<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-11733
AMERICAN STATES FINANCIAL CORPORATION
INDIANA NO. 35-1976549
State of Incorporation I.R.S. Employer Identification No.
500 NORTH MERIDIAN STREET
INDIANAPOLIS , INDIANA 46204 - 1275 (317) 262-6262
Address of principal executive offices Telephone Number
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [ X ]
Shares of common stock outstanding as of August 7, 1996: 60,050,515
The exhibit index to this report is located on page 20.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December, 31
1996 1995
----------- ------------
(Dollars in Thousands)
ASSETS
<S> <C> <C>
Investments:
Securities available-for-sale at fair value:
Fixed maturity (amortized cost: 1996 - $3,498,796; 1995 - $3,590,601) $3,616,959 $3,860,883
Equity (cost: 1996 - $337,622; $1995 - $374,232) 397,445 437,685
Mortgage loans 33,747 33,319
Short-term investments 122,665 63,170
Other invested assets 37,727 35,178
_________ _________
Total investments 4,208,543 4,430,235
Cash 13,486 12,708
Premium receivable 414,854 377,802
Deferred policy acquisition costs 208,760 199,192
Properties to be sold 41,029 41,403
Property and equipment 30,819 29,823
Accrued investment income 63,542 66,173
Federal income taxes 171,320 93,552
Cost in excess of net assets of acquired subsidiaries 99,481 101,190
Ceded reinsurance on claims and claims expense reserves 173,854 136,939
Miscellaneous 57,224 43,073
_________ _________
Total Assets $5,482,912 $5,532,090
======== ========
</TABLE>
(continued on next page)
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
June 30, December, 31
1996 1995
--------- -----------
(Dollars in Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Policy liabilities and accruals:
Losses, loss adjustment expense and future policy benefits $2,912,815 $2,828,337
Unearned premiums 729,059 718,478
_________ _________
Total policy liabilities and accruals 3,641,874 3,546,815
Commissions and other expenses 111,653 134,031
Outstanding checks 68,130 67,308
Other liabilities 143,010 115,229
Notes payable 99,414 -
Debt with affiliate 200,000 -
_________ _________
Total liabilities 4,264,081 3,863,383
Shareholders' equity:
Common stock, no par value: 195,000,000 shares authorized, shares issued
and outstanding: 1996 - 60,050,515; 1995 - 50,000,000 304,792 387,547
Net unrealized gain on securities available-for-sale 113,974 211,767
Retained earnings 800,065 1,069,393
_________ _________
Total shareholders' equity 1,218,831 1,668,707
_________ _________
Total liabilities and shareholders' equity $5,482,912 $5,532,090
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
--------- --------- ------- --------
(Dollars in Thousands,
Except Per Share Data)
<S> <C> <C> <C> <C>
Revenue:
Premiums and other revenue $424,483 $431,525 $848,477 $870,247
Net investment income 66,156 67,191 134,489 133,652
Realized gain on investments 7,374 6,256 28,470 33,471
__________ __________ __________ __________
Total revenue 498,013 504,972 1,011,436 1,037,370
Benefits and expenses:
Benefits and settlement expenses 332,342 359,246 655,905 664,650
Commissions 72,510 72,300 144,382 144,424
Operating and administrative expenses 51,051 56,986 102,224 116,036
Taxes, licenses and fees 8,322 10,080 20,240 22,118
Interest on debt 1,835 - 1,835 -
__________ __________ __________ __________
Total benefits and expenses 466,060 498,612 924,586 947,228
Income before federal income taxes 31,953 6,360 86,850 90,142
Federal income taxes (credit) 2,194 (10,415) 10,178 7,880
__________ __________ __________ __________
Net income $29,759 $16,775 $76,672 $82,262
========== ========== ========== ==========
Net income per share $.55 $.34 $1.48 $1.65
========== ========== ========== ==========
Weighted average shares outstanding 53,644,692 50,000,000 51,832,414 50,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
--------- ----------
(Dollars in Thousands)
<S> <C> <C>
Common stock:
Balance at beginning of period
Issued in stock offering $ 387,547 $ 387,547
Issued to employee benefit plans 215,482 -
Assumption and issuance of debt with affiliate 1,161 -
(299,398) -
---------- ----------
Balance at end of period (304,792) 387,547
Net unrealized gain (loss) on securities available-for-sale:
Balance at beginning of period 211,767 (9,110)
Change during the period (97,793) 159,632
---------- ----------
Balance at end of period 113,974 150,522
Retained earnings:
Balance at beginning of period 1,069,393 1,090,129
Dividend of assets to affiliate (299,866) -
Cash dividends declared to affiliate (46,134) (92,000)
Net income 76,672 82,262
---------- ----------
Balance at end of period 800,065 1,080,391
Total shareholders' equity $1,218,831 $1,618,460
