaries, financial covenants in loan agreements and other
factors deemed relevant by its Board of Directors. As such, there can be no
assurance that the Company will declare and pay any dividends. See "Business --
Regulation."

The Company is an insurance holding company whose principal asset is the
common stock of ASI, and its cash flow consists of dividends received from ASI.
The payment of any cash dividends to holders of Common Stock by the Company
depends upon the receipt of dividend payments by the Company from ASI. The
payment of dividends by ASI will depend on the amount of its statutory surplus,
earnings and regulatory restrictions. The insurance holding company laws of
Indiana regulate the distribution of dividends and other payments to the Company
by its principal Subsidiaries, including ASI. Under the applicable Indiana
statutes, an insurer may not pay dividends in any twelve month period in an
amount exceeding the greater of (i) 10% of statutory surplus as of the end of
the preceding year or (ii) the prior year's net income if the insurer is a
property and casualty insurer, or the prior year's net gain from operations if
the insurer is a life insurer, without notifying the Indiana Commissioner of
Insurance and giving the Commissioner 30 days within which to object.

Historically, ASI has paid dividends to Lincoln, as its parent, based upon
its annual operating results and statutory surplus requirements. A dividend of
$61 million was paid by ASI to Lincoln on December 15, 1995, and a regularly
scheduled dividend of $46 million was paid by ASI to Lincoln on March 15, 1996.
Prior to the Offerings, ASI intends to pay to Lincoln a one-time distribution of
$300 million, consisting of the Dividended Assets. See "The Company." After
taking into account dividends to be paid to Lincoln during 1996, including the
one-time distribution of the Dividended Assets, ASI will not be able to pay any
dividends to the Company during the Twelve Month Period without notifying the
Indiana Commissioner of Insurance and giving the Commissioner 30 days within
which to object. Regulatory restrictions on the ability of the Subsidiaries to
pay dividends or make other payments to the Company could affect the Company's
ability to pay dividends and service its debt. The Company intends to contribute
approximately $150 million of the net proceeds from the

17
<PAGE> 20

Offerings to ASI to enable it to invest in taxable securities for its investment
portfolio to replace the Dividended Assets it distributed to Lincoln, which
consist primarily of tax-exempt municipal securities. Approximately $75 million
of the net proceeds from the Offerings will be retained by the Company for
general corporate purposes. See "Use of Proceeds." No assurance can be given
that there will not be further regulatory actions restricting the ability of the
Subsidiaries to pay dividends to the Company. See "Business -- Regulation --
Restrictions on Dividends to Shareholders; Transactions Among Affiliates." As
such, while management believes that the Company will be able to pay the
intended dividends to its Shareholders, no assurances to that effect can be
given.

DILUTION

At March 31, 1996, the net tangible book value of the Common Stock was
approximately $1,507,359,000, or $30.15 per share. The net tangible book value
per share represents the amount of total tangible assets (total assets less
intangible assets consisting of cost in excess of net assets of acquired
subsidiaries) of the Company reduced by its total liabilities divided by the
number of shares of Common Stock outstanding. After giving effect to the
distribution of the Dividended Assets by ASI to Lincoln and the
Recapitalization, the pro forma net tangible book value before the Offerings
would have been $907,359,000, or $18.15 per share. Then, after giving effect to
the sale of 10,000,000 shares of Common Stock in the Offerings at an assumed
initial public offering price of $24.00 per share less estimated underwriting
discount and offering expenses, but without taking into account any other
changes in net tangible book value after March 31, 1996, the as adjusted net
tangible book value of the Common Stock at March 31, 1996, would have been
$1,132,259, or $18.87 per share. This represents an immediate increase in the
pro forma net tangible book value to Lincoln of $.73 per share, and an immediate
dilution in net tangible book value to new investors purchasing Common Stock in
the Offerings of $5.15 per share. The following table illustrates this per share
dilution:

<TABLE>
<S> <C> <C> <C>
Assumed initial public offering price per share........... $24.00
------
Net tangible book value per share before the
distribution of the Dividended Assets, the
Recapitalization and the Offerings................... $30.15
Decrease per share attributable to the distribution of
the Dividended Assets by ASI to Lincoln.............. (6.00)
Decrease per share attributable to the
Recapitalization..................................... (6.00)
------
Pro forma net tangible book value per share before the
Offerings............................................... $18.15
Increase per share attributable to the purchase of
Common Stock by new investors in the Offerings....... .72
-----
As adjusted net tangible book value per share after the
Offerings............................................... 18.87
------
Dilution per share to new investors (1)(2)................ $ 5.13
======
</TABLE>

- -------------------------
(1) Dilution is determined by subtracting the pro forma net tangible book value
per share of Common Stock, after giving effect to the (i) the distribution
of Dividended Assets, (ii) the Recapitalization, and (iii) the Offerings,
from the amount of cash paid for a share of Common Stock by a new investor
in the Offerings.

(2) Dilution per share to new investors would be $8.53 if the net tangible book
value were determined with deferred policy acquisition costs (which
aggregated $204,092,000 at March 31, 1996) being considered an intangible
asset.

18
<PAGE> 21

CAPITALIZATION

The following table sets forth the historical capitalization and pro forma
basis capitalization (reflecting the transactions other than the Offerings) of
the Company as of March 31, 1996, and as adjusted to reflect the sale of the
shares of Common Stock offered hereby (at an assumed initial public offering
price of $24.00 per share, less estimated underwriting discount and offering
expenses).

<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------------
HISTORICAL PRO FORMA(1) AS ADJUSTED
---------- ------------ -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Debt....................................................... $ -- $ 300.0 $ 300.0
Shareholder's equity:
Preferred Stock; 5,000,000 shares authorized; no shares
outstanding pro forma and as adjusted................. -- -- --
Common Stock, no par value, and additional paid-in
capital; 195,000,000 shares authorized; 50,000,000
shares outstanding pro forma and 60,000,000 shares
outstanding as adjusted............................... 387.6 87.6 312.6
Net unrealized gain on securities........................ 149.8 149.8 149.8
Retained earnings........................................ 1,070.3 770.3 770.3
-------- -------- ------
Total shareholder's equity.......................... $ 1,607.7 $1,007.7 $ 1,232.7
-------- -------- ------
Total capitalization(2).......................... $ 1,607.7 $1,307.7 $ 1,532.7
======== ======== ======
</TABLE>

- -------------------------
(1) Assumes that shares of ASI had been contributed to the Company and gives
effect to (a) the distribution of the Dividended Assets and (b) the
Recapitalization.

(2) Excludes shares reserved for issuance under the Company's Stock Option
Incentive Plan and Executive Performance Incentive Compensation Plan. See
"Management -- Executive Compensation."

19
<PAGE> 22

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following selected consolidated statement of operations data and the
consolidated balance sheet data for the three years ended December 31, 1995 are
derived from the audited consolidated financial statements of the Company,
appearing elsewhere in this Prospectus. The selected consolidated statement of
operations data and the consolidated balance sheet data for the years ended
December 31, 1991 and 1992 are derived from audited financial statements of the
Company not included herein. The selected consolidated statement of operations
data and the consolidated balance sheet data for the three month periods ended
March 31, 1995 and 1996 are derived from the unaudited interim financial
statements, appearing elsewhere in this Prospectus. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which the Company considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1996. The
data should be read in conjunction with the consolidated financial statements,
related notes, and other financial information included herein.

<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE
MONTHS ENDED MARCH
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 31,
---------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Premiums.................................... $2,177.9 $2,064.7 $1,855.1 $1,746.0 $1,746.4 $ 438.7 $ 424.0
Net investment income....................... 254.7 266.2 266.8 260.5 266.6 66.5 68.3
Realized gain on investments................ 107.6 65.4 149.9 19.9 41.0 27.2 21.1
Loss on operating properties (1)............ -- -- -- -- (28.4) -- --
------- ------- ------- ------- ------- ------- -------
Total revenues.......................... 2,540.2 2,396.3 2,271.8 2,026.4 2025.6 532.4 513.4
Benefits and expenses:
Benefits and settlement expenses............ 1,756.5 1,683.4 1,386.3 1,272.0 1,242.3 305.4 323.6
Commissions................................. 377.3 359.3 323.0 296.9 291.5 72.1 71.9
Operating and administrative expenses....... 212.3 219.4 217.6 208.2 236.8 59.1 51.2
Taxes, licenses and fees.................... 57.0 62.4 52.1 49.0 45.9 12.0 11.9
------- ------- ------- ------- ------- ------- -------
Total benefits and expenses............. 2,403.1 2,324.5 1,979.0 1,826.1 1,816.5 448.6 458.6
------- ------- ------- ------- ------- ------- -------
Income before federal income taxes and
cumulative effect of accounting change...... 137.1 71.8 292.8 200.3 209.1 83.8 54.8
------- ------- ------- ------- ------- ------- -------
Federal income taxes (credit) (2)............. 10.4 (34.0) 46.1 15.7 30.8 18.3 7.9
Cumulative effect of change in accounting for
postretirement benefits other than pensions,
net of taxes................................ -- -- (40.5) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income...................................... $ 126.7 $ 105.8 $ 206.2 $ 184.6 $ 178.3 $ 65.5 $ 46.9
======= ======= ======= ======= ======= ======= =======
Pro forma net income (3)...................... $ 151.7 $ 40.3
Pro forma income per share (4)................ $ 2.53 $ .67
CONSOLIDATED BALANCE SHEET DATA:
Total investments and cash.................... $4,115.3 $4,288.1 $4,641.0 $4,152.3 $4,442.9 $4,265.8 $4,401.6
Total assets.................................. 5,213.1 5,569.8 5,777.8 5,419.3 5,539.2 5,475.4 5,605.3
Policy liabilities and accruals............... 3,463.1 3,801.7 3,677.6 3,603.7 3,546.8 3,605.4 3,646.3
Debt.......................................... 5.1 5.0 5.0 -- -- -- --
Total liabilities............................. 3,742.4 4,082.8 4,065.6 3,950.7 3,870.5 3,900.1 3,997.6
Shareholder's equity.......................... 1,470.7 1,487.0 1,712.2 1,468.6 1,668.7 1,575.3 1,607.7
STATUTORY CAPITAL AND SURPLUS:
Property and casualty companies (5)........... $1,050.1 $1,038.2 $1,068.4 $ 980.7 $1,011.0 $ 990.6 $ 998.6
Life company.................................. 57.1 57.9 60.9 61.2 51.7 62.3 53.3
PROPERTY AND CASUALTY STATUTORY RATIOS AND DATA
(6):
Loss ratio.................................... 71.6% 70.9% 63.8% 61.1% 59.3% 57.9% 64.9%
Loss adjustment expense ratio................. 9.8 10.6 11.4 11.8 11.8 12.0 11.5
Underwriting expense ratio.................... 29.0 30.6 31.7 31.6 32.3 32.6 31.7
Policyholder dividend ratio................... 0.4 0.4 0.2 0.1 0.2 0.1 0.2
------- ------- ------- ------- ------- ------- -------
Company combined ratio...................... 110.8% 112.5% 107.1% 104.6% 103.6% 102.6% 108.3%
Industry combined ratio (7)................... 108.8% 115.8% 106.9% 108.5% 106.4% 104.0% N/A
Net premiums written to surplus
(annualized)................................ 2.0x 1.9x 1.6x 1.7x 1.7x 1.7x 1.6x
</TABLE>

20
<PAGE> 23

(2) Federal income tax varies each year in relationship to pre-tax income, and
is less than the statutory rate as a result of permanent differences,
primarily tax-exempt interest and dividend income.

(3) Net income for the year ended December 31, 1995 and for the three months
ended March 31, 1996 are presented on a pro forma basis to reflect the
impact of investment income decreasing by $14.3 and $3.5 million,
respectively, representing the interest yield on $300 million of tax-exempt
municipal securities (the Dividended Assets), interest expense increasing
by $20.1 and $5.0 million, respectively, representing the interest on the
debt assumed and issued and the tax effect on the foregoing of $(7.8) and
$(1.9), respectively.

(4) Based on 60,000,000 shares outstanding.

(5) Includes life statutory capital and surplus of ASLIC.

(6) Company statutory data have been derived from the financial statements of
the Insurers prepared in accordance with SAP and filed with insurance
regulatory authorities. The loss, loss adjustment expense, underwriting
expense, policyholder dividend and Company combined ratios are not
materially different than such ratios computed pursuant to GAAP.

(7) The ratios presented are after policyholder dividends. Industry averages
for 1991 through 1994 are from A.M. Best Aggregates & Averages Property --
Casualty (1995 edition). The industry combined ratio for 1995 is a
published estimate from A.M. Best.

(8) Catastrophe losses are the Company's share of property and casualty
insurance industry losses related to industry catastrophic events as
defined for the industry by the Property Claims Service Division of the
American Insurance Services Group, Inc.

(9) "Natural peril losses", which include catastrophe losses, is a
Company-defined term for losses caused by wind, hail, water (including
freezing water) and earthquake, regardless of the size of any individual
event. The Company feels that this measure is a more meaningful management
tool as compared to catastrophe losses. The majority of the Company's loss
exposure base resides inland (away from coastal exposures) where frequency,
rather than severity, of loss events has historically been a more
significant factor to the Company. See "Risk Factors -- Catastrophe Losses;
Natural Peril Losses."

(10) Represents net income before (i) realized gain on investments, net of
federal income taxes of $36.6, $22.2, $53.5, $7.0 and $19.5 million in
1991, 1992, 1993, 1994 and 1995, respectively, and $10.0 and $7.4 million
for the three months ended March 31, 1995 and 1996, respectively, (ii) the
$28.4 million loss on operating properties in 1995, net of federal income
taxes of $9.9 million, (iii) the estimated Realignment implementation costs
accrued in 1995 of $21.1 million, net of federal income taxes of $7.4
million, and (iv) the cumulative effect of a change in accounting in 1993.
The net effect of these amounts are included to assist the reader in
analyzing the Company's results of operations by showing the effect of the
listed items. The resulting amounts are not intended to represent net
income prepared in accordance with GAAP.

(11) Amounts shown represent dividends declared on ASI stock, which were paid to
Lincoln. Future ASI dividends are anticipated to be less than historic
levels. ASI also declared $.2 million and $.1 million in dividends on
publicly held preferred stock in 1991 and 1992, respectively. This stock
was called and retired in 1992.

21
<PAGE> 24

PRO FORMA FINANCIAL AND OPERATING DATA

The following table presents summary historical and pro forma consolidated
financial data for the Company as of, and for the year ended, December 31, 1995
and as of, and for the three months ended March 31, 1996. The pro forma
consolidated statement of operations data and certain other data give effect to
the Recapitalization (see "The Company") as if it had been consummated at
January 1, 1995 or January 1, 1996. The pro forma statement of operations data
do not reflect any expense savings relating to the Realignment or investment
income from investment of the proceeds from the Offerings. The pro forma
consolidated balance sheet data and other data gives effect to the
Recapitalization and the proceeds from the Offerings as if they had been
consummated on December 31, 1995 or March 31, 1996. The pro forma financial and
operating data are unaudited and do not purport to represent what the Company's
consolidated results of operations or financial position would have been had the
Recapitalization occurred on the dates indicated, or to project the Company's
results of operations or financial position for any future period or date. The
pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable. The pro forma data should
be read in conjunction with the Consolidated Financial Statements and the notes
thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
--------------------------------------- -----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- ----------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
REVENUES:
Premiums................................. $ 1,746.4 $ 1,746.4 $ 424.0 $ 424.0
Net investment income.................... 266.6 $ (14.3)(1) 252.3 68.3 $ (3.5)(1) 64.8
Realized capital gains and losses........ 41.0 41.0 21.1 21.1
Loss on operating properties............. (28.4) (28.4) -- --
------- ------- ------- ------- ------- -------
Total revenues....................... 2,025.6 (14.3) 2,011.3 513.4 (3.5) 509.9
BENEFITS AND SETTLEMENT EXPENSES:
Benefits and settlement expenses......... 1,242.3 1,242.3 323.6 323.6
Commissions.............................. 291.5 291.5 71.9 71.9
Operating and administrative expenses.... 236.8 236.8 51.2 51.2
Taxes, licenses and fees................. 45.9 45.9 11.9 11.9
Interest on debt......................... -- 20.1 (2) 20.1 -- 5.0(2) 5.0
------- ------- ------- ------- ------- -------
Total benefits and expenses.......... 1,816.5 20.1 1,836.6 458.6 5.0 463.6
------- ------- ------- ------- ------- -------
Income before federal income taxes......... 209.1 (34.4) 174.7 54.8 (8.5) 46.3
------- ------- ------- ------- ------- -------
Total federal income tax expense........... 30.8 (7.8)(3) 23.0 7.9 (1.9)(3) 6.0
------- ------- ------- ------- ------- -------
Net income............................... $ 178.3 $ (26.6) $ 151.7 $ 46.9 $ (6.6) $ 40.3
======= ======= ======= ======= ======= =======
Net income per share(4).................... $ 2.53 $ 0.67
CONSOLIDATED BALANCE SHEET DATA:
Total investments and cash............... $ 4,401.7 $ (75.0)(1) $ 4,326.6
Total assets............................. 5,605.3 (75.0) 5,530.3
Policy liabilities and accruals.......... 3,646.3 3,646.3
Debt..................................... -- 300.0(2) 300.0
Total liabilities........................ 3,997.6 300.0 4,297.6
Shareholders' equity..................... 1,607.7 (375.0)(5) 1,232.7
Book value per share(4).................. 20.55
OTHER DATA:
Statutory capital and surplus............ $ 998.6 $ (150.0)(6) $ 848.6
Earnings before realized gain on
investments, loss on operating
properties and estimated realignment
costs, net of federal income taxes
(NON-GAAP DATA)(7)..................... 189.0 162.4 33.2 26.6
</TABLE>

- -------------------------
(Footnotes on next page.)

22
<PAGE> 25

(1) The pro forma adjustment reflects a decrease in pre-tax net investment
income caused by (i) a decrease of $14.3 million and $3.5 million at
December 31, 1995 and March 31, 1996, respectively, in investment income
related to the Dividended Assets of $300 million, based on the interest
yield on actual tax-exempt municipal securities to be transferred. However,
the pro forma adjustment does not include investment earnings from the
proceeds from the Offerings. Based on an assumed initial public offering
price of $24.00 per share, the net proceeds to the Company (after deduction
of estimated underwriting discounts and offering expenses) would be
approximately $225 million. Assuming these proceeds were invested in risk
free investments, the investment income of the Company on a pro forma basis
would be increased by $13.7 and $3.4 million for the year ended December 31,
1995 and for the three months ended March 31, 1996 and the net income would
be increased by $8.9 and $2.2 million, respectively.

(2) The pro forma adjustments reflect, as part of the Recapitalization, (i) the
assumption of 7.125% Lincoln debt in the principal amount of $100 million,
and (ii) execution of a $200 million promissory note payable to Lincoln,
with interest payable quarterly at a rate equal to 50 basis points over the
rate on Treasury securities with a comparable maturity, adjusted annually at
the beginning of each year of the note (and assumed to be 6.5% for purposes
of the pro forma adjustments).

(3) Pro forma decreases in investment income related to the Dividended Assets
have been tax-effected at the rate of 5.25%, because only 15% of this
investment income is taxable at a federal statutory rate of 35%. The
interest on debt has been tax effected at the statutory rate of 35%.

(4) Based on 60,000,000 shares outstanding.

(5) The pro forma adjustment is calculated as follows: (i) a decrease of $300
million due to the distribution of the Dividended Assets, (ii) a decrease of
$100 million due to the assumption of the Assumed Debt, (iii) a decrease of
$200 million due to the issuance of the Term Note and (iv) an increase
reflecting the receipt of estimated net proceeds of $225 million from the
Offerings.

(6) The pro forma adjustments reflect a decrease in ASI's statutory capital and
surplus due to the (i) distribution of $300 million in Dividended Assets and
(ii) the anticipated $150 million capital contribution from the Company as a
result of the Offerings. See "Prospectus Summary -- The Offerings."

(7) Represents net income before (i) realized gain on investment of $41.0 and
$21.1 million for the year ended December 31, 1995 and the three months
ended March 31, 1996, respectively, net of federal income taxes of $19.5 and
$10.0 million, respectively, (ii) the $28.4 million loss on operating
properties in 1995, net of federal income taxes of $9.9 million, and (iii)
the estimated Realignment implementation costs accrued in 1995 of $21.1
million, net of federal income taxes of $7.4 million. The cumulative effect
of the foregoing items were $10.7 million and ($13.7) million, respectively
($.18 and ($.23) per share, respectively). The net effect of these amounts
are included to assist the reader in analyzing the Company's results of
operations by showing the effect of the listed items. The resulting amounts
are not intended to represent net income prepared in accordance with GAAP.

23
<PAGE> 26

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company's revenues from operations are derived primarily from net
premiums earned on policies written by the Company, investment income and
realized gain on investments. Expenses consist primarily of payments for claims
incurred and underwriting expenses, including agents' commissions and operating
expenses.

Significant factors influencing results of operations include the supply
and demand for property and casualty insurance and life insurance, as well as
the number and magnitude of catastrophe or natural peril losses, such as losses
caused by wind, hail, water (including freezing water) and earthquakes. Although
the property and casualty insurance industry has historically been highly
cyclical, management of the Company believes that variability within each
product line has become more pronounced than industry-wide cyclicality. Premium
rate levels are related to the availability of insurance coverage, which varies
according to, among other things, the level of surplus in the industry. The
level of surplus in the industry varies with returns on invested capital and
regulatory barriers to withdrawal of surplus. Surplus levels have been
relatively high in recent years due in part to the gains in the investment
portfolios of many insurers. Increases in surplus have generally been
accompanied by increased price competition among property and casualty insurers.
The industry's profitability can also be affected significantly by fluctuations
in interest rates and other changes in the investment environment which affect
market prices of insurance companies' investments and the income from those
investments, inflationary pressures that affect the size of losses and judicial
decisions affecting insurers' liabilities. The demand for property and casualty
insurance can also vary, generally rising as the overall level of economic
activity increases and falling as such activity decreases.

The Company seeks to manage its risk exposure by adjusting the mix and
volume of business written in response to changes in price and by balancing the
geographic distribution of its risks. Management believes that this strategy
accounts, in part, for loss ratios that are lower than the property and casualty
industry average. In late 1991, the Company took steps counter to the industry
and introduced an aggressive program called "New Directions" to improve its
account selection, risk evaluation and pricing. See "Business -- Strategy --
Focus On Profitable Business." This included an emphasis on maintaining and,
when possible, expanding business in product lines and regions which have
historically provided better than average results. At the same time, product
lines and regions with less profitable experience were de-emphasized and
relationships with under-performing agencies were terminated. Primarily as a
result of New Directions, approximately 50% of the Company's direct premiums
written in property and casualty insurance in 1995 came from the states of
Illinois, Indiana, Kansas, Michigan, Missouri, Ohio, Oregon and Washington,
which comprise the most significant part of the Company's target market, up from
approximately 44% in 1991. In 1995, less than 11% of such direct premiums
written came from California and Florida, states which the Company deems to be
less favorable for profitable property and casualty business, down from 16% in
1991. The earnings improvement recently enjoyed by the Company can be attributed
in large part to New Directions and is reflected in a SAP loss ratio which has
decreased from 71.6% for 1991 to 59.3% for 1995. The cost of following this
strategy has been a significant reduction in net premiums written, particularly
in commercial lines. For 1995, total net premiums written were 16% below 1991
levels. Thus, the decline in total net premiums written was accompanied by an
even greater decline in risk exposure, resulting in the increased earnings.

In 1995, net premiums written increased by 1.0% from 1994, despite the fact
the Company has continued to decrease its exposure in markets it deems less
favorable. Exclusive of the decrease in net premiums written in California and
Florida, net premiums written increased by 2.0% from 1994 to 1995. The Company
is introducing and implementing additional growth strategies designed to further
enhance its position within its marketplace.

As anticipated, due to the Realignment announcement made in November 1995,
the Company experienced some reduction in new business unit production and
direct premiums written during the first quarter of 1996. During January and
February of 1996, agencies appeared to be taking a cautious attitude regarding
the submission of new business. As Company personnel were able to explain the
Company's Realignment, growth initiatives, enhanced agency bonus plan and target
incentives (see "Business -- Strategy

24
<PAGE> 27

- -- Growth Initiatives") more fully, new business unit production increased in
March from January and February levels. Management believes that the increase
reflects the lessened adverse impact of the Realignment as well as some benefit
from these new incentive programs.

Exclusive of the decrease in direct written premiums in California and
Florida, direct premiums written decreased by 1.3% for the three months ended
March 31, 1996 compared to the same period in 1995. As planned, the Company
continues to reduce its exposures in California and Florida, where direct
premiums written decreased by 10.1% for the three months ended March 31, 1996
compared to the same period in 1995. In the aggregate direct premiums written
decreased by 2.3% for the three months ended March 31, 1996 compared to the same
period in 1995. Due to significant reductions recorded for involuntary pools,
particularly workers' compensation, net premiums written decreased by 4.7% for
the three months ended March 31, 1996 compared to the same period in 1995.

In the first quarter of 1996, the Company introduced enhancements to the
agency bonus plan, as well as targeted commission incentives, both designed to
increase the flow and retention of profitable business (see "Business --
Strategy -- Growth Initiatives"). While these programs will increase
underwriting expenses marginally in the short term, management believes that the
added costs should be more than offset by increased earnings over the long term.
Both the enhanced agency bonus plan and targeted incentives are designed to
reward agencies for placing additional volumes of profitable business with the
Company. Management believes that these new incentives will have a small, but
immaterial, adverse effect on the Company's expense ratio.

Prior to 1993, the Company actively marketed reinsurance. In 1993, the
Company ceased writing new reinsurance business and transferred much of its
existing book to another, unrelated insurer by means of an assumption
reinsurance transaction. The Company remained liable for losses which occurred
prior to the date of transfer with respect to such transferred business. It also
remained liable on those reinsurance treaties which were not subject to the
assumption transaction. For 1995, the reinsurance operation which is in run-off
had a negative impact of 4.2 percentage points on the Company's combined ratio
versus 1.4 percentage points for 1994.

In November, 1995, as a follow-up to New Directions, the Company announced
the Realignment of its field structure designed to reduce expenses, contribute
to further improvement of the combined ratio, and enhance growth. Under the
Realignment, the Company will continue to provide sales, claims, technology
support or other agency and customer service functions from approximately 225
locations; and, during 1996 and 1997, it will consolidate the management of
those functions and much of its underwriting from 20 division offices into four
regional offices, each responsible for a designated geographic area. As part of
the Realignment, the Company has created 24 Field Executive positions to
maintain and enhance its working relationships with its agencies by putting more
decision-making authority in the field, close to, and readily accessible by, the
agents. Management believes that the full implementation of the Realignment will
be accomplished within two years. For each division office affected by the
consolidation, job classifications and positions to be eliminated were
identified in the fourth quarter of 1995. Individuals impacted were identified
and appropriate communication of the Company's plan of termination was made,
including severance benefits to be provided. Further, for those locations that
were leased, the penalty for termination of the lease agreement was accrued.
These actions were taken based on a plan developed by senior management of the
Company and approved by the Company's Board of Directors. The majority of the
Realignment is expected to occur in 1996 with the remainder scheduled for
completion in 1997. The estimated pre-tax costs of the Realignment are $21.1
million and were charged to operations in the fourth quarter of 1995.
Additionally, management has begun to dispose of 14 office buildings owned and
largely occupied by the Company. A $28.4 million pre-tax charge for loss on
operating properties, which was calculated based upon independent appraisals
with the net carrying value representing the lower of cost or market value, was
charged to income in the fourth quarter of 1995. See "Business -- Properties."

COMPARISON OF THE FIRST QUARTER ENDED MARCH 31, 1996 TO THE FIRST QUARTER ENDED
MARCH 31, 1995

Consolidated. The Company's revenues for the first quarter of 1996
aggregated $513.4 million, down $19.0 million from its first quarter 1995
revenues which totaled $532.4 million. Net premiums earned and

25
<PAGE> 28

other revenue of $424.0 million for the first quarter of 1996 was $14.7 million,
or 3.4% less than the $438.7 million recorded in the first quarter of 1995. Net
investment income increased by $1.9 million, or 2.8%, while realized gain on
investments decreased by $6.1 million.

The Company's net income of $46.9 million for the first quarter of 1996 was
down 28.4% from $65.5 million for the first quarter of 1995. Natural peril
losses increased $27.8 million due primarily to winter storm activity in the
first quarter of 1996, resulting in a decrease in net income. Natural peril
losses were $42.8 million and $15.0 million in the first quarter of 1996 and
1995, respectively. Realized gain on investments decreased $6.1 million to $21.1
million in the first quarter of 1996 compared to $27.2 million in the first
quarter of 1995. The provision for consolidated income taxes was $7.9 million in
the first quarter of 1996, compared to $18.3 million in 1995. This decrease was
due to lower underwriting income and realized gains on investments.

Property and Casualty. The following table sets forth certain summarized
financial data and key operating ratios for the Company's property and casualty
operations for the quarters ended March 31, 1995 and 1996, respectively. All
ratios are computed using data reported in accordance with SAP.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------------
1995 1996
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Net premiums written..................................................... $425.7 $405.7
Net premiums earned and other revenue.................................... $424.8 $409.5
Losses and loss adjustment expense....................................... 294.3 311.0
Other costs and expenses................................................. 137.7 129.3
------ ------
Underwriting loss................................................. (7.2) (30.8)
Net investment income.................................................... 58.4 59.7
Realized gain on investments............................................. 27.8 21.2
Income tax expense....................................................... 16.7 6.3
------ ------
Net income........................................................ $ 62.3 $ 43.8
====== ======
Loss ratio............................................................... 57.9% 64.9%
Loss adjustment expense ratio............................................ 12.0 11.5
Underwriting expense ratio............................................... 32.6 31.7
Policyholder dividend ratio.............................................. .1 .2
------ ------
Combined ratio.................................................... 102.6% 108.3%
====== ======
Percentage point effect of catastrophe losses on loss ratio.............. 1.6 5.3
Percentage point effect of natural peril losses on loss ratio(1)......... 3.6 10.5
UNDERWRITING RESULTS BY SOURCE:
Net premiums written:
Commercial............................................................. $262.9 $241.4
Personal............................................................... 162.7 164.2
Reinsurance in run-off................................................. .1 .1
------ ------
Total............................................................. $425.7 $405.7
Underwriting gain (loss)(2):
Commercial............................................................. $ 6.7 $(11.0)
Personal............................................................... (11.1) (18.8)
Reinsurance in run-off................................................. (2.8) (1.0)
------ ------
Total............................................................. $ (7.2) $(30.8)
Combined ratios(2):
Commercial............................................................. 97.6% 105.4%
Personal............................................................... 108.1 112.1
Reinsurance in run-off................................................. N/A N/A
Total............................................................. 102.6 108.3
Percentage point effect of reinsurance in run-off on combined ratio...... .7 .2
</TABLE>

- -------------------------
(1) Natural peril losses include substantially all of the catastrophe losses.

26
<PAGE> 29

(2) Most expenses specifically relate to, and are identified to, lines of
business. Fixed expenses, including salaries and other operating expenses,
are allocated to lines of business based on cost and time studies.

Net premiums written decreased by $20.0 million, or 4.7%, to $405.7 million
for the first quarter of 1996 from $425.7 million for the first quarter of 1995.
This decline was largely attributable to a $16.9 million decrease in workers
compensation premiums. Approximately $10.3 million, or 61%, of the workers'
compensation premium decrease was due to lower premiums recorded on involuntary
pools. The balance of the decrease in workers' compensation premiums is due to
rate reductions and the loss of some larger accounts. The workers' compensation
marketplace has become very competitive, particularly for larger accounts.
Despite losing some of these larger accounts, the Company has been able to
increase the total number of workers' compensation policies in-force by writing
more smaller accounts, which management believes are less price sensitive and
thereby should be more profitable on a percentage basis. Net premiums written
for commercial products decreased by $21.5 million, or 8.2%, to $241.4 for the
first quarter of 1996, compared to $262.9 million for the first quarter of 1995.
Net premiums written for personal products increased by $1.5 million, or .9%, to
$164.2 million for the first quarter of 1996, compared to $162.7 million for the
first quarter of 1995. For the states of California and Florida, where the
Company has been reducing its exposure due to unfavorable results, direct
premiums written decreased by 10.1%. For all other states, first quarter 1996
direct written premiums are down 1.3% from first quarter 1995.

Net premiums earned and other revenue (primarily finance and service fees)
decreased by $15.3 million to $409.5 million for the first quarter of 1996, from
$424.8 million for the first quarter of 1995.

Loss and LAE increased by $16.7 million to $311.0 million for the first
quarter of 1996, from $294.3 million for the first quarter of 1995. The SAP loss
ratio for the first quarter of 1996 was 64.9% as compared to 57.9% for the first
quarter of 1995. The 7.0% increase was due to a $27.8 million increase in
natural peril losses during the first quarter of 1996, resulting primarily from
widespread severe winter storm activity. For the first quarter of 1996, natural
peril losses were $42.8 million versus $15.0 million for the first quarter of
1995.

The SAP LAE ratio was 11.5% for the first quarter of 1996 versus 12.0% for
the first quarter of 1995. The LAE ratio was unusually high during the first
quarter of 1995. Unusual items in the first quarter of 1995 included the closing
of two division offices and a service office and an early retirement plan for
certain levels of management. These unusual items added $2.3 million to LAE
expense and accounted for .6% of the LAE ratio for the first quarter of 1995.

Other costs and expenses decreased by $8.4 million, or 6.1%, to $129.3
million for the first quarter of 1996, from $137.7 million for the first quarter
of 1995. The SAP underwriting expense ratio for the first quarter of 1996 was
31.7%, as compared to 32.6% for the first quarter of 1995. The office closings
and early retirement during the first quarter of 1995 added $4.2 million to
expenses and accounted for 1.0% of the underwriting expense ratio for the first
quarter of 1995, with cost savings resulting from the Realignment accounting for
much of the remaining expense decrease in the first quarter of 1996.

The SAP combined ratio, after policyholder dividends, was 108.3% for the
first quarter of 1996, versus 102.6% for the first quarter of 1995. During the
first quarter of 1996, natural peril losses added 10.5% to the SAP loss ratio,
versus 3.6% for the same period in 1995.

Commercial lines results were substantially lower in the first quarter of
1996, with the SAP combined ratio increasing to 105.4% from 97.6% in the first
quarter of 1995. Lower results, as reflected by the SAP loss ratio, were broad
based across most commercial lines. The key lines of businessowners policies
(known as "BOPs"), commercial multi-peril, commercial auto and workers'
compensation deteriorated. Again, the increase in the loss ratios of most of
these lines of business reflects increased natural peril losses as previously
discussed.

The personal lines SAP combined ratio also increased in the first quarter
of 1996, increasing to 112.1% from 108.1% in the first quarter of 1995.
Increased natural peril losses, as reflected by the SAP loss ratio, was most
evident in homeowners.

27
<PAGE> 30

Net investment income increased $1.3 million, or 2.2%, to $59.7 million for
the first quarter of 1996, from $58.4 million in the first quarter of 1995. This
increase is due primarily to a reduction in unaffiliated common stock holdings
and subsequent reinvestment of proceeds in the bond portfolio, primarily higher
yielding taxable securities. The yield on invested assets (excluding realized
and unrealized gains) was 6.4% and 6.3% for the first quarters of 1996 and 1995,
respectively.

Realized gain on investments was $21.2 million for the first quarter of
1996, compared to $27.8 million for the first quarter of 1995.

Federal income taxes decreased by $10.4 million. They were $16.7 million
for the first quarter of 1996, versus $6.3 million for the first quarter of
1995. The decrease is due primarily to lower underwriting income and realized
gains.

Life. The following table sets forth certain summarized financial and key
operating data for the Company's life insurance operations for the first
quarters of 1995 and 1996.

<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------------
1995 1996
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Account values -- Universal life and Annuities.......... $ 292.6 $ 322.1
Life insurance in-force................................. 14,826.1 15,543.0
Invested assets (at amortized cost)..................... 384.0 411.1
Policy income........................................... $ 13.9 $ 14.5
Benefits and expenses................................... 16.6 18.2
Net investment income................................... 8.0 8.6
Realized gain on investments............................ (0.6) (0.1)
Income tax expense...................................... 1.5 1.7
--------- ---------
Net income......................................... $ 3.2 $ 3.1
======== ========
</TABLE>

Life insurance continued to reflect steady growth in policy income, which
increased by 4.3% for the first quarter of 1996, compared to the first quarter
of 1995. Sales of life insurance, primarily universal life products, increased
11% for the first quarter of 1996 compared to 1995. Account values at March 31,
1996, increased by 10.1% from March 31, 1995. Net investment income increased by
7.5% compared to the first quarter of 1995, reflecting the growth in account
values as well as the general growth in invested assets. Net income for the
first quarter of 1996 was comparable to 1995, as higher mortality offset the
positive growth in policy income and investment income.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31,
1994

Consolidated. The Company's revenues for 1995 aggregated $2,025.6 million,
virtually unchanged from its 1994 revenues which totalled $2,026.4 million. Net
premiums earned and other revenue of $1,746.4 million for 1995 slightly exceeded
the $1,746.0 million recorded in 1994. Net investment income increased by $6.1
million, or 2.3%, while realized gain on investments increased by $21.1 million.

The Company's net income of $178.3 million for 1995 was down 3.4% from
$184.6 million for 1994. The costs relating to Realignment, which aggregated
$49.5 million, resulted in the decrease in net income despite significantly
improved underwriting results. Realized gain on investments increased $21.1
million to $41.0 million in 1995 compared to $19.9 million in 1994. The
provision for consolidated income taxes was $30.8 million in 1995 compared to
$15.7 million in 1994. This increase was due to improved underwriting results
and a greater proportion of taxable investment income.

28
<PAGE> 31

Property and Casualty. The following table sets forth certain summarized
financial data and key operating ratios for the Company's property and casualty
operations for 1994 and 1995. All ratios are computed using data reported in
accordance with SAP.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1994 1995
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Net premiums written.................................................. $1,655.5 $1,671.6
Net premiums earned and other revenue................................. $1,693.5 $1,689.6
Losses and loss adjustment expense.................................... 1,226.2 1,193.7
Other costs and expenses.............................................. 536.3 552.8
-------- --------
Underwriting loss.............................................. (69.0) (56.9)
Net investment income................................................. 230.9 233.8
Realized gain on investments.......................................... 19.2 38.8
Loss on operating properties.......................................... -- 28.4
Income tax expense.................................................... 9.4 23.5
-------- --------
Net income..................................................... $ 171.7 $ 163.8
======== ========
Loss ratio............................................................ 61.1% 59.3%
Loss adjustment expense ratio......................................... 11.8 11.8
Underwriting expense ratio............................................ 31.6 32.3
Policyholder dividend ratio........................................... .1 .2
-------- --------
Combined ratio................................................. 104.6% 103.6%
======== ========
Percentage point effect of catastrophe losses on loss ratio........... 4.3 4.8
Percentage point effect of natural peril losses on loss ratio(1)...... 8.4 7.3
Percentage point effect of Realignment costs on combined ratio........ -- 1.3
UNDERWRITING RESULTS BY SOURCE:
Net premiums written:
Commercial.......................................................... $ 985.1 $ 991.6
Personal............................................................ 668.3 681.1
Reinsurance in run-off.............................................. 2.1 (1.1)
-------- --------
Total....................................................... $1,655.5 $1,671.6
Underwriting gain (loss)(2):
Commercial.......................................................... $ 4.5 $ 45.8
Personal............................................................ (49.7) (32.8)
Reinsurance in run-off.............................................. (23.8) (69.9)
-------- --------
Total....................................................... $ (69.0) $ (56.9)
Combined ratios(2):
Commercial.......................................................... 100.1% 95.8%
Personal............................................................ 107.8 104.8
Reinsurance in run-off.............................................. N/A N/A
Total....................................................... 104.6 103.6
Percentage point effect of reinsurance in run-off on combined ratio... 1.4 4.2
</TABLE>

- -------------------------
(1) Natural peril losses include substantially all of the catastrophe losses.

Net premiums written increased by $16.1 million, or 1.0%, to $1,671.6
million for 1995, from $1,655.5 million for 1994. This growth was largely
attributable to an increase in premiums written on private passenger automobile
and businessowners policies designed specifically for owners of small
businesses. Net premiums

29
<PAGE> 32

written for commercial lines products increased by $6.5 million, or .7%, to
$991.6 million for 1995, compared to $985.1 million for 1994. Net premiums
written for personal lines products increased by $12.8 million, or 1.9%, to
$681.1 for 1995, compared to $668.3 million for 1994. For the states of
Illinois, Indiana, Kansas, Michigan, Missouri, Ohio, Oregon and Washington,
which comprise the most significant part of the Company's target market, direct
premiums written increased by 3.6% in 1995, while for the states of California
and Florida, where the Company has been reducing its exposure due to unfavorable
results, direct premiums written decreased by 6.5%. For all other states, 1995
direct premiums written were virtually unchanged from 1994.

Net premiums earned and other revenue (primarily finance and service fees)
decreased by $3.9 million to $1,689.6 million for 1995, from $1,693.5 million
for 1994.

Losses and LAE decreased by $32.5 million to $1,193.7 million for 1995,
from $1,226.2 million for 1994. The SAP loss ratio for 1995 was 59.3% as
compared to 61.1% for 1994. The 1.8 percentage point decline in the loss ratio
in 1995 was due primarily to the continuing benefit from the New Directions
strategy implemented in late 1991. Concentrations of business, both
geographically and by line, were evaluated, and in many cases reduced, in order
to maximize profit potential. Underwriting standards were tightened and claim
evaluation and settlement practices were enhanced, each contributing to a lower
loss ratio. The Company's results of operations benefited materially in 1995 and
1994, as a result of reductions in the estimated amounts needed to settle prior
years' claims, with such benefit being most significant in 1994. See "Business
- -- Reserves for Losses and Loss Adjustment Expense."

Underwriting results of the Company's property and casualty operations are
significantly influenced by estimates of property and casualty losses and LAE
reserves. These reserves reflect the estimated amounts necessary to settle all
outstanding claims, including IBNR claims, as of the reporting date. The reserve
estimates are based upon the known facts in each case and the Company's
experience with similar cases and coverages. In setting reserves, consideration
is given to historical trends such as reserving patterns, loss payments,
inventory of unpaid claims, product mix, court decisions, economic conditions
and public attitudes. All of these can affect the estimation of reserves and the
ultimate cost of claims.

The overall favorable reserve development in both 1995 and 1994 was the
result of improving trends, both industry-wide and related to the Company's New
Directions initiatives, as well as enhancements made in the claim evaluation
process. These favorable developments were mainly attributable to the Company's
core book of ongoing business, which includes businessowners, commercial
multi-peril, commercial automobile, workers' compensation, homeowners and
personal automobile. They also reflect the Company's reserving philosophy,
consistently applied over many years. The conditions and trends which have
caused this positive reserve development in the past may not necessarily occur
in the future, and there can be no assurance that earnings will continue to
benefit from positive reserve developments. Trends in the Company's ongoing core
business have to date more than offset continued adverse developments on
asbestos and environmental exposures and for classes of business which have been
greatly reduced or are in run-off. This latter class of business would include
run-off of reinsurance lines and construction defect exposures arising from
policies written on contractors, largely in California. See "Business --
Reserves for Losses and Loss Adjustment Expense -- Property and Casualty
Reserves."

Construction defect claims are a subset of claims that arise from coverage
provided by general property damage liability insurance. The Company defines
construction defect claims as those involving allegations of defective work
which result in claims for damages to repair the work or diminution in value of
large construction projects, such as condominiums, office buildings, shopping
centers and housing developments. Prior to 1993 the number of construction
defect claims reported to the Company were insignificant relative to the total
number of general property damage liability claims; therefore, these claims were
not separated for the

30
<PAGE> 33

purpose of reserve analysis. The reporting pattern and incurred losses and LAE
for construction defect claims are as follows:

NUMBER OF
CALENDAR REPORTED INCURRED
YEAR CLAIMS LOSSES AND LAE(1)
-------------------------------------------------- --------- ---------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
1990 & prior...................................... 62 $ 3.0
1991.............................................. 174 9.0
1992.............................................. 427 25.0
1993.............................................. 882 46.1
1994.............................................. 990 88.8
1995.............................................. 1,290 110.8
</TABLE>

- -------------------------

(1) Incurred losses and LAE include reported claims and IBNR claims, net of
reinsurance.

Approximately 95% of the reported claims involve construction activity in
California. The Company attributes the increase in reported claims to the
California courts' interpretation of general liability property damage coverage
to include coverage for construction defect. This caused a significant increase
in reported claims. As the number of construction defect claims increased during
1993 and 1994, the Company decided, at the end of 1994, to segregate
construction defect claims from all other general property damage liability
claims for reserve analysis. As a result of a separate analysis of the
construction defect losses, the reserves were increased. The increase in
incurred losses for 1994 was significantly greater than the increase in reported
claims for that year. This analysis was repeated at the end of 1995 as part of
the Company's analysis of its total reserves for general property damage
liability, and the reserves for construction defect claims were increased again.
Based on its latest analysis the Company believes that its total reserves for
general property damage liability insurance make a reasonable provision for all
types of general property damage liability claims.

Establishing reserves for asbestos and environmental claims is subject to
uncertainties that are greater than those presented by other types of claims.
The Company continually monitors and evaluates asbestos and environmental claims
and re-estimates its reserves accordingly. A method used by the Company to
evaluate its reserves for asbestos and environmental claims is to compute the
number of years of claim payments which are being carried in reserve (the
survival ratio). Based on losses and LAE payments made during the preceding
twelve months, the Company's survival ratio was 14.2 years at December 31, 1994
and 17.4 years at December 31, 1995. The loss and LAE reserves for reported and
unreported asbestos and environmental liabilities are as follows:

<TABLE>
<CAPTION>
CALENDAR ASBESTOS ENVIRONMENTAL
YEAR RESERVES RESERVES
- -------- -------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
1993.................................................. $ 71.8 $ 128.9
1994.................................................. 69.6 128.6
1995.................................................. 77.8 163.4
</TABLE>

Approximately 60% of the reserves being carried as part of the run-off
reinsurance operations are related to asbestos and environmental liabilities.
During 1993 and 1994, the reported asbestos and environmental claims from the
run-off reinsurance operations were somewhat higher than had been anticipated.
During 1995, the Company updated its analysis and increased its reserves for
these claims which resulted in a higher survival ratio. This increase was
accomplished by increasing the IBNR reserves for asbestos and environmental
liability for run-off reinsurance by $51 million. It is management's belief that
the Company's current survival ratio for these claims of 17.4 years is
appropriate.