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
----------- -----------
<S> <C> <C>
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $76,672 $82,262
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Deferred policy acquisition costs (4,270) (7,449)
Premiums and fees in course of collection (37,052) (33,647)
Accrual of discount on investments (9,617) (8,771)
Amortization of premium on investments 2,767 3,870
Accrued investment income (1,800) 4,592
Policy liabilities and accruals 76,793 22,012
Federal income taxes (25,110) (32,025)
Provisions for depreciation 3,850 5,269
Gain on sale of investments (28,470) (33,471)
Ceded reinsurance on claims and claims expense reserves (36,914) (1,348)
Other (21,514) 2,744
-------- --------
Net adjustments (81,337) (78,224)
-------- --------
Net cash provided by (used in) operating activities (4,665) 4,038
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale: Purchase of investments (753,087) (622,579)
Sales of investments 583,064 595,498
Maturities and redemptions 38,401 38,903
Purchase of mortgage loans and other investments (7,011) (5,220)
Sale or maturity of mortgage loans and other investments 3,945 23,549
Net (increase) decrease in short-term investments (59,495) 87,630
Net purchase of property and equipment (4,472) (2,704)
Other 16,518 1,424
-------- --------
Net cash provided by (used in) investing activities (182,137) 116,501
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 215,482 -
Universal life investment contract deposits 24,837 23,816
Universal life investment contract withdrawals (6,605) (4,427)
Dividends paid to affiliate (46,134) (137,000)
-------- --------
Net cash provided by (used in) financing activities 187,580 (117,611)
-------- --------
Net increase in cash 778 2,928
Cash at beginning of period 12,708 11,134
-------- --------
Cash at end of period $ 13,486 $ 14,062
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following notes should be read in conjunction with the notes to
consolidated financial statements included in the American States Financial
Corporation prospectus dated May 22, 1996. 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" refer to the
direct and indirect subsidiaries of the Company, which include ASI and its
subsidiaries. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1996.
1. ORGANIZATION AND BASIS OF PRESENTATION
On February 5, 1996, the Company was incorporated in the State of Indiana
to serve as the holding company for ASI. The formation of the Company was done
in contemplation of an initial public offering. On April 22, 1996, ASI
declared, and on May 15, 1996, it distributed to its parent, Lincoln National
Corporation ("LNC"), a dividend of $300 million, consisting primarily of
tax-exempt securities ("Dividended Assets"). On May 16, 1996, LNC transferred
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 assumed $100 million of LNC debt ("Assumed Debt") and
issued a $200 million note to LNC (the "Term Note").
On May 29, 1996, the Company issued 10,000,000 shares of common stock at
$23 per share to the public (the "Offering"). The net proceeds from the
Offering (after deduction of underwriting discounts and offering expenses) were
$215.5 million. The Company contributed $140.5 million of such net proceeds to
ASI to enable it to invest in taxable securities for its investment portfolio
to partially replace the Dividended Assets. The remainder of the net proceeds
were retained by the Company for general corporate purposes. As a result of
the Offering, LNC's ownership was reduced to approximately 83%.
The 50,000,000 shares held by LNC are "restricted shares" as defined by
Rule 144 of the Securities Act of 1993, as amended (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, LNC is subject to certain volume restrictions on the sale of
shares of the Company's common stock. The Company and LNC have agreed not to
sell or otherwise dispose of any shares of the Company's common stock or
securities convertible into or exercisable for the Company's common stock
until, at the earliest, September 19, 1996 without the prior written consent of
the representatives of the underwriters.
The Company's common stock is publicly traded on the New York Stock
Exchange under the symbol "ASX".
The transfer of ASI stock to the Company by LNC in exchange for Company
common stock and the Assumed Debt and Term Note have been accounted for similar
to a pooling of interests in the consolidated financial statements of the
Company, in that the assets, liabilities, shareholders' equity and the results
of operation of the Company and its subsidiaries have been combined at
historical carrying values.
The consolidated financial statements as of and for the periods ended June
30, 1996 and 1995, are unaudited. In the opinion of management, these
financial statements include all adjustments, consisting only of normal
recurring items, which are necessary to present fairly the Company's financial
position and results of operations on a basis consistent with that of prior
audited consolidated financial statements. The balance sheet at December 31,
1995, has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. Significant
intercompany balances and transactions have been
7
<PAGE> 8
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)
eliminated. Certain amounts from prior periods were reclassified to conform to
the 1996 presentation. Net income and shareholders' equity have not been
affected by these reclassifications.
The Company underwrites property and casualty insurance, concentrating on
providing commercial insurance to small to medium-sized businesses and
preferred personal lines coverages to individuals. As a complement to its
property and casualty operations, the Company also markets life insurance. The
Company writes business throughout the United States with the greatest volume
in the Midwest and Pacific Northwest.
2. FEDERAL INCOME TAXES
Through December 31, 1995, a consolidated federal income tax return was
filed by LNC and included the Company. Pursuant to an agreement with LNC, the
Company provided 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 were remitted to or collected from LNC.
A new tax sharing agreement is pending execution. This new agreement,
when executed, will be effective January 1, 1996, and will result in the
Company providing income taxes on a stand-alone basis. This new agreement
would have had no impact on the provision for federal income taxes for 1995 or
1996 had it been implemented January 1, 1995.
The effective tax rate on pre-tax income is lower than the prevailing
corporate federal income tax rate primarily due to tax-exempt interest on
municipal securities.
3. NOTES PAYABLE AND DEBT WITH AFFILIATE
The Assumed Debt is governed by an agreement between the Company and LNC
(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 LNC on July 15, 1992. LNC 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.
The Term Note will pay interest quarterly at a rate of 50 basis points
over the rate on three year Treasury Notes from the Effective Date through and
including November 14, 1997, 50 basis points over the rate on two year Treasury
Notes from November 15, 1997 through and including November 14, 1998 and 50
basis points over the rate on one-year Treasury Bills from November 15, 1998
through the maturity date. The Term Note will be payable in three equal
principal payments due on August 15, 1997, 1998 and 1999. Pursuant to the
provisions on the Term Note, the Company will have the right to prepay the Term
Note at any time. The Term Note also contains covenants that will, among other
things, (i) require the Company to maintain certain levels of adjusted
consolidated net worth (as defined in the Term Note), and (ii) 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.
8
<PAGE> 9
AMERICAN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. NOTES PAYABLE AND DEBT WITH AFFILIATE (Continued)
On May 29, 1996, the Company entered into a revolving credit agreement
under which the Company may borrow and repay amounts up to a maximum of $200
million (the "Line of Credit"). Borrowings under the Line of Credit will bear
interest generally at variable rates tied to LIBOR, an adjusted certificate of
deposit rate or other short-term indices. No debt was outstanding using the
Line of Credit at June 30, 1996.
4. CONTINGENCIES
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 plaintiff's 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.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATION
Three Months Ended June 30, 1996 and 1995
The discussion which follows compares the results of the second quarter
ended June 30, 1996 to the second quarter ended June 30, 1995:
CONSOLIDATED
The Company's revenues decreased 1.4% or $7.0 million to $498.0 million in
the second quarter of 1996 from $505.0 million in the second quarter of 1995.
Net premiums earned and other revenue decreased 1.6% or $7.0 million to $424.5
million in the second quarter of 1996 from $431.5 million in the second quarter
of 1995. Net investment income decreased 1.5% or $1.0 million to $66.2 million
in the second quarter of 1996 from $67.2 million in the second quarter of 1995.
Realized gains on investments increased 17.5% or $1.1 million to $7.4 million
in the second quarter of 1996 from $6.3 million in the second quarter of 1995.
Benefits and settlement expenses decreased 7.5% or $26.9 million to $332.3
million in the second quarter of 1996 from $359.2 million in the second quarter
of 1995. Commissions increased .3% or $.2 million to $72.5 million in the
second quarter of 1996 from $72.3 million in the second quarter of 1995.
Operating and administrative expenses decreased 10.4% or $5.9 million to $51.1
million in the second quarter of 1996 from $57.0 million in the second quarter
of 1995. The company incurred interest on debt of $1.8 million in the second
quarter of 1996 from the Assumed Debt and Term Note.
Net income for the second quarter of 1996 was $29.8 million or 55 cents
per share compared to $16.8 million or 34 cents per share for the second
quarter of 1995. Excluding realized gain on investments, the Company earned
$26.5 million or 49 cents per share for the second quarter of 1996 compared to
$13.1 million or 26 cents per share for the second quarter of 1995.