For 1995, natural peril losses were $122.1 million versus $140.5 million
for 1994. During the spring months of 1995, the Company experienced a relatively
high frequency of wind and hail losses. Hurricane Opal, which struck the Florida
panhandle in October, 1995, resulted in approximately $15.0 million of losses to
the Company in Florida and other southeastern states. Natural peril losses in
1994 were largely due to a severe

31
<PAGE> 34

winter freeze and the Northridge, California earthquake. Gross losses from
Northridge were $32.4 million; $31.1 million net of reinsurance recoveries.
Additional incurred losses from the earthquake of $2.6 million were recorded in
1995.

The SAP LAE ratio was 11.8% for 1995, the same as in 1994. While the
Company's SAP loss ratio decreased due to New Directions and other initiatives,
the impact on the Company's LAE ratio has been less evident, due partially to
increases in legal expense reserves relating to environmental claims. In 1995,
the LAE ratio was favorably impacted by approximately $10.7 million of LAE
reserve release due to positive development of prior accident years. Offsetting
this, some unusual items increased expense in 1995. In the first quarter, the
Company announced an early retirement plan for certain levels of management and
the closing of two division offices and a service office, the second quarter
included the costs of settling a lawsuit and the fourth quarter included the
costs of Realignment. These unusual items added $9.5 million of LAE-related
expense during 1995.

Other costs and expenses increased by $16.5 million, or 3.1%, to $552.8
million for 1995, from $536.3 million for 1994. The SAP underwriting expense
ratio for 1995 was 32.3%, as compared to 31.6% for 1994. The Realignment, office
closings prior to the Realignment and early retirement added $21.9 million to
expenses and accounted for 1.3% of the underwriting expense ratio for 1995.

The SAP combined ratio, after policyholder dividends, was 103.6% in 1995,
versus 104.6% in 1994. After peaking at 112.5% in 1992, the Company's combined
ratio has decreased each of the last three years. Both commercial and personal
lines reflected improvement due to lower natural peril losses, the continued
favorable impact of New Directions and the release of losses and LAE reserves
related to prior accident years. The reinsurance in run-off had a negative
impact of 4.2 percentage points on the Company's combined ratio in 1995, versus
1.4 percentage points in 1994.

Commercial lines results were substantially improved in 1995, with the SAP
combined ratio decreasing to 95.8% from 100.1% in 1994. Improved results, as
reflected by the loss ratio, were broad based across most commercial lines. The
key lines of BOPs, commercial multi-peril, commercial auto and workers'
compensation all improved.

The personal lines SAP combined ratio also improved in 1995, decreasing to
104.8% from 107.8% in 1994. Improvement, as reflected by the loss ratio, was
evident in both personal automobile and homeowners. While somewhat improved,
homeowners remains an underpriced line of business for the Company and the
industry. The Company will continue to address the profitability issues in this
line by continuing to focus on the preferred sector, tightening underwriting and
evaluating each homeowners policy to determine that the amount of protection
purchased is appropriate for the replacement cost of the property.

Net investment income increased $2.9 million, or 1.2%, to $233.8 million
for 1995, from $230.9 million in 1994. This increase was due primarily to an
increase in higher yielding securities, a reduction in unaffiliated common stock
holdings and subsequent reinvestment of proceeds in an unconsolidated
subsidiary, EMPHESYS Financial Group, Inc. The yield on invested assets
(excluding realized and unrealized gains) was 6.3% for 1995, compared with 6.0%
in 1994.

Realized gain on investments was $38.8 million for 1995, compared to $19.2
million in 1994. This increase was due to the reduction in the Company's
investment in unaffiliated common stocks, many of which were sold at a gain. In
1995, a $28.4 million provision was made to recognize the expected loss on
operating properties which the Company now occupies and plans to dispose of in
connection with the Realignment.

Federal income taxes increased by $14.1 million to $23.5 million for 1995
from $9.4 million for 1994. The increase was due primarily to improved
underwriting results and net investment income which reflected an investment
portfolio containing a higher proportion of taxable securities.

32
<PAGE> 35

Life. The following table sets forth certain summarized financial and key
operating data for the Company's life insurance operations for 1994 and 1995.

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED DECEMBER 31,
----------------------
1994 1995
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Account values -- Universal life and Annuities.......... $ 285.7 $ 315.5
Life insurance in-force................................. 14,743.0 15,405.8
Invested assets (at amortized cost)..................... 377.3 389.8
Policy income........................................... $ 52.5 $ 56.8
Benefits and expenses................................... 63.6 70.1
Net investment income................................... 29.6 32.8
Realized gain on investments............................ .7 2.3
Income tax expense...................................... 6.3 7.3
--------- ---------
Net income......................................... $ 12.9 $ 14.5
========= =========
</TABLE>

Life insurance continued to reflect steady growth in policy income, which
increased by 8.2% for 1995, compared to 1994. Sales of life insurance, primarily
universal life products, remained strong. Account values at December 31, 1995,
increased by 10.4% from December 31, 1994 levels. Net investment income
increased by 10.8% during 1995, reflecting the growth in account values as well
as the general growth of invested assets. Realized gain on investments increased
$1.6 million to $2.3 million primarily as a result of sales of securities to
take advantage of market opportunities. Net income increased by 12.4% to $14.5
million in 1995, compared to 1994.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1994 TO THE YEAR ENDED DECEMBER 31,
1993

Consolidated. The Company's aggregate revenues for 1994 were $2,026.4
million, a decrease of 10.8% compared to $2,271.8 million in 1993. Premium
revenue fell $109.1 million, or 5.9%, reflecting the continued impact of the New
Directions program begun in late 1991. In 1994, the financial markets were
affected by the U.S. Federal Reserve's series of interest rate increases, which
were largely in response to inflation concerns. Primarily as a result,
opportunities for sales of securities at a gain were much reduced when compared
to the gains realized in 1993 which resulted from flat to declining interest
rates. Additionally, net investment income decreased slightly, down from $266.8
million in 1993, to $260.5 million in 1994, a decrease of $6.3 million, or 2.4%,
due to a slight reduction in invested assets as well as an overall reduction in
portfolio yield.

The Company's net income of $184.6 million for 1994 was down 10.5% from
$206.2 million in 1993. Realized gains on investments decreased $130.0 million
to $19.9 million in 1994, compared to $149.9 million in 1993. The provision for
income taxes was $15.7 million in 1994, compared to $46.1 million in 1993. This
reduction was due to the much lower level of realized gain on investments.

Net income for 1993 also reflects the impact of a one-time $40.5 million
after-tax charge pursuant to adoption of Financial Accounting Standards Board
Statement ("FAS") 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions." FAS 106 required the Company to accrue the costs of retiree
health and life insurance over the period in which the employees become eligible
for such benefits. See Note 3 to the Consolidated Financial Statements included
elsewhere herein.

33
<PAGE> 36

Property and Casualty. The following table sets forth certain summarized
financial data and key operating ratios for the Company's property and casualty
operations for 1993 and 1994. All ratios are computed using data reported in
accordance with SAP.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1993 1994
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Net premiums written.................................................. $1,716.2 $1,655.5
Net premiums earned................................................... $1,807.5 $1,693.5
Losses and loss adjustment expense.................................... 1,347.3 1,226.2
Other costs and expenses.............................................. 574.0 536.3
-------- --------
Underwriting loss.............................................. (113.8) (69.0)
Net investment income................................................. 239.5 230.9
Realized gain on investments.......................................... 142.7 19.2
Income tax expense.................................................... 38.5 9.4
Cumulative effect of change in accounting for postretirement
benefits other than pensions, net of taxes.......................... 39.4 --
-------- --------
Net income..................................................... $ 190.5 $ 171.7
======== ========
Loss ratio............................................................ 63.8% 61.1%
Loss adjustment expense ratio......................................... 11.4 11.8
Underwriting expense ratio............................................ 31.7 31.6
Policyholder dividend ratio........................................... .2 .1
-------- --------
Combined ratio................................................. 107.1% 104.6%
======== ========
Percentage point effect of catastrophe losses on loss ratio........... 3.2 4.3
Percentage point effect of natural peril losses on loss ratio(1)...... 6.8 8.4

UNDERWRITING RESULTS BY SOURCE:
Net premium written:
Commercial.......................................................... $1,017.5 $ 985.1
Personal............................................................ 690.9 668.3
Reinsurance in run-off.............................................. 7.8 2.1
-------- --------
Total.......................................................... $1,716.2 $1,655.5
Underwriting gain (loss)(2):
Commercial.......................................................... $ (56.1) $ 4.5
Personal............................................................ (22.0) (49.7)
Reinsurance in run-off.............................................. (35.7) (23.8)
-------- --------
Total.......................................................... $ (113.8) $ (69.0)
Combined ratios (2):
Commercial.......................................................... 106.5% 100.1%
Personal............................................................ 103.0 107.8
Reinsurance in run-off.............................................. N/A N/A
Total.......................................................... 107.1 104.6
Percentage point effect of reinsurance in run-off on combined ratio... 2.1 1.4
</TABLE>

- -------------------------
(1) Natural peril losses include substantially all of the catastrophe losses.
(2) Most expenses specifically relate to, and are identified to, lines of
business. Fixed expenses, including salaries and other operating expenses,
are allocated to lines of business based on cost and time studies.

Net premiums written decreased by $60.7 million, or 3.5%, to $1,655.5
million for 1994, from $1,716.2 million for 1993. This decrease was largely
attributable to the continued impact of the New Directions program begun in late
1991. Net premiums written for commercial lines products decreased by $32.4
million,

34
<PAGE> 37

or 3.2%, to $985.1 million for 1994, compared to $1,017.5 million for 1993. Net
premiums written for personal lines products decreased by $22.6 million, or
3.3%, to $668.3 million for 1994, compared to $690.9 million for 1993.

Net premiums earned and other income decreased by $114.0 million, or 6.3%,
to $1,693.5 million for 1994, from $1,807.5 million for 1993. The decrease in
premiums earned for 1994 was related to the decreases in premiums written of
$60.7 million and $217.3 million for 1994 and 1993, respectively.

Losses and LAE decreased by $121.1 million, or 9.0%, to $1,226.2 million
for 1994, from $1,347.3 million for 1993. The SAP loss ratio for 1994 was 61.1%
as compared to 63.8% for 1993. The 2.7 percentage point decline in the loss
ratio for 1994 was primarily due to the continued improvement derived from New
Directions. The Company's results of operations benefited materially in 1994 and
1993, as a result of reductions in the estimated amounts needed to settle prior
years' claims, with such benefit being most significant in 1994. See "Business
- -- Reserves for Losses and Loss Adjustment Expense."

For 1994, natural peril losses were $140.5 million versus $122.7 for 1993.
The major catastrophe event for the year was the Northridge, California
earthquake in January, 1994. The Company's aggregate pre-tax losses from the
Northridge earthquake were $28.5 million for 1994. This event was unusual
because the earthquake occurred in January, 1994, and losses continued to mount
during the year as further investigation of claim sites revealed significant
structural damage that was not apparent on earlier surveys.

The SAP LAE ratio was 11.8% for 1994, compared to 11.4% for 1993, an
increase of .4 percentage points. The implementation of the New Directions
program resulted in a decrease in premiums earned. Fixed expenses did not
decrease at the same rate as premiums earned, resulting in an increase in LAE
ratio.

Other costs and expenses decreased by $37.7 million, or 6.6%, to $536.3
million for 1994, from $574.0 million for 1993. The SAP underwriting expense
ratio for 1994 was 31.6%, as compared to 31.7% for 1993. The decrease in the
underwriting expense ratio was due to a drop in variable expense, driven largely
by mix of business. The fixed expense ratio remained essentially flat,
reflecting aggressive expense management as the Company's base of premium volume
decreased.

For 1994, the SAP combined ratio was 104.6% versus 107.1% for 1993. The
continuing improvement in the Company's underlying loss ratio contributed to its
improved combined ratio in spite of unusually high natural peril losses and
expense ratios that were flat to slightly increasing. Commercial lines showed
substantial improvement for 1994, with the combined ratio decreasing to 100.1%
from 106.5% in 1993. On a product line basis, workers' compensation and
commercial automobile continued to recover while businessowners and commercial
multi-peril remained profitable.

Personal lines, which were more significantly impacted by natural peril
losses, produced a SAP combined ratio of 107.8% in 1994 versus 103.0% in 1993.
While private passenger automobile produced acceptable results for the Company,
homeowners continued to be an underpriced line of business, both for the Company
and the industry. In 1994, the Company continued focusing on the preferred
sector, tightening underwriting and evaluating each homeowners policy to ensure
that the amount of protection purchased was appropriate for the replacement cost
of the property.

For 1994, the run-off of the reinsurance operation had a negative impact of
1.4 percentage points on the Company's SAP combined ratio versus 2.1 percentage
points for 1993. Although the Company exited the reinsurance business in April,
1993, earnings continue to be impacted by adverse development of loss reserves,
primarily related to asbestos, environmental and other casualty business written
prior to 1986.

Net investment income decreased $8.6 million, or 3.6%, to $230.9 million
for 1994, from $239.5 million in 1993. This decrease was due to a slight
reduction of invested assets during the year as well as an overall reduction in
portfolio yield. Invested assets, on an amortized cost basis, decreased by
$139.5 million, or 3.6%, due largely to operating cash flow being less than
dividend payments and other uses of funds. The yield on invested assets
(excluding realized and unrealized gains) was 6.0% for 1994, compared with 6.2%
for 1993.

35
<PAGE> 38

Realized gain on investments decreased $123.5 million to $19.2 million in
1994, compared to $142.7 million in 1993. Interest rate increases during 1994
affected financial markets, resulting in fewer opportunities for sales of
securities at a gain when compared to 1993.

Federal income taxes decreased by $29.1 million to $9.4 million for 1994,
compared to $38.5 million in 1993. The decrease in federal income taxes was due
to lower realized gain on investments.

A $39.4 million after-tax charge pursuant to adoption of FAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," is
reflected in 1993 results.

Life. The following table sets forth certain summarized financial data for
the Company's life insurance operations for 1993 and 1994.

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED DECEMBER 31,
----------------------
1993 1994
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Account values -- Universal life and Annuities......................... $ 255.0 $ 285.7
Life insurance in-force................................................ 13,582.9 14,743.0
Invested assets (at amortized cost).................................... 335.6 377.3
Policy income.......................................................... $ 47.6 $ 52.5
Benefits and expenses.................................................. 57.7 63.6
Net investment income.................................................. 27.3 29.6
Realized gain on investments........................................... 7.2 .7
Income tax expense..................................................... 7.6 6.3
Cumulative effect of change in accounting for postretirement benefits
other than pensions, net of taxes.................................... (1.1) --
--------- ---------
Net income........................................................ $ 15.7 $ 12.9
========= =========
</TABLE>

Results for life insurance continued to reflect steady growth in policy
income, which increased by 10.3% for 1994, compared to 1993. Sales of life
insurance, primarily universal life products, remained strong. Account values at
December 31, 1994, increased by 12.0% from December 31, 1993 levels. Net
investment income increased by 8.4% during 1994, reflecting the growth in
account values as well as the general growth of invested assets. Realized gain
on investments decreased from $7.2 million in 1993 to $.7 million in 1994,
primarily as a result of reduced opportunities for sales of securities at a
gain. The negative impact of a one-time $1.1 million after-tax charge pursuant
to adoption of FAS 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," is reflected in 1993 results. Net income decreased by 17.8% for
1994, as compared to 1993.

LIQUIDITY AND CAPITAL RESOURCES

The primary sources of funds available to the Company and its Subsidiaries
are premiums, investment income and proceeds from the sale or maturity of
invested assets. Such funds are used principally for the payment of claims,
operating expenses, commissions, dividends and the purchase of investments. Cash
outflows can be variable because of uncertainties regarding settlement dates for
liabilities for unpaid losses and because of the potential for large losses
either individually or in the aggregate. Accordingly, the Company maintains
investment programs generally intended to provide adequate funds to pay claims
without the forced sale of investments.

As of March 31, 1996, the Company's investment portfolio aggregated
$4,392.9 million and consisted of tax-exempt bonds (53.2%), U.S. government
securities (5.9%), mortgage-backed and asset-backed securities (6.8%),
corporates and other fixed maturity securities (20.3%), redeemable preferred
stock (1.8%), perpetual preferred stock (4.0%), common stock (4.8%), mortgage
loans (0.8%), short-term investments (1.6%) and other investments (0.8%).

36
<PAGE> 39

Net cash provided by (or used by) the operating activities of the
Subsidiaries was $(21.9) million, $73.8 million, and $107.9 million for 1993,
1994 and 1995, respectively. The increase for 1995 compared to 1994 was
primarily due to a decrease in the level of paid losses and LAE relative to the
amount of premiums collected for the period. The increase for 1994 compared to
1993 was due to similar factors. The use of operating funds in 1993 was a result
of the New Directions activities begun in late 1991 and was anticipated given
the decrease in premium receipts and continued payment of losses.

Historically, ASI has paid dividends to Lincoln, as its parent, based upon
its annual operating results and statutory surplus requirements. After taking
into account the one-time distribution of $300 million consisting of the
Dividended Assets to be paid by ASI to Lincoln prior to the Offerings, ASI will
not be able to pay any additional dividends to the Company for the Twelve Month
Period without notifying the Indiana Commissioner of Insurance and giving the
Commissioner 30 days within which to object. Regulatory restrictions on the
ability of ASI to pay dividends or make other payments to the Company could
affect the Company's ability to pay dividends and service its debt. The Company
intends to contribute most of the net proceeds from the Offerings to ASI to
enable it to invest in taxable securities for its investment portfolio to
replace the Dividended Assets it distributed to Lincoln, which consist primarily
of tax-exempt municipal securities. The Company intends to retain approximately
$75 million of the proceeds from the Offerings for general corporate purposes,
including the funding of its regular cash dividends, debt service obligations
and other general corporate obligations during the Twelve Month Period. Until
utilized for such purposes, the net proceeds from the Offerings not contributed
to ASI will be invested in short-term, interest bearing, investment-grade
securities. See "The Company," "Use of Proceeds" and "Dividend Policy." Based on
an assumed quarterly dividend of $.21 per share and the terms of the Assumed
Debt, Term Note and Line of Credit (defined below), the Company expects that it
will need approximately $50 million to fund regular quarterly cash dividends and
approximately $20 million to fund debt service obligations and other general
corporate obligations during the Twelve Month Period. No assurance can be given
that there will not be further regulatory actions restricting the ability of the
Subsidiaries to pay dividends to the Company or that amounts retained by the
Company from the net proceeds of the Offerings will be sufficient to pay
dividends and meet other obligations. See "Business -- Regulation --
Restrictions on Dividends to Shareholders; Transactions Among Affiliates." As
such, while management believes that the Company will be able to pay the
intended dividends to its shareholders, no assurances to that effect can be
given.

As part of the Recapitalization, the Company will assume the $100 million
of Assumed Debt. The Assumed Debt is governed by an agreement between the
Company and Lincoln (the "Assumption Agreement") which provides for the payment
by the Company of the currently outstanding 7 1/8% notes due July 15, 1999,
originally issued to the public by Lincoln on July 15, 1992. Lincoln will
continue to be the primary obligor of this public debt; however, pursuant to the
Assumption Agreement, the Company will make a $100 million principal payment on
July 15, 1999 to repay the holders of the public debt. The Assumption Agreement
also provides that interest at 7 1/8% is payable semi-annually by the Company.

Also as part of the Recapitalization, the Company will issue the $200
million Term Note to Lincoln. The Term Note is governed by an agreement between
the Company and Lincoln (the "Term Note Agreement") and will pay interest
quarterly at a rate of 50 basis points over the rate on Treasury securities with
a comparable maturity, adjusted annually on November 15 of each year. As of
April 16, 1996, the interest rate on the Note would have been 6.61%. The Term
Note will be payable in three equal principal payments due on August 15, 1997,
1998 and 1999. Pursuant to the provisions of the Term Note Agreement, the
Company will have the right to prepay the Term Note at any time. The Term Note
Agreement also contains covenants that will, among other things, restrict the
ability of the Company to incur indebtedness in excess of 50% of its adjusted
consolidated net worth and to enter into a major corporate transaction unless
the Company is the survivor and would not be in default. The Company does not
believe that the restriction on indebtedness will have a material impact on its
ability to fund its operations.

For additional liquidity, the Company intends to establish a medium-term
note program (the "MTN Program") within the next year. The MTN Program, if
established, would enable the Company to issue debt when the principal payments
on the Assumed Debt and the Term Note become due and, from time to time, for
general corporate purposes.

37
<PAGE> 40

Concurrently with or shortly after the consummation of the Offerings, the
Company intends to have in place a $200 million short-term investment and
revolving credit facility for ASI from third party financial institutions (the
"Credit Facility"). A lead bank has been identified, and the Credit Facility is
currently in the process of syndication. Management expects the Credit Facility
to bear interest at a market rate. The Company will use borrowings under the
Credit Facility to assist it in funding its short-term cash management
requirements. See "Certain Relationships and Related Transactions -- Lincoln
Short-Term Pool."

The NAIC has implemented a new risk-based capital methodology for assessing
the adequacy of the statutory surplus of insurers. The formulas measure an
insurer's statutory surplus requirements based on the risk characteristics of an
insurer's assets and underwriting liabilities. The financial condition of the
Insurers is such that application of this regulatory tool to them has not
resulted in any corrective action by any of the Insurers or by any regulator.
Management has no reason to believe that this regulatory tool will have any such
effect in the foreseeable future or that it will have any material effect on the
way in which the Company conducts its business. See "Business -- Regulation."

EFFECTS OF INFLATION

The effects of inflation on the Company are implicitly considered in
estimating reserves for unpaid losses and LAE, and in the premium rate-making
process. The actual effects of inflation on the Company's results of operations
cannot be accurately known until the ultimate settlement of claims. However,
based upon the actual results reported to date, it is management's opinion that
the Company's loss reserves, including reserves for losses that have been
incurred but not yet reported, make adequate provision for the effects of
inflation.

NEW ACCOUNTING STANDARDS

Post-Retirement Benefits other than Pensions. Effective January 1, 1993,
the Company changed its method of accounting for post-retirement medical and
life insurance benefits for its eligible employees from a pay-as-you-go method
to a full accrual method in accordance with FAS 106 entitled "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The implementation
of FAS 106 resulted in a one-time charge to 1993 income of $40.5 million for the
cumulative effect of the accounting change. See Note 3 to the Consolidated
Financial Statements included elsewhere herein.

Accounting for Income Taxes. Effective January 1, 1993, the Company changed
its method of accounting for income taxes in accordance with FAS 109 entitled
"Accounting for Income Taxes." FAS 109 requires the liability method be used in
accounting for income taxes. Using this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws. Prior to adoption of FAS 109, income tax expense was based on items of
income and expense that were reported in different years in the financial
statements and tax returns and were measured at the tax rate in effect in the
year the differences originated. Financial data contained herein has been
restated to assume adoption of FAS 109 as of January 1, 1990. Adoption of this
statement decreased 1990 net income by $4.2 million, and increased January 1,
1990 shareholder equity by $6.9 million to reflect the cumulative effect of
adopting FAS 109 at that date.

Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts. Effective January 1, 1993, the Company changed its
method of accounting for reinsurance contracts, in accordance with FAS 113
entitled "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts." Adoption of FAS 113 had no effect on the Company's
reported earnings in 1993 or thereafter.

Accounting by Creditors for Impairment of a Loan. Effective the second
quarter of 1993, the Company adopted FAS 114 entitled "Accounting by Creditors
for Impairment of a Loan." FAS 114 requires that an impaired mortgage loan's
fair value be measured based on either the present value of expected future cash
flows discounted at the loan's effective interest rate, at the loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. The adoption of FAS 114 reduced 1993 net income by $5.0 million. See
Note 3 to the Consolidated Financial Statements included elsewhere herein.

38
<PAGE> 41

Accounting for Certain Investments in Debt and Equity Securities. Effective
December 31, 1993, the Company adopted FAS 115 entitled "Accounting for Certain
Investments in Debt and Equity Securities." FAS 115 requires securities to be
classified as available-for-sale, trading or held to maturity. The effect of
adopting FAS 115 at December 31, 1993, was to increase capital and surplus by
$190.5 million. See Note 3 to the Consolidated Financial Statements included
elsewhere herein. Prior year balance sheets have not been restated for FAS 115.

Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of. In March, 1995, the FAS 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of."
FAS 121, effective for fiscal years beginning after December 15, 1995, requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company plans to adopt FAS 121 in 1996. Management is unaware
of any material assets or transactions that would be affected by this statement.

39
<PAGE> 42

BUSINESS

GENERAL

The Insurers have underwritten property and casualty insurance since 1929
and life insurance since 1958. For 1995, property and casualty revenues were
$1,934 million and property and casualty net income was $163.8 million, while
life insurance revenues were $92 million and life insurance net income was $14.5
million. For the three months ended March 31, 1996, property and casualty
revenues were $490 million and property and casualty net income was $43.8
million, while life insurance revenues were $23 million and life insurance net
income was $3.1 million. At March 31, 1996, the consolidated assets of the
property and casualty Insurers were $5,040 million and the assets of ASLIC, the
Company's indirect life insurance subsidiary, were $566 million. As of March 31,
1996, the Company had approximately 1.6 million property and casualty policies
issued and $15.5 billion of life insurance in-force. One or more of the Insurers
is licensed in all 50 states and the District of Columbia.

STRATEGY

General. The Company's strategy is to achieve earnings growth by focusing
both on profitable lines of business and favorable geographic areas. The Company
writes business exclusively through independent agencies and seeks to
distinguish itself by offering high quality, technology-based service to its
agencies and policyholders.

Target Markets. The Company concentrates on providing commercial insurance
to small to medium-sized businesses and preferred personal lines coverages to
individuals. The Company's commercial lines operations focus on small to
medium-sized businesses engaged in retail, wholesale, service, contracting and
other trade businesses with a relatively low concentration of manufacturing and
industrial operations. Unlike larger, more complex accounts, the lower insured
values typical of this target market reduce the importance of claim severity and
increase the importance of claim frequency as an underwriting consideration.
While business generating higher premiums is sought and accepted, the Company's
strategy is to limit the exposures which are often inherent in more complex
accounts.

The Company's primary geographic concentration is in the Midwest and
Pacific Northwest. Its strategy is to deepen market share in these two areas and
grow its business in other states with profit potential and in which management
believes insurers generally have been permitted to manage risk selection and
pricing without undue regulatory interference. In 1995, the Company wrote
approximately 50% of its property and

40
<PAGE> 43

casualty business in eight states. The following table identifies such states,
the premium volume of property and casualty business written in each state for
1991, 1994 and 1995.

<TABLE>
<CAPTION>
1991 1994 1995 %
DIRECT DIRECT DIRECT INCREASE
WRITTEN % OF WRITTEN % OF WRITTEN % OF (DECREASE)
PREMIUM TOTAL PREMIUM TOTAL PREMIUM TOTAL 1994-1995
-------- ----- -------- ----- -------- ----- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Illinois........................... $ 157.6 7.9% $ 163.5 9.9% $ 160.3 9.6% (2.0)%
Indiana............................ 167.5 8.4 136.7 8.2 155.0 9.2 13.4
Missouri........................... 121.9 6.1 124.4 7.5 126.9 7.6 2.0
Ohio............................... 77.1 3.9 67.7 4.1 71.7 4.3 5.9
Michigan........................... 93.2 4.7 65.8 4.0 69.2 4.1 5.2
Kansas............................. 53.3 2.7 54.0 3.2 56.2 3.4 4.1
-------- ----- -------- ----- -------- -----
TOTAL SELECTED MIDWEST
STATES....................... 670.6 33.7 612.1 36.9 639.3 38.2 4.4

Washington......................... 148.2 7.4 138.1 8.3 139.4 8.3 1.0
Oregon............................. 57.0 2.9 54.4 3.3 54.6 3.3 .4
-------- ----- -------- ----- -------- -----
TOTAL SELECTED NORTHWEST
STATES....................... 205.2 10.3 192.5 11.6 194.0 11.6 .8
-------- ----- -------- ----- -------- -----
TOTAL SELECTED EIGHT
STATES.................. 875.8 44.0 804.6 48.5 833.3 49.8 3.6

California......................... 211.9 10.6 126.8 7.6 121.0 7.3 (4.6)
Florida............................ 115.7 5.8 66.0 4.0 59.3 3.5 (10.2)
-------- ----- -------- ----- -------- -----
TOTAL CALIFORNIA/FLORIDA....... 327.6 16.4 192.8 11.6 180.3 10.8 (6.5)

All Others......................... 789.3 39.6 660.5 39.9 660.9 39.4 .1
-------- ----- -------- ----- -------- -----
TOTAL..................... $1,992.7 100.0% $1,657.9 100.0% $1,674.5 100.0% 1.0%
======== ===== ======== ===== ======== =====
</TABLE>

Focus on Profitable Business. The Company's strategy is to achieve earnings
growth by focusing both on profitable lines of business and favorable geographic
areas. To further this strategy, the Company took steps in late 1991 counter to
the industry and introduced New Directions to improve its account selection,
risk evaluation and pricing. Under New Directions, which has been substantially
completed, the Subsidiaries elected to reduce market share in lines of business
which were producing results below acceptable levels in order to improve the
Company's SAP loss ratio. Premium income was also reduced, especially in
geographic areas producing unsatisfactory results, such as southern California
and Florida, and relationships with under-performing agencies were terminated.
New Directions was primarily responsible for the 12.3 percentage point
improvement in the Company's loss ratio from 71.6% for 1991 to 59.3% for 1995.
The following table compares the Company's loss ratio and SAP combined ratio
with industry ratios for the years 1986-1995, 1991-1995 and 1993-1995.

<TABLE>
<CAPTION>
COMPANY INDUSTRY COMPANY INDUSTRY
SAP LOSS SAP LOSS SAP COMBINED SAP COMBINED
RATIO RATIO(1) RATIO(2) RATIO(1)(2)
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
1986............................. 65.0% 70.2% 104.1% 108.0%
1987............................. 59.5 66.6 97.6 104.6
1988............................. 61.6 66.4 100.5 105.4
1989............................. 68.3 69.2 106.9 109.2
1990............................. 70.4 69.4 109.2 109.6
1991............................. 71.6 68.5 110.8 108.8
1992............................. 70.9 74.7 112.5 115.8
1993............................. 63.8 66.7 107.1 106.9
1994............................. 61.1 68.1 104.6 108.5
1995............................. 59.3 65.3 103.6 106.4

86-95 Average(3)................. 65.2% 68.5% 105.7% 108.3%
91-95 Average(3)................. 65.3 68.7 107.7 109.3
93-95 Average(3)................. 61.4 66.7 105.1 107.3
</TABLE>

- -------------------------
(1) Source: A.M. Best Aggregates and Averages -- 1995 Edition. The industry SAP
loss ratio and the industry SAP combined ratio for 1995 are estimates from A.M.
Best.

(2) SAP combined ratio after policyholder dividends.

(3) Computed based on simple average.

41
<PAGE> 44

Expense Control; Realignment. In November, 1995, as a follow-up to New
Directions, the Company announced the Realignment of its field structure
designed to reduce expenses, contribute to further improvement of the combined
ratio, and enhance growth. Under the Realignment, the Company will continue to
provide sales, claims, technology support or other agency and customer service
functions from approximately 225 locations; and, during 1996 and 1997, it will
consolidate the management of those functions and much of its underwriting from
20 division offices into four regional offices, each responsible for a
designated geographic area. Two of the regional offices will be in Indianapolis,
Indiana and the others will be in Seattle, Washington and Fort Scott, Kansas. As
part of the Realignment, the Company has created 24 Field Executive positions to
maintain and enhance its working relationships with its agencies by putting more
decision-making authority in the field, close to, and readily accessible by, the
agents. Each of the Field Executives is a senior-level, experienced insurance
professional who is responsible for the Company's field operations within an
assigned geographic territory. They supervise over 1,000 field personnel
employed by the Company to serve agencies and customers. Management believes
that this structure will allow the Company to enhance service to its customers
and agents and, simultaneously, achieve more economies of scale. Full
implementation of the Realignment is expected by management to be accomplished
within two years.

Expense Control; Technology. A key component of the Realignment and the
Company's overall expense control is the use of existing technology to meet the
needs of agents and customers more effectively. The proprietary Interaction(TM)
system permits the electronic, real-time processing of quotations and
applications between the agencies and the Company. The use of knowledge-based
systems has enabled the Company to underwrite increasing amounts of personal
lines business on an automated basis. Supported by this technology, the
Realignment provides an opportunity for the Company to manage its business more
effectively and efficiently, while continuing to provide quality service to its
agencies and customers. The Company's claims department also utilizes a
knowledge-based system licensed from an unaffiliated vendor to assist in the
evaluation of bodily injury claims. This system positively affects loss costs by
promoting quick settlements that are both fair and consistent.

Growth Initiatives. In addition to its focus on those eight Midwest and
Pacific Northwest states which comprise the most significant part of its target
market, the Company has also targeted a number of other states for increased
marketing efforts where management believes its presence and a favorable
environment give it potential for additional profitable growth. To promote
growth in profitable lines of business and favorable geographic areas, the
Company has introduced an enhanced agency bonus plan and targeted incentives.
Any effect of these new incentives and enhancements is not expected to be
realized until the second half of 1996 at the earliest. The Company has also
recently developed the Customer Information File. This relational database
allows the Company and its agencies to monitor products in-force for its
customers and identify potential needs, and allows the Company to support
agencies in targeting customers where cross-selling opportunities may exist. In
order to afford its agencies access to an even more diverse product line, the
Company intends to market certain ancillary products, not currently distributed
by ASI, which may be manufactured or underwritten by other insurers. While these
programs will increase underwriting expenses somewhat in the short term,
management believes that the added costs should be more than offset by increased
earnings over the long term.

The Company has made a number of acquisitions of property and casualty
insurers over the years, the latest significant transaction being in 1988. These
acquisitions have been a significant contributor to the Company's growth by
extending the geographic reach of its operations and deepening its presence in a
number of existing markets. Although the Company is not actively considering any
significant acquisitions at present, it believes that the automation and
efficiency of its operations, together with its strong distribution network,
should position it to participate in attractive acquisition opportunities that
may arise.

Superior Agent and Customer Service. Because the Company produces its
business through independent agencies, its relationships with those agencies are
critical to its success. The Company seeks to maintain and develop its agency
relationships by providing agencies with fast, efficient service as well as
marketing support. Approximately 94% of the Company's agencies are users of the
Interaction(TM) system. As part of Interaction(TM), ASI provides the agency with
an online computer link to the Company's offices. The agency uses this

42
<PAGE> 45

point-of-sale system to enter data, obtain quotes and submit applications,
thereby providing its customers with rapid, efficient service. Currently,
approximately 78% of all the Company's property and casualty transactions are
processed electronically through Interaction(TM). The average premium for all
commercial business written by the Company is approximately $1,500. Given the
small average policy size written by ASI, agencies value efficient policy
processing and renewals with a minimum of associated paperwork and other
backoffice expenses. Through the use of Interaction(TM) and knowledge-based
underwriting systems, ASI not only reduces policy transaction costs but also
provides rapid and accurate policyholder service to its agency network. In
addition, the Company continually upgrades its technology and provides regular
software maintenance and on site training for agency personnel. See "--
Technology."

Further, the Company's claims department is heavily automated with the
majority of claims being received electronically from the agency. In
approximately 85% of the cases, contact with the claimant is made the same day
the claim is reported or the next business day. Because efficient, responsive
claims service is an integral part of the insurance package sold by the agents
to their customers, ASI's automation of claims handling is an important part of
its commitment to providing superior service to its agents and their customers.

DISTRIBUTION AND MARKETING

The small to medium-sized business market is largely served by independent
agencies. Despite a decline in the number of agencies in the Company's network
as a result of the consolidation in the agency industry and the implementation
of New Directions, the Company continues to distribute its products through a
large, widely dispersed independent agency network consisting of approximately
4,800 independent agencies, none of which is a dominant producer for the
Company. In 1995, the top ten independent agencies ranked by volume of premiums
written through ASI accounted for less than 3% of the 1995 consolidated premiums
of ASI. The Company's distribution approach emphasizes long-term relationships
with high quality agencies. Two-thirds of the nearly 4,800 independent agencies
have represented the Company for 10 or more years.

The Company seeks on an ongoing basis to appoint additional agencies,
particularly in those geographic areas targeted for growth. In their assigned
territories, the Company's field sales force, consisting of 24 Field Executives
and 94 Field Sales Managers employed by the Company, identifies and seeks to
recruit agencies whose portfolio of business and strategic focus is compatible
with that of the Company. Appointments may be recommended by a member of the
field sales force, but may not be made without the approval of the Vice
President responsible for the region.

The Company compensates its agencies by means of commissions, bonuses and
special promotions. Although commissions vary among lines of business and, to
some extent, from state to state, the Company pays commissions which are
generally competitive in the marketplace. In addition to the commissions set
forth in the Company's standard commission schedules, agencies are afforded an
opportunity to earn a bonus based on a formula which takes into consideration
both profitability and growth. This bonus arrangement permits the Company to
reward and encourage agents who succeed in placing profitable business with the
Company. The Company also utilizes travel and other periodic promotions which
permit the Company to target growth in particular lines or areas.

The Company attributes its success in developing and maintaining
relationships with agencies to the following factors: (i) close working
relationships between the Company and agency personnel, (ii) interactive and
knowledge-based technology systems which limit agencies' handling costs on
renewals and facilitate superior policyholder service of new policies, (iii)
prompt and responsive claims handling supported by interactive technology, (iv)
financial strength of the Company, (v) creative bonus and incentive programs
which are designed to encourage agencies to place more of their profitable
business with the Company, and (vi) products designed to meet the needs of the
agency network. In an effort to further enhance its relationship with
independent agencies, the Company intends to provide more marketing support to
agencies to help them expand their businesses. For example, through utilizing
the Customer Information File, the Company will assist agencies in targeting
customers with respect to which cross-selling opportunities may exist. The
Company intends to engage in a joint marketing analysis with selected agencies
in order to permit those agencies to penetrate their markets to a greater extent
by identifying patterns of business and potential

43
<PAGE> 46

customer bases. Also, in order to afford its agencies access to an even more
diverse product line, the Company intends to market certain ancillary products
underwritten by other insurers and not currently distributed by ASI.

PROPERTY AND CASUALTY PRODUCT LINES

General. The Company's major property and casualty business lines include
the following types of property and casualty insurance coverage: BOPs,
commercial multi-peril, commercial automobile, workers' compensation, private
passenger automobile, and homeowners multi-peril. Although other potentially
profitable coverages will be considered, the Company's focus is on small to
medium-sized businesses. Substantially all of the Company's policies are written
on an annual basis, except for private passenger automobile which is typically a
six-month policy.

The following table sets forth the Company's net premiums written and
statutory loss ratio since 1991 for ongoing property and casualty operations, by
product line:

<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
NET PREMIUMS WRITTEN
Commercial Lines:
BOPs.................................... $ 59.2 $ 59.7 $ 60.3 $ 64.0 $ 68.5 $ 16.6 $ 17.7
Commercial multi-peril.................. 385.6 338.8 292.5 291.7 289.1 76.2 75.4
Commercial automobile................... 341.9 294.0 263.3 245.5 239.4 61.9 59.8
Workers' compensation................... 279.4 224.4 208.6 198.0 199.8 57.8 40.9
Other commercial........................ 208.8 208.9 192.8 185.9 194.8 50.4 47.6
------- -------
- -
-------- -------- -------- ------ ------
Total commercial...................... $1,274.9 $1,125.8 $1,017.5 $985.1 $991.6 $262.9 $241.4
======== ======== ======== ====== ====== ======== ========
Personal Lines:
Personal automobile..................... $ 509.0 $ 489.1 $ 467.6 $452.4 $464.6 $116.7 $118.7
Homeowners.............................. 183.6 198.3 191.5 189.9 189.1 39.5 39.1
Other personal.......................... 62.3 58.4 31.8 26.0 27.4 6.5 6.4
------- -------
- -
-------- -------- -------- ------ ------
Total personal........................ $ 754.9 $ 745.8 $ 690.9 $668.3 $681.1 $162.7 $164.2
======== ======== ======== ====== ====== ======== ========
LOSS RATIO
Commercial Lines:
BOPs.................................... 66.6% 60.0% 47.6% 56.2% 46.0% 51.2% 84.5%
Commercial multi-peril.................. 64.9 66.1 55.3 55.7 51.5 49.9 54.6
Commercial automobile................... 65.3 66.3 60.9 57.9 54.1 52.0 65.2
Workers' compensation................... 87.7 84.5 66.8 49.3 38.3 43.6 45.8
Other commercial........................ 59.8 51.4 52.8 44.0 46.2 55.2 55.1
Total commercial...................... 69.3 67.1 58.2 52.8 48.1 50.2 57.9
Personal Lines:
Personal automobile..................... 74.1% 66.3% 63.8% 64.6% 63.9% 69.4% 67.4%
Homeowners.............................. 78.8 77.4 77.1 84.9 70.4 64.1 98.2
Other personal.......................... 79.1 73.0 58.8 63.6 70.0 70.8 30.2
Total personal........................ 75.7 69.8 67.2 70.2 66.0 68.0 74.5
</TABLE>

Commercial Property and Casualty Lines. Management of the Company believes
that ASI is the second largest writer in the United States of commercial
insurance for businesses with fewer than 50 employees, with 3.4% of this segment
of the U.S. market, based on 1994 estimated premiums. The Company's commercial
lines operations, which generated approximately 59% of the Company's property
and casualty net premiums written in 1995, are focused on small to medium-sized
business engaged in retail, wholesale, service, contracting and other trade
businesses with less exposure to hazards. Unlike larger, more complex accounts,
the lower insured values typical of this target market reduce the importance of
claim severity and increase the importance of claim frequency as an underwriting
consideration. The Company's principal commercial

44
<PAGE> 47

property and casualty product lines are BOPs, commercial multi-peril, commercial
automobile, workers' compensation and other commercial insurance.

A BOP is a package policy which provides in one contract most of the
insurance protection commonly needed by typical small business accounts, other
than automobile coverage and workers' compensation. Typically, a BOP covers
buildings and other business property for full replacement cost, includes
coverage for the insured's liability to third parties resulting from negligence
and provides business interruption coverage. Optional coverages, including
protection against such things as employee dishonesty, robbery, loss of money
and securities, damage to signs and breakage of plate glass, may be added to the
basic contract when desired by the insured. One reason for the popularity of
BOPs is that they are rated in a way which is easy for the agent to compute and
for the insured to understand. Unlike other package policies for which each
coverage must be rated separately, BOPs have a single rate per unit of coverage
for each class of insured and a simply determined additional charge for each
optional coverage.

Commercial multi-peril coverage is written as a package policy, providing
multiple coverages in a single contract. It insures business property against
damage, such as may be caused by fire, wind, hail, theft or vandalism. It also
insures businesses for liability to third parties for accidents occurring on the
insured premises or arising out of the insured's operations, such as injuries
caused by products manufactured or sold. According to A. M. Best, in 1994, the
Company was the third largest writer of commercial multi-peril coverage in the
eight Midwest and Pacific Northwest states which comprise the most significant
part of its target market. See "-- Strategy -- Target Markets."

Commercial automobile insurance is also written as a package policy. It
includes coverage for the insured's liability to third parties for bodily injury
or property damage resulting from the operation, maintenance or use of a motor
vehicle, and it includes no-fault benefits where mandated by statute. It also
provides coverage for property damage, however caused, to the insured motor
vehicle. Additionally, a commercial automobile policy may include medical
payments coverage, which obligates the Company to pay certain medical expenses
of those injured by the operation, maintenance or use of an insured vehicle,
regardless of whether the injury was the fault of the insured. The Company
targets the small to medium-sized accounts and lower hazard classes which typify
its commercial customers and insures few large fleets or higher hazard classes,
such as long haul truckers or those engaged in the transport of hazardous cargo.
In 1994, the Company was the second largest writer of commercial automobile
coverage in the eight selected states comprising the most significant part of
its target market. See "-- Strategy -- Target Markets."

Workers' compensation coverage insures employers with respect to their
statutory obligations to provide benefits to employees injured in the course of
employment. It includes coverage for medical expenses, lost wage reimbursement
and compensation for permanent disability resulting from work related injuries
to employees. Workers' compensation coverage is usually provided in conjunction
with other commercial policies and is generally not sold as a stand-alone
policy. Because of the Company's emphasis on small to medium-sized businesses,
most of its workers' compensation business is written at standard rates, which
are not subject to negotiation with the insured. A majority of these policies
are "non-participating," meaning that profits are not shared with the insured by
means of policyholder dividends. While in recent years the workers' compensation
market has returned to profitability after several years of marginal results,
the Company believes this improvement is transitory and plans to continue
emphasizing those accounts where workers' compensation coverage can be sold in
conjunction with other policies.

Other commercial insurance consists, among other things, of (a) commercial
fire and other property insurance; (b) commercial general liability, which
covers the insured's liability to third parties for personal injury and property
damage; (c) farmowners insurance, which is a package policy covering property
and casualty risks common to farmers; (d) boiler and machinery coverage, which
insures against explosion or failure of pressure vessels and other machinery;
(e) fidelity bonds, which protect against defalcation by employees, agents,
trustees and other fiduciaries; (f) surety bonds, which guaranty performance of
contractual or other obligations; (g) inland marine policies, which provide
coverage for specified property; and (h) umbrella policies, which provide
liability coverage in excess of that provided by any other liability insurance
carried by the insured.

45
<PAGE> 48

Personal Property and Casualty Lines. In personal lines, which were 41% of
the Company's property and casualty net premiums written in 1995, the Company
focuses on the preferred automobile and homeowners lines, which generally
experience less policy turnover. Combined, those products accounted for roughly
80% of the Company's personal lines business in 1995. In that year, the
Company's personal automobile net premiums written were $464.6 and its
homeowners net premiums written were $189.1 million.

Private passenger automobile insurance is generally written as a package
policy. At the insured's discretion, the policy may include one or more of the
following: (a) coverage for the insured's liability to third parties for bodily
injury or property damage resulting from the operation, maintenance or use of a
motor vehicle; (b) coverage required by any applicable no-fault statute; (c)
coverage for property damage to the insured vehicle caused by collision; (d)
coverage for property damage to the insured vehicle caused by other means; and
(e) medical payments coverage, which obligates the Company to pay certain
medical expenses of those injured by the operation, maintenance or use of an
insured vehicle, regardless of whether the injury was the fault of the insured.
Depending upon the policy form selected or required by statute, other coverages
may also be provided. The Company has focused its efforts on the preferred, or
lower risk, segment of this market. It augments this strategy by means of the
same customer-based strategy it uses in commercial lines. In recent years
personal automobile coverage has been profitable, with an average loss ratio of
64.1% for 1993 through 1995.

Homeowners insurance is also a package policy. It insures individuals for
losses to their residence and personal property, such as may be caused by fire,
wind, hail, theft or vandalism, as well as for personal injury and property
damage liability claims brought by third parties. It may also provide medical
payments coverage, which obligates the Company to pay certain medical expenses
of those injured on the insured premises, regardless of whether the injury was
the fault of the insured. Depending upon the policy form selected, other,
relatively less important coverages may also be provided. The homeowners line
has been particularly problematic for the insurance industry, with catastrophe
and natural peril losses setting records in the last several years and
inadequate rate levels due to prolonged and severe competition. The Company has
been de-emphasizing this line, choosing to concentrate its effort where there is
a greater potential for profit.

Other personal insurance includes: (a) dwelling fire and extended coverage,
providing protection for residences and their associated property which is more
limited than that available under a homeowners policy; (b) personal inland
marine coverage, which insures specific items of property; and (c) personal
casualty insurance, consisting mostly of personal umbrellas providing liability
insurance in excess of that provided by any other policy carried by the insured.

LIFE INSURANCE PRODUCT LINES

Life insurance is an integrated product line, marketed through the same
independent agency distribution network as the Company's property and casualty
insurance policies, and supported by the Company's field organization and
on-line Interaction(TM) system for policy processing and service. The Company
intends to use the Customer Information File in order to seek to augment sales
of life insurance products by its agency network to existing commercial or
personal lines customers. The Company stresses the sale of universal life and
term life policies, although it also writes whole life, individual annuities and
disability income policies. The following chart shows the percentage of the
Company's policy income accounted for by each of these

46
<PAGE> 49

products in each of the last five years and for each of the three-month periods
ended March 31, 1995 and 1996.

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------------------------------- ------------------------------
1991 1992 1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- ------------- ------------- -------------
% OF % OF % OF % OF % OF % OF % OF
$ TOTAL $ TOTAL $ TOTAL $ TOTAL $ TOTAL $ TOTAL $ TOTAL
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PRODUCT LINE
- -----------
Universal...... $13.5 33.8% $14.6 33.2% $16.2 34.0% $17.5 33.3% $19.7 34.7% $ 4.7 33.9% $ 5.2 35.8%
Term........... 19.7 49.3 22.2 50.5 24.8 52.1 27.3 52.0 28.6 50.4 7.2 51.8 7.0 48.3
Whole
life......... 4.3 10.7 4.6 10.4 4.8 10.1 3.7 7.1 3.5 6.2 0.9 6.5 1.0 6.9
Individual
annuities...... 1.4 3.5 1.4 3.2 1.1 2.3 1.1 2.1 .9 1.6 0.2 1.4 0.3 2.1
Disability(1).. -- -- -- -- -- -- 2.1 4.0 3.1 5.4 0.7 5.0 0.8 5.5
All other...... 1.1 2.7 1.2 2.7 .7 1.5 .8 1.5 1.0 1.7 0.2 1.4 0.2 1.4
----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------
Total...... $40.0 100.0% $44.0 100.0% $47.6 100.0% $52.5 100.0% $56.8 100.0% $13.9 100.0% $14.5 100.0%
===== ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>

- -------------------------
(1) Before 1993, this line of business was written by the property and casualty
Insurers, not ASLIC.

Universal life insurance is life insurance under which premiums are
generally flexible, the level and form of benefits may be adjusted by the policy
owner and expenses and other charges are specifically disclosed to the
purchaser. This is sometimes referred to as "unbundled life insurance" because
the three basic elements (interest earnings, cost of protection and expense
charges) are separately identified both in the policy and in an annual report to
the policyholder.

Term life insurance provides a defined death benefit, but no cash value.
The amount of the death benefit may be level or may decline over the life of the
policy, and coverage may be written for a fixed period or may be renewable at
the option of the policy owner.

Whole life insurance provides both a guaranteed death benefit and a
guaranteed minimum cash value. These policies are sometimes referred to as
"permanent life insurance."

Individual annuities are contracts written for individuals which pay a
periodic income benefit commencing at a time defined by contract and continuing
for the life of the person, for a specified number of years, or a combination of
both.

Disability income insurance provides periodic payment of a contractually
determined amount to the insured in the event he or she becomes unable to work
due to injury or disease. The Company's disability income insurance is
guaranteed renewable, but subject to repricing by the Company.

Other life insurance revenues are derived from a group life insurance
program limited to covering the Company's agents, an accidental death and
dismemberment program written through one large agency and income from fees
earned on certain accident and health policies written by another insurer
through the Company's agency network and facilitated by the Company.

UNDERWRITING

Property and Casualty. The Company seeks to coordinate its underwriting
with its marketing programs. Its underwriting philosophy is to achieve spread of
risk by accepting a large volume of relatively low hazard, uncomplicated
business which lends itself to knowledge-based underwriting and automated
processing. Agencies, the field sales force and underwriters are expected to
work closely together to select and properly price business. They are given
general guidelines defining what is, and what is not, an acceptable risk in each
line of business. Within the parameters defined by these guidelines, the Company
promotes what it calls "common sense underwriting," in which risk selection and
evaluation decisions are based upon a realistic appraisal of the total exposure
presented by each case, assessed in light of the experience and knowledge of
both the agent and the underwriter. The profitability of business submitted by
each agency is carefully tracked and underwriting guidelines for a particular
agency may be adjusted as appropriate.

47
<PAGE> 50

Most of the Company's commercial and personal lines business is written on
policy forms developed by the Insurance Services Office ("ISO"), an independent
industry support organization. The coverage provided by those forms is sometimes
enhanced or otherwise modified by the Company to address specific underwriting,
marketing or geographic considerations. Similarly, most rates are based on loss
cost data provided by ISO, adjusted when appropriate to reflect the Company's
own experience. A factor reflecting the Company's expenses is added to those
adjusted loss costs in order to arrive at the final rate.

While its goal is to earn an underwriting profit on each product line
written, competition, the Company's desire to underwrite each customers's full
account and the demands of its agencies require that the Company offer a broad
range of products throughout its operating territory. Nevertheless, by
customizing its risk selection criteria and pricing to meet market conditions in
each of the states in which it operates, agencies are encouraged to write those
lines which management feels have the most profit potential. While the Company's
underwriting program seeks to balance both profitability and growth, management
believes that profitability should be emphasized. It is for that reason that New
Directions was implemented. See "-- Strategy -- Focus on Profitable Business."

In personal lines, pricing and risk selection are tailored to meet
competition and to reflect the Company's own results in each market. Because of
its concentration on the preferred personal lines market, in recent years the
Company has substantially reduced its writings of standard personal automobile
insurance and has tried to avoid the substandard market altogether. The primary
effort in homeowners has been to control exposure in catastrophe-prone areas and
to evaluate homeowners policies to determine that the amount of protection
purchased is appropriate in relation to the replacement cost of the property.
While the effect of these strategies has been to reduce the amount of personal
lines business written in many states, management believes that it has
contributed to the Company's overall profitability.

Like most of its competitors, the Company permits its agencies to bind new
business and make changes in existing policies in accordance with its
comprehensive guidelines. All coverages bound by agents are promptly reviewed by
the Company before a policy is issued. The Company believes that its willingness
to grant limited binding authority is an important factor in building
relationships with, and attracting business from, the independent agencies with
which it does business.

Life Insurance. The Company's life insurance products and pricing are
directed at the standard market and it seeks to avoid insuring those who
represent higher risks. For that reason, only about 5% of its business is issued
at rates other than standard. Special emphasis is placed on providing products
and sales support which are "user friendly" to the Company's agents. By
concentrating on relatively simple but competitive products, providing a high
level of service and following standardized and consistently applied
underwriting practices, the Company has been able to market to the segment of
the life insurance market which is most readily reached by its distribution
system.

Knowledge-Based Underwriting. Over the past three years, the Company has
developed and tested a knowledge-based underwriting system for its property and
casualty personal lines products which is compatible with Interaction(TM). This
system has undergone two years of testing in a pilot program and is now being
implemented nationally. Because knowledge-based systems mimic the
decision-making process of experienced underwriters in certain commonly
encountered situations and greatly reduce the amount of time spent on clerical
functions, such systems allow the Company to handle a high volume of
transactions in a way that management believes is both efficient and consistent.
The system is able to handle routine cases automatically, while referring the
more difficult or unusual situations to an underwriter.

Over 50% of new personal automobile policies and over 40% of new homeowners
policies are being processed by a knowledge-based underwriting system without
referral to the underwriter. The Company intends to increase the percentage of
personal lines business underwritten by knowledge-based systems and to adapt
this technology for use in underwriting commercial lines. The Company is also in
the process of implementing Life Underwriting System ("LUS"), a knowledge-based
life underwriting system developed by Lincoln and licensed to the Company. See
"-- Technology."

48
<PAGE> 51

CLAIMS

The Company's property and casualty claims department services agencies and
policyholders through a network of approximately 225 field locations including
branch offices and resident adjusters. The majority of claims are resolved by
staff adjusters located in the field throughout the country to maximize service
to the Company's agencies and policyholders. These staff adjusters are qualified
to handle most of the coverages marketed by the Company. The Company believes
that delivering responsive, cost-effective claim service is an important factor
in obtaining and keeping attractive business. Because claims handling will not
be centralized in the four regional offices contemplated by the Realignment,
this program is not expected to have any material effect on claims service.

The field staff, assisted by local claims management and the home office,
handles over 360,000 claims annually. In addition to adjusters and appraisers,
the field staff includes special investigation units to detect and deter
fraudulent cases and attorneys who handle litigation. The claims department is
heavily automated, with over 50% of claims being received electronically from
the agency. In approximately 85% of cases, contact with the claimant is made the
same day the claim is reported or the next business day. By reducing the chance
for errors and the number of disputes regarding settlement amount, the use of an
automated automobile estimating system by appraisers in metropolitan locations
increases the speed with which automobile physical damage claims can be settled.
The Company utilizes a knowledge-based system licensed from an outside vendor to
assist in the evaluation of bodily injury claims. This system reduces loss costs
by promoting quick settlements that are both fair and consistent. While the
majority of claims are handled by the field staff, there are specialized units
in the home office to oversee environmental and construction defect cases.

Agencies are granted authority to handle small, uncomplicated claims and
appropriate controls are in place to monitor their expenditures. This has been a
cost-effective way to handle minor losses. It also helps to build relationships
with agencies by allowing them to provide additional, highly visible service to
their customers.

Authority levels for the claims staff are established by claims management
and are based upon the skill level of the individual, subject to certain
maximums. Claims are reserved promptly after being reported. The case reserving
philosophy is to investigate promptly each claim and establish a realistic
reserve based upon the known exposure of the case. See "-- Reserves for Losses
and Loss Adjustment Expense."

TECHNOLOGY

General. Intensive utilization of technology has been and remains a key
strategy for the Company. In nearly every facet of its operations, the Company
has found ways to accomplish its work more efficiently through the development
and implementation of computerized systems. Some of the more important are
discussed below.

Property and Casualty Underwriting and Sales. The Company's property and
casualty underwriting and sales efforts utilize a proprietary, on-line data
processing system known as "Interaction,(TM)" which enables the Company to
connect electronically with its agencies. Interaction,(TM) which is used for
both personal and commercial lines, reduces paperwork and handling by permitting
one-time entry of underwriting information at the point of sale. The data is
then immediately available to the underwriter in a form which can be processed
by the Company's automated policy rating, issuance, billing and service systems.
Interaction(TM) also allows agencies to obtain automated, point-of-sale price
quotations and to communicate with the Company's underwriters via e-mail.
Approximately 94% of the agencies representing the Company are "on-line" with
Interaction(TM) and approximately 78% of all property and casualty transactions
are processed electronically.

Through its Interaction(TM) system, the Company provides a processing and
service platform which gives the independent agency the capability of providing
on-line, timely service to its customers while achieving cost efficiencies for
the agency and the Company. This technological approach to service provides a
competitive advantage to the agency and the Company by reducing handling costs
associated with the high volume and relatively lower premium characteristics of
the small to medium-sized business market.

49
<PAGE> 52

In addition, the Company has recently developed the Customer Information
File, a relational database that allows the Company and its agencies to monitor
the products in-force and identify the potential needs for existing customers.
The Company expects this database to help agencies sell additional products to
its current customers.

Over the past three years, the Company has developed and tested a
knowledge-based underwriting system for its personal line products, which is
compatible with Interaction(TM). This system has undergone two years of testing
in a pilot program and is now being implemented nationally. Because
knowledge-based systems mimic the decision-making processes of experienced
underwriters in certain commonly encountered situations and greatly reduce the
amount of time spent on clerical functions, these systems allow the Company to
handle a high volume of transactions in a way which is more efficient and
consistent. The system is able to handle routine cases automatically, while
referring the more difficult or unusual situations to an underwriter. The
Company intends to expand the utilization of the knowledge-based system into
other states and to increase the percentage of personal lines of business
underwritten by this system. A similar knowledge-based underwriting system has
also been developed for BOPs and commercial automobile business. This system is
being carefully tested and will likely be introduced in 1996.

The Company has also developed a unified premium billing system for all
policies issued to a single customer. This system reduces the Company's
processing costs, simplifies the premium payment process for the customer and
gives the customer flexibility in selecting from customized options.

Management believes that the cumulative effect of these systems is to give
the Company a significant advantage by allowing it to operate more efficiently
in its target markets than its competitors. At the same time, service to both
the agency and the ultimate customer is enhanced.

Claims. The Company's claims operation is also highly automated. All
adjusters have available to them a knowledge-based software package, licensed
from an outside vendor, which aids them in the evaluation of bodily injury
claims. This system factors in the type of injury sustained, the magnitude of
the compensatory damages, the degree of fault of each party, the location of the
claim, prior experience with similar claims and the expert judgment of
experienced claim handling staff in order to suggest a range of values within
which the claim may be expected to settle. In use for three years, management
believes this system has resulted in a greater degree of consistency and,
therefore, reduced loss costs, than had been achieved prior to its
implementation.

Appraisers in metropolitan areas also utilize an automated system for the
estimation of automobile physical damage claims which minimizes estimate errors
and disputes and facilitates the expeditious settlement of claims in a fair and
cost-effective manner.

Life Insurance. Technology is also an integral part of the Company's life
insurance operation, which utilizes a life underwriting system developed by
Lincoln and currently used by approximately 40 other life insurers. This system
has the potential to receive applications and underwrite and issue policies.
When fully implemented, the Company expects a significant portion of its new
life insurance business to be issued without the need for review by an
underwriter and with a turnaround time of as little as 24 hours from application
to issuance.

The Interaction(TM) system, integral to the Company's property and casualty
business, is also used in its life operations. Interaction(TM) allows most of
the Company's agents to obtain automated life insurance price quotes and to
communicate with the Company by e-mail. In addition, it provides a mechanism
with which the Company can quickly communicate sales promotions and interest
rate changes to the agency force.

Support Personnel. The Company has approximately 130 employees on its
software development and maintenance staff. It also has approximately 85 field
technology advisers who service the agencies by providing on-site training,
telephonic support and maintenance and upgrade of software.

50
<PAGE> 53

RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSE

Property and Casualty Reserves. The Subsidiaries are required by applicable
insurance laws and regulations to maintain reserves for payment of losses and
LAE for claims, both reported and incurred but not reported ("IBNR"), arising
from the policies they have issued. These laws and regulations require that
provision be made for the ultimate cost of those claims without regard to how
long it takes to settle them or the time value of money. The determination of
reserves involves actuarial and statistical projections of what the Company
expects to be the cost of the ultimate settlement and administration of such
claims based on facts and circumstances then known, estimates of future trends
in claims severity, and other variable factors such as inflation and changing
judicial theories of liability.

The estimation of ultimate liability for losses and LAE is an inherently
uncertain process and does not represent an exact calculation of that liability.
The Company's reserve policy recognizes this uncertainty by maintaining reserves
at a level providing for the possibility of adverse development relative to the
estimation process. The Company does not discount its reserves to recognize the
time value of money.

When a claim is reported to the Company, its claims personnel establish a
"case reserve" for the estimated amount of the ultimate payment. This estimate
reflects an informed judgment, based upon general insurance reserving practices
and on the experience and knowledge of the estimator regarding the nature and
value of the specific claim, the severity of injury or damage, and the policy
provisions relating to the type of loss. Case reserves are adjusted by the
Company's claims staff as more information becomes available. It is the
Company's policy to settle each claim as expeditiously as possible.

The Company maintains IBNR reserves whose purpose is to provide for future
development on reported claims and IBNR claims. The IBNR reserve is determined
by estimating the Company's ultimate net liability for both reported and IBNR
claims and then subtracting the case reserves for reported claims.

Each quarter, the Company's actuaries compute its estimated ultimate
liability using actuarial principles and procedures applicable to the lines of
business written. Such reserves are also considered annually by the Company's
independent auditors in connection with their audit of the Company's financial
statements. However, because the establishment of loss reserves is an inherently
uncertain process, there can be no assurance that ultimate losses will not
exceed the Company's loss reserves. As required by insurance regulatory
authorities, each of the Company's direct and indirect Subsidiaries submits to
the various jurisdictions in which it is licensed a statement of opinion by its
appointed actuary concerning the adequacy of statutory reserves.

The primary actuarial projection techniques utilized by the Company are the
"reported loss development method" and the "paid loss development method." These
methods involve projecting reported losses to ultimate levels based on either
historic loss reporting or historic loss payment patterns. Loss-based methods
are considered most appropriate for the product lines primarily written by the
Company. These methods are supplemented, when appropriate, by premium-based
techniques utilizing estimated loss ratios and earned premiums. As part of this
process, the Company's actuaries review historical data and anticipate the
impact of various factors such as legislative enactments and judicial decisions
which may affect future claim settlements. Such factors include the increasing
propensity of juries to return large damage awards, changes in political
attitudes that may affect the tendency of legislators and judges to impose
liability for certain types of losses, and trends in general economic
conditions, including the effects of inflation. Adjustments are also made to
take into account changes in the volume of business written, claim frequency and
severity, the mix of business, changes in the claim settlement process and other
factors which can be expected to affect the Company's liability for losses. This
process assumes that past experience, adjusted for the effects of current and
anticipated trends, is an appropriate basis for predicting future events.

Certain of the Company's reserves are for assumed reinsurance business
which the Company commenced writing in 1964 and discontinued marketing in 1993.
At various times during that 29-year period many different kinds and lines of
reinsurance were written by ASI and its subsidiaries. Included were a broad
range of property and casualty reinsurance coverages for both primary companies
and other reinsurers. Excess of loss, quota share and catastrophe reinsurance in
a wide range of limits was written, with special emphasis on

51
<PAGE> 54

serving the small mutual company market. This business, which in no year
generated more than $82 million of net premiums written and averaged less than
$36 million per year, includes the assumption of some primary insurance written
on manufacturers of asbestos products and others with emerging environmental
liabilities. The inherent uncertainties of estimating reserves are greater with
respect to reinsurance than for primary insurance due to the diversity of the
development patterns among different types of reinsurance contracts, the
necessary reliance on ceding companies for information regarding reported
claims, differing reserving practices among ceding companies and significant
periods of time elapsing between the occurrence of an insured loss and its being
reported to the reinsurer. This book of business includes some of the most
difficult types of losses for estimating reserves, including environmental
liability, asbestos and latent injury claims. Of the Company's total property
and casualty reserves, net of reinsurance, at December 31, 1995, $210.3 million,
or 9.5%, was attributable to the Company's reinsurance business. Approximately
60% of the Company's reserves for its reinsurance business at December 31, 1995,
consisted of reserves for environmental and asbestos claims. The Company's paid
losses and allocated LAE on claims for all lines of its reinsurance business
were $62.6 million in 1993, $30.6 million in 1994 and $19.3 million in 1995. The
Company's paid losses on asbestos and environmental claims in its reinsurance
business were $4.0 million in 1993, $5.3 million 1994 and $6.8 million in 1995.

The Company has established an environmental claim unit of experienced
employees, whose main function is to evaluate and process asbestos and hazardous
waste claims. The staff of this unit determines appropriate coverage issues
according to the terms of the policies and contracts involved and, on the basis
of its experience, makes judgments as to the ultimate loss potential related to
each claim submitted for payment under the various policies and contracts.
Judgments of potential losses are also made from precautionary reports submitted
by reinsured companies for claims which have the possibility of invoking policy
coverage. Factors considered in determining the reserve are: whether the claim
relates to asbestos or hazardous waste; whether the claim is for bodily injury
or property damage; the limits of liability and attachment points; policy
provisions for expenses (which are a significant portion of the estimated
ultimate cost of these claims); type of insured; and any provision for
reinsurance recoverables. Since October, 1991, with respect to asbestos and
hazardous wastes, the Company has developed data used to estimate the ultimate
cost of environmental and asbestos losses. The Company uses this data to develop
possible ranges of outcomes in making those estimates. However, because of the
uncertainty of circumstances surrounding many critical factors that affect these
losses, it is very difficult to project the ultimate costs. Although the
Company's "survival ratio" (the ratio of reserves divided by paid losses and
LAE) for these claims was 17.4 years at December 31, 1995, which is
substantially above the property and casualty industry average, the ultimate
liability for such claims may vary materially from the reserves.

The following table summarizes the Company's property and casualty
reserves, net of reinsurance recoverables, by type of claim as of the dates
indicated.

<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Commercial and personal:
Core commercial and personal................................. $2,083.5 $1,941.7 $1,724.6
Construction defect.......................................... 114.8 173.9 245.5
Asbestos and environmental................................... 96.8 101.3 114.1
-------- -------- --------
Total commercial and personal........................... 2,295.1 2,216.9 2,084.2
-------- -------- --------
Reinsurance in run-off:
Asbestos and environmental................................... 103.9 96.9 127.1
All other reinsurance in run-off............................. 59.5 63.4 83.2
-------- -------- --------
Total reinsurance in run-off............................ 163.4 160.3 210.3
-------- -------- --------
Total reserves, net of reinsurance recoverables................ $2,458.5 $2,377.2 $2,294.5
======== ======== ========
</TABLE>

52
<PAGE> 55

The following table provides a reconciliation of the Company's property and
casualty losses and LAE reserve balances for the years indicated.

<TABLE>
<CAPTION>
CONSOLIDATED LESS CONSTRUCTION
DEFECTS, ASBESTOS, AND
OTHER ENVIRONMENTAL CONSTRUCTION DEFECTS ASBESTOS
------------------------------ ------------------------ -------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------ ------------------------ -------------------------
1993 1994 1995 1993 1994 1995 1993 1994 1995
-------- -------- -------- ------ ------ ------ ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, net of
related reinsurance recoveries...... $2,272.7 $2,142.9 $2,005.1 $ 91.7 $114.8 $173.9 $69.2 $71.8 $69.6
Add:
Provision for losses and LAE
occurring in the current year, net
of reinsurance.................... 1,387.5 1,303.9 1,221.8 3.1 8.4 8.9 0.4 0.9 0.4
Increase/(decrease) in estimated
losses and LAE occurring in prior
years, net of reinsurance......... (125.0) (178.0) (195.8) 43.0 80.4 101.9 6.8 2.7 12.9
-------- -------- -------- ------ ------ ------ ----- ----- -----
Incurred losses and LAE during the
current year, net of
reinsurance....................... 1,262.5 1,125.9 1,026.0 46.1 88.8 110.8 7.2 3.6 13.3
Deduct:
Losses and LAE payments for claims,
net of reinsurance, occurring
during:
Current year...................... 626.6 617.1 613.2 0.1 0.1 0.2 -- -- --
Prior years....................... 765.7 646.5 610.1 22.9 29.7 39.0 4.6 5.8 5.1
-------- -------- -------- ------ ------ ------ ----- ----- -----
Total......................... 1,392.3 1,263.6 1,223.3 23.0 29.8 39.2 4.6 5.8 5.1
-------- -------- -------- ------ ------ ------ ----- ----- -----
Balance as of December 31, net of
related reinsurance recoveries...... 2,142.9 2,005.2 1,807.8 114.8 173.8 245.5 71.8 69.6 77.8
Reinsurance recoverables on losses and
LAE at end of year.................. 111.3 99.5 97.4 1.1 1.7 2.4 14.7 15.3 16.1
-------- -------- -------- ------ ------ ------ ----- ----- -----
Reserves for losses and LAE, gross of
related reinsurance recoverables, at
end of year......................... $2,254.2 $2,104.7 $1,905.2 $115.9 $175.5 $247.9 $86.5 $84.9 $93.9
======== ======== ======== ====== ====== ====== ===== ===== =====

OTHER ENVIRONMENTAL TOTAL
------------------------ ------------------------------

YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------ ------------------------------
1993 1994 1995 1993 1994 1995
------ ------ ------ -------- -------- --------

<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, net of
related reinsurance recoveries...... $104.9 $128.9 $128.6 $2,538.5 $2,458.4 $2,377.2
Add:
Provision for losses and LAE
occurring in the current year, net
of reinsurance.................... 4.4 5.0 2.5 1,395.4 1,318.2 1,233.6
Increase/(decrease) in estimated
losses and LAE occurring in prior
years, net of reinsurance......... 27.1 2.9 41.1 (48.1) (92.0) (39.9)
------ ------ ------ -------- -------- --------
Incurred losses and LAE during the
current year, net of
reinsurance....................... 31.5 7.9 43.6 1,347.3 1,226.2 1,193.7
Deduct:
Losses and LAE payments for claims,
net of reinsurance, occurring
during:
Current year...................... 0.1 0.2 0.1 626.8 617.4 613.5
Prior years....................... 7.4 8.0 8.7 800.6 690.0 662.9
------ ------ ------ -------- -------- --------
Total......................... 7.5 8.2 8.8 1,427.4 1,307.4 1,276.4
------ ------ ------ -------- -------- --------
Balance as of December 31, net of
related reinsurance recoveries...... 128.9 128.6 163.4 2,458.4 2,377.2 2,294.5
Reinsurance recoverables on losses and
LAE at end of year.................. 4.0 3.0 4.2 131.1 119.5 120.1
------ ------ ------ -------- -------- --------
Reserves for losses and LAE, gross of
related reinsurance recoverables, at
end of year......................... $132.9 $131.6 $167.6 $2,589.5 $2,496.7 $2,414.6
====== ====== ====== ======== ======== ========
</TABLE>

53
<PAGE> 56

The reconciliation shows a decrease to the total liability for estimated
losses and LAE in 1993, 1994 and 1995 by $48.1, $92.0 and $39.9 million,
respectively. Such reserve adjustments, which affected current operations during
1993, 1994 and 1995, resulted from developed losses from prior years being
different than were anticipated when the liabilities for losses and LAE expense
were originally estimated. The favorable reserve development in both 1994 and
1995 was the result of improving trends, both industry-wide and related to the
Company's New Directions initiatives, as well as enhancements made in the claim
evaluation process. These development trends have been considered in
establishing liabilities for 1995.

- -------------------------

(1) Incurred losses and LAE include reported claims and IBNR claims, net of
reinsurance.

Approximately 95% of the reported claims involve construction activity in
California. The Company attributes the increase in reported claims to the
California courts' interpretation of general liability property damage coverage
to include coverage for construction defect. This caused a significant increase
in reported claims. As the number of construction defect claims increased during
1993 and 1994, the Company decided, at the end of 1994, to segregate
construction defect claims from all other general property damage liability
claims for reserve analysis. As a result of a separate analysis of the
construction defect losses, the reserves were increased. The increase in
incurred losses for 1994 was significantly greater than the increase in reported
claims for that year. This analysis was repeated at the end of 1995 as part of
the Company's analysis of its total reserves for general property damage
liability, and the reserves for construction defeat claims were increased again.
Based on its latest analysis the Company believes that its total reserves for
general property damage liability insurance make a reasonable provision for all
types of general property damage liability claims.

54
<PAGE> 57

December 31, 1995. The loss and LAE reserves for reported and unreported
asbestos and environmental liabilities are as follows:

<TABLE>
<CAPTION>
ASBESTOS ENVIRONMENTAL
CALENDAR YEAR RESERVES RESERVES
--------------------------------------------------------- -------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
1993.................................................... $ 71.8 $ 128.9
1994.................................................... 69.6 128.6
1995.................................................... 77.8 163.4
</TABLE>

The liability for property and casualty losses and LAE included in the
preceding table is determined on a basis prescribed by GAAP. Such liabilities
differ from that reported to state insurance regulators. A reconciliation of the
GAAP liability and the corresponding liability reported to state insurance
regulators is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1994 1995
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Liability reported to state insurance regulators.......... $2,414.5 $2,331.6
Increase (decrease) related to:
Estimated salvage and subrogation recoveries............ (37.3) (37.1)
Amount recoverable from reinsurers...................... 119.5 120.1
-------- --------
Liability reported on a GAAP basis................. $2,496.7 $2,414.6
======== ========
</TABLE>

The following is a reconciliation of the activity in the liability for
losses and LAE for property and casualty operations to the consolidated balance
sheets and statements of income:

<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Property and casualty incurred losses and loss adjustment
expense during the current year, net of reinsurance.......... $1,347.3 $1,226.2 $1,193.7
Life insurance benefits and settlement expenses, net of
reinsurance.................................................. 39.0 45.8 48.6
-------- -------- --------
Benefits and settlement expenses, net of reinsurance........... $1,386.3 $1,272.0 $1,242.3
======== ======== ========
Liability for property and casualty losses and loss adjustment
expense, at end of year...................................... $2,589.5 $2,496.7 $2,414.6
Liability for life future policy benefits, at end of year...... 339.4 381.5 413.7
-------- -------- --------
Liability for losses, loss adjustment expense and future policy
benefits..................................................... $2,928.9 $2,878.2 $2,828.3
======== ======== ========
Reinsurance recoverables on property and casualty losses and
loss adjustment expenses, at end of year..................... $ 131.0 $ 119.5 $ 120.1
Reinsurance recoverables on life future policy benefits, at end
of year...................................................... 19.8 18.7 16.8
-------- -------- --------
Ceded reinsurance on claims and claims expense reserves, at end
of year...................................................... $ 150.8 $ 138.2 $ 136.9
======== ======== ========
</TABLE>

55
<PAGE> 58

The following table shows the development of the reserves for unpaid losses
and LAE from 1985 through 1995 for the Company's property and casualty Insurers
on a GAAP basis. The top line of the table shows the liabilities at the balance
sheet date for each of the indicated years. This reflects the estimated amounts
of losses and LAE for claims arising in that year and all prior years that are
unpaid at the balance sheet date, including losses incurred but not yet reported
to the Company. The upper portion of the table shows the cumulative amounts
subsequently paid as of successive years with respect to the liability. The
lower portion of the table shows the reestimated amount of the previously
recorded liability based on experience as of the end of each succeeding year.
The estimates change as more information becomes known about the frequency and
severity of claims for individual years. The redundancy (deficiency) exists when
the reestimated liability at each December 31 is less (greater) than the prior
liability estimate. The "cumulative redundancy (deficiency)" depicted in the
table, for any particular calendar year, represents the aggregate change in the
initial estimates over all subsequent calendar years.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1985 1986 1987 1988 1989
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Liability for unpaid losses and LAE, net of reinsurance
recoverable....................................................... $1,064.4 $1,257.6 $1,395.8 $1,643.9 $1,890.7
Cumulative amount of liability paid through:
One year later.................................................... 441.9 477.0 509.5 606.0 710.3
Two years later................................................... 679.7 727.1 785.2 937.0 1,096.2
Three years later................................................. 828.7 887.6 931.0 1,152.6 1,321.7
Four years later.................................................. 923.2 971.6 1,052.4 1,272.2 1,479.7
Five years later.................................................. 977.0 1,046.3 1,124.7 1,361.9 1,580.1
Six years later................................................... 1,027.1 1,095.7 1,180.3 1,422.1 1,659.9
Seven years later................................................. 1,060.2 1,134.3 1,219.8 1,471.4
Eight years later................................................. 1,089.4 1,164.1 1,253.5
Nine years later.................................................. 1,112.0 1,190.4
Ten years later................................................... 1,133.9
Liability reestimated as of:
One year later.................................................... 1,088.3 1,189.2 1,335.6 1,608.7 1,900.9
Two years later................................................... 1,129.3 1,205.9 1,328.7 1,635.5 1,924.6
Three years later................................................. 1,147.1 1,227.9 1,354.6 1,651.4 1,969.1
Four years later.................................................. 1,154.1 1,259.6 1,375.3 1,685.6 2,028.9
Five years later.................................................. 1,186.0 1,285.2 1,420.9 1,764.7 2,052.7
Six years later................................................... 1,216.1 1,326.6 1,507.0 1,779.4 2,159.3
Seven years later................................................. 1,252.4 1,410.9 1,515.1 1,871.8
Eight years later................................................. 1,336.5 1,417.4 1,604.7
Nine years later.................................................. 1,341.6 1,507.1
Ten years later................................................... 1,425.3
Cumulative total redundancy (deficiency)(1)........................ $ (360.9) $ (249.5) $ (208.9) $ (227.9) $ (268.6)
======== ======== ======== ======== ========
Change in cumulative total redundancy (deficiency)................. $ 111.4 $ 40.6 $ (19.0) $ (40.7)
Net reserve -- December 31.........................................
Reinsurance recoverables...........................................
Gross reserve -- December 31.......................................
Net re-estimated reserve...........................................
Re-estimated reinsurance recoverables..............................
Gross re-estimated reserve.........................................
Gross cumulative redundancy........................................
Cumulative redundancy (deficiency):
Personal and commercial lines..................................... $ (122.0) $ (37.2) $ (11.3) $ (37.5) $ (46.2)
Reinsurance business in run-off................................... (238.9) (212.3) (197.6) (190.4) (222.4)
-------- -------- -------- -------- --------
$ (360.9) $ (249.5) $ (208.9) $ (227.9) $ (268.6)
======== ======== ======== ======== ========
Change in cumulative redundancy (deficiency):
Personal and commercial lines..................................... $ 84.8 $ 25.9 $ (26.2) $ (8.7)
Reinsurance business in run-off................................... 26.6 14.7 7.2 (32.0)
-------- -------- -------- --------
$ 111.4 $ 40.6 $ (19.0) $ (40.7)
======== ======== ======== ========

1990 1991 1992 1993 1994
-------- -------- -------- -------- --------

<S> <C>
Liability for unpaid losses and LAE, net of reinsurance
recoverable....................................................... $2,148.6 $2,370.3 $2,538.5 $2,458.4 $2,377.2
Cumulative amount of liability paid through:
One year later.................................................... 777.7 779.7 800.6 690.0 662.9
Two years later................................................... 1,183.1 1,230.8 1,225.1 1,094.3
Three years later................................................. 1,453.7 1,495.6 1,501.6
Four years later.................................................. 1,617.9 1,685.4
Five years later.................................................. 1,740.6
Six years later...................................................
Seven years later.................................................
Eight years later.................................................
Nine years later..................................................
Ten years later...................................................
Liability reestimated as of:
One year later.................................................... 2,153.4 2,397.9 2,490.4 2,366.4 2,337.3
Two years later................................................... 2,195.5 2,407.0 2,458.0 2,399.5
Three years later................................................. 2,247.7 2,402.5 2,534.3
Four years later.................................................. 2,265.3 2,505.3
Five years later.................................................. 2,373.5
Six years later...................................................
Seven years later.................................................
Eight years later.................................................
Nine years later..................................................
Ten years later...................................................
Cumulative total redundancy (deficiency)(1)........................ $ (224.9) $ (135.0) $ 4.2 $ 58.9 $ 39.9
======== ======== ======== ======== ========
Change in cumulative total redundancy (deficiency)................. $ 43.7 $ 89.9 $ 139.2 $ 54.7 $ (19.0)
Net reserve -- December 31......................................... $2,458.4 $2,377.2
Reinsurance recoverables........................................... 131.0 119.5
-------- --------
Gross reserve -- December 31....................................... $2,589.4 $2,496.7
======== ========
Net re-estimated reserve........................................... $2,399.5 $2,337.3
Re-estimated reinsurance recoverables.............................. 146.8 132.9
-------- --------
Gross re-estimated reserve......................................... $2,546.3 $2,470.2
======== ========
Gross cumulative redundancy........................................ $ 43.1 $ 26.5
Cumulative redundancy (deficiency):
Personal and commercial lines..................................... $ (13.6) 58.3 $ 135.5 $ 152.7 $ 109.2
Reinsurance business in run-off................................... (211.3) (193.3) (131.3) (93.8) (69.3)
-------- -------- -------- -------- --------
$ (224.9) $ (135.0) $ 4.2 $ 58.9 $ 39.9
======== ======== ======== ======== ========
Change in cumulative redundancy (deficiency):
Personal and commercial lines..................................... $ 32.6 $ 71.9 $ 77.2 $ 17.2 $ (43.5)
Reinsurance business in run-off................................... 11.1 18.0 62.0 37.5 24.5
-------- -------- -------- -------- --------
$ 43.7 $ 89.9 $ 139.2 $ 54.7 $ (19.0)
======== ======== ======== ======== ========

1995
--------

Liability for unpaid losses and LAE, net of reinsurance
recoverable....................................................... $2,294.5
Cumulative amount of liability paid through:
One year later....................................................
Two years later...................................................
Three years later.................................................
Four years later..................................................
Five years later..................................................
Six years later...................................................
Seven years later.................................................
Eight years later.................................................
Nine years later..................................................
Ten years later...................................................
Liability reestimated as of:
One year later....................................................
Two years later...................................................
Three years later.................................................
Four years later..................................................
Five years later..................................................
Six years later...................................................
Seven years later.................................................
Eight years later.................................................
Nine years later..................................................
Ten years later...................................................
Cumulative total redundancy (deficiency)(1)........................

Change in cumulative total redundancy (deficiency)................. $ (39.9)
Net reserve -- December 31......................................... $2,294.5
Reinsurance recoverables........................................... 120.1
--------
Gross reserve -- December 31....................................... $2,414.6
========
Net re-estimated reserve...........................................
Re-estimated reinsurance recoverables..............................

Gross re-estimated reserve.........................................

Gross cumulative redundancy........................................
Cumulative redundancy (deficiency):
Personal and commercial lines.....................................
Reinsurance business in run-off...................................

Change in cumulative redundancy (deficiency):
Personal and commercial lines..................................... $ (109.2)
Reinsurance business in run-off................................... 69.3
--------
$ (39.9)
========
</TABLE>

- -------------------------

(1) The cumulative deficiency in reserves for the years 1985 -1991 is primarily
attributable to environmental and asbestos claims incurred in prior years under
assumed reinsurance.

56
<PAGE> 59

The following table is derived from the preceding table and summarizes the
effect of reserve reestimates, net of reinsurance, on calendar year operations
for the same ten-year period ended December 31, 1995. The total of each column
details the amount of reserve reestimates made in the indicated calendar year
and shows the accident years to which the reestimates are applicable. The
amounts in the total accident year column on the far right represent the
cumulative reserve reestimates for the indicated accident year(s).
<TABLE>
<CAPTION>
EFFECT OF RESERVE REESTIMATES ON CALENDAR YEAR OPERATIONS
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN RESERVES FOR CALENDAR YEAR
-----------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993
----- ------- ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accident Years
1985 and prior......................... $23.9 $ 41.0 $ 17.8 $ 7.0 $ 31.9 $ 30.1 $ 36.3 $ 84.0
1986................................... (109.4) (1.1) 15.0 (0.3) (4.5) 5.1 0.3
1987................................... (76.9) (29.0) (5.7) (4.9) 4.2 1.8
1988................................... (28.2) 0.9 (4.9) (11.4) (7.0)
1989................................... (16.6) 7.9 10.3 (19.4)
1990................................... (18.9) (2.5) (7.5)
1991................................... (14.4) (43.1)
1992................................... (57.2)
1993...................................
1994...................................
----- ------- ------ ------ ------ ------ ------ ------
Total calendar year effect: ............. $23.9 $ (68.4) $(60.2) $(35.2) $ 10.2 $ 4.8 $ 27.6 $(48.1)
===== ======= ====== ====== ====== ====== ====== ======

<CAPTION>
CUMULATIVE
DEFICIENCY
(REDUNDANCY)
FROM
REESTIMATES
FOR EACH
1994 1995 ACCIDENT YEAR
------ ------ -------------

<S> <<C> <C> <C>
Accident Years
1985 and prior......................... $ 5.1 $ 83.7 $ 360.8
1986................................... 1.4 6.0 (87.5)
1987................................... 1.6 (0.1) (109.0)
1988................................... 6.6 2.8 (41.2)
1989................................... 9.1 14.2 5.5
1990................................... (6.2) 1.7 (33.4)
1991................................... (22.1) (5.5) (85.1)
1992................................... (27.9) (26.5) (111.6)
1993................................... (59.6) (43.2) (102.8)
1994................................... (73.0) (73.0)
------ ------ -------
Total calendar year effect: ............. $(92.0) (39.9) $(277.3)
====== ====== =======
</TABLE>

57
<PAGE> 60

Life Insurance Reserves. The procedures for calculating life insurance
reserves are prescribed by the insurance laws and regulations of the various
states. The Company is required to establish reserves and contractholder fund
liabilities in accordance with GAAP and in recognition of the Company's future
benefit obligations under in-force life and annuity policies; however, the
method of determining the required reserves differs under the two standards.

Reserves for life insurance policy benefits relate to traditional life
(including limited payment contracts) and disability insurance. Policy benefit
reserves for traditional life and disability insurance are computed based on
assumptions as to future investment yields, mortality, morbidity, terminations,
and expenses. These assumptions, which for traditional life insurance are
applied using the net level premium method, include provisions for adverse
deviation and generally vary by such characteristics as plan, year of issue and
policy duration.

Contractholder fund liabilities are carried for universal life and
investment contracts. The liability for universal life contracts is established
under the retrospective deposit method. Under this method, liabilities are equal
to the account balance that accrues to the benefit of the contractholder. The
liability for investment contracts represents the aggregate of contractholder
account balances.

REINSURANCE CEDED

General. The Company follows the customary industry practice of reinsuring
a portion of its risks and paying for that protection based upon premiums
received on all policies subject to such reinsurance. Insurance is ceded
principally to reduce the Company's exposure on large individual risks and to
provide protection against large losses, including catastrophe losses. Although
reinsurance does not legally discharge the ceding insurer from its primary
obligation to pay the full amount of losses incurred under policies reinsured,
it does render the reinsurer liable to the insurer to the extent provided by the
terms of the reinsurance treaty. As part of its internal procedures, the Company
evaluates the financial condition of each prospective reinsurer before it cedes
business to that carrier. Based on the Company's review of its reinsurers'
financial health and reputation in the insurance marketplace, the Company
believes its reinsurers are financially sound and that they therefore can meet
their obligations to the Company under the terms of the reinsurance treaties.
Reserves for uncollectible reinsurance are provided as deemed necessary.

Property and Casualty Reinsurance. Catastrophe reinsurance serves to
protect the ceding insurer from significant aggregate losses arising from a
single event (or series of related events occurring within a short period), such
as a hurricane, earthquake, windstorm, hail, tornado, riot or other such
extraordinary occurrence. If the coverage is exhausted, additional catastrophe
coverage under the treaty may be purchased as a matter of right (a reinstatement
of the original coverage) by paying an additional, contractually defined premium
which is typically due at the time of the reinstatement. The number of
reinstatements which the reinsurer is required to grant is limited by the terms
of the treaty. Normally, that limit is one or two reinstatements per year.

The Company's property catastrophe reinsurance program for 1996 provides
protection of $150 million in excess of a $30 million retention per occurrence.
The Company also retains 5% of the first $90 million within this program and 10%
of the remaining $60 million. Catastrophe reinsurance arrangements for workers'
compensation provide for recovery of $25 million in excess of $6 million per
occurrence.

Casualty claims above $1.5 million up to $25 million each occurrence are
reinsured. Property lines are covered on a per risk basis above $1.5 million up
to $10 million. Property risks in excess of $10 million are facultatively
reinsured to arrive at $10 million net exposure, which is then subject to the
excess treaty.

During the past 20 years, the Company exceeded its catastrophe retention on
a single occasion -- in 1994 in connection with the Northridge, California
earthquake. This excess was only slightly above the Company's $30.0 million
retention.

Principal property casualty reinsurers are American Re-Insurance Company,
Employers Reinsurance Corporation, General Reinsurance Corporation, Munich
American Reinsurance company, Swiss Reinsurance American Corporation and Lloyds
Underwriters.

58
<PAGE> 61

Life and Health Reinsurance. At year end 1995, the Company had reinsured
about 12% of its ordinary life insurance in-force. A majority of this
reinsurance was placed with an affiliate of Lincoln, The Lincoln National Life
Insurance Company. Maximum net retention on any one life is currently $250,000.
See "Certain Relationships and Related Transactions -- Reinsurance Agreements."

INVESTMENTS

The Company pursues a total return investment strategy which seeks an
attractive level of current income combined with long-term capital appreciation.
In addition, it seeks to balance safety and liquidity while maintaining
portfolio diversification.

The Company's investment strategies, overall portfolio quality and
transactions are reviewed and approved by the investment committees of the
Company and its principal Insurers, the members of which are appointed by the
respective companies' Boards of Directors. The investment committees meet on a
regular basis to authorize transactions and to review investment positions,
practices and plans and executed transactions. Investment activities are managed
by Lincoln's investment management subsidiary, Lincoln Investment Management,
Inc. ("LIM"). With respect to the Company's common stock portfolio, LIM has
relationships with three sub-advisors, two of which are also affiliates. See
"Certain Relationships and Related Transactions -- Investment Management
Agreement."

The Company's fixed maturity securities are classified as
available-for-sale and, accordingly, are carried at fair value. The difference
between amortized cost and fair value, less deferred income taxes, is reflected
as a component of shareholder's equity.

The following table details, at carrying value, the distribution of the
Company's portfolios between property and casualty and life operations at March
31, 1996.