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 June 30, 1996 and 1995. All ratios are computed using data
reported in accordance with statutory accounting principles ("SAP").
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1996 1995
----------- -----------
<S> <C> <C>
(Dollars in Millions)
Net premiums written $419.2 $433.6
Net premiums earned and other revenue $410.1 $417.0
Losses and loss adjustment expense 319.9 347.2
Other costs and expenses 126.5 134.0
------ -----
Underwriting loss (36.3) (64.2)
Net investment income 57.6 59.0
Realized gain on investments 6.9 5.8
Federal income tax expense (credit) .8 (12.3)
------ ------
Net income $ 27.4 $ 12.9
====== ======
</TABLE>
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
<TABLE>
<S> <C> <C>
Loss ratio 66.8% 69.5%
Loss adjustment expense ratio 11.6 14.2
Underwriting expense ratio 30.6 30.5
Policyholder dividend ratio .1 .1
----- -----
Combined ratio 109.1% 114.3%
===== =====
</TABLE>
Net Premiums Written
Net premiums written decreased 3.3% or $14.4 million to $419.2 million in
the second quarter of 1996 from $433.6 million in the second quarter of 1995.
The decline in net premiums written is largely attributable to three factors.
First and most pervasive is intensifying commercial lines competition with the
impact most evident in workers' compensation and larger accounts. In addition,
premium volume from state-mandated workers' compensation pools continues to
decline. Finally, the Company continues its planned reduction of exposure in
California and Florida. For the states of California and Florida, net
premiums written decreased by 12.9% in the second quarter of 1996 compared to
the second quarter of 1995. For all other states, net premiums written
decreased by 2.1% in the second quarter of 1996 compared to the second quarter
of 1995.
Net Premiums Earned and Other Revenue
Net premiums earned and other revenue (primarily finance and service fees)
decreased 1.7% or $6.9 million to $410.1 million in the second quarter of 1996
from $417.0 million in the second quarter of 1995.
Losses and Loss Adjustment Expense ("LAE")
Loss and LAE decreased 7.9% or $27.3 million to $319.9 million in the
second quarter of 1996 from $347.2 million in the second quarter of 1995. The
SAP loss ratio for the second quarter of 1996 was 66.8% compared to 69.5% for
the second quarter of 1995. The 2.7 point decrease in the quarter was
primarily due to a decrease in natural peril losses and a modest improvement in
the underlying loss ratio.
The SAP LAE ratio was 11.6% and 14.2% for the second quarter of 1996 and
1995, respectively. The improvement in the LAE ratio in the second quarter of
1996 compared to the second quarter of 1995 is primarily due to (i) lower LAE
reserves, driven primarily by lower related loss reserves and (ii) a reduction
in errors and omission insurance expense. The decrease in insurance expense in
1996 as compared to 1995 is due to the settlement of a lawsuit in 1995.
Other Costs and Expenses
Other costs and expenses decreased 5.6% or $7.5 million to $126.5 million
in the second quarter of 1996 from $134.0 million in the second quarter of
1995. The realignment of field offices and implementation of internal cost
controls, announced in the fourth quarter of 1995, continued to produce 1996
expense savings in line with expectations. In addition, in 1995 the Company
incurred two unusual expense charges: (i) a charge off of an involuntary
property pool account receivable and (ii) the Company made a payment related to
a guarantee of business transferred to a third party in 1991. Concurrent with
this payment in 1995, the guarantee was terminated, precluding the possibility
of future payments. The SAP underwriting expense ratio increased by .1 point
to 30.6% due to a decline in net premiums written.
Combined Ratio
The SAP combined ratio, after policyholder dividends, was 109.1% and
114.3% for the second quarter of 1996 and 1995, respectively. As outlined
above, this improvement was primarily generated by improvements in losses and
loss adjustment expenses.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
Net Investment Income
Net investment income decreased 2.4% or $1.4 million to $57.6 million in
the second quarter of 1996 from $59.0 million in the second quarter of 1995.
This decrease is due primarily to a decline in total average invested assets
caused by the distribution of the Dividended Assets, as well as a slight
decline in the overall investment portfolio yield. The yield on invested
assets (excluding realized and unrealized gains) was 6.39% and 6.40% for the
second quarters of 1996 and 1995, respectively.
Federal Income Tax Expense (Credit)
Federal income tax expense was $.8 for the second quarter of 1996 compared
to a federal income tax credit of $(12.3) million for the second quarter of
1995. The increase in expense is due primarily to improved underwriting
results.