<TABLE>
<CAPTION>
PROPERTY AND
CASUALTY LIFE TOTAL
----------------- --------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturity securities:
Tax-exempt municipal................. $2,335.9 59.5% -- -- $2,335.9 53.2%
U.S. government...................... 241.0 6.1 $ 19.2 4.1% 260.2 5.9
Mortgage-backed and asset-backed..... 237.0 6.0 59.7 12.8 296.7 6.8
Corporate and other.................. 560.4 14.3 329.8 71.0 890.2 20.3
Redeemable preferred stock........... 80.7 2.1 -- -- 80.7 1.8
Equities:
Perpetual preferred stock............ 177.4 4.5 -- -- 177.4 4.0
Common stock......................... 196.8 5.0 13.1 2.8 209.9 4.8
Mortgage loans............................ 19.5 0.5 14.6 3.1 34.1 0.8
Short-term investments.................... 66.2 1.7 4.9 1.1 71.1 1.6
Other..................................... 13.4 0.3 23.3 5.0 36.7 0.8
-------- ------ ------ ------ -------- ------
Total................................ $3,928.3 100.0% $464.6 100.0% $4,392.9 100.0%
======== ====== ====== ====== ======== ======
</TABLE>

Tax-exempt Municipal Securities. Tax-exempt municipal bonds aggregated
$2,335.9 million as of March 31, 1996, and account for a significant portion of
the Company's property and casualty investment portfolio because the Company
believes tax-exempt municipal bonds offer superior risk-adjusted pre-tax
equivalent rates of return when compared to the taxable alternatives. The
Company's investment policy is to maintain the average quality of the tax-exempt
municipal bond portfolio at "AA." The tax-exempt municipal bond portfolio
consisted of 45% general obligation bonds, 49% revenue bonds and 6% industrial
development revenue bonds ("IDR") as of March 31, 1996. A portion of the IDR
portfolio as of March 31, 1996, consisted of commercial mortgage loans (2% of
the total tax-exempt municipal bond portfolio) that were structured as
tax-exempt securities.

59
<PAGE> 62

U.S. Government Securities. U.S. Government securities aggregated $260.2
million as of March 31, 1996, and consisted almost entirely of U.S. Treasury
obligations. Treasury securities are owned in order to provide liquidity and
quality in the portfolio and to facilitate overall duration management.

Mortgage-Backed and Asset-Backed Securities. Mortgage-backed securities
("MBS"), commercial mortgage-backed securities ("CMBS") and asset-backed
securities ("ABS") aggregated $296.7 million as of March 31, 1996, and are
included in the portfolio because they provide strong credit quality, liquidity,
diversification, and often a yield advantage over corporate and Treasury bonds.

Most of the MBS issues are Government National Mortgage Association,
Federal National Mortgage Association or Federal Home Loan Mortgage Corporation
pass-through securities and collateralized mortgage obligations ("CMO").
Approximately 99% of the MBS securities were rated "AAA" as of March 31, 1996.

The ABS securities are backed by several types of receivables, including
auto loans, credit card receivables, and mobile home loans. Approximately 88% of
the ABS securities were rated either "AA" or "AAA" as of March 31, 1996.

The securitized portion of the Company's portfolio consisted of 50% planned
amortization class CMO's, 3% other CMO's, 29% pass-throughs, 12% ABS and 6% CMBS
as of March 31, 1996. The planned amortization class CMO's have reduced
prepayment risk because they are structured to provide a more certain cash flow
than pass-throughs.

Corporate and Other Fixed Maturity Securities. Corporate bonds aggregated
$890.2 million as of March 31, 1996, and are included in the portfolio in order
to provide income and diversification. Public corporate bonds are purchased for
liquidity and yield. The average quality of the public bond portfolio is
targeted at "A."

ASI owns a corporate bond issued by the acquiror of ASI's headquarters
facility and two other properties when they were acquired from Lincoln in 1984.
The properties were leased back to ASI and Lincoln by the third party acquiror
as part of the transaction. This bond is a zero coupon, 15 year note due in
August, 1999. The par value of the bond at maturity will be approximately $130
million. As of March 31, 1996, the market value of the bond was approximately
$102.4 million and the accreted value of the bond was approximately $79.3
million. If the call or put option on the bond is not exercised in August, 1999,
the term of the bond extends to August, 2009. See "Certain Relationships and
Related Transactions -- Building Lease."

Privately-placed corporate bonds aggregated approximately $188.7 million as
of March 31, 1996, and are purchased for the Insurers' portfolios because they
offer yield and covenant advantages not generally available in the public bond
market.

Redeemable Preferred Stock. Redeemable preferred stock aggregated $80.7
million as of March 31, 1996, and is held in the investment portfolio because it
offers attractive pre-tax equivalent returns. The redeemable preferred stock
held by the Company was rated primarily either low "A" or high "BBB" as of March
31, 1996.

Perpetual Preferred Stock. Perpetual preferred stock aggregated $177.4
million as of March 31, 1996, and is held in the investment portfolio because it
offers attractive pre-tax equivalent returns. The perpetual preferred stock held
by the Company was rated primarily either low "A" or high "BBB" as of March 31,
1996.

Common Stock. Common Stock aggregated $209.9 million at March 31, 1996. The
Company invests in common stock in order to achieve returns which, over the
long-term, should exceed the returns available in the fixed maturity markets,
and to increase shareholders' equity through long-term capital appreciation.

Mortgage Loans. Mortgage loans aggregated $34.1 million as of March 31,
1996. The Company invests in commercial mortgage loans for diversification
purposes and to earn returns which exceed those available on most other fixed
maturity alternatives. As of March 31, 1996, (i) the mortgage loan portfolio
consisted exclusively of loans secured by first mortgages on developed,
commercial real estate, (ii) substantially all of the commercial mortgage loans
were nonrecourse to the borrower, (iii) there were no construction loans in the
mortgage loan portfolio, and (vi) the mortgage loan portfolio consisted
primarily of loans secured by office

60
<PAGE> 63

buildings, light industrial properties, retail properties and apartment
complexes. As of March 31, 1996, the mortgage loan portfolio of the Company had
a book yield of 9.53%.

Short-term Investments. As of March 31, 1996, the Company's short-term
investments aggregated approximately $71.1 million. The Company invests
available cash balances in taxable securities having a final maturity date or
redemption date of one year or less. Approximately $34.5 million, or 48.5%, of
total short-term investments as of March 31, 1996, were invested through a
short-term pool maintained by Lincoln for the benefit of the Subsidiaries of the
Company and other Lincoln affiliates. See "Certain Relationships and Related
Transactions -- Lincoln Short-term Pool." Management anticipates that subsequent
to the Offerings, all short-term investments will be made directly by the
Company.

Other. As of March 31, 1996, the Company's investments which have been
aggregated as other investments approximated $36.7 million. This category
includes policy loans, miscellaneous partnerships, and real estate acquired in
satisfaction of debt. As of March 31, 1996, policy loans were $22.5 million with
the remaining $14.2 million attributable to miscellaneous partnerships and real
estate.

The following table shows the composition of the Company's bond portfolio
which includes tax-exempt municipal bonds, U.S. government securities,
mortgage-backed and asset-backed securities and corporate and other bonds, by
rating as of March 31, 1996.

<TABLE>
<CAPTION>
CARRYING % OF
RATING(1) VALUE TOTAL
------------------------------------------------------------- -------- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
U.S. treasury and U.S. agency bonds.......................... $ 260.2 6.9%
Aaa.......................................................... 1,079.6 28.5
Aa........................................................... 1,073.8 28.4
A............................................................ 997.9 26.4
Baa.......................................................... 345.8 9.1
Ba and below................................................. 25.7 0.7
-------- -----
Total................................................... $3,783.0 100.0%
======== =====
</TABLE>

- -------------------------
(1) The ratings set forth above are based on the ratings, if any, assigned by
Moody's and/or Standard & Poors. If ratings were split, the rating generally
indicates the higher of the two. Approximately $188.7 million of securities
are private placements, for which ratings have been assigned by the Company
based generally on equivalent ratings supplied by the NAIC.

The following table shows the carrying value, book yield, average pre-tax
equivalent yield, average life, and duration of the Company's fixed maturity
securities portfolio as of March 31, 1996.

<TABLE>
<CAPTION>
AVERAGE
PRE-TAX AVERAGE
CARRYING BOOK EQUIVALENT LIFE DURATION
VALUE YIELD YIELD (YEARS) (YEARS)
-------- ----- ---------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Fixed maturity securities:
Tax-exempt municipal............................ $2,335.9 6.03 % 8.84% 8.94 5.12
U.S. government................................. 260.2 6.98 6.98 11.88 6.58
Mortgage-backed and asset-backed................ 296.7 7.19 7.19 6.98 4.83
Corporate and other............................. 890.2 8.29 8.29 9.20 5.39
Redeemable preferred stock...................... 80.7 6.48 8.56 10.22 5.54
</TABLE>

61
<PAGE> 64

Annual investment results of the Company for 1991 through 1995 and
quarterly investment results of the Company for the three-month periods ended
March 31, 1995 and 1996 are shown in the following table.

<TABLE>
<CAPTION>
AS OF AND FOR THE
AS OF AND FOR THE THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Average total
investments(1).......... $3,758.4 $4,051.4 $4,217.3 $4,220.0 $4,140.7 $4,159.9 $4,138.1
Net investment
income(2)............... 254.7 266.2 266.8 260.5 266.6 66.5 68.3
Average pre-tax yield..... 6.78% 6.57% 6.33% 6.17% 6.44% 6.39% 6.56%
Average pre-tax equivalent
yield................... 8.21 8.19 8.07 7.87 8.07 7.97 8.11
</TABLE>

- -------------------------
(1) Average of the aggregate invested amounts at the beginning and end of the
period stated at amortized cost.

(2) Investment income is net of investment expenses and does not include net
realized gain on investments or provision for income taxes.

The Company closely monitors its investment portfolio for "Problem"
investments. The Company defines a "Problem" investment as falling into one of
three categories: (1) in default with respect to payment of principal or
interest; (2) investments with substantial credit risk, but not in default; and
(3) investments receiving substantial credit attention. As of March 31, 1996,
the Company had identified $.9 million (at amortized cost) of investments in
Category 1, $1.0 million (at amortized costs) of investments in Category 2 and
$8.3 million (at amortized cost) of investments in Category 3. As of March 31,
1996, the above investments which have been identified as "Problem" investments
are being carried at fair value (meaning book value less write-downs), or $10.2
million.

The Company intends to contribute approximately $150 million of the net
proceeds from the Offerings to ASI to enable it to invest in taxable securities
for its investment portfolio to replace the Dividended Assets it distributed to
Lincoln, which consisted primarily of tax-exempt municipal securities. See "The
Company" and "Use of Proceeds." The Company has been reducing its position in
tax-exempt municipal securities during 1995 in order to provide for greater
diversification of the portfolio and to give the Company greater margin relative
to the possibility of being in a federal alternative minimum tax position. As of
March 31, 1996, after giving pro forma effect to the transfer of the Dividended
Assets, 49.7% of the Company's investment portfolio would have consisted of
tax-exempt municipal securities as compared to 53.2% as of such date without
giving effect to the transfer. As of March 31, 1996, after giving pro forma
effect to the transfer of the Dividended Assets, the tax-exempt municipal
securities portfolio would have had a duration of 5.1 years, an average life of
8.9 years and a nominal book yield of 6.25% as compared to a duration of 5.1
years, an average life of 8.9 years and a nominal book yield of 6.03% without
giving effect to the transfer as of such date. Management of the Company does
not expect that the transfer of the Dividended Assets will have a material
adverse effect on the quality of the Company's investment portfolio or its
earnings.

COMPETITION

The property and casualty insurance industry is diverse and highly
competitive on the basis of both price and service. The Company competes with
other stock insurers, mutual insurance companies and other underwriting
organizations. The factors influencing decisions by the Company's customers in
the small to medium-sized business market which the Company targets include
price, breadth of coverage, reputation of the agency, reputation of the Company,
service, financial strength and ratings. Agencies are motivated by many of these
same considerations and also by the level of agency compensation, the ease with
which transactions may be effected and the personal relationships among agency
and insurer personnel.

The Company competes against other property and casualty companies,
including direct writers (which usually deal through exclusive agencies) and
other independent agency companies, seeking to write business

62
<PAGE> 65

in its target markets, including other companies utilizing the same independent
agencies which represent the Company. In the Midwest and Pacific Northwest,
particularly in the market for those small to medium-sized businesses the
Company targets, regional carriers are the most significant competitors. In the
personal lines market, direct writers are the Company's major competitors. Some
of the Company's competitors are larger than the Company and have significantly
greater resources than the Company.

RATINGS

A.M. Best has currently assigned an "A+" (Superior) rating to each of the
Company's property and casualty Insurers and a rating of "A" (Excellent) to the
Company's life insurance Subsidiary. A.M. Best's ratings are based upon a
comprehensive review of a company's financial performance, which is supplemented
by certain data, including responses to A.M. Best's questionnaires, phone calls
and other correspondence between A.M. Best analysts and company management,
quarterly NAIC filings, state insurance department examination reports, loss
reserve reports, annual reports, company business plans and other reports filed
with state insurance departments. A.M. Best undertakes a quantitative
evaluation, based upon profitability, leverage and liquidity, and a qualitative
evaluation, based upon the composition of a company's book of business or spread
of risk, the amount, appropriateness and soundness of reinsurance, the quality,
diversification and estimated market value of its assets, the adequacy of its
loss reserves and policyholders' surplus, the soundness of a company's capital
structure, the extent of a company's market presence, and the experience and
competence of its management. A.M. Best's ratings represent an independent
opinion of a company's financial strength and ability to meet its obligations to
policyholders. A.M. best's ratings are not a measure of protection afforded
investors. An "A+" and an "A" rating are A.M. Best's second and third highest
rating classifications, respectively, out of 15 ratings. An "A+" rating is
awarded to insurers which, in A.M. Best's opinion, "have demonstrated superior
overall performance when compared to the standards established by the A.M. Best
Company" and "have a very strong ability to meet their obligations to
policyholders over a long period of time." An "A" rating is awarded to insurers
which, in A.M. Best's opinion, "have demonstrated excellent overall performance
when compared to the standards established by the A.M. Best Company" and "have a
strong ability to meet their obligations to policyholders over a long period of
time."

ASI and its property and casualty subsidiaries have a claims-paying rating
from Standard & Poor's Insurance Rating Services ("S&P") of "AA." The
claims-paying rating reflects S&P's opinion of an operating insurance company's
financial capacity to meet the obligations of its insurance policies in
accordance with their terms. The claims-paying ratings assigned by S&P are based
upon factors relevant to policyholders and are not directed toward the
protection of investors. In this context, ratings assigned by S&P to insurers
and reinsurers are not "market" ratings, nor are they recommendations to buy,
sell or hold any security. The "AA" rating assigned to the Company is the second
highest of ten ratings in the "secure" category and is said by S&P to indicate
excellent financial security and that capacity to meet policyholder obligations
is strong under a variety of economic and underwriting conditions. In March of
1996, S&P placed the claims-paying rating of ASI and its property and casualty
subsidiaries on "CreditWatch" with negative implications, citing ASI's expense
ratio and premium trends.

Moody's Investor Service ("Moody's") has currently assigned a financial
strength rating of "Aa3" to each of the Company's property and casualty
Insurers. Ratings by Moody's for the industry currently range from "Aaa" to "C."
Moody's defines an insurer whose financial strength is rated "Aa" as offering
excellent financial security. Together with the "Aaa" group, they constitute
what are generally known as high grade companies. Moody's further distinguishes
the ranking of an insurer within its generic rating classification from "Aa" to
"B" with a numeric modifier of "1," "2" or "3" ("1" indicates that the company
ranks in the higher end of its generic rating category and "3" indicates that
the company ranks in the lower end of its generic rating category).

Ratings have become increasingly important in establishing the competitive
position of an insurer. Although the Company intends to continue to operate the
Insurers so as to maintain their current ratings, no assurances can be given
that in the future A.M. Best, S&P or Moody's will not reduce or withdraw the
ratings of the Insurers because of factors, including material losses, that may
or may not be within the control of the Company.

63
<PAGE> 66

None of A.M. Best's, S&P's or Moody's ratings of the Insurers addresses the
merits of, or the risks inherent in, an investment in the Common Stock.

REGULATION

General. The Insurers, one or more of which is licensed in all 50 states
and the District of Columbia, are subject to comprehensive regulation by
government agencies in the states in which they do business. The nature and
extent of that regulation vary from jurisdiction to jurisdiction, but typically
involve prior approval of the acquisition of control of an insurance company or
of any company controlling an insurance company, regulation of certain
transactions entered into by an insurance company with any of its affiliates,
limitations on dividends, approval or filing of premium rates and policy forms
for many lines of insurance, solvency standards, minimum amounts of capital and
surplus which must be maintained, limitations on types and amounts of
investments, restrictions on the size of risks which may be insured by a single
company, limitation of the right to cancel or non-renew policies in some lines,
regulation of the right to withdraw from markets or agencies, licensing of
insurers and agents, deposits of securities for the benefit of policyholders,
reporting with respect to financial condition, and other matters. In addition,
state insurance department examiners perform periodic financial and market
conduct examinations of insurance companies. Such regulation is generally
intended for the protection of policyholders rather than security holders.

In addition to the regulatory supervision of the Insurers, the Company is
also subject to regulation under the Indiana, Texas and Illinois Insurance
Holding Company System Regulation Acts (the "Holding Company Acts"). The Holding
Company Acts contain certain requirements including the filing of information
relating to the Company's capital structure, ownership, financial condition and
the general business operations of its Subsidiaries. The Holding Company Acts
contain special limitations, reporting and prior approval requirements with
respect to transactions between an insurer and its affiliates.

Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures and judicial decisions which define and
extend the risks and benefits for which insurance is sought and provided. These
include the broadening of risk exposure in areas such as product liability,
environmental damage and employee benefits, including workers' compensation and
disability benefits. In addition, individual state insurance departments may
prevent premium rates for some classes of insureds from reflecting the level of
risk assumed by the insurer. Such developments may adversely affect the
profitability of various lines of insurance in particular jurisdictions.

Acquisition or Change of Control of Insurers. Certain Subsidiaries are
domestic insurance companies organized under the laws of Indiana, Texas and
Illinois (the "Insurance Codes"). The Holding Company Acts contain provisions to
the effect that the acquisition or change of "control" of a domestic insurer or
of any person controlling a domestic insurer cannot be consummated without the
prior approval of the relevant insurance regulatory authority. A person seeking
to acquire control, directly or indirectly, of an insurance company or of any
person controlling an insurance company must generally file an application for
change of control containing certain information required by statute and
regulations with the insurance regulatory authority of the insurer's domiciliary
state. A copy of that application must be provided to the insurer. In Indiana,
Texas and Illinois, control is presumed to exist if any person, directly or
indirectly, owns, controls, holds with the power to vote or holds proxies
representing 10% or more of the voting securities of any other person.

In addition, the laws of many states contain provisions requiring
notification to state agencies prior to any change in control of a non-domestic
insurance company admitted to transact business in that state. While such
prenotification statutes do not authorize the state agency to disapprove the
change of control, they do authorize issuance of cease and desist orders with
respect to the non-domestic insurer if it is determined that certain conditions,
such as undue market concentration, will result from the acquisition.

Any future transactions constituting a change in control of the Company
would generally require prior approval by the insurance departments of Indiana,
Texas and Illinois, as well as notification in those states which have
preacquisition notification statutes or regulations. The need to comply with
those requirements may deter, delay or prevent certain transactions affecting
the control of the Company or the ownership of the

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<PAGE> 67

Company's Common Stock, including transactions which could be advantageous to
the shareholders of the Company.

Membership in Insolvency Funds and Mandatory Pools. Most states require
insurers to become members of insolvency funds or guaranty associations whose
purpose it is to protect policyholders against the insolvency of an insurer
licensed and doing business in the state. Typically, there is one fund or
association for life insurers and another for property and casualty insurers.
Members of each fund or association are assessed to fund the payment of certain
claims for policy benefits and refund of unearned premium made against an
insolvent insurer as well as the operating expenses of the fund or association.
The maximum assessments permitted of any member in a year vary between 1% and 2%
of annual premiums written by the member in that state. The Insurers recorded
assessments of $6.2 million, $6.6 million and $6.4 million, respectively, for
1993, 1994 and 1995 by guaranty associations. Most payments are, at least
theoretically, recoverable through the rating mechanism or premium tax
reductions.

The Insurers writing property and casualty insurance are also required to
participate in various mandatory insurance facilities, pools and other
mechanisms (the "Pools") established to provide insurance coverage for customers
who are unable to obtain it in the voluntary market. Among the Pools in which
such Insurers participate are those providing automobile, property and workers'
compensation insurance, as well as those established in coastal states to
provide windstorm and other similar types of property coverage. The Pools
typically require all companies writing specified lines of business in the state
to participate and share the deficiencies experienced by the Pool based upon
their proportionate shares of the statewide premium writings in those specified
lines. Any profit made by the Pool in a year is normally shared among members on
the same basis as are losses. To the extent that the Company's share of these
assessments is not covered by its reinsurance treaties, these assessments may
have an adverse effect on the Company's financial performance. In 1993 and 1994,
total assessments, net of any reinsurance recoveries, resulted in accrued losses
of $18.5 and $1.5 million, respectively, from Pools. In 1995, the Company
recorded income, net of any reinsurance recoveries, of $4.1 million from Pools.

Restrictions on Dividends to Shareholders; Transactions Among
Affiliates. The Subsidiaries are subject to various state statutes and
regulations which limit the amount of dividends or distributions by an insurance
company to its shareholders. These restrictions generally make the amount of
dividends an insurer may pay without regulatory intervention a function of its
surplus, net income and net gain from operations, as determined under statutory
accounting practices.

The principal Subsidiaries are domiciled in Indiana. The laws of that state
define as "extraordinary" any dividend or distribution which, together with all
other dividends and distributions to shareholders within the preceding 12 months
exceed the greater of (i) 10% of statutory surplus as of the end of the
preceding year or (ii) the prior year's net income if the insurer is a property
and casualty insurer or the prior year's net gain from operations if the insurer
is a life insurer. "Extraordinary" dividends and distributions may not be paid
without the prior approval of the Indiana Commissioner of Insurance or until the
Commissioner has been given 30 days prior notice and has not disapproved within
that period. The Indiana Department of Insurance must receive notice of all
dividends, whether "extraordinary" or not, within 5 business days after they are
declared. Dividends which are not "extraordinary" may not be paid until ten days
after the Indiana Department of Insurance receives notice of their declaration.
Certain other extraordinary transactions between an insurance company and its
affiliates, including reinsurance, purchases, sales, loans or investments which
exceed a threshold amount in any year, may not be consummated unless the Indiana
Department of Insurance has been given 30 days prior notice and has not
disapproved within that period. The threshold for property and casualty insurers
is the lesser of 3% of admitted assets or 25% of policyholder surplus with
respect to purchases, sales, exchanges, guarantees, loans and investments, and
5% of surplus for reinsurance transactions. For life insurers, the threshold is
3% of admitted assets for purchases, sales, exchanges, guarantees, loans and
investments, and 5% of surplus for reinsurance transactions. All of these
thresholds are computed using figures reported to the Indiana Department of
Insurance for the end of the prior year.

Other Subsidiaries of immaterial size are domiciled in Texas and Illinois.
The laws of both states contain limitations on dividends which are similar to
those contained in Indiana law. Both states prohibit the payment

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of "extraordinary" dividends until their insurance regulators have received
prior notice and have either approved or failed to disapprove within 30 days. In
addition, like Indiana, both Texas and Illinois regulate material transactions
between domestic insurers and their affiliates by requiring prior notice of, and
30 days in which to disapprove, any such transactions. The materiality
thresholds vary to some degree from state to state.

Future dividends from the Subsidiaries may be limited by business and
regulatory considerations. After taking into account dividends to be paid to
Lincoln during 1996, including the one-time distribution of the Dividended
Assets, ASI will not be able to pay any dividends to the Company during the
Twelve Month Period without notifying the Indiana Commissioner of Insurance and
giving the Commissioner 30 days within which to object. The Company intends to
retain approximately $75 million of the proceeds from the Offerings for general
corporate purposes, including the funding of its regular cash dividends, debt
service obligations and other general corporate obligations during the Twelve
Month Period. Until utilized for such purposes, the net proceeds from the
Offerings not contributed to ASI will be invested in short-term, interest
bearing, investment-grade securities. See "The Company," "Use of Proceeds" and
"Dividend Policy." Based on an assumed quarterly dividend of $.21 per share and
the terms of the Assumed Debt, Term Note and Line of Credit, the Company expects
that it will need approximately $50 million to fund regular quarterly cash
dividends and approximately $20 million to fund debt service obligations and
other general corporate obligations during the Twelve Month Period. No assurance
can be given that there will not be further regulatory actions restricting the
ability of the Subsidiaries to pay dividends to the Company or that amounts
retained by the Company from the net proceeds of the Offerings will be
sufficient to pay dividends and meet other obligations. As such, while
management believes that the Company will be able to pay the intended dividends
to its shareholders, no assurances to that effect can be given.

Underwriting and Marketing Restrictions. All of the states in which the
Company's property and casualty Insurers operate impose some restrictions on
their ability to cancel or nonrenew policies. Most of those restrictions are
limited to personal lines and require notice to policyholders prior to
nonrenewal or cancellation. Generally, the right of cancellation may be
exercised only for specified reasons, while nonrenewal is permitted at the
option of the insurer, provided that the notice informs the insured of the
reason for the insurer's action. In some jurisdictions, however, the right of an
insurer to terminate its relationship with an insured is much more narrowly
limited. These limitations vary from state to state and among lines of business,
and their cumulative effect is to limit the flexibility of insurers to react
quickly as market conditions change.

An increasing number of states restrict the freedom of insurers to withdraw
from markets or substantially reduce their writings in one or more product
lines. These restrictions typically require prior notice to the insurance
regulator and the implementation of an approved plan for the orderly withdrawal
from the state or line of business. The insurance regulator normally has a great
deal of discretion in deciding whether to approve such a plan.

Certain aspects of the relationship between an insurer and its agents are
regulated. In particular, some states limit an insurance company's right to
terminate contracts with independent agents by imposing a required
rehabilitation period or extending the period during which the insurer must
continue doing business with an agent whose contract has been cancelled.

Effect of Federal Legislation. Although the federal government does not
directly regulate the business of insurance, federal initiatives often affect
the insurance business in a variety of ways. Current and proposed federal
measures which may significantly affect the insurance business include adoption
of uniform national product liability laws, changes in the taxation of insurers
and reinsurers, changes in the environmental laws, a program of federal
involvement in catastrophe insurance and reinsurance, and automobile safety
regulations (including the end of federally mandated maximum speed limits). Over
the years there have been several Congressional inquiries into the adequacy of
existing state regulation of insurance companies. In addition, Congressional
committees have in the recent past reviewed the McCarran-Ferguson Act of 1945,
which provides a limited exemption from federal antitrust laws for the "business
of insurance." A number of states, including California, have repealed or are
reviewing their statutory exemptions of the "business of insurance" from their
antitrust laws.

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Risk-Based Capital and IRIS Ratios. The risk-based capital requirements,
which apply to both property and casualty and life insurers, have been developed
to calculate and report information under formulae which attempt to measure
statutory capital and surplus needs based upon the underwriting and investment
risks assumed by the insurer. The formulae (one for property and casualty
companies and one for life insurance companies) are designed to allow state
insurance regulators to identify companies whose capital is potentially
inadequate. Under the formulae, a company determines its "risk-based capital" by
taking into account certain risks related to the insurer's assets (including its
investment portfolio) and underwriting risks related to the nature and
experience of its insurance business. The risk-based capital rules establish
different levels of regulatory attention depending upon the ratio of a company's
actual adjusted capital to its risk-based capital requirements. The statute
describes four levels of risk-based capital, each with different consequences.
If a company's risk-based capital is below a defined threshold, it is at the
"mandatory control level." At that level, the regulator is required to assume
control of the insurer. If risk-based capital is above the mandatory control
level, but below a separately defined threshold, it is at the "authorized
control level." At that level, the regulator is permitted, but not required, to
assume control. The next threshold is the "regulatory action level." At that
level, the regulator must require the insurer to submit a corrective plan,
examine the insurer and issue an order specifying the corrective actions to be
taken. At the "company action level," the insurer is required to submit to the
regulator a plan for the correction of its risk-based capital deficiencies. No
action is required by either the regulator or the company if risk-based capital
exceeds the company action level. The various thresholds are based on the
authorized control level. The mandatory control level is reached if an insurer's
risk-based capital is less than seven-tenths (.7) of its authorized control
level risk-based capital. The regulatory action threshold is 1.5 times the
authorized control level risk-based capital, and the company action threshold is
2 times authorized control level.

The NAIC's Insurance Regulatory Information System ("IRIS") identifies
eleven ratios for property and casualty insurers and thirteen for life insurers.
"Usual values" are specified for each ratio. Departures from the usual values on
three or more of these ratios may lead to inquires from state insurance
regulators. None of the Insurers have three or more unusual values. The only
Insurer with any ratios outside the usual values is ASLIC. It has two such
values, the net change in capital and surplus and the gross change in capital
and surplus, which are outside the usual values. Both are the result of a
$17,275,000 extraordinary dividend paid in December, 1995 in order to adjust the
Company's capital to more appropriate levels.

The financial condition of the Insurers is such that application of these
analytical tools to them has not resulted in any corrective action by any of the
Insurers or by any regulator. Management does not believe that they will have
any such effect in the foreseeable future or that they will have any material
effect on the way in which the Company conducts its business.

LEGAL PROCEEDINGS

The Subsidiaries are routinely involved in pending or threatened legal
proceedings. Those proceedings sometimes involve alleged breaches of contract,
torts (including bad faith and fraud claims) and miscellaneous other causes of
action. Some of the pending litigation includes claims for punitive damages in
addition to compensatory damages and other relief. While the aggregate dollar
amounts involved in these legal proceedings cannot be determined with certainty,
the amounts at issue could have a significant effect on the Company's results of
operations. However, based upon information presently available, and in light of
legal and other defenses available to the Company and its Subsidiaries,
management does not believe that any of these routine proceedings will have a
material adverse effect on the financial condition or results of operations of
the Company.

On February 14, 1996, three of the Insurers were among 23 underwriters of
real property insurance named defendants in a case alleging that their
underwriting, sales and marketing practices violate a number of civil rights
laws (including, without limitation, the Fair Housing Act) and constitute a
civil conspiracy. Brought in the United States District Court for the Western
District of Missouri, the plaintiffs seek to represent themselves and a putative
class of similarly situated persons in the State of Missouri. The relief sought
includes unspecified compensatory damages, punitive damages and attorneys' fees.
While it is too early to evaluate the plaintiffs' specific allegations,
management believes, based upon current information, that the

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Insurers' underwriting, sales and marketing practices have complied in all
material respects with the applicable requirements. The involved Insurers intend
to vigorously defend this action.

PROPERTIES

The Company's home office complex consists of a leased office building of
approximately 407,800 square feet in downtown Indianapolis, Indiana, a nearby
leased parking garage and a printing and supply building of approximately 52,400
square feet, which is owned by the Company. The lease covering the office
building and parking garage (the "Lease") will expire on August 31, 2009.
Semi-annual lease payments under the Lease total approximately $3.2 million
($6.4 million per year) until August, 1999. From September, 1999, until August,
2004, the semi-annual lease payments will total approximately $4.9 million ($9.8
million per year), and from September, 2004, until August, 2009, the semi-annual
lease payments will approximate $5.2 million ($10.4 million per year). See
"Certain Relationships and Related Transactions -- Building Lease" and Note 11
to the Consolidated Financial Statements included elsewhere herein.

The Company owns 15 of the buildings in which the Company's principal field
offices are located. The location and approximate size of each of those offices
are as follows:

<TABLE>
<CAPTION>
OFFICE
----------------------------------------------------- APPROXIMATE SIZE
----------------
(IN SQUARE FEET)
<S> <C>
Carol Stream, IL..................................... 39,500
Costa Mesa, CA....................................... 53,000
Englewood, CO........................................ 44,400
Fort Scott, KS....................................... 82,000
Grand Rapids, MI..................................... 44,500
Lake Oswego, OR...................................... 58,100
Lexington, KY........................................ 43,500
Maitland, FL......................................... 58,200
Montgomery, AL....................................... 30,500
Mountlake Terrace, WA................................ 52,500
New Britain, CT...................................... 59,600
Pittsburgh, PA....................................... 48,300
Pleasant Hill, CA.................................... 61,500
Richardson, TX....................................... 59,300
San Antonio, TX...................................... 43,700
</TABLE>

As part of the Realignment, the Company intends to dispose of all of these
owned properties, except the offices in Fort Scott, Kansas and Mountlake
Terrace, Washington. A $28.4 million pre-tax charge for loss on operating
properties was charged to income in the fourth quarter of 1995. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Overview."

The Company's field operations that are conducted elsewhere are conducted
from approximately 110 leased offices aggregating approximately 390,000 square
feet. These leases generally have terms of five years or less.

EMPLOYEES

As of March 31, 1996, the Company's business was conducted by approximately
3,700 employees. None of them is represented by a labor union or subject to a
collective bargaining agreement. Management believes its employee relations are
generally good.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The directors of the Company are divided into three classes and are elected
to hold office for a three-year term or until their successors are elected and
qualified. The election of each class of directors is staggered over each
three-year period. See "Description of Capital Stock -- Anti-takeover
Provisions." All directors of the Company were elected by Lincoln as the sole
shareholder of the Company. After completion of the Offerings, Lincoln will own
approximately 83% of the outstanding Common Stock and will continue to have the
power to control the Company and to be able to elect the Company's Board of
Directors. See "Risk Factors -- Control by Lincoln; Certain Continuing
Relationships with Lincoln and its Affiliates; Conflicts of Interest."

The following table provides information regarding the executive officers
and directors of the Company and ASI.

<TABLE>
<CAPTION>
EXPIRATION
OF TERM
AS DIRECTOR
OF THE
NAME AGE POSITION COMPANY
- ---------------------------- --- ------------------------------------------------ -----------
<S> <C> <C> <C>
F. Cedric McCurley.......... 61 Director, Chairman and Chief Executive Officer 1998
of the Company and ASI
William J. Lawson........... 56 Director, President and Chief Operating Officer 1999
of the Company and ASI
Jerome T. Gallogly.......... 60 Executive Vice President of the Company and ASI N/A
and Director of ASI
David N. Hafling............ 48 Senior Vice President and Actuary of ASI and N/A
Director of ASI
Todd R. Stephenson.......... 41 Senior Vice President, Treasurer and Chief N/A
Financial Officer of the Company and ASI and
Director of ASI
Harry R. Simpson............ 55 Senior Vice President of ASLIC and Director of N/A
ASI
Thomas M. Ober.............. 51 Vice President, Secretary and General Counsel of N/A
the Company and ASI and Director of ASI
J. Robert Coffin............ 59 Senior Vice President, Technology Administration N/A
of ASI and Director of ASI
Janis E. Stoddard-Smith..... 48 Senior Vice President, Claims of ASI and N/A
Director of ASI
Ronald K. Young............. 46 Senior Vice President, Product Management of ASI N/A
and Director of ASI
Robert A. Anker............. 54 Director of the Company 1999
Edwin J. Goss............... 69 Director of the Company 1997
Stephen J. Paris............ 57 Director of the Company 1999
Paula M. Parker-Sawyers..... 44 Director of the Company 1998
William E. Pike............. 67 Director of the Company 1998
Gabriel L. Shaheen.......... 42 Director of the Company 1997
Milton O. Thompson.......... 41 Director of the Company 1997
</TABLE>

Biographical information for each of the individuals listed in the above
table is set forth below. Officers and directors of the Company have held their
positions in the Company since the Company's incorporation on February 5, 1996.
Officers of the Company are elected annually and serve until their resignation
or removal.

Mr. McCurley is Chairman and Chief Executive Officer of the Company and
ASI. He joined ASI in 1986 as Executive Vice President, following the
acquisition by ASI of the Western Insurance Companies, where Mr. McCurley had
served as President. Mr. McCurley was elected President of ASI in 1991 and he
has

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served as Chief Executive Officer since 1992. He was elected Chairman of ASI in
October, 1995. Mr. McCurley also currently serves as a director of all of the
Subsidiaries, except for Lloyds. Mr. McCurley has 37 years of experience in the
insurance industry.

Mr. Lawson is President, Chief Operating Officer and a director of the
Company and ASI, having joined ASI in October, 1995. Prior to joining ASI, Mr.
Lawson served as Chairman and Chief Executive Officer of EMPHESYS Financial
Group, Inc. ("EMPHESYS"), the parent company of Employers Health Insurance
Company, from 1994, until he joined ASI in October, 1995; and he served as
President and Chief Executive Officer of EMPHESYS from 1993 to 1994. Mr. Lawson
served as President, Chief Executive Officer and a director of Employers Health
Insurance Company, a Lincoln affiliate, from 1988 to 1993. Mr. Lawson has 34
years of experience in the insurance industry.

Mr. Gallogly has been Executive Vice President and a director of ASI since
1992. He joined ASI in 1975 and has held various positions with ASI including
Senior Vice President, Product Management from 1986 to 1992. Mr. Gallogly has 37
years experience in the insurance industry.

Mr. Hafling has been Senior Vice President and Actuary of ASI since 1993
and a director of ASI since April, 1996. He joined ASI's Actuarial Department in
1972 and has held various positions with ASI including Vice President and
Actuary from 1986 to 1993. Mr. Hafling has 23 years experience in the insurance
industry.

Mr. Stephenson has been a director of ASI since February, 1995 and Senior
Vice President, Treasurer and Chief Financial Officer since May, 1995. He joined
ASI in 1977 and served in a number of financial positions with ASI, including
Vice President, Corporate Accounting from 1992 to May, 1995; Second Vice
President, Planning and Administration from 1991 to 1992; and Assistant
Treasurer and Manager of Budget and Financial Planning from 1984 to 1991. Mr.
Stephenson has 18 years experience in the insurance industry.

Mr. Simpson has been Senior Vice President of ASLIC since May, 1995 and a
director of ASI since April, 1996. In such position, he acts as the general
manager of ASLIC. Mr. Simpson joined ASI in 1977, and has held various positions
with ASI including Vice President, Field Operations from 1990 until May, 1995.
Mr. Simpson has 29 years experience in the insurance industry.

Mr. Ober joined ASI in 1973 and has served as Vice President, Secretary and
General Counsel of ASI since 1984 and a director of ASI since April, 1996. Mr.
Ober has 28 years experience in the insurance industry.

Mr. Coffin has been Senior Vice President, Technology Administration of ASI
since May, 1995 and a director of ASI since April, 1996. He joined ASI in the
data processing department in 1968, and has served ASI in several areas of
management including Vice President, Personnel from 1990 until May, 1995. Mr.
Coffin has 27 years experience in the insurance industry.

Ms. Stoddard-Smith has been Senior Vice President, Claims of ASI since May,
1995 and a director of ASI since April, 1996. She joined ASI in 1973 and has
held several claims management positions with ASI, including Vice President of
Claims for the Eastern Region from 1991 to May, 1995 and Indiana Division Claim
Manager from 1989 to 1991. Ms. Stoddard-Smith has 24 years experience in the
insurance industry.

Mr. Young has been Senior Vice President, Product Management of ASI since
May, 1995 and a director of ASI since April, 1996. He joined ASI in 1971 and has
held several management positions with ASI, including Vice President, Field
Operations, from 1992 to May, 1995, and Division Vice President from 1988 to
1992. Mr. Young has 24 years experience in the insurance industry.

Mr. Anker is a director of the Company and served as a director of ASI from
1984 to April, 1996. Mr. Anker has served as President and Chief Operating
Officer of Lincoln since 1992, and Chairman and Chief Executive Officer of The
Lincoln National Life Insurance Company ("Lincoln Life"), a Lincoln affiliate,
since 1994. He has also served as President and Chief Operating Officer of
Lincoln Life from 1992 to 1994. In addition, Mr. Anker has served ASI as
President from 1985 until 1991; as Chief Executive Officer from 1990 to 1992;
and as Chairman from 1991 until 1992. Mr. Anker currently serves as a director
of various other Lincoln affiliates and has over 32 years of experience in the
insurance industry. Mr. Anker is also currently a director of Fort Wayne
National Corporation, the holding company for Fort Wayne National Bank.

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Mr. Goss is a director of the Company and served as a director of ASI from
1975 to April, 1996. Mr. Goss retired in 1990 after serving ASI in various
capacities since he joined the firm in 1951. At the time of his retirement, Mr.
Goss was Chairman and Chief Executive Officer of ASI, having served as such
since 1985. Mr. Goss also served as a director of Lincoln from 1981 to 1990. Mr.
Goss also currently serves as a director of all of the Subsidiaries, except for
ICI and Lloyds, and as a director of Ipalco Enterprises, Inc. ("Ipalco"), a
public utility holding company, and Indianapolis Power and Light Company, an
electric utility and subsidiary of Ipalco. Mr. Goss has 44 years experience in
the insurance industry.

Mr. Paris is a director of the Company and served as a director of ASI from
1992 to April, 1996. Mr. Paris has served as the managing partner of Morrison,
Mahoney & Miller since 1985. Morrison, Mahoney & Miller is a law firm, based in
Boston, Massachusetts, with offices throughout Massachusetts and in New York,
California, Connecticut, Rhode Island and Michigan, which specializes in civil
litigation defense and insurance law.

Ms. Parker-Sawyers is a director of the Company and served as a director of
ASI from 1994 to April, 1996. Ms. Parker-Sawyers has served as Program Director
of the Indiana University Center on Philanthropy since 1993. Prior to assuming
that position, Ms. Parker-Sawyer had served as Director of Community Relations
for the Associated Insurance Companies, Inc., a health insurance company, from
1991 to 1993 and as Deputy Mayor for the City of Indianapolis, Indiana from 1989
to 1991.

Mr. Pike is a director of the Company and served as a director of ASI from
1981 to April, 1996. Since retiring as Executive Vice President of J.P. Morgan &
Company in 1989, he has been a private investor. Mr. Pike also currently is a
director of VF Corporation, a public apparel manufacturer.

Mr. Shaheen is a director of the Company and served as a director of ASI
from May, 1995 to April, 1996. Mr. Shaheen has served as President of Lincoln
National Reassurance Company ("LNRAC"), a Lincoln affiliate, since 1994. Mr.
Shaheen has also served Lincoln National Life Reinsurance Company ("LNLR"), a
Lincoln affiliate, as President from 1994 to June, 1995, at which time it merged
with LNRAC. Prior to assuming that position, he had served as Executive Vice
President of LNLR and LNRAC from May, 1994 until October, 1994; and as Senior
Vice President of these two companies from 1993 until 1994. Mr. Shaheen has also
held the title of Executive Vice President of Lincoln Life since 1994, and has
held other various positions with Lincoln Life including Senior Vice President
from 1991 to 1994 and Vice President from 1987 until 1991. Mr. Shaheen also
currently serves as a director of various other Lincoln affiliates and has 19
years experience in the insurance industry.

Mr. Thompson is a director of the Company and served as a director of ASI
from February, 1995 to April, 1996. He has served as the President of Grand Slam
Licensing, Inc., a designer, importer and distributor of licensed sports and
entertainment collectibles, since 1995 and the general partner of Grand Slam
III, LP, a provider of management services to professional athletes,
entertainers, celebrities and promoters of special events, since 1981. Mr.
Thompson is also a partner in Baker, Siegal & Page, a law firm based in
Indianapolis. Prior to joining Baker, Siegal & Page, Mr. Thompson was Of Counsel
with Henderson, Daily, Withrow and DeVoe, a law firm based in Indianapolis, from
1990 to 1993. Mr. Thompson currently is also a director of IWC Resources, Inc.,
a public utility holding company.

COMMITTEES AND COMPENSATION OF THE BOARD OF DIRECTORS

Directors of the Company who are not employees of the Company or its
affiliates will receive an annual retainer at a rate of $15,000 plus a fee of
$900 for each Board and Board committee meeting attended. The annual retainer
and fees are either deferred in phantom units of Common Stock of the Company
which are payable in cash at termination of service as a director, including
death or disability, or paid currently in cash or in a combination of both
deferred units and current cash in the proportion elected by the director
annually with respect to each succeeding year of service as a director. In
addition, the Company reimburses directors for reasonable travel expenses
incurred in attending Board and Board committee meetings.

The Company's Compensation Committee consists of Messrs. Paris, Pike and
Thompson. The Company's Audit Committee consists of Messrs. Paris and Pike and
Ms. Parker-Sawyers.

71
<PAGE> 74

EXECUTIVE COMPENSATION

The following Summary Compensation Table sets forth information as to
annual, long-term and other compensation for services in all capacities as
employees and directors of ASI for Mr. McCurley and the other four most highly
compensated executive officers of the Company (collectively, the "Named
Executives").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
PAYOUTS
------------------------------
AWARDS LONG-TERM
ANNUAL COMPENSATION -------------------------- PERFORMANCE
------------------------------------ RESTRICTED PLANS
NAME AND OTHER ANNUAL STOCK (LTPP) ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2)(3)(4) OPTIONS PAYOUTS(4) COMPENSATION(5)
- -------------------- ---- -------- ----- --------------- --------------- ------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
F. Cedric
McCurley.......... 1995 $370,425 $-- $ 350 $ 332,134(2) 14,000 $ 229,450 $52,563
Chairman and CEO
of
the Company and
ASI
Jerome T.
Gallogly.......... 1995 283,000 -- 1,205 340,185(2) 7,000 145,900 43,324
EVP of the Company
and ASI
David N. Hafling.... 1995 165,981 -- 238 149,590(2) 3,000 72,950 21,898
SVP and Actuary of
ASI
Todd R.
Stephenson........ 1995 155,812 -- 127 111,950(2) 6,000 111,950 19,053
SVP and CFO of the
Company and ASI
Harry R. Simpson.... 1995 154,219 -- 536 97,300(2) 3,000 97,300 28,758
SVP of ASLIC
</TABLE>

- -------------------------
(1) The amounts included represent (a) amounts reimbursed during the year for
payment of taxes and (b) perquisites and other personal benefits if they
exceed the lesser of $50,000 or 10% of the total of base salary and annual
bonus for the Named Executives.

(2) Each Named Executive received a restricted stock award under the Lincoln
Executive Value Sharing Plan for the 1993-1995 performance cycle. Such
awards were determined in May of 1996. These amounts are paid in restricted
stock of the Company, instead of restricted stock of Lincoln. The
restrictions on the shares awarded under the Executive Value Sharing Plan
lapse on the earliest of death, disability, or the third anniversary of
January 1 of the year next succeeding the applicable performance cycle. No
dividends are payable on the restricted shares. However, when the
restrictions lapse, a "dividend equivalency" bonus is paid. The dollar value
of the LTPP restricted stock awards for the 1993-1995 performance cycle are
as follows: Mr. McCurley, $229,450; Mr. Gallogly, $145,900; Mr. Hafling,
$72,950; Mr. Stephenson, $111,950; and Mr. Simpson, $97,300. The Lincoln
Compensation Committee also made the following additional restricted stock
awards to the Named Executives so that the total award (the award under the
Executive Value Sharing Plan and the award described in this sentence) was
competitive relative to the market: Mr. McCurley, 2,409 shares; Mr.
Gallogly, 4,558 shares; and Mr. Hafling, 1,798 shares, with a market value
on December 31, 1994 of $84,315, $159,530, and $62,930, respectively. See
footnote (4) for the cash portion of the payout.

(3) As of December 31, 1995, the number and value of the aggregate Lincoln
restricted shareholdings of all employees of the Company were 36,645 shares
at $1,969,669. At that time, Mr. McCurley held 22,245 restricted shares of
Lincoln common stock with a market value of $1,195,669; Mr. Gallogly held
6,892 restricted shares with a market value of $370,445; and Mr. Hafling
held 2,508 restricted shares with a market value of $134,805.

(4) Each Named Executive also received a cash award under the Lincoln Executive
Value Sharing Plan for the 1993-1995 performance cycle. These amounts are
paid in cash. These awards were determined in May of 1996. See footnote (2)
for the restricted stock portion of the payout.

(5) Amounts included in the All Other Compensation column are amounts
contributed to or accrued for the Named Executives under Lincoln's
Employees' Savings and Profit-Sharing Plan and the related supplemental
savings plans based on a $1.007 matching company contribution for each $1.00
that each employee contributed. The amounts for 1995 are as follows: Mr.
McCurley, $22,355; Mr. Gallogly, $17,099; Mr. Hafling, $10,029; Mr.
Stephenson, $9,414; and Mr. Simpson, $9,318. In addition, the dollar value
of insurance premiums paid by ASI for the benefit of the Named Executives is
included. The amounts for 1995 are as follows: Mr. McCurley, $25,565; Mr.
Gallogly, $22,217; Mr. Hafling, $9,205; Mr. Stephenson, $7,355; and Mr.
Simpson, $16,878. Also, the Company's contributions for flexible benefit
credits for 1995 are as follows: Mr. McCurley, $4,643; Mr. Gallogly, $4,008;
Mr. Hafling, $2,664; Mr. Stephenson, $2,284; and Mr. Simpson, $2,562.

72
<PAGE> 75

Stock Option Plans. As senior executives of ASI, the Named Executives are
eligible to participate in the 1982 Stock Option Incentive Plan and the 1986
Stock Option Incentive Plan maintained by Lincoln (collectively, the "Stock
Option Plans"). Stock option grants provide the opportunity to purchase shares
of Lincoln common stock at fair market value (the average of the high and low
trading prices on the day preceding the date of grant). The objective of these
grants is to increase participant's equity interest in Lincoln and to allow them
to share in the appreciation of Lincoln's common stock. Stock options only have
value for the executive officers if the stock price appreciates in value from
the date the options are granted. The Stock Option Plans were approved by
Lincoln's shareholders. Expenses related to compensation of ASI employees under
the Stock Option Plans are charged by Lincoln back to ASI.

Participants in the Stock Option Plans receive annual grants of options.
Twenty-five percent of the options in each annual grant vest each year; as such,
all options in an annual grant are fully vested four full years after grant. The
options have a ten year term. The Chief Executive Officer of Lincoln recommends
grants for the named executives; these grants must then be approved by the
Compensation Committee of the Board of Directors of Lincoln. In granting stock
options under the Stock Option Plans, the Compensation Committee takes into
account the participant's level of responsibility and individual contribution.
In addition, the Compensation Committee of the Board of Directors of Lincoln
considers the practices of other companies as verified by external surveys,
shares of Lincoln common stock owned by the participant, and total compensation
objectives. Participants are encouraged to hold shares received upon the
exercise of options. The Compensation Committee considers whether or not
participants sell shares of Lincoln common stock prior to reaching established
ownership guidelines when determining future option grants.

The following table sets forth information on grants of stock options
pursuant to the Stock Option Plans during 1995 to the Named Executives, which
are reflected in the Summary Compensation Table. All options are for the
purchase of shares of common stock of Lincoln; and, the Named Executives and
other Company employee participants will continue to hold their Lincoln stock
options which remain unexercised after the closing of the Offerings. No stock
appreciation rights were granted under the Stock Option Plans during 1995.

OPTION GRANTS IN 1995

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF STOCK PRICE
SECURITIES TOTAL OPTIONS PER SHARE APPRECIATION OF
UNDERLYING GRANTED TO EXERCISE OPTION TERM (1)
OPTIONS EMPLOYEES OR BASE EXPIRATION --------------------
NAME GRANTED (2) IN 1995 (3) PRICE (4) DATE (5) 5% 10%
- ---------------------------- ----------- ------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
F. Cedric McCurley.......... 14,000 13.40% $ 42.63 5/10/2005 $375,223 $950,996
Jerome T. Gallogly.......... 7,000 6.70 42.63 5/10/2005 187,611 475,498
David N. Hafling............ 3,000 2.87 42.63 5/10/2005 80,405 203,785
Todd R. Stephenson.......... 6,000 5.74 42.63 5/10/2005 160,810 407,570
Harry R. Simpson............ 3,000 2.87 42.63 5/10/2005 80,405 203,785
</TABLE>

- -------------------------
(1) Amounts represent the potential realizable value of each grant of options,
assuming that the market price of the underlying shares appreciates in value
from the date of grant to the end of the option term, at annualized rates of
5% and 10%.

(2) Options granted on May 10, 1995, are exercisable with respect to 25% of the
option shares on the first anniversary of the grant date with an additional
25% of the option shares becoming exercisable on each successive anniversary
date, with earlier full vesting occurring on death or disability.

(3) Lincoln granted options totalling 104,450 shares to all ASI employees in
1995.

(4) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of already owned shares or by offset of the underlying
shares, subject to certain conditions.

73
<PAGE> 76

(5) The options were granted for a term of 10 years, subject to earlier
termination in certain events related to termination of employment.

The following table sets forth information with respect to option exercises
in 1995 and unexercised options to purchase shares of common stock of Lincoln
granted in 1995 and prior years under the Stock Option Plans to the Named
Executives. As in the table above, all options are for the purchase of shares of
common stock of Lincoln.

AGGREGATED OPTION EXERCISES IN 1995 AND OPTION VALUES AT DECEMBER 31, 1995

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1995 AT DECEMBER 31, 1995(1)
SHARES ACQUIRED --------------------------- ----------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- --------------- -------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
F. Cedric McCurley.... 4,000 $ 67,250 38,400 35,000 $ 948,263 $ 489,025
Jerome T. Gallogly.... 1,200 17,856 15,700 15,300 384,235 207,465
David N. Hafling...... 0 0 8,950 6,650 238,833 89,970
Todd R. Stephenson.... 0 0 2,750 8,250 66,369 100,490
Harry R. Simpson...... 0 0 2,575 5,525 50,602 73,871
</TABLE>

- -------------------------
(1) Based on the closing price of the New York Stock Exchange Composite
Transactions of Lincoln's Common Stock on December 29, 1995 ($53.75).

The Company intends to adopt, and Lincoln as the shareholder is expected to
approve, the Company's Stock Option Incentive Plan (the "Stock Option Incentive
Plan"), which will contain provisions similar to the provisions of the 1986
Stock Option Plan of Lincoln. Stock option grants will provide the opportunity
to purchase shares of Common Stock of the Company at fair market value (the
average of the high and the low prices on the day preceding the date of grant)
during the period the option remains outstanding. Under the terms of the Stock
Option Incentive Plan, the Compensation Committee of the Company will be able to
award to eligible employees of the Company up to a maximum of 1,000,000 shares
of Common Stock of the Company prior to the expiration of the Stock Option
Incentive Plan on July 1, 2000. The Compensation Committee will not be able to
award to any one person in any year more than options for 50,000 shares and
50,000 stock appreciation rights. In addition, the Compensation Committee may
not award an aggregate of more than 75,000 shares of restricted stock (other
than stock issued upon the exercise of options or stock appreciation rights) in
any year. The Compensation Committee may make awards in the form of (i) stock
options, including both incentive stock options ("ISO") and nonqualified stock
options, (ii) restricted stock, (iii) restricted or unrestricted stock awarded
as payment of incentives, and (iv) stock appreciation rights.

The number of shares subject to options under the initial awards to the
Named Executives and Mr. Lawson at the Initial Offering Price ("IPO Price") will
be determined using a conversion ratio based upon the relative prices of Lincoln
common stock to the IPO Price. For illustrative purposes, using the price for
Lincoln common stock of $49.25 (its closing price as of April 23, 1996) per
share and an assumed IPO Price of $24.00 per share, the number of shares of
Common Stock of the Company subject to options under the initial awards would be
as follows: Mr. McCurley, 28,729; Mr. Lawson, 20,521; Mr. Gallogly, 14,365; Mr.
Hafling, 6,156; Mr. Stephenson, 12,313; and Mr. Simpson, 6,156. The actual
number of shares of Common Stock of the Company subject to options under the
initial awards will depend on the average of the opening price and closing price
of Lincoln common stock on the business day immediately preceding the closing
date of the offering. These options will be exercisable with respect to 25% of
the option shares on the first anniversary of the grant date with an additional
25% of the option shares becoming exercisable on each successive anniversary
date, with earlier full vesting occurring on death or disability. The total
number of shares subject to options at the IPO price is 200,000.

Executive Performance Incentive Compensation Plan. The Named Executives and
Mr. Lawson will participate in the Executive Performance Incentive Compensation
Plan to be maintained by the Company

74
<PAGE> 77

(the "EPIC Plan"), which Lincoln as the shareholder is expected to approve.
Under the EPIC Plan, awards will be made only if specified performance
objectives are attained. In the case of the Named Executives and Mr. Lawson, the
amount of these awards will depend in part on performance over "performance
cycles" of one to three years' duration, relative to the performance of other
insurers in a selected peer group.

Participation in the EPIC Plan is extended to a select group of senior
executives of the Company who have a significant impact on its future direction
and long-term performance. The Compensation Committee of the Board of Directors
of Lincoln (which may delegate some or all authority to the Compensation
Committee of the Board of Directors of the Company) selects the participants,
establishes the performance cycles and the performance goals and fomulae for
measuring relevant performance, determines the relevant peer group, establishes
the maximum amounts which can become payable, certifies the extent to which such
performance goals have been attained, and determines the actual award. The
Compensation Committee has the authority to defer the time of payment of awards
to assure the most appropriate tax treatment for both the Company and the
individual, to comply with applicable securities laws, or for other reasons.
Upon completion of a cycle, any award may be paid with respect to that cycle in
restricted shares of Common Stock of the Company, in phantom stock of the
Company, in cash or in a combination of these payment media. Any such restricted
shares awarded decrease the aggregate maximum of restricted shares that the
Compensation Committee may award in a given year under the Stock Option
Incentive Plan. See "-- Stock Option Plans."

While the various elements used to determine the awards under the EPIC Plan
may be changed from time to time, it is anticipated that the performance
measurement standard for EPIC awards for the initial performance cycles will
utilize a two-part formula: (1) the "Company Portion" (75% of each award), which
will be based on two factors related to performance by the Company, and (2) the
"Lincoln Portion" (25% of each award), which will be based on Lincoln's return
on adjusted book value.

For the Company Portion, the first factor is a combined ratio component and
the second factor is a growth component. The percentage weighting specified for
the combined ratio factor and for the growth factor will be dependent upon the
business environment and may vary from cycle to cycle.

For the initial cycle, the part of the Company Portion dependent upon the
combined ratio will be determined by comparing the Company's combined ratio
performance during a performance cycle to that of the peer group. The "combined
ratio" for this purpose is the sum of (i) losses and LAE incurred divided by
premiums earned plus (ii) underwriting expenses divided by premiums written. For
these purposes, reinsurance in run-off business will be excluded.

All peer companies will be ranked by the combined ratio results each
achieved during the period. Three performance levels have been identified.
Threshold performance is the 50th percentile of a middle group of peer
companies. No award will be made for the combined ratio component of the Company
Portion if the Company's performance is at or below that level. Target
performance is the 75th percentile of this group. If the Company's performance
is at this level, the combined ratio component of the Company Portion of the
award will not exceed a specified percentage of the Company Portion of the
target award. If the Company has the lowest average combined ratio among the
peer companies and if the combined ratio is under 100%, the combined ratio
component will be a specified percentage of the Company Portion of the maximum
award. Awards will be adjusted proportionally to reflect combined ratio
performance falling between the threshold and the maximum.

The growth factor for the initial cycle will be measured by the percentage
increase in the Company's property and casualty and life policies in-force. The
threshold for this component is the growth set forth in the Company's strategic
plan for the period. If that threshold is achieved, the growth component of the
Company Portion will be a specified percentage of the Company Portion of the
threshold award. If growth is 150% of the planned amount, then the growth
component of the Company Portion will be no more than a specified percentage of
the Company Portion of the target award. The maximum award for the growth
component of the Company Portion is reached when growth is 200% of that planned.
At that level, the growth component of the award would be no higher than a
specified percentage of the Company Portion of the maximum award. Awards for
performance between the threshold and the maximum are paid proportionally. There
is no payout for performance below the threshold plan level.

75
<PAGE> 78

For the Lincoln Portion of each award, performance goals established by
Lincoln's Compensation Committee will measure performance by comparing Lincoln's
return on adjusted book value against similar returns for a designated peer
group of companies. When return on adjusted book value equals or exceeds the
average of the peer group, generally determined after excluding the three
highest and three lowest performing companies within the group, incentive awards
begin to be paid to participants. If return on adjusted book value is below
average, no award is made. As performance rises above the 75th percentile of the
peer group, awards increase towards the maximum award level payable if Lincoln
is the top-performing company in the peer group.

Payments of the awards under the EPIC Plan for the performance cycles
ending in 1996 and 1997 will be subject to a transitional phase-in recognizing
that the individuals covered under the EPIC Plan were previously covered under
the Lincoln Executive Value Sharing Plan ("EVSP") for partially completed cycles
that began in 1994 and 1995. This transition takes into account on a
proportionate basis the periods during which such individuals were covered under
the Lincoln EVSP. Similarly, to phase in the EPIC Plan, the plan will utilize
one- and two-year performance cycles for 1996 and 1996-97 for the Company
Portion of the awards and will utilize the goals and performance cycles existing
under the Lincoln EVSP at the end of 1995 for purposes of determining the
Lincoln Portion of EPIC Plan awards for periods that, if calculated on a three-
year performance cycle basis, would have included periods prior to 1996.

The Company's Chief Executive Officer has the discretion to adjust
individual awards under the EPIC Plan to recognize outstanding contributions
made by one or more participants. In no event, however, may the total amount
awarded in a year exceed the maximum permissible under the EPIC Plan.

If participation in the EPIC Plan is terminated due to retirement,
disability, or death, the award will be paid at the end of the performance cycle
based on the months the participant was eligible during the cycle. No award
under the EPIC Plan will be paid if the participant is discharged for gross
misconduct or if the participant voluntarily terminates his or her employment
(other than by mutual agreement with his or her employer).

76
<PAGE> 79

The table below sets forth the estimated future payments for the three
performance cycles commencing in 1996 under the EPIC Plan for the Named
Executives.

LONG-TERM INCENTIVE PLANS -- AWARDS IN 1995

<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE NON-STOCK
NUMBER OF OR OTHER PRICE-BASED PLANS
SHARES, UNITS PERIOD UNTIL -------------------------------------
OR OTHER MATURATION OR THRESHOLD TARGET MAXIMUM
NAME RIGHTS(1) AWARD(2) AWARD AWARD(3) AWARD(4)
- ----------------------------------- ------------- ------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
F. Cedric McCurley................. N/A 1996 $ 370,000 $ 930,000 $1,400,000
1996-1997 370,000 930,000 1,620,000
1996-1998 420,000 1,010,000 1,760,000
Jerome T. Gallogly................. N/A 1996 180,000 450,000 800,000
1996-1997 210,000 530,000 920,000
1996-1998 240,000 570,000 1,010,000
David N. Hafling................... N/A 1996 100,000 250,000 430,000
1996-1997 100,000 250,000 430,000
1996-1998 110,000 260,000 450,000
Todd R. Stephenson................. N/A 1996 140,000 350,000 610,000
1996-1997 160,000 400,000 690,000
1996-1998 180,000 420,000 740,000
Harry R. Simpson................... N/A 1996 120,000 300,000 530,000
1996-1997 140,000 350,000 600,000
1996-1998 160,000 380,000 660,000
</TABLE>

- -------------------------
(1) The Company's EPIC Plan is administered by the Compensation Committee as
described in the text above. The performance goals for the Named Executives
are based on the Company's performance in the manner set forth in the text
above. If results are consistent with the formulae described in the text
above, then awards will be made in accordance with pre-established formulae
with Compensation Committee discretion to adjust downward.

(2) In determining the amount of the Lincoln portion of the EPIC Plan awards,
the Compensation Committee will use the following three-year performance
cycles: 1994-96, 1995-97 and 1996-98.

(3) The targets are the estimated maximums to be paid for the 1996 cycle, the
1996-97 cycle and the 1996-98 cycle if the Company's performance is at the
target level described in the text above compared to its competitors.

(4) The maximums are the most that would be awarded with respect to each listed
cycle if the performance goals described in the text above were achieved at
the levels described entitling the Named Executives to a 100% payment.

The Named Executives participated in the EVSP of Lincoln for the period of
their employment prior to 1996. Commencing in 1996, the Named Executives ceased
to participate under the Lincoln EVSP and no longer retained any right to
payments under that plan. The Named Executives and Mr. Lawson thus began to
participate exclusively under the EPIC Plan as of January 1, 1996 and have
rights with respect to long-term incentive plan payments only under the EPIC
Plan on and after January 1, 1996.

Restricted Stock. Awards of Common Stock of the Company, upon the
recommendation of the Compensation Committee of the Board of Directors of
Lincoln, may be made to any of the Named Executives and Mr. Lawson in lieu of a
cash payment under the EPIC Plan. The shares awarded typically will be
restricted from sale or trade for three years after grant except in a situation
relating to death or disability. During the period that the shares are issued
but restricted, the executives may vote the shares. In addition, at

77
<PAGE> 80

the time the restrictions lapse, compensation equal to the amount of dividends
that would have been paid during the period the shares were restricted is paid
to the executive. The Compensation Committee of the Board of Directors of the
Company, upon the recommendation of the Compensation Committee of the Board of
Directors of Lincoln, may also grant individuals restricted stock to recognize
exceptional performance or in order to ensure retention of key executives.

ASI Executives' Salary Continuation Plan. Certain officers of ASI and its
subsidiaries, including all Named Executives and Mr. Lawson, have entered into
salary continuation agreements with ASI under the terms of the American States
Executive Salary Continuation Plan (the "Salary Continuation Plan"). Under the
Salary Continuation Plan, the amount each officer is entitled to receive upon
retirement is 2% of final monthly compensation times the number of years the
salary continuation agreement has been in effect up to a maximum of 10% of final
monthly salary, so long as the officer agrees to an exclusive consulting
arrangement with ASI until the earlier of the waiver of such arrangement or
attainment of age 65. This amount will be paid in the form of a 120-month
certain and life annuity. In the event of death prior to retirement, designated
beneficiaries of executives who were participating in the Salary Continuation
Plan on December 31, 1991, will instead receive annual payments each equal to
25% of the employee's final annual salary until the later of the date on which
the employee would have attained age 65 or the date on which a minimum of ten
payments have been made. These salary continuation agreements automatically
terminate upon the officer's termination of service for reasons other than
death, disability or retirement; except that in the event of a change-in-control
of ASI or Lincoln, and a subsequent voluntary or involuntary termination of the
employee's employment within 2 years of the change-in-control, such employee
shall be treated as continuing employment with ASI and its affiliates until age
65 at which time benefits shall begin. The Salary Continuation Plan caps
compensation used to determine benefits at the greater of $200,000 or the annual
base compensation in effect on December 31, 1991, for all current and future
participants and eliminates the death benefit for future participants.

ASI Performance Incentive Compensation Plans. Officers and other key
contributors not participating in the EPIC Plan participate in the management
performance incentive compensation plans. Awards will be based upon a formula
which considers combined ratio (both in absolute terms and in comparison to the
industry), unit growth and ASI's policies in-force results.

Deferred Compensation Plan. As senior executives of ASI, the Named
Executives are eligible to participate in the Deferred Compensation Plan of
Lincoln. This plan allows certain officers of Lincoln to defer a portion of
their compensation until after termination of employment. The plan allows
eligible employees to designate that a portion of any such deferral is to be in
the form of phantom units of Common Stock of Lincoln or other forms of
investment units payable in cash after termination of employment. Elections for
1996 by executives who have deferred compensation under the plan will continue
to apply for the remainder of the year. The plan includes, with respect to
employees of the Company, an additional opportunity to designate that a portion
of any deferral is to be in the form of phantom units of Common Stock of the
Company.

The Company intends to establish a deferred compensation plan which will
contain provisions similar to those of Lincoln's plan. The Company's plan is
expected to become effective on January 1, 1997 and will permit certain
officers, including the Named Executives and Mr. Lawson, to defer a portion of
their compensation in accordance with the provisions of the plan.

Split Dollar Life Insurance Arrangements and Agreements. The Company is a
party to existing split-dollar arrangements and agreements. As a result, all
rights and obligations thereunder exist exclusively between the Company and
those executives who are covered under such arrangements and agreements,
including the Named Executives, as well as Messrs. Lawson, Coffin and Young and
Ms. Stoddard-Smith.

Pension Plans. The Named Executives, along with other employees of the
Company, currently participate in a qualified non-contributory defined benefit
retirement plan of ASI (the "Retirement Plan"). The assets of the Retirement
Plan are pooled with those of Lincoln's pension plan for investment purposes.
The following table shows the estimated annual retirement benefits payable on a
straight life annuity basis to

78
<PAGE> 81

participating employees under the Retirement Plan. Such benefits reflect a
reduction to recognize in part the Company's cost of Social Security benefits
related to service to the Company.

PENSION PLAN TABLE

<TABLE>
<CAPTION>
FINAL ESTIMATED ANNUAL RETIREMENT BENEFITS FOR CREDITED YEARS OF SERVICE
AVERAGE -------------------------------------------------------------------------------------
SALARY 10 15 20 25 30 35 40
- ---------------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$200,000........ $32,897 $ 49,345 $ 65,794 $ 82,242 $ 98,691 $115,139 $120,139
225,000........ 37,147 55,720 74,294 92,867 111,441 130,014 135,639
250,000........ 41,397 62,095 82,794 103,492 124,191 144,889 151,139
275,000........ 45,647 68,470 91,294 114,117 136,941 159,764 166,639
300,000........ 49,897 74,845 99,794 124,742 149,691 174,639 182,139
325,000........ 54,147 81,220 108,294 135,367 162,411 189,514 197,639
350,000........ 58,397 87,595 116,794 145,992 175,191 204,389 213,139
375,000........ 62,647 93,970 125,294 156,617 187,941 219,264 228,639
400,000........ 66,897 100,345 133,794 167,242 200,691 234,139 244,139
425,000........ 71,147 106,720 142,294 177,867 213,441 249,014 259,639
450,000........ 75,397 113,095 150,794 188,492 226,191 263,889 275,139
475,000........ 79,647 119,470 159,294 199,117 238,941 278,764 290,639
500,000........ 83,897 125,845 167,794 209,742 251,691 293,639 306,139
</TABLE>

The above table assumes retirement at age 65 (the current normal retirement
age under the Retirement Plans) and that, at age 65, Messrs. McCurley, Gallogly,
Hafling, Stephenson and Simpson will have 14, 25, 34, 41 and 28 years of service
credited to them, respectively.

Under the Retirement Plan, the "final average salary" is the average of an
employee's base salary paid in any consecutive 60-month period during an
employee's last ten years of active employment which produces the highest
average salary.

As a result of limitations under the Code, a portion of these Retirement
Plan benefits will be paid under an unfunded non-qualified supplemental defined
benefit retirement plan established by the Company to provide benefits (included
in the above table) which would exceed these limits.

Savings and Profit Sharing Plan. The Company will maintain a savings and
profit sharing plan qualified under section 401(k) of the Code (the "Savings
Plan"). Employees electing to participate must deposit a percentage of their
salaries into an account maintained for them by the Savings Plan's trustee.
Company contributions to each participant's account will be based on the first
6% of salary deposited by the employee. The amount of Company contributions will
depend on its performance, measured by a formula adopted by the Board of
Directors. While that formula may be changed from time to time, it will
initially consider the Insurers' combined ratio averaged over three years (or
since the year of the Savings Plan's inception, if less), both in absolute terms
and compared to a selected peer group of other property and casualty insurers.
Generally, contributions to the Savings Plan made by the Company will be in the
form of its Common Stock. Participants may select from a number of investment
options, including the Company's Common Stock. They are permitted to change
investment options, subject to certain limitations.

Employees of ASI have previously participated in a similar plan maintained
by Lincoln (the "'Lincoln Plan"), which included as one of its investment
options the common stock of Lincoln. Account balances of Company employees will
be transferred from the Lincoln Plan to the Savings Plan. While the Savings Plan
will not offer Lincoln common stock as an on-going investment option, it may
hold any such stock transferred to it by participating employees.

Employment Contracts and Termination of Employment. The Company will enter
into employment agreements (the "Employment Agreements") with Messrs. McCurley,
Lawson, Gallogly and Stephenson (the "Contract Executives"). The Employment
Agreements will expire on the date which is 24 months after the date of the
Offerings, except that in the case of Mr. McCurley, his Employment Agreement
will extend until the later of December 31, 1997 or 12 months after the date on
which the Board of Directors designates

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anyone other than Mr. McCurley as Chief Executive Officer of the Company. The
Employment Agreements provide for the capacities in which the Contract
Executives will serve as employees of the Company, their responsibilities,
compensation, benefits and eligibility for stock option and restricted stock
awards. The Employment Agreements also provide that in the event of termination
of employment for reasons other than incapacity or death and without cause, the
Company will continue to provide the Contract Executive's salary, bonus under
the EPIC Plan and benefits until the termination of the Employment Agreement and
for vesting and exercisability of all stock options as if employment had
continued until such date.

In 1996, Mr. McCurley's base salary will be $385,000; Mr. Lawson's will be
$340,000; Mr. Gallogly's will be $303,000; and Mr. Stephenson's will be
$208,000. Each Contract Executive's base salary may be adjusted annually at the
discretion of the Board of Directors of the Company. Contract Executives are
also entitled to participate in and receive all benefits under any and all
benefit programs maintained by the Company.

The Employment Agreements will also provide that the Contract Executives
will receive bonuses in 1996. Messrs. McCurley, Gallogly and Stephenson will
receive a bonus in an amount equal to the bonus that would have been payable
under the EVSP for the performance cycle ending in 1995, in lieu of the bonus
payable under the EVSP. Mr. Lawson's bonus will be the greater of the amount of
bonus that would have been payable under the EVSP for the performance cycle
ending in 1995, or $400,000, and will also be in lieu of the bonus payable under
the EVSP. The bonus can be paid in cash, restricted Company common stock, or
restricted phantom stock or stock units of the Company. The Compensation
Committee will determine the form or combination of forms in which each Contract
Employee's bonus will be paid. Additional bonuses will be paid in future years
in lieu of the bonuses owed under the EVSP for the performance cycles ending in
1996 and subsequent years.

The Contract Executives will agree not to disclose or reveal any trade
secrets or other confidential information related to the Company both during and
after the term of the Employment Agreement. Each Contract Executive has agreed
that certain specified amounts payable under his Employment Agreement are
subject to compliance with these and other provisions of the Employment
Agreement.

Compensation Committee Interlocks and Insider Participation. During 1995,
the following persons served as members of Lincoln's Compensation Committee,
which approved prior compensation for certain of the Named Executives: Thomas D.
Bell, Jr., Earl L. Neal, John M. Pietruski, Jill S. Ruckelshaus and Gordon A.
Walker. All of the above persons are currently serving on Lincoln's Compensation
Committee. None of these people had interlocks reportable under Section
402(j)(3) and (4) of Regulation S-K, and none were employees, officers or former
officers of Lincoln or its subsidiaries.

The following persons will serve as members of the Company's Compensation
Committee during the 1996 year: Stephen J. Paris, William E. Pike and Milton O.
Thompson. None of these people had interlocks reportable under Section 402(j)(3)
and (4) of Regulation S-K, and none were employees, officers or former officers
of the Company or its Subsidiaries or affiliates.

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<PAGE> 83

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

THE RECAPITALIZATION

As part of the Recapitalization, Lincoln will transfer all of the
outstanding shares of ASI to the Company in exchange for 50,000,000 shares of
the Company's Common Stock. Concurrent with the transfer of the ASI stock, the
Company will assume the $100 million of Assumed Debt and issue to Lincoln the
$200 million Term Note. See "The Company."

The Assumed Debt is governed by the Assumption Agreement which provides for
the payment by the Company of the currently outstanding 7 1/8% notes due July
15, 1999, originally issued to the public by Lincoln on July 15, 1992. Lincoln
will continue to be the primary obligor of this public debt; however, pursuant
to the Assumption Agreement, the Company will make a $100 million principal
payment on July 15, 1999 to repay the holders of the public debt. The Assumption
Agreement also provides that interest at 7 1/8% is payable semi-annually by the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

The Term Note is governed by the Term Note Agreement and will pay interest
quarterly at a rate of 50 basis points over the rate on Treasury securities with
a comparable maturity, adjusted annually on November 15 of each year. As of
April 16, 1996, the interest rate on the Note would have been 6.61%. The Term
Note will be payable in three equal principal payments due on August 15, 1997,
1998 and 1999. Pursuant to the provisions of the Term Note Agreement, the
Company will have the right to prepay the Term Note at any time. The Term Note
Agreement also contains covenants that will, among other things, restrict the
ability of the Company to incur indebtedness in excess of 50% of its adjusted
consolidated net worth and to enter into a major corporate transaction unless
the Company is the survivor and would not be in default. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."

For additional liquidity, the Company intends to establish the MTN Program
within the next year. The MTN Program, if established, would enable the Company
to issue debt when the principal payments on the Assumed Debt and the Term Note
become due and, from time to time, for general corporate purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Prior to the Offerings and the Recapitalization, ASI will declare and
distribute to Lincoln the $300 million of Dividended Assets, consisting
primarily of tax-exempt municipal securities. See "The Company."

REGISTRATION RIGHTS AGREEMENT

Pursuant to the Registration Rights Agreement which will be entered into
between the Company and Lincoln (the "Registration Rights Agreement"), Lincoln
will have the right to have any or all of the shares of Common Stock held by it
after the Offerings included in a registration statement filed by the Company
under the Securities Act, subject to certain limitations set forth in the
Registration Rights Agreement (a "Piggyback Registration"). In addition, subject
to (i) the Purchase Agreement among the Underwriters, the Company and Lincoln
restricting the right of Lincoln to sell any Common Stock for 120 days after the
completion of the Offerings and (ii) certain other conditions, Lincoln also will
have the right to require the Company to file a Registration Statement under the
Securities Act with respect to the Common Stock held by Lincoln (a "Demand
Registration").

Lincoln will be entitled to an unlimited number of Demand Registrations,
provided that each Demand Registration is for a number of shares of Common Stock
exceeding 10% of the number of shares of Common Stock outstanding at the time
Lincoln requires the Demand Registration or Lincoln owns less than 10% of the
number of shares of Common Stock outstanding at the time it requires a Demand
Registration (unless the Company has been eligible to utilize a simplified form
of registration statement), and an unlimited number of Piggyback Registrations.
The registration rights will be assignable in whole or in part. Generally, the
Company

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will be required to file a registration statement within 30 days of a request by
Lincoln; however, the Company may defer compliance with any Demand Registration
request for up to 120 days if, in the good faith judgment of its Board of
Directors, the filing of a registration statement would be seriously detrimental
to the Company and its shareholders.

In general, Lincoln will bear all of the registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, "blue sky"
fees and expenses and the expense of any special audits incident to or required
by any demand registration. Lincoln will generally be responsible for its pro
rata share of such expenses in excess of $100,000 in connection with any
piggyback registration. Lincoln will also bear all fees and expenses of its
counsel and all underwriting discounts and selling commissions applicable to its
sales.

The Company and Lincoln will agree to indemnify each other against certain
liabilities, including liabilities under the Securities Act, in connection with
the registration of Common Stock pursuant to the Registration Rights Agreement.

INVESTMENT MANAGEMENT AGREEMENTS

The Company and its Subsidiaries and LIM will enter into Investment
Management Agreements (the "Investment Management Agreements") pursuant to which
LIM will provide investment advice and services to the Company and its
Subsidiaries following the completion of the Offerings in connection with the
management of their respective portfolios. Pursuant to the Investment Management
Agreements, LIM will receive an annual fee equal to 0.13 of 1% of the average
assets under management. These fees are comparable to the fees which LIM charges
its non-affiliated clients. The Investment Management Agreements will have an
initial term of three years and termination after the initial term will then
take effect upon 60 days notice by either party. The parties will agree to
indemnify each other against certain liabilities under the Investment Management
Agreements. Assuming the Investment Management Agreements had been in effect for
the year ended December 31, 1995, and that the Company's investments as of
December 31, 1995, totalled the average assets under management (including
assets of its Subsidiaries) under the Investment Management Agreements, the
annual fee to be paid to LIM under the Investment Management Agreements would
have been $5.2 million. LIM retains various subadvisors to manage portions of
the portfolio. Some of these subadvisors are affiliates of Lincoln. Subadvisors
charge fees for services ranging from 0.25 of 1% to 1% of average assets
managed. Total subadvisor fees paid in 1995 were $1,246,743, of which $418,733
was paid to Lincoln affiliates. Management expects these fee arrangements to
continue to be made available on terms no less favorable to that which would be
obtained at arm's length. The Investment Management Agreements will supersede
any similar agreements which may now be in-force between the Company or any of
its Subsidiaries and LIM.

LIM has managed ASI's invested assets since 1983. Actual fees paid by ASI
to LIM, including fees paid to LIM-affiliated subadvisors, during 1993, 1994 and
1995 were $3,135,902, $3,128,984 and $2,926,430, respectively.

TAX SHARING AND INDEMNIFICATION AGREEMENTS

Effective January 1, 1969 (or such later date as the Company or a
Subsidiary first became included in Lincoln's consolidated tax return), the
Company and its Subsidiaries were included in Lincoln's state and federal
consolidated tax returns and have operated in accordance with the terms of
federal and state income tax sharing agreements between Lincoln and the Company
and its Subsidiaries (the "Tax Sharing Agreements"). The Tax Sharing Agreements
provide for the allocation of tax liability among Lincoln and the Company,
including its Subsidiaries. To the extent that tax liability allocated to the
Company and its Subsidiaries under the Tax Sharing Agreements differs from the
actual tax liability ultimately paid, the Company and its Subsidiaries are
responsible for any additional tax payments required and are entitled to any tax
refunds attributable to the Company and its Subsidiaries. The Company and its
Subsidiaries paid approximately $64.4 and $21.6 million to Lincoln under the Tax
Sharing Agreements for the 1993 and 1994 tax years, respectively; and, the
Company and its Subsidiaries have paid $36.0 million to Lincoln under the Tax
Sharing Agreements to date for tax year 1995.

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Upon consummation of the Offerings, the Company and its Subsidiaries, along
with the other tax-consolidated subsidiaries of Lincoln (Lincoln, the Company
and its Subsidiaries and the other tax-consolidated subsidiaries are
collectively referred to as the "Lincoln Consolidated Group"), will continue to
be eligible to be included in Lincoln's state and federal consolidated income
tax returns since Lincoln will continue to own 80% or more of the voting power
and value of the Company. Effective January 1, 1996, the current Tax Sharing
Agreements will be terminated, and new tax sharing agreements between Lincoln
and the Company and its Subsidiaries (the "New Tax Sharing Agreements") will
become effective.

Under the New Tax Sharing Agreements, the Company and its Subsidiaries will
be treated as if they constituted a stand-alone consolidated group for most
federal income and relevant state income tax purposes (the "Company Tax Group").
Generally, the terms of the New Tax Sharing Agreements will result in the
Company Tax Group paying no more taxes than it would have paid on a stand-alone
basis, but it may be necessary to consider more than one taxable year when
determining whether the Company Tax Group has paid more taxes than it would have
on a stand-alone basis.

REINSURANCE AGREEMENTS

ASLIC is a party to several reinsurance agreements with affiliated
companies of Lincoln (the "Reinsurance Agreements"). The Reinsurance Agreements
consist of indemnity coinsurance agreements, quota share reinsurance agreements
and excess of loss reinsurance agreements. Indemnity coinsurance and quota share
reinsurance agreements are contractual arrangements whereby the Lincoln
affiliate, as reinsurer, assumes an agreed percentage of certain risks insured
by ASLIC, as the ceding reinsurer, and shares premium revenues and losses in
proportion to the percentage defined in the agreement. The principal advantage
of excess of loss reinsurance agreements is the protection they afford ASLIC
against sustaining a large loss above a certain level. In the opinion of
management, the provisions of the Reinsurance Agreements are no less favorable
than could be generally obtained from comparable unaffiliated third parties,
taking into account factors such as price, creditworthiness of the reinsurer,
renewal history and the stability of the relationship.

The Reinsurance Agreements are open ended since they contain no stated
termination dates. As such, either party can terminate a Reinsurance Agreement
for new business, but business already written under the Reinsurance Agreement
remains in force under the Reinsurance Agreement for as long as it remains in
force with ASLIC. An exception may occur if the Lincoln affiliate and ASLIC
agree to an amount that will settle all present and future claims on outstanding
business and further agree to terminate the Reinsurance Agreement for all
in-force business.

Under one Reinsurance Agreement, ASLIC's liability limits on accident and
sickness policies are $300 or $700 per month per policy, depending on the policy
form. Another Reinsurance Agreement covering disability income limits ASLIC's
liability to 20% of its written monthly benefit after a five year extended wait
period. An additional Reinsurance Agreement reinsures a group long-term
disability plan above ASLIC's 20% retained amount. The majority of the other
Reinsurance Agreements cover various individual life insurance plans and these
agreements were amended effective November 1, 1995, to set ASLIC's retention at
$250,000 per issued policy. A final Reinsurance Agreement covers annuity
business written by ASLIC.

Reinsurance premiums paid by ASLIC to Lincoln affiliates under the
Reinsurance Agreements for life accounts, disability accounts and health
accounts, respectively, were $2,900,747, $7,987 and $585,529 in 1993,
$2,979,453, $5,790 and $543,204 in 1994 and $2,909,007, $33,056 and $100,076 in
1995.

SERVICES AGREEMENT

The Company is currently a party to an agreement, and is entering into a
revised agreement, with Lincoln pursuant to which the Company and its
Subsidiaries receive, and will continue to receive, certain services provided by
Lincoln and in turn pay to Lincoln its share of the cost of such services (the
"Service Agreement"). These services include systems, strategic planning and
management advice, financial services, legal services, accounting services, and
assistance with employee benefits, information services, data processing,
actuarial, marketing and human resources. Under the current Service Agreement,
ASI incurred service fees of approximately $7.1, $7.7 and $7.6 million payable
to Lincoln in 1993, 1994 and 1995, respectively, and

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<PAGE> 86

the Company will be charged comparable amounts under the revised Service
Agreement. Upon consummation of the Offerings, the Service Agreement will
continue, unless terminated by mutual consent, so long as Lincoln owns more than
50% of the Common Stock.

ADMINISTRATION AGREEMENTS

An intercompany agreement between ASI and Linsco Reinsurance Company, a
Lincoln subsidiary ("Linsco"), exists for the supervision and administration by
ASI of Linsco (the "Administration Agreement"). Linsco is a discontinued
operation of Lincoln which is currently running off its existing books of
business. Linsco had provided property and casualty reinsurance. Pursuant to the
Administration Agreement, ASI manages Linsco's accounting, premium collection,
claim handling, reinsurance and other functions. The Administration Agreement,
however, prohibits ASI from obligating Linsco as an accepting reinsurer without
Lincoln's prior approval. Lincoln paid ASI an annual fee of $432,000 in 1993,
1994 and 1995 pursuant to the Administration Agreement, based on Lincoln's and
ASI's annual estimates of costs incurred.

On January 19, 1996, an intercompany agreement (the "Lincoln Specialty
Agreement") between ASI and Lincoln relating to the administration by ASI of
Lincoln National Specialty Insurance Company ("Lincoln Specialty"), another
discontinued operation of Lincoln, was terminated when Lincoln Specialty was
sold. Lincoln Specialty provided property and casualty coverage in specialty
markets, including sports, leisure and entertainment, through an affiliated
managing general agency, K&K Insurance Group, Inc. This $30 million book of
business was also being run-off and ASI was servicing it. Pursuant to the
Lincoln Specialty Agreement, ASI performed the same functions for Lincoln
Specialty as it did for Linsco under the Administration Agreement. Lincoln paid
ASI a fee of approximately $149,400, $192,600 and $492,000 in 1993, 1994 and
1995, respectively, pursuant to the Lincoln Specialty Agreement, based on
Lincoln's and ASI's annual estimates of costs incurred. As part of the sale of
Lincoln Specialty, ASI assumed all of Lincoln Specialty's liabilities pursuant
to a 100% Quota Share Reinsurance and Administration Agreement. On a SAP basis,
the value of the liabilities assumed was approximately $63,676,000 and ASI
received assets having an equivalent market value as consideration for its
assumption of Lincoln Specialty's liabilities.

BUILDING LEASE

Pursuant to the lease of ASI's headquarters facility in Indianapolis,
Indiana, Lincoln executed an irrevocable guaranty dated August 1, 1984 (the
"Guaranty"), covering payment in full to a third-party lessor, The Connecticut
Bank and Trust Company, National Association and F.W. Kawam, as Trustees, of all
sums due and performance by ASI of all covenants and conditions under the lease.
The sum total of future minimum lease payments through 2009 guaranteed by
Lincoln under the Guaranty is in excess of $126.1 million.

ASI owns a corporate bond issued by the acquiror of ASI's headquarters
facility and two other properties when they were acquired from Lincoln in 1984.
The properties were leased back to ASI and Lincoln by the third party acquiror
as part of the transaction. This bond is a zero coupon, 15 year note due in
August, 1999. The par value of the bond at maturity will be approximately $130
million. As of December 31, 1995, the market value of the bond was approximately
$104.1 million and the accreted value of the bond was approximately $76.5
million. If the call or put option on the bond is not exercised in August, 1999,
the term of the bond extends to August, 2009. The bond is secured by a second
mortgage on the properties, a second assignment of lease and guaranty, and other
collateral. The guaranty is a guaranty by Lincoln of the obligations of each
lease.

RISK MANAGEMENT SERVICES

The Company provides administrative processing services and insurance
coverage to Lincoln in a number of coverage areas including: directors and
officers liability, professional liability, commercial general liability,
business automobile, worker's compensation, and surety bonds. For the most part,
these policies are subject to retrospective adjustment based on actual loss
experience, and as such, do not represent a significant potential for loss to
the Company. The Company's services in this area are utilized by Lincoln
primarily to track its

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actual claims history, to provide administrative support, and to reduce costs
(i.e. avoidance of outside insurance brokers' commissions which may otherwise be
payable). The net profits from this business are not material. Lincoln paid
total premiums to the Company of $8,731,000, $5,298,000, and $6,277,000 for
policies in-force in 1993, 1994, and 1995, respectively.

The Company also utilizes the services of Lincoln to purchase outside
market insurance coverage for umbrella liability, employee fidelity, directors
and officers liability, professional liability, property, travel accident,
fiduciary liability, and fidelity bonds. In total, the actual costs of such
policies are allocated by various means, but typically by headcount, revenues or
property values, and in any event expenses are billed at no profit to Lincoln.
Lincoln also prefunds the Company's expected losses related to various
deductibles under the employee fidelity and property policies. These costs are
passed on to the Company at no profit to Lincoln. ASI incurred total costs for
these coverages and services payable to Lincoln of $5,755,618, $2,600,823 and
$6,935,299 in 1993, 1994 and 1995, respectively.

There are no formal agreements for provision of any of the aforementioned
services. Management of the Company does, however, expect these aforementioned
risk management services to continue, although no assurances to that effect may
be given.

LINCOLN SHORT-TERM POOL

Prior to the Recapitalization, Lincoln had established procedures that
permitted affiliates to invest with or borrow from Lincoln to meet short-term
cash management requirements. Investments held in the Lincoln short-term pool
consist mainly of U.S. Treasury securities and higher grade commercial paper
with average maturities of 30 to 60 days. Following the Offerings, ASI will no
longer have the ability to invest in or borrow funds from the short-term pool.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

SYSTEMS AND INTELLECTUAL PROPERTY

There are a number of agreements relating to financial reporting, business
recovery services, telecommunications services, and other hardware and software
that Lincoln has licensed from third parties on a corporate wide basis, which
include affiliates. The amounts paid by ASI under these agreements are included
in the amounts paid under the Service Agreement. See " -- Service Agreement."
These systems will continue to be made available to ASI on terms no less
favorable to that which would be obtained at arm's length.

In addition, ASLIC has a software license agreement with a Lincoln
affiliate for a life insurance underwriting system. A one-time fee of $200,000
was paid by ASLIC to the Lincoln affiliate in 1989 pursuant to this agreement.
In addition, fees paid by ASLIC to the Lincoln affiliate under a related
software maintenance agreement totalled $30,000, $45,000 and $50,000 in 1993,
1994 and 1995. Fees paid by ASLIC under the software license agreement and
related software maintenance agreement are on similar terms as to that which the
Lincoln affiliate provides to third parties. The software license is perpetual,
unless terminated due to breach. See "Business -- Technology -- Life Insurance."

INDEMNIFICATION AGREEMENT

The Company and Lincoln have agreed to indemnify each other against certain
liabilities in connection with the Offerings, including liabilities under the
Securities Act.

CONTROL BY LINCOLN; POTENTIAL CONFLICTS WITH LINCOLN

The Company is a wholly-owned subsidiary of Lincoln, and after completion
of the Offerings, Lincoln will own 83% of the outstanding Common Stock. Lincoln
will have the power to control the Company, to elect its Board of Directors and
to approve any action requiring shareholder approval, including adopting
amendments to the Company's articles of incorporation and approving or
disapproving mergers or sales of all or substantially all of the assets of the
Company. Because Lincoln has the ability to elect the Board of Directors of the
Company, it will be able to effectively control all of the Company's policy
decisions. As long

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as Lincoln is majority shareholder of the Company, third parties will not be
able to obtain control of the Company through purchases of Common Stock not
owned by Lincoln.

Currently, Lincoln does not market property and casualty insurance products
which compete with products sold by the Company; and, Lincoln currently has no
intention, either short-term or long-term, of engaging in property and casualty
business of the type conducted by the Company. However, there are no
restrictions on the activities in which Lincoln may engage. Management believes
that Lincoln and ASI historically have not competed to any significant degree in
the sale of life insurance products primarily because they use different
distribution channels and target different market segments. There can be no
assurance, however, that the Company will not encounter competition from Lincoln
in the future or that actions by Lincoln or its affiliates will not inhibit the
Company's growth strategy. See "Risk Factors -- Control by Lincoln; Certain
Continuing Relationships with Lincoln and its Affiliates; Conflicts of
Interest."

Conflicts of interest between the Company and Lincoln could arise with
respect to business dealings between them, including potential acquisitions of
businesses or properties, the issuance of additional securities, the election of
new or additional directors, and the payment of dividends by the Company. The
Company has not instituted any formal plan or arrangement to address potential
conflicts of interest that may arise between the Company and Lincoln. The
Company, however, intends to seek the approval of its disinterested directors
for any future business transactions between the Company and Lincoln. See "Risk
Factors -- Control by Lincoln; Certain Continuing Relationships with Lincoln and
its Affiliates; Conflicts of Interest."

SURETY BOND

At the request of Lincoln, ASI provided a surety bond (the "Bond"),
effective November 3, 1993, to enhance the issuance of a series of industrial
revenue bonds ("IRBs") having the Industrial Development Authority of the City
of Clayton, Missouri as obligor and Mercantile Bank of St. Louis, N.A. as
obligee. The IRBs were issued in 1983 to finance the construction of an office
building by a joint venture of which Lincoln was a party. Lincoln's contribution
to the joint venture was to provide a guaranty on the IRBs. After a sale and
leaseback of the real property underlying the office complex to a third party
and a subsequent default on the lease, the joint venture gave the improvements
to the third party in full satisfaction of the lease and then dissolved. In
1993, the third party approached Lincoln, which still remained as guarantor on
the IRBs, about refinancing the IRBs at a lower interest rate. To accomplish
this refinancing, Lincoln requested ASI to provide the Bond since, under
applicable statutes, Lincoln could no longer remain a guarantor since it no
longer had an equity interest in the property.

Claims against the Bond are limited solely to losses associated with the
underlying IRBs. The IRBs had an original principal amount of $8,600,000 and are
composed of a combination of serial and term bonds, having a final maturity of
May 1, 2008. As of December 31, 1995, the outstanding principal balance of the
IRBs was $8,515,000. Management does not expect any claims against the Bond,
although no assurances to that effect are given. Lincoln fully indemnifies ASI
for any losses. LIM pays ASI $4,300 per year for providing the Bond.

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SECURITIES OWNERSHIP

OWNERSHIP OF THE COMPANY

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of the date of this Prospectus and
after giving effect to the Offerings, by each person known by the Company to
beneficially own more than 5% of the outstanding shares of Common Stock.

As of the date hereof, none of the outstanding shares of Common Stock is
owned by any director or executive officer of the Company.

<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON
STOCK STOCK
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
NAME AND ADDRESS TITLE OF CLASS NUMBER OF SHARES THE OFFERINGS OFFERINGS
- ----------------------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Lincoln National
Corporation................ Common Stock, 50,000,000(1) 100.0% 83.3%(2)
200 East Berry St. no par value
Fort Wayne, IN 46802
</TABLE>

- -------------------------
(1) Lincoln has sole voting and dispositive power over all these Common Shares.

(2) Lincoln would beneficially own 81.3% of the Company after the Offerings if
the Underwriters' over-allotment option is exercised in full.

OWNERSHIP OF LINCOLN

The following table sets forth certain information regarding beneficial
ownership of the capital stock of Lincoln, as of December 31, 1995 (unless
otherwise indicated), by (i) each person known by the Company to beneficially
own more than 5% of the outstanding shares of a class of capital stock of
Lincoln, (ii) by each of the Company's executive officers and directors, and
(iii) by all executive officers and directors of the Company as a group. Except
as otherwise indicated, based on information furnished by such owners, the
beneficial owners of the capital stock listed below have sole voting and
dispositive power with respect to such shares, subject to community property
laws where applicable. Fractional shares are rounded to the nearest whole share.

The ownership of Lincoln will not be affected by the Offerings.

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<PAGE> 90

<TABLE>
<CAPTION>
PERCENTAGE
OF SHARES OF
COMMON STOCK
NUMBER OF BENEFICIALLY
NAME AND ADDRESS(1) TITLE OF CLASS SHARES OWNED
- ------------------------------------------------------- -------------- --------- ------------
<S> <C> <C> <C>
Todd R. Stephenson..................................... Common 8,721(9) (5)
Harry R. Simpson....................................... Common 8,310(10) (5)
Thomas M. Ober......................................... Common 11,549(11) (5)
J. Robert Coffin....................................... Common 11,593(12) (5)
Janis E. Stoddard-Smith................................ Common 3,398(13) (5)
Ronald K. Young........................................ Common 7,292(14) (5)
Robert A. Anker........................................ Common 133,564(15) (5)
Edwin J. Goss.......................................... Common 39,107(16) (5)
Stephen J. Paris....................................... N/A -- --
Paula M. Parker-Sawyers................................ N/A -- --
William E. Pike........................................ Common 1,500 (5)
Gabriel L. Shaheen..................................... Common 24,197(17) (5)
Milton O. Thompson..................................... N/A -- --
All executive officers and directors of the Company as
a group (17 persons)................................. Common.... 402,754(18) (5)
</TABLE>

- -------------------------
(1) Addresses given for 5% or greater beneficial owners only.

(2) Ownership is as of January 19, 1996, not December 31, 1995.

(3) Of these shares, Capital Guardian Trust Company and Capital Research
Management Company have sole dispositive power over 8,251,660 shares and
sole voting power over 1,660 shares.

(4) Of these shares, 1,000 are owned jointly by Mr. McCurley and his wife and
38,400 are subject to stock options granted under the Stock Option Plans
which are currently exercisable or exercisable within 60 days.

(5) Less than 1%.

(6) Of these shares, 1,926 are owned jointly by Mr. Lawson and his wife, 401
are owned by his wife and 18,000 are subject to stock options granted under
the Stock Option Plans which are currently exercisable or exercisable
within 60 days.

(7) Of these shares, 3,121 are owned jointly by Mr. Gallogly and his wife and
15,700 are subject to stock options granted under the Stock Option Plans
which are currently exercisable or exercisable within 60 days.

(8) Of these shares, 18 are owned jointly by Mr. Hafling and his wife and 8,950
are subject to stock options granted under the Stock Option Plans which are
currently exercisable or exercisable within 60 days.

(9) Of these shares, 1,218 are owned jointly by Mr. Stephenson and his wife and
2,750 are subject to stock options granted under the Stock Option Plans
which are currently exercisable or exercisable within 60 days.

(10) Of these shares, 896 are owned by Mr. Simpson's wife and 2,575 are subject
to stock options granted under the Stock Option Plans which are currently
exercisable or exercisable within 60 days.

(11) Of these shares, 7,900 are subject to stock options granted under the Stock
Option Plans which are currently exercisable or exercisable within 60 days.

(12) Of these shares, 5,187 are subject to stock options granted under the Stock
Option Plans which are currently exercisable or exercisable within 60 days.

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(13) Of these shares, 1,525 are subject to stock options granted under the Stock
Option Plans which are currently exercisable or exercisable within 60 days.

(14) Of these shares, 302 are owned jointly by Mr. Young and his wife and 3,975
are subject to stock options granted under the Stock Option Plans which are
currently exercisable or exercisable within 60 days.

(15) Of these shares, 4,000 are owned jointly by Mr. Anker and his wife and
95,000 are subject to stock options granted under the Stock Option Plans
which are currently exercisable or exercisable within 60 days.

(16) Of these shares, 5,960 are owned jointly by Mr. Goss and his wife and
14,087 are owned by his wife.

(17) Of these shares, 5,313 are owned jointly by Mr. Shaheen and his wife, 3 are
owned by his wife as custodian for their son and 7,625 are subject to stock
options granted under the Stock Option Plans which are currently
exercisable or exercisable within 60 days.

(18) Of these shares, 207,587 are subject to stock options granted under the
Stock Option Plans which are currently exercisable or exercisable within 60
days.

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL STOCK

The Company's authorized capital stock consists of 195,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock (the "Preferred Stock").
Immediately following the Offerings, approximately 60,000,000 shares of Common
Stock will be outstanding (61,500,000 shares assuming the Underwriters' over-
allotment option is exercised). All of the shares of Common Stock that will be
outstanding immediately following the Closing, including the shares of the
Common Stock sold in the Offerings, will be validly issued, fully paid and
nonassessable.

COMMON STOCK

The holders of Common Stock will be entitled to one vote for each share on
all matters voted on by shareholders, including elections of directors, and,
except as otherwise required by law and provided in any resolution adopted by
the Company's Board of Directors with respect to any series of Preferred Stock,
the holders of such shares will possess exclusive voting power. The Articles of
Incorporation of the Company (the "Articles") do not provide for cumulative
voting in the election of directors. Holders of Common Stock shall have no
preemptive, subscription, redemption or conversion rights. Subject to any
preferential rights of any outstanding series of Preferred Stock created by the
Company's Board of Directors from time to time, the holders of Common Stock will
be entitled to such dividends as may be declared from time to time by the
Company's Board of Directors from funds available therefor, and upon liquidation
will be entitled to receive pro rata all assets of the Company available for
distribution to such holders.

PREFERRED STOCK

The Company's Articles authorize the Company's Board of Directors to
establish one or more series of Preferred Stock and to determine, with respect
to any series of Preferred Stock, the terms and rights of such series, including
(i) the designation of the series, (ii) the number of shares of the series,
which number the Company's Board of Directors may thereafter (except where
otherwise provided in the applicable certificate of designation) increase or
decrease (but not below the number of shares thereof then outstanding), (iii)
whether dividends, if any, will be cumulative or noncumulative, the preference
or relation which such dividend, if any, will bear to the dividends payable on
any other class or classes of any other series of capital stock, and the
dividend rate of the series, (iv) the conditions and dates upon which dividends,
if any, will be payable, (v) the redemption rights and price or prices, if any,
for shares of the series, (vi) the terms and amounts of any sinking fund
provided for the purchase or redemption of shares of the series, (vii) the
amounts payable on and the preference, if any, of shares of the series in the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, (viii)(a) whether the shares of the series will be
convertible or exchangeable into shares of any other class or series, or any
other security, of the

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Company or any other corporation, and (b) if so, the specification of such other
class or series or such other security, the conversion or exchange price(s) or
rate(s), any adjustments thereof, the date(s) as of which such shares shall be
convertible or exchangeable and all other terms and conditions upon which such
conversion or exchange may be made, (ix) restrictions on the issuance of shares
of the same series or of any other class or series, (x) the voting rights, if
any, of the holders of the shares of the series, and (xi) any other relative
rights, preferences and limitations of such series.

Although the Company's Board of Directors has no present intention of doing
so, it could issue a series of Preferred Stock that, depending on the terms of
such series, could impede the completion of a merger, tender offer or other
takeover attempt. The Company's Board of Directors will make any determination
to issue such shares based on its judgment as to the best interests of Company
and its shareholders. The Company's Board of Directors, in so acting, could
issue Preferred Stock having terms that could discourage an acquisition attempt
through which an acquiror may be able to change the composition of the Company's
Board of Directors, including a tender offer or other transaction that some, or
a majority, of the Company's shareholders may believe to be in their best
interests or in which shareholders might receive a premium for their Common
Stock over the then current market price of such Common Stock.

ANTI-TAKEOVER PROVISIONS

The following discussion is a general summary of the material provisions of
the Company's Articles, the Company's Bylaws (the "Bylaws") and certain other
provisions which may be deemed to have an effect of delaying, deferring or
preventing a change in control. The following description of certain of these
provisions is general and not necessarily complete and is qualified by reference
to the Articles and Bylaws.

Directors. Certain provisions in the Articles and Bylaws will impede
changes in majority control of the Board of Directors of the Company. The Bylaws
provide that the Board of Directors of the Company will be divided into three
classes, with directors in each class elected for three-year staggered terms.
Therefore, it would take two annual elections to replace a majority of the
Company's Board of Directors. The Bylaws also impose certain notice and
information requirements in connection with the nomination by shareholders of
candidates for election to the Board of Directors or the proposal by
shareholders of business to be acted upon at an annual meeting of shareholders.
The Articles provide that directors may be removed only by the affirmative vote
of at least 75% of the shares eligible to vote generally in the election of
directors.

Authorization of Preferred Stock. The Board of Directors of the Company is
authorized, without shareholder approval, to issue Preferred Stock in series and
to fix the voting designations, preferences and relative, participating,
optional or other special rights of the shares of each series and the
qualifications, limitations and restrictions thereof. Preferred Stock may rank
prior to the Common Stock as to dividend rights, liquidation preferences, or
both, and could have full or superior voting rights. The holders of Preferred
Stock will be entitled to vote as a separate class or a series under certain
circumstances, regardless of any other voting rights which such holders may
have. Accordingly, issuance of shares of Preferred Stock could adversely affect
the voting power of holders of Common Stock or could have the effect of
deterring or delaying an attempt to obtain control of the Company.

Provisions of Indiana Law. Several provisions of the Indiana Business
Corporation Law (the "IBCL") could affect the acquisition of shares of the
Common Stock or otherwise the control over the Company. Chapter 43 of the IBCL
prohibits certain business combinations, including mergers, sales of assets,
recapitalizations, and reverse stock splits, between corporations such as the
Company (assuming that it has over 100 shareholders) and an interested
shareholder, defined as the beneficial owner of 10% or more of the voting power
of the outstanding voting shares, for five years following the date on which the
shareholder obtained 10% ownership unless the business combination or the
purchase of the shares was approved in advance of that date by the board of
directors. If prior approval were not obtained, several price and procedural
requirements must be met before the business combination can be completed.

In addition, the IBCL contains provisions designed to assure that minority
shareholders have a voice in determining their future relationship with Indiana
corporations in the event that a person made a tender offer for, or otherwise
acquired, shares giving the acquiror more than 20%, 33 1/3%, and 50% of the
outstanding voting

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<PAGE> 93

securities of corporations having 100 or more shareholders (the "Control Share
Acquisitions Statute"). Under the Control Share Acquisitions Statute, if an
acquiror purchases those shares at a time that the corporation is subject to the
Control Share Acquisitions Statute, then until each class or series of shares
entitled to vote separately on the proposal approves, by a majority of all votes
entitled to be cast by that group (excluding shares held by officers of the
corporation, by employees of the corporation who are directors thereof and by
the acquiror), the rights of the acquiror to vote the shares that take the
acquiror over each level of ownership as stated in the statute, the acquiror
cannot vote those shares.

The IBCL requires directors to discharge their duties, based on the facts
then known to them, in good faith, with the care an ordinary, prudent person in
a like position would exercise under similar circumstances and in a manner the
director reasonably believes to be in the best interests of the corporation. The
director is not personally liable for any action taken as a director, or any
failure to take any action, unless the director has breached, or failed to
perform the duties of the director's office in compliance with, the foregoing
standard and the breach or failure to perform constitutes willful misconduct or
recklessness.

The IBCL specifically authorizes directors, in considering the best
interests of a corporation, to consider the effects of any action on
shareholders, employees, suppliers, and customers of the corporation, and
communities in which offices or other facilities of the corporation are located,
and any other factors the directors consider pertinent. Under the IBCL,
directors are not required to approve a proposed business combination or other
corporate action if the directors determine in good faith that such approval is
not in the best interests of the corporation. The IBCL explicitly provides that
the different or higher degree of scrutiny imposed in Delaware and certain other
jurisdictions upon director actions taken in response to potential changes in
control will not apply.

The foregoing provisions of the IBCL could have the effect of preventing or
delaying a person from acquiring or seeking to acquire a substantial equity
interest in, or control of, the Company.

Insurance Regulation Concerning Change of Control. Many state insurance
regulatory laws, including Indiana's, intended primarily for the protection of
policyholders contain provisions that require advance approval by state agencies
of any change in control of an insurance company or insurance holding company
which owns an insurance company that is domiciled (or, in some cases, having
such substantial business that it is deemed commercially domiciled) in that
state. In addition, many state insurance regulatory laws contain provisions that
require prenotification to state agencies of a change in control of a
nondomestic admitted insurance company in that state. While such prenotification
statutes do not authorize the state agency to disapprove the change of control,
such statutes do authorize issuance of a cease and desist order with respect to
the nondomestic admitted insurer if certain conditions exist, such as undue
market concentration. Any future transactions constituting a change in control
of the Company would generally require prior approval by the insurance
departments of Indiana, Texas and Illinois, as well as notification in those
states which have preacquisition notification statutes or regulations. The need
to comply with those requirements may deter, delay or prevent certain
transactions affecting the control of the Company or the ownership of the
Company's Common Stock, including transactions which could be advantageous to
the shareholders of the Company. For a more comprehensive discussion of
applicable Indiana regulations, see "Business -- Regulation -- Acquisition or
Change of Control of Insurers."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have 60,000,000 shares
of Common Stock outstanding (61,500,000 if the Underwriters' over-allotment
option is exercised in full). Of those shares, the 10,000,000 shares of Common
Stock sold in the Offerings (11,500,000 if the Underwriters' over-allotment
option is exercised in full) will be freely transferable without restriction
under the Securities Act, except for any such shares of Common Stock which may
be acquired by an "affiliate" of the Company (as that term is defined in Rule
144 promulgated under the Securities Act), which shares will be subject to the
resale limitations of Rule 144. The remaining 50,000,000 shares of outstanding
Common Stock held by Lincoln are "restricted securities" within the meaning of
Rule 144 and may not be resold in a public distribution except in

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compliance with the registration requirements of the Securities Act or pursuant
to an exemption from registration, such as that to which Rule 144 relates.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned
"restricted securities" for a period of at least two years from the later of the
date on which such restricted securities were acquired from the Company or from
an affiliate of the Company is entitled to sell, within any three-month period,
a number of such securities that does not exceed the greater of 1% of the then
outstanding shares of the Common Stock or the average weekly trading volume in
the Common Stock on the NYSE or reported through the automated quotation system
of a registered securities association during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain restrictions on the
manner of sale, notice requirements, and the availability of current public
information about the Company. Further, under Rule 144(k), if a period of at
least three years has elapsed between the later of the date on which restricted
shares were acquired from the Company or from an affiliate of the Company, a
holder of such restricted securities who is not an affiliate of the Company for
at least three months prior to the sale would be entitled to sell the shares
immediately without regard to the volume limitations and other conditions
described above.

The Company, its directors and executive officers and Lincoln have agreed
not to sell or otherwise dispose of any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock for a period of
120 days after the date of this Prospectus without the prior written consent of
the representatives of the U.S. Underwriters and the International Underwriters,
except for shares of Common Stock offered in connection with the Offerings. See
"Underwriting."

Pursuant to the Registration Rights Agreement, Lincoln has certain rights
to require the Company to effect the registration under the Securities Act of
shares of Common Stock owned by Lincoln, in which event such shares could be
sold publicly upon the effectiveness of any such registration without
restriction. See "Certain Relationships And Related Transactions -- Registration
Rights Agreement."

Prior to the Offerings, there has been no public market for the Common
Stock and no prediction can be made as to the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
of the Common Stock prevailing from time to time. The Company is unable to
estimate the number of shares that may be sold in the public market pursuant to
Rule 144 because this will depend on the market price of the Common Stock, the
individual circumstances of the sellers and other factors. Any sale of
substantial amounts of Common Stock in the open market could adversely affect
the market price of the Common Stock.

The Common Stock has been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "ASX."

CERTAIN U.S. FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS

The following is a discussion of certain United States federal income and
estate tax consequences of the ownership and disposition of Common Stock
applicable to Non-U.S. Holders of such Common Stock. In general, a "Non-U.S.
Holder" is any person other than (i) a citizen or resident of the United States,
or certain non-resident individuals who were previously U.S. citizens, (ii) a
corporation, partnership or other business entity created or organized in the
United States or under the laws of the United States or any political
subdivision thereof, or (iii) an estate or trust whose income is includable in
gross income for United States federal income tax purposes regardless of its
source. The discussion is based on current law and, to the extent indicated, on
proposed regulations. The discussion assumes that the Common Stock will be
regularly traded on the NYSE or some other established securities market. The
discussion does not address aspects of taxation other than federal income and
estate taxation and does not address all aspects of federal income and estate
taxation. The discussion does not consider any specific facts or circumstances
that may apply to a particular Non-U.S. Holder. This discussion does not
constitute, and should not be viewed as, legal or tax advice to prospective
investors. Accordingly, prospective investors are urged to consult their tax
advisors regarding the

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United States federal, state, local and non-U.S. income and other tax
consequences of holding and disposing of shares of Common Stock.

Proposed United States Treasury Regulations were issued on April 15, 1996
(the "Proposed Regulations") which, if adopted, could affect the United States
taxation of dividends on Common Stock paid to a Non-U.S. Holder. The Proposed
Regulations are generally proposed to be effective with respect to dividends
paid after December 31, 1997, subject to certain transition rules. It cannot be
predicted at this time whether the Proposed Regulations will become effective as
proposed or what modifications, if any, may be made to them. The discussion
below is not intended to include a complete discussion of the provisions of the
Proposed Regulations, and prospective investors are urged to consult their tax
advisors with respect to the effect the Proposed Regulations may have if
adopted.

DIVIDENDS

In general, dividends paid to a Non-U.S. Holder will be subject to United
States withholding tax at a 30% rate (or any lower rate prescribed by an
applicable tax treaty) unless the dividends are effectively connected with a
trade or business carried on by the Non-U.S. Holder within the United States. To
determine the applicability of such 30% tax and the availability of a tax treaty
providing for a lower rate of withholding, dividends paid to an address in a
foreign country are presumed under current Treasury procedures to be paid to a
resident of that country, absent knowledge that such presumption is not
warranted.

The Proposed Regulations would provide for certain presumptions (which
differ from the presumption described above) upon which the Company may
generally rely to determine whether, in the absence of certain documentation, a
holder should be treated as a Non-U.S. Holder for purposes of the 30%
withholding tax described above. The presumptions would not apply for purposes
of granting a reduced rate of withholding under a treaty. Under the Proposed
Regulations, to obtain a reduced rate of withholding under a treaty a Non-U.S.
Holder would generally be required to provide an Internal Revenue Service Form
W-8 certifying such Non-U.S. Holder's entitlement to benefits under a treaty
together with, in certain circumstances, additional information. The Proposed
Regulations also would provide rules to determine whether, for purposes of
determining the applicability of a tax treaty and for purposes of the 30%
withholding tax described above, dividends paid to a Non-U.S. Holder that is an
entity should be treated as paid to the entity or those holding an interest in
that entity.

Dividends effectively connected with such trade or business, and so treated
as effectively connected income, will generally not be subject to withholding
(if the Non-U.S. Holder files Form 4224 with the payer of the dividend) and will
generally be subject to tax at ordinary federal income tax rates. The Proposed
Regulations would replace Form 4224 with Form W-8. In the case of Non-U.S.
Holder corporations, such effectively connected income may be subject to the
branch profits tax at a 30% rate or such lower rate as may be specified by an
applicable tax treaty (which is generally imposed on a foreign corporation upon
the repatriation from the United States of effectively connected earnings and
profits).

SALE OF COMMON STOCK

Generally, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon disposition of its Common Stock unless (i)
the Company is or has been a "U.S. real property holding corporation" for
federal income tax purposes at any time within the shorter of the five year
period ending on the date of disposition or the Non-U.S. Holder's holding period
(which the Company does not believe that it is or is likely to become) and the
Non-U.S. Holder held, directly or indirectly at any time during the five-year
period ending on the date of disposition, more than five percent of the Common
Stock, (ii) the gain is effectively connected with a trade or business carried
on by the Non-U.S. Holder within the United States or (iii) in the case of
certain Non-U.S. Holders who are individuals and who hold the Common Stock as a
capital asset, such an individual is physically present in the United States for
183 days or more in the taxable year of the disposition and either the
individual has a "tax home" in the United States or the sale is attributable to
an office or other fixed place of business maintained by the individual in the
United States.

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Non-U.S. Holders should consult applicable tax treaties, which may result
in United States federal income tax treatment on the sale, exchange or other
disposition of Common Stock different than as described above.

ESTATE TAX

Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as defined for United States federal estate tax purposes)
of the United States at the time of death will be includable in the individual's
gross estate for United States federal estate purposes, unless an applicable tax
treaty provides otherwise. Such individual's estate may be subject to United
States federal tax on the property includable in the estate for United States
federal estate tax purposes.

BACKUP WITHHOLDING AND INFORMATION REPORTING

The Company must report annually to the Internal Revenue Service and to
each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These information reporting requirements apply
regardless of whether withholding was reduced by an applicable tax treaty.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities in the
country in which the Non-U.S. Holder resides. United States backup withholding
tax (which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish the information required under the
United States information reporting requirements) will generally not apply to
dividends paid on Common Stock to a Non-U.S. Holder at an address outside the
United States (unless the Company has knowledge that the holder is a United
States person for United States federal income tax purposes).

Unless the Company has actual knowledge that a holder is a Non-U.S. Holder,
dividends paid to a holder of Common Stock at an address within the United
States may be subject to backup withholding at a rate of 31% if the holder is
not an "exempt recipient" as defined in existing Treasury Regulations (which
includes corporations) and fails to provide a correct taxpayer identification
number and other information to the Company.

The payment of the proceeds from the disposition of Common Stock effected
by or through the United States office of a broker will be subject to
information reporting and backup withholding unless the owner, under penalties
of perjury, certifies, among other things, its status as a Non-U.S. Holder or
otherwise establishes an exemption (and its broker has no actual knowledge to
the contrary). The payment of the proceeds from the disposition of Common Stock
effected by or through a non-U.S. office of a broker will generally, except as
noted below, not be subject to backup withholding and information reporting. In
the case of the payment of proceeds from the disposition of Common Stock
effected by or through a non-U.S. office of a broker that is a United States
person or a "U.S. related person," existing regulations require information
reporting on the payment unless the broker has documentary evidence in its files
that the owner is a Non-U.S. Holder and the broker has no actual knowledge to
the contrary. For this purpose, a "U.S. related person" is (i) a "controlled
foreign corporation" for United States federal income tax purposes (generally, a
foreign corporation controlled by United States shareholders), or (ii) a foreign
person 50% or more of whose gross income from all sources for a certain period
is derived from activities that are effectively connected with the conduct of a
United States trade or business.

The Proposed Regulations would, if adopted, alter the foregoing rules in
certain respects. Among other things, the Proposed Regulations would provide
certain presumptions and other rules under which Non-U.S. Holders may be subject
to backup withholding in the absence of required certifications and would revise
the definition of an "exempt recipient" in the case of a corporation.

Amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund of or a credit against such Non-U.S.
Holder's United States federal income tax, provided required information is
forwarded to the Internal Revenue Service. The backup withholding and
information reporting rules are currently under review by the Treasury
Department and their application to the Common Stock is subject to change.

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<PAGE> 97

UNDERWRITING

Subject to the terms and conditions set forth in the U.S. Purchase
Agreement (the "U.S. Purchase Agreement") among the Company, Lincoln and each of
the U.S. Underwriters named below (the "U.S. Underwriters"), the Company and
Lincoln have agreed to sell to each of the U.S. Underwriters, and each of the
U.S. Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Goldman, Sachs & Co. are acting as representatives (the "Representatives"),
has severally agreed to purchase, the number of shares of Common Stock set forth
below opposite its name. The U.S. Underwriters are committed to purchase all of
such shares if any are purchased. Under certain circumstances, the commitments
of non-defaulting U.S. Underwriters may be increased as set forth in the U.S.
Purchase Agreement.

<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
Goldman, Sachs & Co. ..............................................

Total.................................................
---------
8,000,000
=========
</TABLE>

The Company and Lincoln have also entered into a purchase agreement (the
"International Purchase Agreement") with certain underwriters outside the United
States (the "International Underwriters"), for whom Merrill Lynch International
and Goldman Sachs International are acting as representatives (the
"International Representatives"). Subject to the terms and conditions set forth
in the International Purchase Agreement, and concurrently with the sale of
8,000,000 shares of Common Stock to the U.S. Underwriters, the Company and
Lincoln have agreed to sell to the International Underwriters, and the
International Underwriters have severally agreed to purchase, an aggregate of
2,000,000 shares of Common Stock. Under certain circumstances as set forth in
the International Purchase Agreement, the commitments of non-defaulting
International Underwriters may be increased. The initial public offering price
per share and the underwriting discount per share are identical under the U.S.
Purchase Agreement and the International Purchase Agreement.

In the U.S. Purchase Agreement and International Purchase Agreement, the
several U.S. Underwriters and the several International Underwriters
(collectively, the "Underwriters"), respectively, have agreed, subject to the
terms and conditions set forth therein, to purchase all of the shares of Common
Stock being sold pursuant to each such Purchase Agreement if any of the shares
of Common Stock being sold pursuant to each such Purchase Agreement are
purchased. The closing with respect to the sale of shares of Common Stock sold
pursuant to each Purchase Agreement is a condition to the closing with respect
to the sale of shares of Common Stock sold pursuant to the other Purchase
Agreement.

The U.S. Underwriters and International Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") which provides for the
coordination of their activities. Under the terms of the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to each
other for purposes of resale.

The Representatives have advised the Company that the U.S. Underwriters
propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per share.
The U.S. Underwriters

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<PAGE> 98

may allow, and such dealers may re-allow, a discount not in excess of $ per
share on sales to certain other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.

The Company has granted the Underwriters an option to purchase up to
1,500,000 additional shares of Common Stock on a pro rata basis from the Company
at the initial public offering price, less the underwriting discount. Such
option, which expires 30 days after the date of this Prospectus, may be
exercised solely to cover over-allotments. To the extent that the U.S.
Underwriters exercise such option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of the option shares that the number of shares to be purchased
initially by the Underwriters bears to the total number of shares to be
purchased initially by the Underwriters.

Certain of the Underwriters perform brokerage and investment banking
services for Lincoln and its affiliates from time to time, for which they
receive customary compensation.

The Company and Lincoln have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.

The Company, its directors and executive officers and Lincoln have agreed
that they will not, without the prior written consent of the Representatives,
sell, offer to sell, grant any option for the sale of, or otherwise dispose of
or enter into any agreement to sell any shares of Common Stock or similar
securities or securities convertible into or exchangeable or exercisable for
shares of Common Stock or file with the Commission a registration statement
under the Securities Act to register any Common Stock or any securities
convertible into or exercisable for Common Stock, other than the sale to the
Underwriters of the shares of Common Stock offered hereby, for a period of 120
days after the date of this Prospectus, except that the Company may, without
such consent, grant options pursuant to the Stock Option Incentive Plan. See
"Shares Eligible for Future Sale."

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price will be determined through negotiations
among the Company, Lincoln and the Representatives. Among the factors to be
considered in such negotiations will be an assessment of the financial
information contained herein, an evaluation of the Company's management, the
future prospects of the Company and the property and casualty insurance industry
in general, market prices of securities of companies engaged in activities
similar to those of the Company and the prevailing conditions in the securities
market. There can be no assurance that an active trading market will develop for
the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offerings at or above the initial public offering price.

The Common Stock has been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "ASX." The Underwriters intend to
sell the shares of Common Stock so as to meet the distribution requirements of
NYSE listing.

The Company has been informed that, under the terms of the Intersyndicate
Agreement, the U.S. Underwriters and any dealer to whom they sell shares of
Common Stock will not offer to sell or sell shares of Common Stock to persons
who are non-United States or non-Canadian persons or persons they believe intend
to resell to persons who are non-United States or non-Canadian persons, and the
International Underwriters and any dealer to whom they sell shares of Common
Stock will not offer to sell or sell shares of Common Stock to United States
persons or Canadian persons or to persons they believe intend to resell to
United States persons or Canadian persons, except in each case for transactions
pursuant to the Intersyndicate Agreement which, among other things, permits the
Underwriters to purchase from each other and offer for resale such number of
shares of Common Stock as the selling Underwriter or Underwriters and the
purchasing Underwriter or Underwriters may agree.

96
<PAGE> 99

employees and agents of the Company and its Subsidiaries and affiliates and
certain other individuals having a business relationship with these entities.
The number of shares of Common Stock available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the U.S.
Underwriters to the general public on the same basis as the other shares offered
hereby.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Barnes & Thornburg, Indianapolis, Indiana, and for the
Underwriters by Sidley & Austin, Chicago, Illinois. Sidley & Austin will rely on
the opinion of Barnes & Thornburg as to matters of Indiana law. Certain other
legal matters will be passed upon for the Company by Thomas M. Ober, Esq., Vice
President, Secretary and General Counsel of the Company and by Sommer & Barnard,
Indianapolis, Indiana, counsel to the Company. Mr. Ober beneficially owns
approximately 11,550 shares of Lincoln common stock.

EXPERTS

The Consolidated Financial Statements and financial statement schedules of
the Company as of December 31, 1994 and 1995, and for each of the three years in
the period ended December 31, 1995, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.

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GLOSSARY OF SELECTED INSURANCE AND CERTAIN DEFINED TERMS

<TABLE>
<S> <C>
ACTUARIAL ANALYSIS; ACTUARIAL
MODELS............................. Evaluation of risks in order to attempt to assure
that premiums and loss reserves adequately reflect
expected future loss experience and claims payments;
in evaluating risks, mathematical models are used to
predict future loss experience and claims payments
based on past loss ratios and loss development
patterns and other relevant data and assumptions.
ADMITTED ASSETS...................... Assets of an insurer permitted by an insurer's
domiciliary state to be taken into account in
determining its financial condition for statutory
purposes.
AEIC................................. American Economy Insurance Company, an indirect
subsidiary of the Company.
ALLOCATED LOSS ADJUSTMENT EXPENSES
("ALLOCATED LAE" OR "ALAE")........ Loss adjustment expenses allocated to a particular
claim or loss.
A.M. BEST............................ A. M. Best Company, Inc., a rating agency and
publisher for the insurance industry.
AMERICAN STATES POOL................. This is a reinsurance pooling mechanism which enables
each participant to achieve identical underwriting
results by combining its business with that of the
others and then share pro rata in the aggregate
results.
ANNUITY.............................. A contract which pays a periodic income benefit for
the life of a person or persons or for a specified
number of years, or a combination of the two.
ASI.................................. American States Insurance Company, the sole direct
subsidiary of the Company.
ASLIC................................ American States Life Insurance Company, an indirect
subsidiary of the Company.
ASPIC................................ American States Preferred Insurance Company, an
indirect subsidiary of the Company.
ASSUME............................... To accept from the primary insurer or reinsurer all
or a portion of the liability underwritten by such
primary insurer or reinsurer.
ASSUMED DEBT......................... The $100 million of Lincoln debt to be assumed by the
Company as part of the Recapitalization.
ASSUMPTION AGREEMENT................. The agreement between the Company and Lincoln that
governs the Assumed Debt.
ASSUMPTION REINSURANCE............... A type of reinsurance in which the reinsurer is
substituted for the ceding company on the reinsured
policies and the ceding company is released from any
future liability or responsibility under those
policies.
AST.................................. American States Insurance Company of Texas, an
indirect subsidiary of the Company.
ATTACHMENT POINT..................... The dollar amount, time period or level at which
reinsurance coverage takes effect.
</TABLE>

98
<PAGE> 101

<TABLE>
<S> <C>
BROKER; INTERMEDIARY................. One who negotiates contracts of insurance or
reinsurance on behalf of an insured party, receiving
a commission from the insurer or reinsurer for
placement and other services rendered.
BUSINESSOWNERS POLICIES ("BOPS")..... A BOP is a package policy which provides in one
contract most of the insurance protection commonly
needed by small to medium-sized businesses, other
than automobile coverage and workers' compensation.
Typically, a BOP covers buildings and other business
property for full replacement cost, includes coverage
for the insured's liability to third parties
resulting from negligence and also provides business
interruption coverage. Optional coverages may be
added to the basic contract when desired by the
insured. They might include protection against such
things as employee dishonesty, robbery, loss of money
and securities, damage to signs and breakage of plate
glass. Rather than separately rating each coverage,
as is commonly done for other package policies, BOPs
are composite rated, meaning that there is a single
rate per unit of coverage for each class of insured
and an easily computable additional charge for each
optional coverage added to the basic policy.
CASE RESERVES........................ Recorded estimates of unpaid liabilities associated
with specific reported claims. Case reserves may
pertain to losses, allocated LAE or both.
CASUALTY INSURANCE................... Insurance which is primarily concerned with the
losses caused by injuries to third persons (i.e., not
the policyholder) and the legal liability imposed on
the insured resulting therefrom. It includes, but is
not limited to, employers' liability, workers'
compensation, public liability, automobile liability,
personal liability and aviation liability insurance.
It excludes certain types of loss that by law or
custom are considered as being exclusively within the
scope of other types of insurance, such as fire or
marine.
CATASTROPHE.......................... An event that is designated to be a "catastrophe" by
the Property Claims Service Division of the American
Insurance Services Group, Inc., an insurance industry
body. It generally defines a "catastrophe" as an
event or series of related events which are estimated
to cause more than $5 million of insurance property
damage over a short period of time and which affect a
significant number of insureds and insurers.
CATASTROPHE REINSURANCE.............. A form of excess of loss property reinsurance which,
subject to a specified limit, indemnifies the ceding
company for the aggregate amount of losses in excess
of a specified retention for losses resulting from a
particular catastrophic event. The actual reinsurance
document is called a "catastrophe cover."
CEDE; CEDING COMPANY................. When an insurance company reinsures its risk with
another insurance company, it "cedes" business and is
referred to as the "ceding company."
CODE................................. The Internal Revenue Code of 1986, as amended.
</TABLE>

99
<PAGE> 102

<TABLE>
<S> <C>
COMBINED RATIO....................... A combination of the loss ratio, the LAE ratio, the
underwriting expense ratio and the policyholder
dividend ratio, determined using data reported in
accordance with SAP. A combined ratio below 100%
generally indicates profitable underwriting results.
A combined ratio over 100% generally indicates
unprofitable underwriting results.
COMMERCIAL LINES..................... Types of insurance written for businesses instead of
individuals.
COMMISSION........................... The Securities and Exchange Commission.
COMMON STOCK......................... The shares of common stock, no par value, of the
Company.
COMPANY.............................. American States Financial Corporation.
DECONSOLIDATION...................... Either a sale by Lincoln of some of its shares of
Company Common Stock or Lincoln's consent to the
Company's issuance of additional shares of Common
Stock which causes Lincoln's ownership in the Company
to fall below 80% and thus results in the loss of the
ability of the Company and its domestic subsidiaries
to join with Lincoln and its domestic business units
in the filing of a consolidated federal income tax
return.
DEPOSITS............................. Payments made by the policyholder to the life
insurance company under universal life-type and
investment contracts. Such payments are not
recognized as premiums under GAAP.
DIRECT WRITER........................ An insurer or reinsurer that markets and sells
insurance directly to its insured, either by use of
telephone, mail or exclusive agents.
DISABILITY INCOME INSURANCE.......... Insurance protection to cover loss of income due to a
disability suffered by the insured that prevents the
insured from being able to work.
DIVIDENDED ASSETS.................... Assets consisting primarily of tax-exempt municipal
securities to be distributed by ASI to Lincoln in the
amount of $300 million.
EXCESS OF LOSS REINSURANCE........... A generic term describing reinsurance which
indemnifies the reinsured against all or a specified
portion of losses on underlying insurance policies in
excess of a specified dollar amount, called a "layer"
or "retention."
EXCHANGE ACT......................... The Securities Exchange Act of 1934, as amended.
EXPENSE RATIO........................ The ratio of underwriting expenses to net premiums
written, as determined using data reported in
accordance with SAP.
FACULTATIVE REINSURANCE.............. The reinsurance of all or a portion of the insurance
coverage provided by a single policy. Each policy
reinsured is separately negotiated.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP")................ Accounting principles as set forth in opinions of the
Accounting Principles Board of the American Institute
of Certified Public Accountants and/or in statements
of the Financial Accounting Standards Board and/or
their respective successors and which are applicable
in the circumstances as of the date in question.
</TABLE>

100
<PAGE> 103

<TABLE>
<S> <C>
IBCL................................. The Indiana Business Corporation Law.
ICI.................................. Insurance Company of Illinois, an indirect subsidiary
of the Company.
INCURRED BUT NOT REPORTED ("IBNR")
CLAIMS............................. Claims under policies that have been incurred but
have not yet been reported to the Company by the
insured.
INCURRED BUT NOT REPORTED ("IBNR")
RESERVES........................... Loss reserves for estimated losses and LAE, which
have been incurred but not yet reported to the
insurer (including future developments on losses that
are known to the insurer).
INCURRED LOSSES...................... For a given period, the total losses sustained by an
insurance company under a policy or policies, whether
paid or unpaid. Incurred losses include a provision
for IBNR.
INLAND MARINE........................ A broad type of insurance generally covering articles
that may be transported from one place to another, as
well as bridges, tunnels and other instrumentalities
of transportation. It includes goods in transit
(generally other than transoceanic) and may include
"floater" policies such as personal effects, personal
property, jewelry, furs, fine arts and others.
INSURANCE REGULATORY INFORMATION
SYSTEM ("IRIS").................... A system developed by the NAIC primarily intended to
assist state insurance departments in executing their
statutory mandates to oversee the financial condition
of insurance companies operating in their respective
states.
INSURERS............................. The direct and indirect consolidated subsidiaries of
the Company, which include ASI, AEIC, ASPIC, AST,
ICI, Lloyds and ASLIC.
LAE RATIO............................ The ratio of LAE to premiums earned, determined using
data reported in accordance with SAP.
LIM.................................. Lincoln Investment Management, Inc., an affiliate of
Lincoln which manages the Company's investment
activities. See "Business -- Investments."
LINCOLN.............................. Lincoln National Corporation, the current sole
shareholder of the Company.
LLOYDS............................... American States Lloyds Insurance Company, an indirect
subsidiary of the Company.
LOSS ADJUSTMENT EXPENSES ("LAE")..... The expenses of settling claims, including legal and
other fees and the portion of general expenses
allocated to claim settlement costs.
LOSS RATIO........................... The ratio of incurred losses to premiums earned,
determined using data reported in accordance with
SAP.
</TABLE>

101
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<TABLE>
<S> <C>
LOSS RESERVES........................ Liabilities established by insurers and reinsurers to
reflect, as of a given date, the estimated cost of
claim payments that the insurer or reinsurer will
ultimately be required to pay in respect of insurance
or reinsurance on which premiums have been earned.
Reserves are established for losses and for LAE, and
consist of case reserves and IBNR reserves.
MTN PROGRAM.......................... A program the Company intends to establish within the
next year to enable the Company to issue debt when
the principal payments on the Assumed Debt and the
Term Note become due and, from time to time, for
general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital
Resources."
NAIC................................. The National Association of Insurance Commissioners.
NATURAL PERIL LOSSES................. A Company-defined term for losses caused by wind,
hail, water (including freezing water) and
earthquake, regardless of the size of any individual
event, including catastrophe losses. The Company
feels that this measure is a more meaningful
management tool as compared to catastrophe losses.
The majority of the Company's loss exposure base
resides inland (away from coastal exposures) where
frequency, rather than severity, of loss events has
historically been a more significant factor to the
Company.
NET PREMIUMS EARNED.................. The portion of net premiums written in a particular
period that is recognized for accounting purposes as
income during that period.
NET PREMIUMS WRITTEN................. Gross premiums written less premiums on ceded
business.
NEW DIRECTIONS....................... A program introduced by the Company in late 1991, to
improve its account selection, risk evaluation and
pricing. See "Business -- Strategy -- Focus on
Profitable Business."
NYSE................................. The New York Stock Exchange.
OFFERINGS............................ The offering by the Company of 8,000,000 shares of
its Common Stock in the United States and Canada by
the U.S. Underwriters and 2,000,000 shares of its
Common Stock in a concurrent offering outside the
United States and Canada by the International
Underwriters.
PERSONAL LINES....................... Types of insurance written for individuals rather
than businesses.
POLICIES-IN-FORCE.................... Policies written and recorded on the books of an
insurance carrier which are unexpired as of a given
date.
POLICY INCOME........................ Revenues generated from the sale of life insurance
policies, individual annuities and disability income
policies.
POLICYHOLDER DIVIDEND RATIO.......... The ratio of policyholder dividends paid to net
premiums earned, determined using data reported in
accordance with SAP.
</TABLE>

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<TABLE>
<S> <C>
POLICYHOLDER SURPLUS................. The excess of admitted assets over total liabilities
(including loss reserves), determined using data
reported in accordance with SAP.
POOLS................................ Statutory mechanism established by states to provide
insurance coverage for consumers who are unable to
obtain coverage in the voluntary market. Pools
typically require all companies writing specified
lines of business in the state to participate and
share deficiencies experienced in the pool based on
their proportionate shares of the statewide premium
writings in those specified lines.
PREFERRED AUTOMOBILE INSURANCE....... Personal lines automobile insurance written for those
individuals presenting a better than average risk
profile in terms of loss history, driving record,
type of vehicle driven and other factors.
PRIMARY INSURANCE.................... Insurance policies issued to the public generally.
PROPERTY INSURANCE................... Insurance that provides coverage to a person with an
insurable interest in tangible property for that
person's property loss, damage or loss of use.
QUOTA SHARE REINSURANCE.............. A generic term describing all forms of reinsurance in
which the reinsurer shares a proportional part of
both the original premiums and the losses of the
reinsured. (Also known as proportional reinsurance,
pro rata reinsurance, and participating reinsurance.)
REALIGNMENT.......................... The realignment of the Company's field structure
designed to enhance service to its customers and
agencies and, simultaneously, improve productivity.
See "Business -- Strategy -- Expense Control;
Realignment."
RECAPITALIZATION..................... The (i) transfer by Lincoln of all of the outstanding
shares of ASI to the Company, (ii) assumption of the
Assumed Debt by the Company, and (iii) issuance of
the Term Note by the Company.
REINSURANCE.......................... The practice whereby one party, called the reinsurer,
in consideration of a premium paid to it agrees to
indemnify another party, called the ceding party, for
part or all of the liability assumed by the ceding
party under a policy or policies of insurance which
it has issued. The reinsured may be referred to as
the original or primary insurer, the direct writing
company or the ceding company. Reinsurance does not
legally discharge the primary insurer from its
liability to the insured.
RETENTION............................ The amount or portion of risk which an insurer or
reinsurer retains for its own account. Losses in
excess of the retention level are paid by the
reinsurer or retrocessionaire. In pro rata treaties,
the retention may be a percentage of the original
policy's limit. In excess of loss reinsurance, the
retention is a dollar amount of loss, a loss ratio or
a percentage of loss.
</TABLE>

103
<PAGE> 106

<TABLE>
<S> <C>
RETROCESSION; RETROCESSIONAIRE....... A transaction whereby a reinsurer cedes to another
reinsurer (the "retrocessionaire") all or part of the
reinsurance it has assumed. Retrocessions do not
legally discharge the ceding reinsurer from its
liability with respect to its obligations to the
reinsured.
SECURITIES ACT....................... The Securities Act of 1933, as amended.
STANDARD AUTOMOBILE INSURANCE........ Personal lines automobile insurance written for those
individuals presenting an average risk profile in
terms of loss history, driving record, type of
vehicle driven and other factors.
STATUTORY ACCOUNTING PRACTICES
("SAP")............................ The rules and procedures prescribed or permitted by
United States state insurance regulatory authorities
for recording transactions and preparing financial
statements. Statutory accounting practices generally
reflect a liquidation, rather than a going concern,
concept of accounting.
STATUTORY SURPLUS.................... The excess of admitted assets over total liabilities
(including loss reserves), determined using data
reported in accordance with SAP.
SUBSIDIARIES......................... Same as "Insurers," which is defined above.
SUBSTANDARD AUTOMOBILE INSURANCE..... Personal lines automobile insurance written for those
individuals presenting a below average risk profile
in terms of loss history, driving record, type of
vehicle driven and other factors.
SURPLUS.............................. The same as "policyholder surplus," defined above.
SURVIVAL RATIO....................... The ratio of recorded reserves for asbestos and
environmental claims to actual payments made for
asbestos and environmental claims over the preceding
twelve months.
TAIL................................. The period of time that elapses between the
occurrence and settlement of losses under a policy.
TERM LIFE INSURANCE.................. Life insurance protection for a limited number of
years which expires without value if the insured
survives the stated period specified in the policy.
TERM NOTE............................ The $200 million note to be issued to Lincoln by the
Company as part of the Recapitalization.
TERM NOTE AGREEMENT.................. The agreement between the Company and Lincoln that
governs the Term Note.
TREATY REINSURANCE................... The reinsurance of a specified type or category of
risks defined in a reinsurance agreement (a "treaty")
between a primary insurer or other reinsured and a
reinsurer. Typically, in treaty reinsurance, the
primary insurer or reinsured is obligated to offer
and the reinsurer is obligated to accept a specified
portion of all such type or category of risks
originally underwritten by the primary insurer or
reinsured.
TWELVE MONTH PERIOD.................. The twelve month period commencing on the date the
Dividended Assets are distributed by ASI to Lincoln.
</TABLE>

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<TABLE>
<S> <C>
UNDERWRITER.......................... An employee of an insurance company who examines,
accepts or rejects risks and classifies accepted
risks in order to charge an appropriate premium for
each accepted risk. The underwriter is expected to
select business which will produce an average risk of
loss no greater than that anticipated for the class
of business. In the life insurance industry,
"underwriter" may also mean an agent or other field
representative who is referred to as a "field
underwriter".
UNDERWRITING......................... The insurer's or reinsurer's process of reviewing
applications submitted for insurance coverage,
deciding whether to accept all or part of the
coverage requested and determining the applicable
premiums.
UNDERWRITING EXPENSES................ The aggregate of policy acquisition costs, including
commissions, and the portion of administrative,
general and other expenses attributable to
underwriting operations.
UNDERWRITING EXPENSE RATIO........... Same as "expense ratio," which is defined above.
UNEARNED PREMIUMS.................... The portion of a premium representing the unexpired
portion of the contract term as of a certain date.
UNIVERSAL LIFE INSURANCE............. Life insurance under which (1) premiums are generally
flexible, (2) the level of death benefits may be
adjusted, and (3) expenses and other charges are
specifically disclosed to a purchaser. This policy is
sometimes referred to as unbundled life insurance
because its three basic elements(investment earnings,
cost of protection and expense charges) are
separately identified both in the policy and in an
annual report to the policyholder.
WHOLE LIFE INSURANCE................. Permanent life insurance offering guaranteed death
benefits and guaranteed cash values.
WORKERS' COMPENSATION................ Insurance which covers employers against statutorily
imposed liability for medical and indemnity claims
resulting from work related injuries to employees.
</TABLE>

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Audited Financial Statements
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheets at December 31, 1994 and 1995............................ F-3
Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and
1995............................................................................... F-4
Consolidated Statements of Shareholder's Equity for the Years Ended December 31,
1993, 1994 and 1995................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995............................................................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
Consolidated Interim Financial Statements
Consolidated Interim and Year End Balance Sheets at March 31, 1996 (unaudited) and
December 31, 1995.................................................................. F-22
Consolidated Interim Statements of Income for the three months ended March 31, 1995
and 1996 (unaudited)............................................................... F-23
Consolidated Interim Statements of Cash Flows for the three months ended March 31,
1995 and 1996 (unaudited).......................................................... F-24
Notes to Consolidated Interim Financial Statements................................... F-25
</TABLE>

F-1
<PAGE> 109

REPORT OF INDEPENDENT AUDITORS

Board of Directors
American States Financial Corporation

We have audited the accompanying consolidated balance sheets of American States
Financial Corporation and subsidiaries (See Note 1 to the consolidated financial
statements for information on the formation and ownership) as of December 31,
1994 and 1995, and the related consolidated statements of income, shareholder's
equity, and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American States
Financial Corporation and subsidiaries at December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.

As described in Note 3, in 1993, the Company changed its methods of accounting
for certain investments in debt and equity securities, impairment of loans and
postretirement benefits other than pensions.

Indianapolis, Indiana
January 31, 1996
except for Note 1, as to which the date
is May , 1996 and Note 16, as to
which the date is February 14, 1996

- --------------------------------------------------------------------------------

The foregoing report is in the form that will be signed upon the completion of
the recapitalization as described in Note 1 to the consolidated financial
statements.

ERNST & YOUNG LLP

/s/ ERNST & YOUNG LLP

Indianapolis, Indiana

May 13, 1996

F-2
<PAGE> 110

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale at fair value:
Fixed maturity (amortized cost: 1994 -- $3,468,160; 1995 --
$3,590,601).................................................... $3,429,853 $3,860,883
Equity (cost: 1994 -- $503,985; 1995 -- $374,232)............... 522,517 437,685
Mortgage loans..................................................... 49,700 33,319
Short-term investments............................................. 105,445 63,170
Other invested assets.............................................. 33,742 35,178
---------- ----------
4,141,257 4,430,235
Cash................................................................. 11,134 12,708
Premium receivable, less allowance for doubtful accounts (1994,
$2,610; 1995, $2,860).............................................. 384,022 377,802
Deferred policy acquisition costs.................................... 210,789 199,192
Properties to be sold, less valuation allowances ($28,350)........... -- 41,403
Property and equipment-at cost, less allowances for depreciation
(1994, $87,451; 1995, $70,012)..................................... 105,296 29,823
Other assets:
Accrued investment income.......................................... 72,426 66,173
Deferred federal income taxes recoverable.......................... 216,952 100,647
Cost in excess of net assets of acquired subsidiaries, less
amortization (1994, $39,200; 1995, $42,618)..................... 104,607 101,190
Ceded reinsurance on claims and claims expense reserves............ 138,163 136,939
Miscellaneous...................................................... 34,645 43,073
---------- ----------
566,793 448,022
---------- ----------
$5,419,291 $5,539,185
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Policy liabilities and accruals:
Losses, loss adjustment expense and future policy benefits......... $2,878,235 $2,828,337
Unearned premiums.................................................. 725,448 718,478
---------- ----------
3,603,683 3,546,815
General liabilities:
Commissions and other expenses..................................... 107,824 134,031
Current federal income taxes payable............................... 1,841 7,095
Outstanding checks................................................. 72,818 67,308
Other liabilities.................................................. 164,559 115,229
Debt............................................................... -- --
---------- ----------
347,042 323,663
---------- ----------
3,950,725 3,870,478
Shareholder's equity:
Preferred stock: 5,000,000 shares authorized, no shares issued and
outstanding..................................................... -- --
Common stock, no par value: 195,000,000 shares authorized,
50,000,000 shares issued and outstanding........................ 5,000 5,000
Paid-in capital.................................................... 382,547 382,547
Net unrealized gain (loss) on securities available-for-sale........ (9,110) 211,767
Retained earnings.................................................. 1,090,129 1,069,393
---------- ----------
1,468,566 1,668,707
---------- ----------
$5,419,291 $5,539,185
========== ==========
</TABLE>

See accompanying notes.

F-3
<PAGE> 111

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue:
Premiums............................................... $1,855,099 $1,745,971 $1,746,386
Net investment income.................................. 266,796 260,454 266,569
Realized gain on investments........................... 149,947 19,936 41,044
Loss on operating properties........................... -- -- (28,350)
---------- ---------- ----------
Total revenue............................................ 2,271,842 2,026,361 2,025,649
Benefits and expenses:
Benefits and settlement expenses....................... 1,386,345 1,271,957 1,242,270
Commissions............................................ 322,969 296,886 291,551
Operating and administrative expenses.................. 217,611 208,248 236,825
Taxes, licenses and fees............................... 52,127 49,003 45,891
Interest on debt....................................... -- -- --
---------- ---------- ----------
Total benefits and expenses.............................. 1,979,052 1,826,094 1,816,537
---------- ---------- ----------
Income before federal income taxes and cumulative effect
of accounting change................................... 292,790 200,267 209,112
Federal income taxes (credit):
Current................................................ 56,893 26,124 35,298
Deferred............................................... (10,838) (10,415) (4,450)
---------- ---------- ----------
Total federal income taxes............................... 46,055 15,709 30,848
---------- ---------- ----------
Income before cumulative effect of change in accounting
for postretirement benefits other than pensions........ 246,735 184,558 178,264
Cumulative effect of change in accounting for
postretirement benefits other than pensions, net of
taxes of $20,886....................................... (40,542) -- --
---------- ---------- ----------
Net income............................................... $ 206,193 $ 184,558 $ 178,264
========== ========== ==========
Pro forma income per share (Note 1)...................... $2.53
==========
</TABLE>

See accompanying notes.

F-4
<PAGE> 112

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
NET UNREALIZED
COMMON STOCK GAIN (LOSS) ON
------------------- SECURITIES
NUMBER PAID-IN AVAILABLE- RETAINED
OF SHARES AMOUNT CAPITAL FOR-SALE EARNINGS TOTAL
---------- ------ -------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993..... 50,000,000 $5,000 $382,547 $ 80,059 $1,019,378 $1,486,984
Cumulative effect of change in
accounting for fixed maturity
investments.................. -- -- -- 190,460 -- 190,460
Change in unrealized gain
(loss) on securities
available-for-sale........... -- -- -- (31,439) -- (31,439)
Cash dividends on common
stock........................ -- -- -- -- (140,000) (140,000)
Net income..................... -- -- -- -- 206,193 206,193
---------- ------ -------- --------- ---------- ----------
Balance at December 31, 1993... 50,000,000 5,000 382,547 239,080 1,085,571 1,712,198
Change in unrealized gain
(loss) on securities
available-for-sale........... -- -- -- (248,190) -- (248,190)
Cash dividends on common
stock........................ -- -- -- -- (180,000) (180,000)
Net income..................... -- -- -- -- 184,558 184,558
---------- ------ -------- --------- ---------- ----------
Balance at December 31, 1994... 50,000,000 5,000 382,547 (9,110) 1,090,129 1,468,566
Change in unrealized gain
(loss) on securities
available-for-sale........... -- -- -- 220,877 -- 220,877
Cash dividends on common
stock........................ -- -- -- -- (199,000) (199,000)
Net income..................... -- -- -- -- 178,264 178,264
---------- ------ -------- --------- ---------- ----------
Balance at December 31, 1995... 50,000,000 $5,000 $382,547 $ 211,767 $1,069,393 $1,668,707
========== ====== ======== ========= ========== ==========
</TABLE>

F-5
<PAGE> 113

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $ 206,193 $ 184,558 $ 178,264
Adjustments to reconcile net income to cash provided
by
(used in) operating activities:
Deferred policy acquisition costs................ 17,278 1,743 (280)
Premiums and fees in course of collection........ 57,543 4,558 6,220
Accrued investment income........................ (2,889) (622) 6,253
Policy liabilities and accruals.................. (167,682) (111,825) (95,605)
Federal income taxes............................. (41,928) (12,485) 803
Provisions for depreciation...................... 9,569 10,453 10,535
Gain on sale of investments...................... (149,947) (19,936) (41,044)
Loss on operating properties..................... -- -- 28,350
Ceded reinsurance on claims and claims expense
reserves....................................... 4,983 12,589 1,224
Other............................................ 44,941 4,760 13,170
----------- ----------- -----------
Net adjustments....................................... (228,132) (110,765) (70,374)
----------- ----------- -----------
Net cash provided by (used in) operating activities... (21,939) 73,793 107,890
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturity securities held for investment:
Purchase............................................ (673,412) -- --
Sales............................................... 360,568 -- --
Maturities.......................................... 227,500 -- --
Securities available-for-sale or trading:
Purchases........................................... (1,018,054) (1,009,660) (1,002,548)
Sales............................................... 1,181,535 983,684 990,781
Maturities.......................................... 975 110,236 68,846
Purchase of mortgage loans and other investments...... (11,769) (13,441) (11,441)
Sale or maturity of mortgage loans and other
investments......................................... 10,313 11,747 28,039
Net (increase) decrease in short-term investments..... (28,359) 34,653 42,275
Purchase of property and equipment.................... (8,704) (9,871) (4,815)
Other................................................. (6,597) 1,989 (12,191)
----------- ----------- -----------
Net cash provided by investing activities............. 33,996 109,337 98,946
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable................... -- (5,000) --
Universal life investment contract deposits........... 49,503 47,285 47,805
Universal life investment contract withdrawals........ (6,003) (9,330) (9,067)
Dividends paid to parent.............................. (60,000) (215,000) (244,000)
----------- ----------- -----------
Net cash used in financing activities................. (16,500) (182,045) (205,262)
----------- ----------- -----------
Net increase (decrease) in cash....................... (4,443) 1,085 1,574
Cash at beginning of year............................. 14,492 10,049 11,134
----------- ----------- -----------
Cash at end of year................................... $ 10,049 $ 11,134 $ 12,708
=========== =========== ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 114

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

1. BASIS OF PRESENTATION

PRINCIPLES OF CONSOLIDATION

On February 5, 1996, the American States Financial Corporation ("ASFC") was
incorporated to serve as a holding company. The consolidated financial
statements include the accounts of American States Insurance Company ("ASI") and
its wholly-owned subsidiaries and have been presented as if the holding company
formation occurred at the earliest date presented herein. ASFC, a wholly owned
subsidiary of Lincoln National Corporation ("LNC"), is an Indiana domiciled
insurance holding company doing business through ASI, its wholly-owned
subsidiary, and the six insurance subsidiaries of ASI (collectively referred to
as "the Company"). ASI has licenses to write business in all 50 states and the
District of Columbia. ASI and its subsidiaries write standard commercial and
personal lines, and life insurance business throughout the United States with
the greatest volume in the Midwest and Pacific Northwest. All significant
intercompany accounts and transactions are eliminated in consolidation.

During 1994, American Union Reinsurance Company and Amstats Insurance
Company were sold. These transactions had no significant effect on the results
of operation for that year.

HOLDING COMPANY FORMATION

As noted above, the financial statements have been presented as if ASFC had
been organized at the earlier date presented herein. The formation of ASFC was
done in contemplation of an initial public offering. Immediately prior to the
effective date of the Registration Statement on Form S-1, ASI will declare and
pay to LNC a dividend of $300,000 consisting primarily of tax-exempt municipal
securities (Dividended Assets). Following the dividend, LNC will transfer all of
the outstanding shares of ASI in exchange for common stock and $300,000 debt of
ASFC. As a result of the foregoing, LNC's ownership could be reduced to
approximately 81%.

PRO FORMA ADJUSTMENTS

The pro forma income per share for 1995 is based on 50,000,000 shares
outstanding plus the 10,000,000 shares being offered and is based on historical
income after reflecting the pro forma impact of investment income decreasing by
$14,280 representing the interest yield on $300,000 of tax exempt municipal
securities, interest expense resulting from the assumed and issued debt of
$20,125 and federal income tax benefit of $7,794. Such adjustments do not
reflect any investment earnings resulting from the proceeds of the offerings of
common stock.

2. SIGNIFICANT ACCOUNTING POLICIES

INVESTMENTS

Fixed maturity and equity securities (common and perpetual preferred
stocks) are classified as available-for-sale and, accordingly, are carried at
fair value (see Note 3). Prior to December 31, 1993, the Company classified
fixed maturity securities in accordance with accounting standards existing at
that time, and accordingly, selected those fixed maturity securities that were
not intended to be held to maturity and designated them as trading account and
carried them at fair value. Other fixed maturity securities were carried at
cost, adjusted for amortization of premium or discount, since the Company had
both the ability and intent to hold such securities until maturity.

For the mortgage-backed bond portion of the fixed maturity securities
portfolio, the Company recognizes income using a constant effective yield based
on anticipated prepayments and the estimated economic life of the securities.
When actual prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date and
anticipated future payments. The net investment in the

F-7
<PAGE> 115

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
securities is adjusted to the amount that would have existed had the new
effective yield been applied since the acquisition of the securities. This
adjustment is reflected in net investment income.

Mortgage loans on real estate are carried at the outstanding principal
balances less unaccrued discounts and allowances for losses. Short-term
investments which are carried at cost, include all highly liquid debt
instruments purchased with a maturity of one year or less, and the carrying
value approximates fair value.

Realized gains and losses on investments are recognized in net income using
the specific identification method. Changes in the fair values of securities
carried at fair value are reflected directly in shareholder's equity after
deductions for related adjustments for deferred policy acquisition costs and
deferred taxes.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less allowances for
depreciation. Depreciation is computed generally by the straight-line method at
rates calculated to amortize costs over the estimated useful lives of the
assets. Properties to be sold are carried at the lower of cost or estimated fair
value, less selling costs. The difference between book value and fair value is
recognized by maintaining a valuation allowance.

COST IN EXCESS OF NET ASSETS OF ACQUIRED SUBSIDIARIES

Cost in excess of net assets from the purchase of subsidiaries is being
amortized using the straight-line method over 40 years. The carrying value of
these assets will be reviewed if the facts and circumstances suggest that it may
be impaired. If this review indicates that they will not be recoverable, the
carrying value will be reduced by the estimated shortfall.

USE OF ESTIMATES

The nature of the insurance business requires management to make estimates
and assumptions that affect the amounts reported in the financial statements.
Actual results reported in future financial statements could differ from these
estimates. The effects of changes in estimates are included in the operating
results for the period in which such changes occur.

LOSSES, LOSS ADJUSTMENT EXPENSE AND FUTURE POLICY BENEFITS

The liability for losses and loss adjustment expense is determined using
case basis evaluation and statistical analysis and represents estimates of the
ultimate net cost of all reported and unreported losses which are unpaid at year
end. This liability includes estimates of future trends in claim severity and
frequency and other factors which could vary as the losses are ultimately
settled. Although it is not possible to measure the degree of variability
inherent in such estimates, management believes that the liability for losses
and loss adjustment expense is adequate. The estimates are continually reviewed
and as adjustments become necessary to this liability, they are made and
reflected in current operations. The reserve for losses and loss adjustment
expense is stated at an amount after deduction of salvage and subrogation
recoverable. At December 31, 1995, ASI has guaranteed and is contingently liable
in the amount of $47,066 with respect to annuities purchased to fund structured
settlements. In the normal course of settling losses, ASI has been named in
various lawsuits. The ultimate settlement of these lawsuits is not expected to
be material to the Company's operations.

Future policy benefits on traditional life insurance have been computed
using principally a net-level premium method and assumptions for investment
yields, withdrawals and mortality based principally on Company experience
projected at the time of policy issue, with provision for possible adverse
deviations. Interest assumptions for direct individual life reserves range from
approximately 4.5% for 1958 issues to 7.25% for 1995 issues. With respect to
universal life and annuity products, the retrospective deposit accounting

F-8
<PAGE> 116

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
method is used. Policy reserves represent the premiums received plus accumulated
interest, less mortality and administration charges.

RECOGNITION OF INCOME AND EXPENSES

Premiums include property and casualty insurance premiums and life
insurance premiums and contract charges earned. Direct property and casualty
insurance premiums are earned ratably over the terms of the policies. Assumed
reinsurance premiums are earned ratably over the terms of the original policies
issued and terms of the reinsurance contracts. The reserve for unearned premiums
is computed by the semi-monthly pro rata method. Life insurance premiums on
traditional life business are generally earned when due. Revenues for universal
life and investment products consist of policy charges for the cost of
insurance, policy administration charges, amortization of policy initiation
fees, and surrender charges assessed against policyholder account balances
during the period. Expenses related to these products include interest credited
to policyholder account balances and death benefits incurred in excess of
policyholder account balances. Commissions, premium taxes, and certain other
expenses incurred in the acquisition of business are deferred and amortized as
the related premiums are earned. Acquisition costs that are not recoverable from
future premiums and related investment income are expensed. The amounts of
acquisition costs amortized were $391,514, $359,747 and $359,840 in 1993, 1994
and 1995, respectively.

FEDERAL INCOME TAXES

A consolidated federal income tax return is filed by LNC and includes the
Company. Pursuant to an agreement with LNC, the Company provides for income
taxes on the basis of a separate return calculation; however, certain
deductions, credits, losses, and other items that may be limited or not allowed
on a separate return basis are allowed. The taxes computed are remitted to or
collected from LNC.

Effective January 1, 1996, the current tax sharing agreement will be
terminated and new tax sharing agreements will result in the Company providing
income taxes on a stand-alone basis. This change would have had no impact on the
provision for federal income taxes for 1993, 1994 and 1995, had it been
implemented January 1, 1993.

PENSION PLAN AND OTHER RETIREMENT BENEFITS

A qualified non-contributory defined benefit retirement plan covers
substantially all employees. Benefits are based on total years of service and
the highest 60 months of compensation during the last 10 years of employment.
The plan is funded by contributions to tax-exempt trusts consistent with
requirements of federal law and regulations. Contributions are intended to
provide not only the benefits attributed to service to date, but also those
expected to be earned in the future. Plan assets consist principally of listed
equity securities, corporate obligations, and United States government bonds.

The Company also sponsors an unfunded, nonqualified, supplemental defined
benefit pension plan for certain employees.

Further, the Company sponsors an unfunded defined benefit plan that
provides postretirement medical and life insurance benefits to full-time
employees who have worked 10 years and attained age 55 while in service with the
Company. The plan is contributory, with retiree contributions adjusted annually,
and contains other cost-sharing features such as deductibles and coinsurance.

Eligible employees also participate in a defined contribution plan
sponsored by LNC. The Company's contribution to the plan is equal to a
participant's pre-tax contribution, not to exceed 6% of base pay, multiplied by
a percentage, ranging from 25% to 150%, which varies according to certain
incentive criteria as

F-9
<PAGE> 117

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
determined by LNC's Board of Directors. Expense for this plan amounted to
$9,749, $11,419 and $6,644 in 1993, 1994 and 1995, respectively.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121 ("FAS 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Long-lived assets
that are expected to be disposed of are also covered by FAS 121. The Company
will adopt FAS 121 in the first quarter of 1996, however, management is unaware
of any material assets or transactions that will be affected by this Statement.

RECLASSIFICATIONS

Amounts from prior periods have been reclassified to conform to the 1995
presentation. Net income and shareholder's equity have not been affected by
these reclassifications.

3. CHANGES IN ACCOUNTING PRINCIPLES

ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES

In May 1993, the FASB issued Statement No. 115 ("FAS 115") Accounting for
Certain Investments in Debt and Equity Securities, which was adopted by the
Company as of December 31, 1993. FAS 115 requires securities to be classified as
available-for-sale, trading or held-to-maturity. Since December 31, 1993, the
Company has classified its entire fixed maturity securities portfolio as
available-for-sale.

ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN

In May 1993, the FASB issued Statement No. 114 ("FAS 114") Accounting by
Creditor for Impairment of a Loan, which was adopted by the Company during 1993.
FAS 114 requires that an impaired mortgage loan's fair value be measured based
either on the present value of expected future cash flows discounted at the
loan's effective interest rate, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. If the fair
value of the mortgage loan as described above is less than the recorded
investment in the loan, the difference is recorded in the mortgage loan
allowance for losses account. The change in the mortgage loan allowance for
losses account is reported with realized gain (loss) on investments. This method
has been used since January 1, 1993.

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

In December 1990, FASB issued Statement No. 106 ("FAS 106") Employers'
Accounting for Postretirement Benefits Other Than Pensions. This full accrual
method recognizes the estimated obligation for retired employees and active
employees that are expected to retire in the future. Effective January 1, 1993,
the Company changed its method of accounting for postretirement medical and life
insurance benefits for its eligible employees from a pay-as-you-go method to a
full accrual method.

F-10
<PAGE> 118

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INVESTMENTS

The cost, unrealized gains and losses and fair value of securities
available-for-sale are as follows:

<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
United States treasury securities and other
United States government agencies.............. $ 307,027 $ 460 $ 15,448 $ 292,039
Obligations of states and political
subdivisions................................... 2,323,048 44,366 54,490 2,312,924
Corporate securities............................. 583,823 27,093 30,851 580,065
Mortgage-backed securities....................... 177,589 3,176 7,909 172,856
Redeemable preferred stocks...................... 76,673 22 4,726 71,969
---------- -------- -------- ----------
Total fixed maturity securities.................. 3,468,160 75,117 113,424 3,429,853
Common and perpetual preferred stocks............ 503,985 46,167 27,635 522,517
---------- -------- -------- ----------
$3,972,145 $ 121,284 $ 141,059 $3,952,370
========== ======== ======== ==========
DECEMBER 31, 1995
United States treasury securities and other
United States government agencies.............. $ 301,547 $ 27,097 $ 86 $ 328,558
Obligations of states and political
subdivisions................................... 2,222,697 153,728 2,211 2,374,214
Corporate securities............................. 679,983 77,831 692 757,122
Mortgage-backed securities....................... 312,705 11,326 320 323,711
Redeemable preferred stocks...................... 73,669 3,985 376 77,278
---------- -------- -------- ----------
Total fixed maturity securities.................. 3,590,601 273,967 3,685 3,860,883
Common and perpetual preferred stocks............ 374,232 71,306 7,853 437,685
---------- -------- -------- ----------
$3,964,833 $ 345,273 $ 11,538 $4,298,568
========== ======== ======== ==========
</TABLE>

Fair values for fixed maturity securities are based on quoted market
prices, where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing services or,
in the case of private placements, are estimated by discounting expected future
cash flows using a current market rate applicable to the yield, credit quality,
and maturity of the investments. The fair values for equity securities are based
on quoted market prices.

The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1995, by contractual maturity, is shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations without call or prepayment penalties.

<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Available-for-sale:
Due in one year or less............................. $ 67,124 $ 67,876
Due after one year through five years............... 652,394 708,156
Due after five years through ten years.............. 1,209,592 1,297,157
Due after ten years................................. 1,348,786 1,463,983
---------- ----------
3,277,896 3,537,172
Mortgage-backed securities............................ 312,705 323,711
---------- ----------
$3,590,601 $3,860,883
========== ==========
</TABLE>

F-11
<PAGE> 119

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INVESTMENTS (CONTINUED)
Major categories of investment income are summarized as follows:

<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Fixed maturity:
Tax exempt.................................. $144,375 $145,940 $134,506
Taxable..................................... 86,731 81,000 100,611
-------- -------- --------
231,106 226,940 235,117
Equity........................................ 31,965 26,759 23,328
Other......................................... 9,559 11,754 11,938
-------- -------- --------
272,630 265,453 270,383
Less investment expense....................... 5,834 4,999 3,814
-------- -------- --------
Net investment income......................... $266,796 $260,454 $266,569
======== ======== ========
</TABLE>

The change in unrealized gain (loss) on securities available-for-sale is as
follows:

<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturity securities
available-for-sale......................... $ 297,101 $(346,946) $ 308,589
Equity securities available-for-sale......... (45,232) (46,001) 44,921
--------- --------- ---------
Net change in unrealized gain (loss) on
securities available-for-sale.............. 251,869 (392,947) 353,510
Adjustment for effect on other balance sheet
accounts................................... (7,177) 11,116 (11,877)
Less deferred income taxes................... (85,671) 133,641 (120,756)
--------- --------- ---------
Change in unrealized gain (loss) included in
shareholder's equity....................... $ 159,021 $(248,190) $ 220,877
========= ========= =========
Fixed maturity securities held for
investments................................ $(167,283) $ -- $ --
========= ========= =========
</TABLE>

The realized gain (loss) on investments is summarized as follows:

<TABLE>
<S> <C> <C> <C>
Available-for-sale:
Fixed maturity
Gross gain............................... $ 38,408 $ 18,977 $ 5,816
Gross loss............................... (1,893) (11,300) (5,063)
Equity Securities
Gross gain............................... 121,815 36,663 63,123
Gross loss............................... (35,125) (29,942) (24,264)
Held for investment:
Fixed maturity
Gross gain............................... 38,037 -- --
Gross loss............................... (5,407) -- --
Other......................................... (5,888) 5,538 1,432
-------- -------- --------
Total....................................... $149,947 $ 19,936 $ 41,044
======== ======== ========
</TABLE>

The Company has estimated the fair value of its investment in mortgage
loans on real estate to be $48,853 and $35,591 at December 31, 1994 and 1995,
respectively. This estimate was established using a

F-12
<PAGE> 120

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INVESTMENTS (CONTINUED)
discounted cash flow method based on rating, maturity and future income when
compared to the expected yield for mortgages having similar characteristics.

The recorded investment in impaired loans, net of mortgage loan allowance
for losses, was $19,279 and $0 at December 31, 1994 and 1995, respectively. A
reconciliation of the mortgage loan allowance for losses is as follows:

<TABLE>
<CAPTION>
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Balance at beginning of year........................ $ 705 $ 5,968 $ 4,435
Provisions for losses............................... 5,941 76 155
Releases due to recoveries.......................... -- (1,222) --
Releases due to sales............................... -- (387) (4,330)
Transfers to real estate............................ (678) -- (260)
------ ------- -------
Balance at end of year.............................. $5,968 $ 4,435 $ --
====== ======= =======
</TABLE>

The carrying value of short-term investments and other invested assets
approximate fair value.

5. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity in the liability for losses and loss adjustment expense for
property and casualty operations is summarized as follows:

<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance as of January 1, net of related reinsurance
recoverables........................................... $2,538,491 $2,458,465 $2,377,245
Add:
Provision for losses and loss adjustment expense
occurring in the current year, net of reinsurance... 1,395,462 1,318,224 1,233,627
Decrease in estimated losses and loss adjustment
expense occurring in prior years, net of
reinsurance......................................... (48,125) (91,984) (39,917)
---------- ---------- ----------
Incurred losses and loss adjustment expense during the
current year, net of reinsurance.................... 1,347,337 1,226,240 1,193,710
Deduct:
Losses and loss adjustment expense payments for losses,
net of reinsurance, occurring during:
Current year........................................ 626,716 617,425 613,580
Prior years......................................... 800,647 690,035 662,917
---------- ---------- ----------
1,427,363 1,307,460 1,276,497
---------- ---------- ----------
Balance as of December 31, net of related reinsurance
recoverables........................................... 2,458,465 2,377,245 2,294,458
Reinsurance recoverables on losses and loss adjustment
expenses at end of year................................ 131,028 119,458 120,117
---------- ---------- ----------
Liability for losses and loss adjustment expense, gross
of related reinsurance recoverables, at end of year.... $2,589,493 $2,496,703 $2,414,575
========== ========== ==========
</TABLE>

The reconciliation shows a decrease to the liability for estimated losses
and loss adjustment expense arising in prior years. Such reserve adjustments,
which affected current operations during each of the years, resulted from
developed losses from prior years being different than were anticipated when the
liability for

F-13
<PAGE> 121

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
losses and loss expense were originally estimated. The favorable development
trends are reflective of the change the Company has initiated in its
underwriting practices. These development trends have been considered in
establishing the current year liabilities.

Included in the liability for losses and loss adjustment expense for
property and casualty operations is liability for environmental and asbestos
losses of $198,216 and $241,216 as of December 31, 1994 and 1995, respectively.
In establishing liabilities for losses and loss expenses related to
environmental matters, management considers facts currently known and the
current state of the law and coverage litigation. Liabilities are recognized for
known losses, including the cost of related litigation, when sufficient
information has been developed to indicate the involvement of a specific
insurance policy and management can reasonably estimate its liability. In
addition, liabilities have been established to cover additional exposures on
both known and unasserted losses. Estimates of the liabilities are reviewed and
updated continually. Developed case law and adequate claim history do not exist
for a portion of the Company's environmental exposure, especially because
significant uncertainty exists about the outcome of coverage litigation and
whether past loss experience will be representative of future loss experience.
Management believes the estimated liabilities provided for environmental and
asbestos losses at December 31, 1995, are adequate; however, it is reasonably
possible that a change in estimate of the required liability could occur in the
future. It is not possible to provide a meaningful estimate of a range of
possible outcomes at this time.

The Company writes personal and commercial lines of property and casualty
insurance throughout the United States. As a result, the Company is always at
risk that there could be significant losses arising in certain geographic areas
from catastrophes, such as earthquakes and hurricanes. The Company seeks to
protect itself from such events by purchasing catastrophe insurance which
provides protection of $150,000 in excess of $30,000 retention per occurrence.
The Company's policies providing earthquake, hurricane and related coverage in
the midwest, western and southeastern coastal areas of the United States could
expose the Company to losses exceeding its reinsurance limits. Although the
exposure exists, the Company has not encountered losses in excess of its
reinsurance limits during the past twenty years.

The following is a reconciliation of the activity in the liability for
losses and loss adjustment expense for property and casualty operations to the
consolidated balance sheets and statements of income:

<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Property and casualty incurred losses and loss adjustment
expense during the current year, net of reinsurance.... $1,347,337 $1,226,240 $1,193,710
Life insurance benefits and settlement expenses,
net of reinsurance..................................... 39,008 45,717 48,560
---------- ---------- ----------
Benefits and settlement expenses, net of reinsurance..... $1,386,345 $1,271,957 $1,242,270
========== ========== ==========
Liability for property and casualty losses and loss
adjustment expense, at end of year..................... $2,589,493 $2,496,703 $2,414,575
Liability for life future policy benefits, at end of
year................................................... 339,386 381,532 413,762
---------- ---------- ----------
Liability for losses, loss adjustment expense and future
policy benefits........................................ $2,928,879 $2,878,235 $2,828,337
========== ========== ==========
Reinsurance recoverables on property and casualty losses
and loss adjustment expenses, at end of year........... $ 131,028 $ 119,458 $ 120,117
Reinsurance recoverables on life future policy benefits,
at end of year......................................... 19,724 18,705 16,822
---------- ---------- ----------
Ceded reinsurance on claims and claims expense reserves,
at end of year......................................... $ 150,752 $ 138,163 $ 136,939
========== ========== ==========
</TABLE>

F-14
<PAGE> 122

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. FEDERAL INCOME TAXES

Federal income taxes paid in 1993, 1994 and 1995 were $67,095, $28,556 and
$30,045, respectively.

The effective tax rate on pre-tax income before cumulative effect of
accounting change is lower than the prevailing corporate federal income tax
rate. A reconciliation of this difference is as follows:

<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Tax on pre-tax income at 35%................................ $102,477 $ 70,093 $ 73,189
Add (deduct) tax effect of:
Tax exempt bond interest.................................. (50,651) (51,333) (47,174)
Dividends earned.......................................... (9,375) (6,028) (5,513)
15% of tax exempt interest and dividends received
deduction.............................................. 7,604 7,828 7,311
Goodwill.................................................. 1,219 1,219 1,196
Effect of change in tax rate on deferred recoverables..... (3,715) -- --
Other..................................................... (1,504) (6,070) 1,839
-------- -------- --------
Federal income taxes........................................ $ 46,055 $ 15,709 $ 30,848
======== ======== ========
</TABLE>

Significant components of net deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
1994 1995
-------- ---------
<S> <C> <C>
Deferred tax assets:
Change in unearned premium reserve................................... $ 49,447 $ 48,916
Discounting of losses and loss adjustment expense reserves........... 171,713 165,991
Other postretirement benefits........................................ 24,275 24,926
Sale/leaseback of building........................................... 8,318 8,000
Nondeductible accruals............................................... 13,314 22,879
Net unrealized losses on securities.................................. 5,543 --
Other................................................................ 27,013 29,607
-------- ---------
Total deferred tax assets.............................................. 299,623 300,319

Deferred tax liabilities:
Deferred acquisition costs........................................... (72,398) (72,496)
Net unrealized gains on securities................................... -- (114,028)
Other................................................................ (10,273) (13,148)
-------- ---------
Total deferred tax liabilities......................................... (82,671) (199,672)
-------- ---------
Net deferred tax asset................................................. $216,952 $ 100,647
======== =========
</TABLE>

As defined by previous life insurance company tax law, certain amounts were
accumulated tax free in a special memorandum account designated as
"Policyholders' Surplus Account" and generally are not subject to federal income
taxes until distributed to stockholders. The aggregate accumulation in this
account is $17,623. No provision has been made for federal income taxes on this
account since distributions are not presently contemplated.

7. RESTRICTIONS ON SHAREHOLDER'S EQUITY

Generally, the net assets of the Company's insurance subsidiaries available
for transfer to ASFC are limited to the amounts that the insurance subsidiaries'
net assets, as determined in accordance with statutory accounting practices,
exceed minimum statutory capital requirements; however, payments of such amounts
as dividends may be subject to approval by regulatory authorities. At December
31, 1995, $7,200 of consolidated

F-15
<PAGE> 123

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. RESTRICTIONS ON SHAREHOLDER'S EQUITY (CONTINUED)
shareholder's equity represents net assets of the Company's insurance
subsidiaries that cannot be transferred in the form of dividends, loans or
advances to ASFC.

8. RECONCILIATION WITH STATUTORY ACCOUNTING POLICIES

Net income of ASI and subsidiaries, as determined in accordance with
statutory accounting practices, was $263,124, $177,654 and $197,058 for 1993,
1994 and 1995, respectively. Consolidated statutory shareholder's equity for ASI
was $980,716 and $1,010,992 at December 31, 1994, and 1995, respectively.

9. PENSION PLAN

The funded status of the defined benefit pension plan and the amount
recognized in the balance sheet are as follows:

<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested.............................................................. $(101,012) $(134,836)
Non vested.......................................................... (6,173) (7,909)
--------- ---------
Accumulated benefit obligation........................................ (107,185) (142,745)
Effect of future compensation increases............................... (32,483) (48,595)
--------- ---------
Projected benefit obligation.......................................... (139,668) (191,340)
Plan assets available for benefits.................................... 133,942 172,913
--------- ---------
Projected benefit obligation in excess of plan assets................. (5,726) (18,427)
Unrecognized prior service cost....................................... 2,810 2,561
Unrecognized net loss................................................. 5,110 19,355
--------- ---------
Prepaid pension cost included in the balance sheet.................... $ 2,194 $ 3,489
========= =========
</TABLE>

Assumptions used in the foregoing calculations are as follows:

<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Assumed rate on plan assets..................................... 9.0 % 9.0 % 9.0 %
Weighted average discount rate.................................. 7.0 8.0 7.0
Future compensation trends...................................... 5.0 5.0 5.0
</TABLE>

The change in discount rate increased (decreased) the accumulated benefit
obligation by ($13,000) and $17,800 as of December 31, 1994, and 1995,
respectively.

Net pension cost for the defined benefit pension plans includes the
following components:

<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost benefits earned................................ $ 7,926 $ 8,982 $ 8,091
Interest cost on projected benefit obligation............... 9,121 10,189 11,322
Actual return on assets..................................... (14,689) 3,338 (31,425)
Net amortization and deferral............................... 4,221 (13,779) 20,708
Impact of realignment of field operations (see Note 15)..... -- -- 3,029
-------- -------- --------
Net periodic pension cost................................... $ 6,579 $ 8,730 $ 11,725
======== ======== ========
</TABLE>

F-16
<PAGE> 124

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. POSTRETIREMENT BENEFIT PLAN

The postretirement defined benefit plan is unfunded; however, the details
of the amount included in other liabilities are as follows:

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................. $32,672 $34,715
Fully eligible active plan participants.................. 12,140 12,746
Other active plan participants........................... 15,172 16,384
------- -------
59,984 63,845
Unrecognized net gain...................................... 9,304 7,378
------- -------
Accrued postretirement benefit cost........................ $69,288 $71,223
======= =======
</TABLE>

Assumptions used in the foregoing calculations at December 31 are as
follows:

<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate........................................ 7.0 % 8.0 % 7.0 %
Rate of compensation increases....................... 5.0 5.0 5.0
</TABLE>

Net periodic postretirement benefit cost includes the following components:

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ -------
<S> <C> <C> <C>
Service cost......................................... $1,876 $2,033 $ 1,395
Interest cost........................................ 4,494 4,373 4,057
Net amortization and deferral........................ -- (115) (1,120)
------ ------ -------
Net periodic postretirement benefit cost............. $6,370 $6,291 $ 4,332
====== ====== =======
</TABLE>

The calculation of the accumulated postretirement benefit obligation
assumes a weighted-average annual assumed rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) of 9.5% for 1996
gradually decreasing to 5.5% by 2004. The health care cost trend rate assumption
has a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1995
by $4,469, and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for 1995 by $436.

11. RENT EXPENSE

The principal leased property is the home office which is leased through a
sale-leaseback agreement. The agreement, which was entered into in 1984,
provides for a 25 year lease period with options to renew for six additional
terms of five years each. The agreement also provides the Company with the right
of first refusal to purchase the property during the term of the lease,
including renewal periods, at a price as defined in the agreements. In addition,
the Company has the option to purchase the leased property at fair market value
as defined in the agreements on the last day of the initial 25 year lease period
ending in 2009 or the last day of any of the renewal periods.

Rent expense included in benefits and expenses amounted to approximately
$16,993, $16,898 and $16,123 in 1993, 1994 and 1995, respectively. At December
31, 1995, future minimum payments, by year and

F-17
<PAGE> 125

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. RENT EXPENSE (CONTINUED)

in the aggregate, for noncancelable operating leases with initial or remaining
terms of one year or more consisted of the following:

<TABLE>
<S> <C>
1996....................................................... $10,700
1997....................................................... 9,247
1998....................................................... 7,820
1999....................................................... 8,159
2000....................................................... 10,102
2001 and thereafter........................................ 87,761
</TABLE>

12. REINSURANCE ACTIVITIES

The principal sources of reinsurance assumed are national and state
associations. In 1993, other insurance companies were also a significant source
of reinsurance assumed. Reinsurance is ceded to other companies for risks which
exceed retention limits and to provide for catastrophic claims.

The effect of reinsurance on premiums written and earned is as follows:

<TABLE>
<CAPTION>
EARNED
WRITTEN -----------------------------------
PROPERTY- PROPERTY-
CASUALTY CASUALTY LIFE TOTAL
---------- ---------- ------- ----------
<S> <C> <C> <C> <C>
1993
Direct......................................... $1,688,948 $1,756,737 $50,810 $1,807,547
Assumed........................................ 76,234 99,628 788 100,416
Ceded.......................................... (48,939) (48,890) (3,974) (52,864)
---------- ---------- ------- ----------
Net......................................... $1,716,243 $1,807,475 $47,624 $1,855,099
========== ========== ======= ==========
1994
Direct......................................... $1,657,930 $1,686,388 $54,469 $1,740,857
Assumed........................................ 55,557 61,031 2,060 63,091
Ceded.......................................... (58,028) (53,977) (4,000) (57,977)
---------- ---------- ------- ----------
Net......................................... $1,655,459 $1,693,442 $52,529 $1,745,971
========== ========== ======= ==========
1995
Direct......................................... $1,674,470 $1,689,668 $57,872 $1,747,540
Assumed........................................ 43,481 46,562 2,870 49,432
Ceded.......................................... (46,391) (46,635) (3,951) (50,586)
---------- ---------- ------- ----------
Net......................................... $1,671,560 $1,689,595 $56,791 $1,746,386
========== ========== ======= ==========
</TABLE>

Benefits and settlement expenses were reduced by $28,987, $24,399 and
$22,904 in 1993, 1994 and 1995, respectively, as a result of ceded reinsurance
arrangements. ASI remains contingently liable with respect to losses reinsured
in the event any reinsurer is unable to meet obligations assumed.

13. TRANSACTIONS WITH AFFILIATES

At December 31, 1994 and 1995, the Company has $90,260 and $37,910,
respectively, invested in LNC's short-term investment pool. Also, the Company
had $34,492 and $40,072, at cost, invested in mutual funds administered by a
subsidiary of LNC with a fair value of $32,332 and $41,198 at December 31, 1994
and 1995, respectively.

F-18
<PAGE> 126

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
Included in other liabilities, at December 31, 1994, was $45,000 of accrued
dividends payable to LNC.

On March 29, 1995, the Company purchased 4,986,507 shares, or 29.22% of
EMPHESYS Financial Group, Inc. from LNC for $193,227. This investment was
accounted for using the equity method and resulted in equity earnings of $6,449
being included in net investment income through September 30, 1995. On August
22, 1995, a tender offer was extended by Humana, Inc. and on October 7, 1995,
the Company tendered its investment in EMPHESYS stock resulting in an after tax
loss of $9,004.

In addition to the above, the Company has various other transactions with
LNC and its affiliates in the normal course of operations. These transactions
include systems, strategic planning and management advice, financial services,
investment services, legal services, accounting services, and assistance with
employee benefits, information services, data processing, actuarial, marketing
and human resources. In 1993, 1994 and 1995, the Company paid LNC fees totaling
$7,104, $7,659, and $7,603.

The Company provides supervision and administrative services to two
wholly-owned property and casualty insurance subsidiaries of LNC. In 1993, 1994
and 1995, LNC paid the Company fees totaling $581, $625 and $924, respectively.

LNC paid the Company $8,731, $5,298 and $6,277 during 1993, 1994 and 1995
for administrative services and insurance coverages provided by the Company to
LNC. The Company paid LNC $5,756, $2,601 and $6,935 during 1993, 1994 and 1995
for services rendered by LNC to purchase corporate insurance coverages. The
Company's life insurance subsidiary paid LNC $3,194, $3,528 and $3,042 during
1993, 1994 and 1995 for reinsurance coverages.

F-19
<PAGE> 127

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. SEGMENT INFORMATION

The Company operates within the property/casualty and the life insurance
industry through a network of independent agents. The property/casualty
insurance industry is further broken down into commercial, personal and
reinsurance business in runoff. Revenues, pretax operating income and
identifiable assets for the property/casualty and life segments are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Property/casualty operations
Net premiums earned:
Personal.......................................... $ 709,134 $ 684,903 $ 684,091
Commercial........................................ 1,070,653 1,003,209 1,005,364
Reinsurance business in runoff.................... 27,688 5,330 140
Net investment income............................... 239,484 230,945 233,759
Net realized gain on investments.................... 142,709 19,228 38,778
Loss on operating properties........................ -- -- (28,350)
---------- ---------- ----------
Total Property/casualty operations..................... 2,189,668 1,943,615 1,933,782
---------- ---------- ----------
Life operations
Net premiums earned................................. 47,624 52,529 56,791
Net investment income............................... 27,312 29,509 32,810
Net realized gain on investments.................... 7,238 708 2,266
---------- ---------- ----------
Total life operations.................................. 82,174 82,746 91,867
---------- ---------- ----------
Total revenues........................................... $2,271,842 $2,026,361 $2,025,649
========== ========== ==========
Pretax income
Property/casualty operations
Underwriting gain (loss):
Personal.......................................... $ (21,999) $ (49,800) $ (32,789)
Commercial........................................ (56,085) 4,533 45,762
Reinsurance business in runoff.................... (35,691) (23,777) (69,826)
Net investment income............................... 239,484 230,945 233,759
Net realized gain on investments.................... 142,709 19,228 38,778
Loss on operating properties........................ -- -- (28,350)
---------- ---------- ----------
Total Property/casualty operations....................... 268,418 181,129 187,334
Life operations.......................................... 24,372 19,138 21,778
---------- ---------- ----------
Total pretax income...................................... $ 292,790 $ 200,267 $ 209,112
========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Identifiable assets
Property/casualty operations....................................... $4,910,111 $4,981,343
Life operations.................................................... 511,982 560,325
Eliminations....................................................... (2,802) (2,483)
---------- ----------
Total identifiable assets............................................ $5,419,291 $5,539,185
========== ==========
</TABLE>

The operating expenses of the Company have all been considered to be
allocable to the segments since the Company's activities were all directly
related to those segments through December 31, 1995. Capital expenditures and
depreciation expense are not material.

F-20
<PAGE> 128

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. REALIGNMENT OF FIELD OPERATIONS

In November of 1995, the Company approved a realignment plan which includes
consolidating the field operations from 20 divisional offices into four regional
offices. Certain of the locations will be converted to service offices. Those
operating properties owned by the Company that will not be used as a regional
office will be sold. For each location to be downsized, job classifications,
positions to be eliminated and individuals impacted were identified and
severance benefits were communicated. This process has been started and the
majority of the Realignment is expected to occur in 1996 with the remainder
scheduled to be completed in 1997. Management has estimated that the costs of
realignment and valuation allowance for the sale of the operating properties
based on independent appraisals with net carrying value representing the lower
of cost or market, net of taxes, will approximate $13,700 and $18,400,
respectively, which were charged to income in 1995. Accordingly, income before
cumulative effect of change in accounting and net income decreased by $32,100.

16. SUBSEQUENT EVENTS

On February 14, 1996, three of the Company's property and casualty
insurance subsidiaries were among 23 underwriters of real property insurance
named defendants in a case alleging that their underwriting, sales and marketing
practices violate a number of civil rights laws (including, without limitation,
the Fair Housing Act) and constitute a civil conspiracy. Brought in the United
States District Court for the Western District of Missouri, the plaintiffs seeks
to represent themselves and a putative class of similarly situated persons in
the State of Missouri. The relief sought includes unspecified compensatory
damages, punitive damages and attorneys' fees. While it is too early to evaluate
the plaintiffs' specific allegations, management believes, based upon current
information, that the Company's underwriting, sales and marketing practices have
complied in all material respects with the applicable requirements of both state
and federal law. The Company intends to vigorously defend this action.

F-21
<PAGE> 129

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED INTERIM BALANCE SHEETS

(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
DECEMBER 31, PRO FORMA
1995 HISTORICAL (NOTE 1)
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Investments:
Securities available-for-sale at fair value:
Fixed maturity (amortized cost: 1995 -- $3,590,601; 1996
historical -- $3,687,626).............................................. $3,860,883 $3,863,758 $3,563,758
Equity (cost: 1995 -- $374,232; 1996 -- $328,860)........................ 437,685 387,266 387,266
Mortgage loans............................................................. 33,319 34,111 34,111
Short-term investments..................................................... 63,170 71,050 71,050
Other invested assets...................................................... 35,178 36,672 36,672
---------- ---------- ----------
4,430,235 4,392,857 4,092,857
Cash......................................................................... 12,708 8,704 8,704
Premium receivable, less allowance for doubtful accounts (1995 -- $2,860;
1996 -- $3,010)............................................................ 377,802 388,719 388,719
Deferred policy acquisition costs............................................ 199,192 204,092 204,092
Properties to be sold, less valuation allowances (1995 and 1996 --
$28,350)................................................................... 41,403 40,960 40,960
Property and equipment -- at cost, less allowances for depreciation (1995 --
$79,011; 1996 -- $70,259).................................................. 29,823 30,111 30,111
Other assets:
Accrued investment income.................................................. 66,173 58,592 58,592
Deferred federal income taxes recoverable.................................. 100,647 141,938 141,938
Cost in excess of net assets of acquired subsidiaries, less amortization
(1995 -- $42,618; 1996 -- $43,473)....................................... 101,190 100,335 100,335
Ceded reinsurance on claims and claims expense reserves.................... 136,939 177,189 177,189
Miscellaneous.............................................................. 43,073 61,844 61,844
---------- ---------- ----------
448,022 539,898 539,898
---------- ---------- ----------
$5,539,185 $5,605,341 $5,305,341
========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Policy liabilities and accruals:
Losses, loss adjustment expense and future policy benefits................. $2,828,337 $2,928,219 $2,928,219
Unearned premiums.......................................................... 718,478 718,120 718,120
---------- ---------- ----------
3,546,815 3,646,339 3,646,339
General liabilities:
Commissions and other expenses............................................. 134,031 112,056 112,056
Current federal income taxes payable....................................... 7,095 18,379 18,379
Outstanding checks......................................................... 67,308 80,540 80,540
Other liabilities.......................................................... 115,229 141,155 141,155
Debt....................................................................... -- -- 300,000
---------- ---------- ----------
323,663 351,308 651,308
---------- ---------- ----------
3,870,478 3,997,647 4,297,647
Shareholder's equity:
Preferred stock: 5,000,000 shares authorized, no shares issued and
outstanding.............................................................. -- -- --
Common stock, no par value: 195,000,000 shares authorized, 50,000,000
issued and outstanding................................................... 5,000 5,000 5,000
Paid-in capital............................................................ 382,547 382,547 82,547
Net unrealized gain on securities available-for-sale....................... 211,767 149,841 149,841
Retained earnings.......................................................... 1,069,393 1,070,306 770,306
---------- ---------- ----------
1,668,707 1,607,694 1,007,694
---------- ---------- ----------
$5,539,185 $5,605,341 $5,305,341
========== ========== ==========
</TABLE>

See accompanying notes.

F-22
<PAGE> 130

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED INTERIM STATEMENTS OF INCOME

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1995 1996
-------- --------
(DOLLARS IN
THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Revenue:
Premiums.............................................................. $438,722 $423,994
Net investment income................................................. 66,461 68,333
Realized gain on investments.......................................... 27,215 21,096
-------- --------
Total revenue........................................................... 532,398 513,423
Benefits and expenses:
Benefits and settlement expenses...................................... 305,404 323,563
Commissions........................................................... 72,124 71,872
Operating and administrative expenses................................. 59,050 51,173
Taxes, licenses and fees.............................................. 12,038 11,918
Interest on debt...................................................... -- --
-------- --------
Total benefits and expenses............................................. 448,616 458,526
-------- --------
Income before federal income taxes...................................... 83,782 54,897
Federal income taxes (credit):
Current............................................................... 20,630 15,931
Deferred.............................................................. (2,335) (7,947)
-------- --------
Total federal income taxes.............................................. 18,295 7,984
-------- --------
Net income.............................................................. $ 65,487 $ 46,913
======== ========
Pro forma income per share (Note 1)..................................... $ .67
========
</TABLE>

See accompanying notes.

F-23
<PAGE> 131

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
1995 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................ $ 65,487 $ 46,913
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Deferred policy acquisition costs................................... (2,657) (973)
Premiums and fees in course of collection........................... (11,242) (10,917)
Accrued investment income........................................... 14,959 7,581
Policy liabilities and accruals..................................... (7,488) 90,659
Federal income taxes................................................ 18,169 2,115
Provisions for depreciation......................................... 2,637 1,917
Gain on sale of investments......................................... (27,215) (21,095)
Ceded reinsurance on claims and claims expense reserves............. 1,173 (53,329)
Other............................................................... (28,071) 2,975
--------- ---------
Net adjustments....................................................... (39,735) 18,933
--------- ---------
Net cash provided by operating activities............................. 25,752 65,846

CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
Purchases........................................................... (261,771) (372,983)
Sales............................................................... 433,040 339,239
Maturities.......................................................... 25,325 7,156
Investment in unconsolidated subsidiaries............................. (194,961) (230)
Purchase of mortgage loans and other investments...................... (1,297) (3,484)
Sale or maturity of mortgage loans and other investments.............. 21,809 1,427
Net (increase) decrease in short-term investments..................... 32,575 (7,880)
Purchase of property and equipment.................................... (1,679) (1,760)
Other................................................................. 3,588 5,350
--------- ---------
Net cash provided by (used in) investing activities................... 56,629 (33,165)

CASH FLOWS FROM FINANCING ACTIVITIES
Universal life investment contract deposits........................... 11,439 12,222
Universal life investment contract withdrawals........................ (2,113) (2,907)
Dividends paid to parent.............................................. (91,000) (46,000)
--------- ---------
Net cash used in financing activities................................. (81,674) (36,685)
--------- ---------
Net increase (decrease) in cash....................................... 707 (4,004)
Cash at December 31................................................... 11,134 12,708
--------- ---------
Cash at March 31...................................................... $ 11,841 $ 8,704
========= =========
</TABLE>

See accompanying notes.

F-24
<PAGE> 132

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

MARCH 31, 1996

1. BASIS OF PRESENTATION

PRINCIPLES OF CONSOLIDATION

On February 5, 1996, the American States Financial Corporation ("ASFC") was
incorporated to serve as a holding company. The interim consolidated financial
statements include the accounts of American States Insurance Company ("ASI") and
its wholly-owned subsidiaries and have been presented as if the holding company
formation occurred at the earliest date presented herein. ASFC, a wholly owned
subsidiary of Lincoln National Corporation ("LNC"), is an Indiana domiciled
insurance holding company doing business through ASI, its wholly-owned
subsidiary, and the six insurance subsidiaries of ASI (collectively referred to
as "the Company"). ASI has licenses to write business in all 50 states and the
District of Columbia. ASI and its subsidiaries write standard commercial and
personal lines, and life insurance business throughout the United States with
the greatest volume in the Midwest and Pacific Northwest. All significant
intercompany accounts and transactions are eliminated in consolidation.

During 1994, American Union Reinsurance Company and Amstats Insurance
Company were sold. These transactions had no significant effect on the results
of operation for that year.

The interim financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP") and, in the opinion of
management, reflect all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of results for such periods. The results of
operations and cash flows for any interim period are not necessarily indicative
of results for the full year. These financial statements do not include all
disclosures required by GAAP and should be read in conjunction with the
financial statements as of December 31, 1994 and 1995, and for each of the three
years in the period ended December 31, 1995, and related notes thereto,
presented elsewhere, herein.

HOLDING COMPANY FORMATION

PRO FORMA ADJUSTMENTS

The pro forma consolidated balance sheet at March 31, 1996 reflects the
investments decreasing by $300,000 representing the Dividended Assets, the debt
increasing by $300,000, representing the debt assumed and issued as part of the
Recapitalization and shareholder's equity decreasing by $600,000 because of the
foregoing dividend and debt transactions.

The pro forma income per share for the three months ended March 31, 1996 is
based on 50,000,000 shares outstanding plus the 10,000,000 shares being offered
and is based on historical income after reflecting the pro forma impact of
investment income decreasing by $3,570 representing the interest yield on
$300,000 of tax-exempt municipal securities, interest expense resulting from the
assumed and issued debt of $5,031 and federal income tax benefit of $1,948. Such
adjustments do not reflect any investment earnings resulting from the proceeds
of the offerings of common stock.

F-25
<PAGE> 133

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)

(UNAUDITED)

2. FEDERAL INCOME TAXES

During 1995, a consolidated federal income tax return is filed by LNC and
includes the Company and its subsidiaries. Pursuant to an agreement with LNC,
the Company and its subsidiaries provide for income taxes on the basis of a
separate return calculation; however, certain deductions, credits, losses, and
other items that may be limited or not allowed on a separate return basis are
allowed. The taxes computed are remitted to or collected from LNC.

Effective January 1, 1996, the current tax sharing agreement will be
terminated and new tax sharing agreements will result in the Company providing
income taxes on a stand-alone basis. This change would have had no impact on the
provision for federal income taxes for 1995 and 1996 had it been implemented
January 1, 1995.

The effective tax rate on pre-tax income is lower than the prevailing
corporate rate primarily due to tax exempt interest on municipal securities.

F-26
<PAGE> 134

- ------------------------------------------------------
- ------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.................. 2
Prospectus Summary..................... 3
Risk Factors........................... 8
The Company............................ 15
Use of Proceeds........................ 17
Dividend Policy........................ 17
Dilution............................... 18
Capitalization......................... 19
Selected Historical Financial and
Operating Data....................... 20
Pro Forma Financial and Operating
Data................................. 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 24
Business............................... 40
Management............................. 69
Certain Relationships and Related
Transactions......................... 81
Securities Ownership................... 87
Description of Capital Stock........... 89
Shares Eligible for Future Sale........ 91
Certain U.S. Federal Tax Consequences
to Non-U.S. Holders.................. 92
Underwriting........................... 95
Legal Matters.......................... 97
Experts................................ 97
Glossary of Selected Insurance and
Certain Defined Terms................ 98
Index to Consolidated Financial
Statements........................... F-1
</TABLE>

UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
10,000,000 SHARES

AMERICAN STATES
FINANCIAL CORPORATION

COMMON STOCK

---------------------------

PROSPECTUS

---------------------------

MERRILL LYNCH & CO.

GOLDMAN, SACHS & CO.

, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 135

[ALTERNATE COVER PAGE FOR INTERNATIONAL OFFERING]

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED MAY 14, 1996

PROSPECTUS

10,000,000 SHARES

AMERICAN STATES
FINANCIAL CORPORATION
COMMON STOCK
------------------------

All 10,000,000 shares of Common Stock, no par value (the "Common Stock"),
are being offered hereby by American States Financial Corporation (the
"Company"). Of the shares of Common Stock offered hereby, 2,000,000 shares are
being offered outside the United States and Canada by the International
Underwriters and 8,000,000 shares are being offered in a concurrent offering in
the United States and Canada by the International Underwriters (collectively,
the "Offerings"). The price to the public and the underwriting discount per
share will be identical for both Offerings. See "Underwriting."

The Common Stock has been approved for listing on the New York Stock
Exchange (the "NYSE"), subject to official notice of issuance, under the symbol
"ASX."

SEE "RISK FACTORS" AT PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON
STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>

(1) The Company and Lincoln have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."

(2) Before deduction of expenses payable by the Company estimated at
$ .

MERRILL LYNCH INTERNATIONAL GOLDMAN SACHS INTERNATIONAL
------------------------

The date of this Prospectus is , 1996.
<PAGE> 136

[ALTERNATE PAGE FOR INTERNATIONAL OFFERING]

UNDERWRITING

Subject to the terms and conditions set forth in the International Purchase
Agreement (the "International Purchase Agreement") among the Company, Lincoln
and each of the International Underwriters named below (the "International
Underwriters"), the Company and Lincoln have agreed to sell to each of the
International Underwriters, and each of the International Underwriters, for whom
Merrill Lynch International and Goldman Sachs International are acting as
representatives (the "International Representatives"), has severally agreed to
purchase, the number of shares of Common Stock set forth below opposite its
name. The International Underwriters are committed to purchase all of such
shares if any are purchased. Under certain circumstances, the commitments of
non-defaulting International Underwriters may be increased as set forth in the
International Purchase Agreement.

<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL UNDERWRITERS SHARES
------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch International........................................
Goldman Sachs International........................................

---------
Total................................................ 2,000,000
=========
</TABLE>

The Company and Lincoln have also entered into a purchase agreement (the
"U.S. Purchase Agreement") with certain underwriters in the United States (the
"U.S. Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Goldman, Sachs & Co. are acting as representatives (the "U.S.
Representatives"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of 2,000,000 shares of Common
Stock to the International Underwriters, the Company and Lincoln have agreed to
sell to the U.S. Underwriters, and the U.S. Underwriters have severally agreed
to purchase, an aggregate of 8,000,000 shares of Common Stock. Under certain
circumstances as set forth in the U.S. Purchase Agreement, the commitments of
non-defaulting U.S. Underwriters may be increased. The initial public offering
price per share and the underwriting discount per share are identical under the
U.S. Purchase Agreement and the International Purchase Agreement.

The International Representatives have advised the Company that the
International Underwriters propose to offer the shares of Common Stock to the
public initially at the public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a concession not in
excess of $ per share. The International Underwriters may allow, and such
dealers may re-allow, a discount not in excess of

A-2
<PAGE> 137

[ALTERNATE PAGE FOR INTERNATIONAL OFFERING]

$ per share on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.

The Company has granted the Underwriters an option, exercisable by the U.S.
Underwriters, to purchase up to 1,500,000 additional shares of Common Stock on a
pro rata basis from the Company at the initial public offering price, less the
underwriting discount. Such option, which expires 30 days after the date of this
Prospectus, may be exercised solely to cover over-allotments. To the extent that
the U.S. Underwriters exercise such option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage of the option shares that the number of shares to be purchased
initially by the Underwriters bears to the total number of shares to be
purchased initially by the Underwriters.

Certain of the Underwriters perform brokerage and investment banking
services for Lincoln and its affiliates from time to time, for which they
receive customary compensation.

The Company, its directors and executive officers and Lincoln have agreed
that they will not, without the prior written consent of the International
Representatives, sell, offer to sell, grant any option for the sale of, or
otherwise dispose of or enter into any agreement to sell any shares of Common
Stock or similar securities or securities convertible into or exchangeable or
exercisable for shares of Common Stock or file with the Commission a
registration statement under the Securities Act to register any Common Stock or
any securities convertible into or exercisable for Common Stock, other than the
sale to the Underwriters of the shares of Common Stock offered hereby, for a
period of 120 days after the date of this Prospectus, except that the Company
may, without such consent, grant options pursuant to the Option Plan. See
"Shares Eligible for Future Sale."

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

Each International Underwriter has represented and agreed that (i) it has
not offered or sold and, prior to the expiring of six months from the closing of
the Offerings, will not offer or sell, directly or indirectly, any shares of
Common Stock offered hereby to persons in the United Kingdom, except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995, (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Common Stock in, from or
otherwise involving the United Kingdom, and (iii) it has only issued or passed
on and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the issuance of Common Stock if that
person is of a kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom
such document may otherwise lawfully be issued or passed on.

Purchase of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase, in addition to the offering price set forth on the
cover page hereof.

Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price will be determined through negotiations
among the Company, Lincoln and the International Representatives. Among the
factors to be considered in such negotiations will be an assessment of the
financial information contained herein, an evaluation of the Company's
management, the future prospects of the Company and the property and casualty
insurance industry in general, market prices of securities of companies engaged
in activities similar to those of the Company and the prevailing conditions in
the securities market. There can be no assurance that an active trading market
will develop for the Common Stock or that the

A-3
<PAGE> 138

[ALTERNATE PAGE FOR INTERNATIONAL OFFERING]

Common Stock will trade in the public market subsequent to the Offerings at or
above the initial public offering price.

The Common Stock has been approved for issuance on the NYSE, subject to
official notice of issuance, under the symbol "ASX." The Underwriters intend to
sell the shares of Common Stock so as to meet the distribution requirements of
NYSE listing.

The Company has been informed that, under the terms of the Intersyndicate
Agreement, the International Underwriters and any dealer to whom they sell
shares of Common Stock will not offer to sell or sell shares of Common Stock to
persons who are United States or Canadian persons or persons they believe intend
to resell to persons who are United States or Canadian persons, and the U.S.
Underwriters and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to non-United States persons or
non-Canadian persons or to persons they believe intend to resell to non-United
States persons or non-Canadian persons, except in each case for transactions
pursuant to the Intersyndicate Agreement which, among other things, permits the
Underwriters to purchase from each other and offer for resale such number of
shares of Common Stock as the selling Underwriter or Underwriters and the
purchasing Underwriter or Underwriters may agree.

At the request of the Company, the U.S. Underwriters are reserving up to
500,000 shares at the public offering price as set forth on the cover page of
the Prospectus for sales to qualified officers, directors, employees and agents
of the Company and its Subsidiaries and affiliates and certain other individuals
having a business relationship with these entities. The number of shares of
Common Stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares which are
not so purchased will be offered by the U.S. Underwriters to the general public
on the same basis as the other shares offered hereby.

LEGAL MATTERS

EXPERTS

A-4
<PAGE> 139

[ALTERNATE PAGE FOR INTERNATIONAL OFFERING]

- ------------------------------------------------------
- ------------------------------------------------------

TABLE OF CONTENTS

AMERICAN STATES
FINANCIAL CORPORATION

COMMON STOCK

---------------------------

PROSPECTUS

---------------------------

MERRILL LYNCH INTERNATIONAL

GOLDMAN SACHS INTERNATIONAL

, 1996
- ------------------------------------------------------
- ------------------------------------------------------

A-5
<PAGE> 140

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1).

<TABLE>
<S> <C>
Blue Sky Legal Services and Registration Fees...................... $
NYSE Filing Fee....................................................
NASD Fee...........................................................
Securities and Exchange Commission Registration Fee................
Legal Services and Distributions -- Issuer's Counsel...............
Auditing and Accounting Services...................................
Transfer Agent Fee.................................................
Printing and engraving costs.......................................
Postage............................................................
Other Expenses.....................................................
--------
TOTAL(2)...................................................... $
========
</TABLE>

- -------------------------
(1) Costs represented by salaries and wages of regular employees and officers of
the Registrant are excluded.

(2) All of the above items, except the SEC Registration and NYSE Filing Fees,
are estimated.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Chapter 37 of the Indiana Business Corporation Law, as amended (the
"ICBL"), grants to each corporation broad powers to indemnify directors,
officers, employees or agents against expenses incurred in certain proceedings
if the conduct in question was found to be in good faith and was reasonably
believed to be in the corporation's best interests. The indemnification rights
provided by the Registrant's articles of incorporation and by-laws provide the
maximum indemnification protection available under law to the directors and
officers of the Registrant. Directors, officers employees or agents of the
Registrant who also are directors, officers, employees or agents of Lincoln
National Corporation ("Lincoln") receive similar indemnification protection
under Lincoln's articles of incorporation and by-laws. In addition, Lincoln
carries directors and officers insurance policies.

Pursuant to the provisions of the U.S. Purchase Agreement and the
International Purchase Agreement among the Registrant, Lincoln and the
Underwriters, the Underwriters severally agree to indemnify the Registrant, its
directors, its officers who signed the Registration Statement and its
controlling persons against any and all loss, liability, claim, damage or
expense, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Registration Statement
and prospectus (or any amendment thereto), including filings made under Rule
430A and Rule 434 of the Securities Act of 1933, if applicable, or any
preliminary prospectus (or any amendment and supplement thereto) (collectively,
the "Documents") in reliance upon and in conformity with written information
furnished to the Registrant by such Underwriter through Merrill Lynch and Co.
expressly for use in the Documents.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

The Registrant was incorporated on February 5, 1996 to serve as the holding
company for American States Insurance Company ("ASI"). ASI was formed on July
15, 1929. ASI is a wholly-owned, direct subsidiary of Lincoln and will remain so
until consummation of the Recapitalization (as defined in the Prospectus), at
which time it will become a direct, wholly-owned subsidiary of the Registrant.
Pursuant to the Recapitalization, among other things, Lincoln will transfer all
of the outstanding shares of ASI to the Registrant in exchange for 50,000,000
shares of the Registrant's common stock. See the section entitled "The Company"
in the Prospectus for a more detailed discussion of the Recapitalization. The
transfer of the Registrant's common stock to Lincoln will be exempt under
Section 4(2) of the Securities Act and no underwriting commissions are to be
paid in connection therewith.

S-1
<PAGE> 141

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The exhibits furnished with this Registration Statement are listed
beginning on page E-1.

(b) The following financial statement schedules of the Registrant are
included in the Registration Statement beginning on page S-5:

<TABLE>
<S> <C>
Schedule I -- Summary of Investments Other Than Investments in Related
Parties
Schedule III -- Supplementary Insurance Information
Schedule IV -- Reinsurance
Schedule V -- Valuation and Qualifying Accounts
</TABLE>

ITEM 17. UNDERTAKINGS.

(1) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.

(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of an action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

(3) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

S-2
<PAGE> 142

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Indianapolis, State of Indiana, on May 13, 1996.

AMERICAN STATES FINANCIAL CORPORATION

By /s/ F. Cedric McCurley*

------------------------------------
F. Cedric McCurley,
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------------------------------------- ---------------------------------- -------------------
<S> <C> <C>
(1) Principal Executive Officer:
/s/ F. Cedric McCurley* Chairman of the Board and
- ---------------------------------------- Chief Executive Officer
F. Cedric McCurley
(2) Principal Financial and Accounting
Officer:
/s/ Todd R. Stephenson* Senior Vice President, Treasurer
- ---------------------------------------- and Chief Financial Officer
Todd R. Stephenson
(3) The Board of Directors:
/s/ F. Cedric McCurley* Director
- ----------------------------------------
F. Cedric McCurley
/s/ William J. Lawson* Director
- ----------------------------------------
William J. Lawson
/s/ Robert A. Anker* Director
- ----------------------------------------
Robert A. Anker
/s/ Edwin J. Goss* Director
- ----------------------------------------
Edwin J. Goss
/s/ Stephen J. Paris* Director
- ----------------------------------------
Stephen J. Paris
/s/ Paula M. Parker-Sawyers* Director
- ----------------------------------------
Paula M. Parker-Sawyers
/s/ William E. Pike* Director
- ----------------------------------------
William R. Pike
/s/ Gabriel L. Shaheen* Director
- ----------------------------------------
Gabriel L. Shaheen
/s/ Milton O. Thompson* Director
- ----------------------------------------
Milton O. Thompson
*By: /s/ Thomas M. Ober
-----------------------------------
Thomas M. Ober, Attorney-in-Fact
</TABLE>

May 13, 1996

<PAGE> 143

The following consolidated financial statement schedules of American States
Financial Corporation and subsidiaries are included in Item 16:

<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
- ------------- ----------------------------------------------------------------
<S> <C>
Schedule I Summary of Investments Other Than Investments in Related Parties
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule V Valuation and Qualifying Accounts
</TABLE>

All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.

S-4
<PAGE> 144

Board of Directors
American States Financial Corporation and Subsidiaries

We have audited the consolidated financial statements of American States
Financial Corporation and subsidiaries as of December 31, 1994 and 1995, and for
each of the three years in the period ended December 31, 1995, and have issued
our report thereon dated January 31, 1996, except for Note 1, as to which the
date is May , 1996 and except for Note 16, as to which the date is February
14, 1996 (included elsewhere in this Registration Statement). Our audits also
included the financial statement schedules listed in Item 16 of this
Registration Statement. These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

Indianapolis, Indiana
, 1996

- --------------------------------------------------------------------------------

The foregoing report is in the form that will be signed upon the completion
of the recapitalization as described in Note 1 to the consolidated financial
statements.

ERNST & YOUNG LLP

/s/ ERNST & YOUNG LLP

Indianapolis, Indiana

May 13, 1996

S-5
<PAGE> 145

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

SCHEDULE I -- SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
(000'S OMITTED)

COLUMN A COLUMN B COLUMN C COLUMN D
- --------------------------------------------------------- ---------- ---------- -----------
AMOUNT AT
WHICH SHOWN
IN BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
------------------ ---------- ---------- -----------

<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Bonds:
United States Government and government agencies and
authorities....................................... $ 301,547 $ 328,558 $ 328,558
States, municipalities, and political
subdivisions...................................... 2,222,697 2,374,214 2,374,214
Mortgage-backed securities.......................... 312,705 323,712 323,712
Foreign governments................................. 6,569 7,410 7,410
Public utilities.................................... 116,890 126,954 126,954
All other corporate bonds........................... 556,524 622,757 622,757
Redeemable preferred stocks............................ 73,669 77,278 77,278
---------- ---------- ----------
Total.................................................. 3,590,601 $3,860,883 3,860,883
==========
Equity securities, available-for-sale:
Common stocks:
Public utilities.................................... 9,401 $ 11,181 11,181
Banks, trusts, and insurance companies.............. 22,214 26,080 26,080
Industrial, miscellaneous, and all other............ 170,703 206,850 206,850
Perpetual preferred stocks............................. 171,914 193,574 193,574
---------- ---------- ----------
Total.................................................. 374,232 $ 437,685 437,685
==========
Mortgage loans on real estate............................ 33,319 33,319
Short-term investments................................... 63,170 63,170
Other investments........................................ 35,178 35,178
---------- ----------
Total investments........................................ $4,096,500 $4,430,235
========== ==========
</TABLE>

S-6

<PAGE> 146

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
(000'S OMITTED)

COL. A COL. B COL. C COL. D COL. E
- -------------------------------------------- ----------- ---------------- -------- ----------------
SEGMENT DEFERRED FUTURE POLICY
------- POLICY BENEFITS, LOSSES OTHER POLICY
ACQUISITION CLAIMS, AND LOSS UNEARNED CLAIMS AND
COSTS EXPENSES PREMIUMS BENEFITS PAYABLE
----------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
December 31, 1993:
Property/casualty insurance............... $ 147,406 $2,589,493 $748,674 $--
Life insurance and annuities.............. 54,012 339,386 -- --
--
-------- ---------- --------
Total................................ $ 201,418 $2,928,879 $748,674 $--
======== ========== ======== ==
December 31, 1994
Property/casualty insurance............... $ 140,122 $2,496,703 $725,448 $--
Life insurance and annuities.............. 70,667 381,532 -- --
--
-------- ---------- --------
Total................................ $ 210,789 $2,878,235 $725,448 $--
======== ========== ======== ==
December 31, 1995:
Property/casualty insurance............... $ 138,272 $2,414,575 $718,478 $--
Life insurance and annuities.............. 60,920 413,762 -- --
--
-------- ---------- --------
Total................................ $ 199,192 $2,828,337 $718,478 $--
======== ========== ======== ==
</TABLE>

COL. F COL. G COL. H COL. I COL. J COL. K
---------- ---------- ---------------- ----------------- --------- ----------
BENEFIT, CLAIMS OTHER
NET LOSSES, AND AMORTIZATION OF OPERATING PREMIUMS
PREMIUM INVESTMENT SETTLEMENT DEFERRED POLICY EXPENSES WRITTEN
REVENUE INCOME(A) EXPENSES (C) ACQUISITION COSTS (A,C) (B)
---------- ---------- ---------------- ----------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993:
Property/casualty
insurance............. $1,807,475 $ 239,484 $1,347,337 $ 385,177 $ 188,737 $1,716,243
Life insurance and
annuities............. 47,624 27,312 39,008 6,337 12,456
---------- -------- ---------- -------- --------
Total............... $1,855,099 $ 266,796 $1,386,345 $ 391,514 $ 201,193
========== ======== ========== ======== ========
December 31, 1994
Property/casualty
insurance............. $1,693,442 $ 230,945 $1,226,240 $ 355,528 $ 180,717 $1,655,459
Life insurance and
annuities............. 52,529 29,509 45,717 4,219 13,673
---------- -------- ---------- -------- --------
Total............... $1,745,971 $ 260,454 $1,271,957 $ 359,747 $ 194,390
========== ======== ========== ======== ========
December 31, 1995:
Property/casualty
insurance............. $1,689,595 $ 233,759 $1,193,710 $ 352,503 $ 200,236 $1,671,560
Life insurance and
annuities............. 56,791 32,810 48,560 7,337 14,191
---------- -------- ---------- -------- --------
Total............... $1,746,386 $ 266,569 $1,242,270 $ 359,840 $ 214,427
========== ======== ========== ======== ========
</TABLE>

- -------------------------
(A) Allocations of Net Investment Income and Other Operating Expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.

(B) Does not apply to life insurance. This amount includes premiums from
reinsurance assumed and is net of premiums on reinsurance ceded.

(C) In 1995, the cost related to implementing the realignment plan to
consolidate field operations from twenty divisional offices into four
regional offices was allocated to loss adjustment expenses and other
operating expenses in the amounts of $3,608 and $17,500, respectively.

S-7
<PAGE> 147

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

SCHEDULE IV -- REINSURANCE
(000'S OMITTED)

COL. A COL. B COL. C COL. D COL. E COL. F
- ------------------------------------- ----------- ---------- ---------- ----------- -------
% OF
CEDED TO ASSUMED AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------- ---------- ---------- ----------- -------

<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Life insurance in force (A)........ $13,582,940 $1,335,708 $ -- $12,247,232 0.0%
=========== ========== ======== ===========
Insurance premiums and other
considerations:
Property/casualty insurance..... $ 1,756,737 $ 48,890 $ 99,628 $ 1,807,475 5.5%
Life insurance and annuities.... 50,810 3,974 788 47,624 1.7
----------- ---------- -------- -----------
Total...................... $ 1,807,547 $ 52,864 $100,416 $ 1,855,099 5.4
=========== ========== ======== ===========
Year ended December 31, 1994:
Life insurance in force (A)........ $14,742,987 $1,289,364 $ -- $13,453,623 0.0%
=========== ========== ======== ===========
Insurance premiums and other
considerations:
Property/casualty insurance..... $ 1,686,388 $ 53,977 $ 61,031 $ 1,693,442 3.6%
Life insurance and annuities.... 54,469 4,000 2,060 52,529 3.9
----------- ---------- -------- -----------
Total...................... $ 1,740,857 $ 57,977 $ 63,091 $ 1,745,971 3.6
=========== ========== ======== ===========
Year ended December 31, 1995:
Life insurance in force (A)........ $15,405,804 $1,820,391 $ -- $13,585,413 0.0%
=========== ========== ======== ===========
Insurance premiums and other
considerations:
Property/casualty insurance..... $ 1,689,668 $ 46,635 $ 46,562 $ 1,689,595 2.8%
Life insurance and annuities.... 57,872 3,951 2,870 56,791 5.1
----------- ---------- -------- -----------
Total...................... $ 1,747,540 $ 50,586 $ 49,432 $ 1,746,386 2.8
=========== ========== ======== ===========
</TABLE>

- -------------------------

(A) At end of year.

S-8
<PAGE> 148

AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
(000'S OMITTED)

COL. A COL. B COL. C COL. D COL. E
- ----------------------------- ---------- ------------------------------------ ------------ ----------
ADDITIONS
------------------------------------
(2)
CHARGED TO
BALANCE AT (1) OTHER ACCOUNTS DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO -- -- END OF
DESCRIPTION OF PERIOD COSTS & EXPENSES DESCRIBE(A) DESCRIBE(B) PERIOD
----------- ---------- ---------------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Deducted from asset accounts:
Allowance for losses on
mortgage loans.......... $ 705 $ 5,941 $ (678) $ -- $ 5,968
Allowance for doubtful
accounts................ 3,604 3,685 -- 4,385(B) 2,904
Year ended December 31, 1994
Deducted from asset accounts:
Allowance for losses on
mortgage loans.......... $5,968 $ 76 $ -- $1,609(C) $ 4,435
Allowance for doubtful
accounts................ 2,904 2,793 -- 3,087(B) 2,610
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for losses on
mortgage loans.......... $4,435 $ 155 $ (260) $4,330(C) $ --
Allowance for doubtful
accounts................ 2,610 1,066 -- 816(B) 2,860
Allowance for losses on
operating properties.... -- 28,350 -- -- 28,350
</TABLE>

- -------------------------
(A) Transfer between investment classifications.

(B) Uncollectible accounts written off, net of recoveries.

S-9
<PAGE> 149

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ -------------------------------------------------------------------------- ------
<S> <C> <C>
1.1 Form of U.S. Purchase Agreement, dated , 1996, among the
Registrant, Lincoln, Merrill Lynch & Co. and Goldman, Sachs & Co. *
1.2 Form of International Purchase Agreement, dated , 1996, among
the Registrant, Lincoln, Merrill Lynch International and Goldman Sachs
International *
3.1 Registrant's Restated Articles of Incorporation *
3.2 Registrant's Restated Code of Bylaws *
4.1 Article V -- "Number, Terms and Voting Rights of Shares" and Article XI --
"Provisions for Certain Business Combinations" of the Registrant's
Articles of Incorporation, incorporated by reference to the Registrant's
Articles of Incorporation filed hereunder as Exhibit 3.1
4.2 Article I -- "Shareholders" and Article VI -- "Stock Certificates,
Transfer of Shares, Stock Records" of the Registrant's Code of Bylaws,
incorporated by reference to the Registrant's Code of Bylaws filed
hereunder as Exhibit 3.2
5 Opinion of Barnes & Thornburg regarding legality of the securities being
registered #
10.1 Assumption Agreement, dated , 1996, by and between the
Registrant and Lincoln *
10.2 Promissory Note, dated , 1996, by and between the Registrant
and Lincoln *
10.3 American States Financial Corporation Stock Option Incentive Plan *
10.4 American States Financial Corporation Executive Performance Incentive
Compensation Plan *
10.5 American States Executive Salary Continuation Plan *
10.6 (1) American States Insurance Companies Sustained Performance Incentive Plan
for Senior Management *
10.6 (2) American States Insurance Companies Sustained Performance Incentive Plan
for Second Vice Presidents *
10.6 (3) American States Insurance Companies Sustained Performance Incentive Plan
for Assistant Vice Presidents, Assistant Treasurers, Actuaries and Other
Key Positions *
10.6 (4) American States Insurance Companies Sustained Performance Incentive Plan
for Division Managers *
10.6 (5) American States Insurance Companies Sustained Performance Incentive Plan
for Division Senior Department Managers *
10.7 Lincoln National Corporation Executive Deferred Compensation Plan for
Employees *
10.8 Form of American States Financial Corporation Split-Dollar Life Insurance
Arrangements *
10.9 American States Insurance Company Savings and Profit Sharing Plan *
10.10 Employment Agreement, dated March 18, 1996, between Registrant and F.
Cedric McCurley *
10.11 Employment Agreement, dated March 18, 1996, between Registrant and William
J. Lawson *
10.12 Employment Agreement, dated March 18, 1996, between Registrant and Jerome
T. Gallogly *
</TABLE>

E-1
<PAGE> 150

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ -------------------------------------------------------------------------- ------
<S> <C> <C>
10.13 Employment Agreement, dated March 18, 1996, between Registrant and Todd R.
Stephenson *
10.14 Registration Rights Agreement, dated , 1996, between the
Registrant and Lincoln #
10.15 (1) Investment Management Agreement, dated , 1996, between Lincoln
Investment Management, Inc. and American States Lloyds Insurance Company #
10.15 (2) Investment Management Agreement, dated , 1996, between Lincoln
Investment Management, Inc. and Insurance Company of Illinois #
10.15 (3) Investment Management Agreement, dated , 1996, between Lincoln
Investment Management, Inc. and Registrant #
10.15 (4) Investment Management Agreement, dated , 1996, between Lincoln
Investment Management, Inc. and American States Life Insurance Company #
10.15 (5) Investment Management Agreement, dated , 1996, between Lincoln
Investment Management, Inc. and American States Insurance Company of Texas #
10.15 (6) Investment Management Agreement, dated , 1996, between Lincoln
Investment Management, Inc., American States Insurance Company, American
Economy Insurance Company and American States Preferred Insurance Company #
10.16 Tax Sharing Agreement, dated , 1996, by and among the Registrant
and its Subsidiaries and Lincoln *
10.17 (1) Reinsurance Agreement, dated January 1, 1984, between American States Life
Insurance Company and The Lincoln National Life Insurance Company, as
amended on January 14, 1985; April 23, 1985; January 31, 1986; March 17,
1986; July 16, 1986; July 19, 1990; August 13, 1990; January 15, 1992;
April 13, 1992; April 19, 1993; June 30, 1993; November 3, 1994; November
5, 1994; December 11, 1995 and April 19, 1996. *
10.17 (2) Reinsurance Agreement, dated March 1, 1983, between American States Life
Insurance Company and The Lincoln National Life Insurance Company, as
amended on November 30, 1984; April 23, 1985; January 31, 1986; March 17,
1986; December 17, 1986; January 15, 1992; November 3, 1994; and April 19,
1996. *
10.17 (3) Accident and Sickness Reinsurance Agreement, dated June 15, 1964, between
American States Life Insurance Company and The Lincoln National Life
Insurance Company, as amended on October 3, 1986. *
10.17 (4) Coinsurance Agreement, dated October 31, 1985, between American States
Life Insurance Company and The Lincoln National Life Insurance Company, as
amended on December 17, 1986; January 15, 1992; February 18, 1992;
November 3, 1994; March 14, 1996 and April 19, 1996. *
10.17 (5) Coinsurance Agreement, dated January 1, 1981, between American States Life
Insurance Company and The Lincoln National Life Insurance Company, as
amended on November 13, 1981; December 2, 1981; December 16, 1983;
November 7, 1984; March 17, 1986; January 15, 1992; November 3, 1994; and
April 19, 1996. *
10.17 (6) Coinsurance Agreement, dated January 1, 1983, between American States Life
Insurance Company and The Lincoln National Life Insurance Company, as
amended on October 17, 1985. *
10.17 (7) Disability Income Extended-Wait Reinsurance Agreement, dated January 1,
1995, between American States Life Insurance Company and The Lincoln
National Life Insurance Company, as amended on September 1, 1995. *
</TABLE>

E-2
<PAGE> 151

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ -------------------------------------------------------------------------- ------
<S> <C> <C>
10.17 (8) Reinsurance Agreement, dated January 1, 1963, between American States Life
Insurance Company and The Lincoln National Life Insurance Company, as
amended on June 11, 1969; June 26, 1972; January 3, 1975; May 16, 1977;
March 28, 1979; May 25, 1979; September 2, 1980; November 13, 1981;
December 2, 1981; December 16, 1983; January 3, 1985; April 23, 1985;
January 31, 1986; March 17, 1986; January 15, 1992; November 3, 1994; and
April 19, 1996. *
10.18 Services Agreement, dated , 1996, by and between the
Registrant and Lincoln *
10.19 Management Agreement, dated October 1, 1989, by and between American
States Insurance Company and Linsco Reinsurance Company, as amended on
August 28, 1990. *
10.20 (1) Lease and Agreement, dated as of August 1, 1984, between Clinton Street
Limited Partnership and American States Insurance Company *
10.20 (2) Assignment of Lease and Guaranty, dated as of August 1, 1984, from Clinton
Street Limited Partnership to Clinton Holding Corporation *
10.20 (3) Second Assignment of Lease and Guaranty, dated as of August 1, 1984, from
Clinton Street Limited Partnership to Clinton Holding Corporation *
10.20 (4) Reassignment of Lease and Guaranty, dated as of August 1, 1984, from
Clinton Holding Corporation to the Connecticut Bank and Trust Company,
National Association and F.W. Kawam, as Trustees *
10.21 Software License Agreement, dated April 1, 1989, by and between American
States Life Insurance Company and Lincoln National Risk Management, Inc.,
as amended May 5, 1994 *
10.22 Indemnification Agreement, dated , 1996, by and between the
Registrant and Lincoln #
10.23 (1) Surety Bond, effective November 3, 1993, between American States Insurance
Company, the Industrial Development Authority of the City of Clayton,
Missouri and Mercantile Bank of St. Louis, N.A. *
10.23 (2) Indemnity Agreement, dated November 3, 1993, by Lincoln *
21 Subsidiaries of the Registrant *
23.1 Consent of Ernst & Young LLP ------
23.2 Consent of Barnes & Thornburg (contained in Exhibit 5)
*
24 Power of Attorney (included on page S-3 of the Registration Statement)
28 Information from Reports Furnished to State Insurance Regulatory *
Authorities
29 Cover Page for Prospectus used in Canada ------
</TABLE>

- -------------------------
(*) Previously filed.
(#) To be filed by amendment.

E-3

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated January 31, 1996 (except for Note 1, as to which
the date is May , 1996 and Note 16, as to which the date is February 14,
1996), with respect to the consolidated financial statements and schedules of
American States Financial Corporation included in the Registration Statement on
Form S-1 and related Prospectus of American States Financial Corporation for the
registration of 10,000,000 shares of its common stock.

Indianapolis, Indiana
, 1996

- --------------------------------------------------------------------------------

The foregoing consent is in the form that will be signed upon the
completion of the recapitalization as described in Note 1 to the consolidated
financial statements.

ERNST & YOUNG LLP

/s/ ERNST & YOUNG LLP

Indianapolis, Indiana

May 13, 1996

<PAGE> 1

EXHIBIT 29

AMERICAN STATES FINANCIAL CORPORATION

PRIVATE PLACEMENT IN CANADA OF
SHARES OF COMMON STOCK

THE OFFERING

The shares of Common Stock being offered in Canada are part of an offering
of 10,000,000 shares of Common Stock (the "Common Stock") of American States
Financial Corporation, an Indiana corporation (the "Company") (11,500,000 shares
of Common Stock if the Underwriters' over-allotment option is exercised in
full), of which 8,000,000 shares of Common Stock are being offered initially in
the United States and Canada (9,200,000 shares of Common Stock if the U.S.
Underwriters' over-allotment option is exercised in full).

Attached hereto is a copy of the prospectus filed with the Securities and
Exchange Commission in the United States regarding the offering being made in
the United States. The offering in Canada is being made solely in the Province
of Ontario.

RESALE RESTRICTIONS

The distribution of the shares of Common Stock in Ontario is being made on
a private placement basis. Accordingly, any resale of such shares must be made
in accordance with an exemption from the registration and prospectus
requirements of applicable securities law. Purchasers of the shares of Common
Stock are advised to seek legal advice prior to any resale of the shares of
Common Stock.

REPRESENTATION BY PURCHASERS

Confirmations of the acceptance of offers to purchase the shares of Common
Stock will be sent to purchasers in Ontario who have not withdrawn their offers
to purchase prior to the issuance of such confirmations. Each purchaser who
receives a purchase confirmation will, by the purchaser's receipt thereof, be
deemed to represent to the Company and the dealer from whom such purchase
confirmation is received that such purchaser is entitled under Ontario
securities law to purchase such shares of Common Stock without the benefit of a
prospectus qualified under such securities law.

ENFORCEMENT OF LEGAL RIGHTS

The shares of Common Stock being offered are those of a foreign issuer and
Ontario purchasers will not receive the contractual right of action prescribed
by section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.

All of the Company's directors and officers, as well as the experts named
herein, may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada upon
the Company or such persons. All or a substantial portion of the assets of the
Company and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or such persons in
Canada or to enforce a judgment obtained in Canadian courts against the Company
or such persons outside of Canada.