LIFE
The following table sets forth certain summarized financial data for the
Company's life insurance operations for the quarters ended June 30, 1996 and
1995.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1996 1995
----------- -----------
<S> <C> <C>
(Dollars in Millions)
Account values - Universal life and Annuities $329.9 $301.1
Life insurance in-force 15,518.9 15,034.8
Invested assets (at amortized cost) 454.8 429.3
Policy income $ 14.4 $ 14.5
Benefits and expenses 17.5 17.3
Net investment income 8.2 8.3
Realized gain on investments .3 .4
Federal income tax expense 2.0 2.0
---- ----
Net income $ 3.4 $ 3.9
==== ====
</TABLE>
Policy income was essentially flat in the second quarter of 1996 compared
to the second quarter of 1995. Account values at June 30, 1996 increased by
9.6% from June 30, 1995. Despite an increase in invested assets, net
investment income decreased 1.2% in the second quarter of 1996 compared to the
second quarter of 1995. The yield on invested assets (excluding realized and
unrealized gains) was 7.31% and 7.78% for the second quarters of 1996 and 1995,
respectively. The majority of the decrease in yield is due to a higher
effective yield on mortgage backed securities in 1995. This higher effective
yield was caused by a shortening of estimated prepayment patterns on the
underlying securities, which in turn accelerated income recognition. Net
income for the second quarter of 1996 was lower compared to the second quarter
of 1995 primarily due to higher mortality.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
Six Months Ended June 30, 1996 and 1995
The discussion which follows compares the results of the six months ended
June 30, 1996 to the six months ended June 30, 1995:
CONSOLIDATED
The Company's revenues decreased 2.5% or $26.0 million to $1,011.4 million
in the first six months of 1996 from $1,037.4 million in the first six months
of 1995. Net premiums earned and other revenue decreased 2.5% or $21.7
million to $848.5 million in the first six months of 1996 from $870.2 million
in the first six months of 1995. Net investment income increased .6% or $.8
million to $134.5 million in the first six months of 1996 from $133.7 million
in the first six months of 1995. Realized gains on investments decreased 14.9%
or $5.0 million to $28.5 million in the first six months of 1996 from $33.5
million in the first six months of 1995.
Benefits and settlement expenses decreased 1.3% or $8.8 million to $655.9
million in the first six months of 1996 from $664.7 million in the first six
months of 1995. Commissions were $144.4 million for the first six months of
1996 and 1995. Operating and administrative expenses decreased 11.9% or $13.8
million to $102.2 million in the first six months of 1996 from $116.0 million
in the first six months of 1995. The company incurred interest on debt from
the Assumed Debt and Term Note of $1.8 million in the first six months of 1996.
Net income for the first six months of 1996 was $76.7 million or $1.48 per
share compared to $82.3 million or $1.65 per share for the first six months of
1995. Excluding realized gain on investments, the Company earned $59.8 million
or $1.15 per share for the first six months of 1996 compared to $61.4 million
or $1.23 per share for the first six months of 1995.
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 six
months ended June 30, 1996 and 1995. All ratios are computed using data
reported in accordance with SAP.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
----------- -----------
<S> <C> <C>
(Dollars in Millions)
Net premiums written $824.9 $859.3
Net premiums earned and other revenue $819.6 $841.8
Losses and loss adjustment expense 630.9 641.5
Other costs and expenses 255.8 271.7
----- -----
Underwriting loss (67.1) (71.4)
Net investment income 117.3 117.4
Realized gain on investments 28.1 33.6
Federal income tax expense 7.1 4.4
---- ----
Net income $ 71.2 $ 75.2
==== ====
</TABLE>
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
<TABLE>
<S> <C> <C>
Loss ratio 65.9% 63.7%
Loss adjustment expense ratio 11.5 13.1
Underwriting expense ratio 31.2 31.5
Policyholder dividend ratio .2 .1
----- -----
Combined ratio 108.8% 108.4%
===== =====
</TABLE>
Net Premiums Written
Net premiums written decreased 4.0% or $34.4 million to $824.9 million in
the first six months of 1996 from $859.3 million in the first six months of
1995. The decline in net premiums written is largely attributable to three
factors. First and most pervasive is the intensifying commercial lines
competition with the impact most evident in workers' compensation and larger
accounts. In addition, premium volume from state-mandated workers'
compensation pools continues to decline. Finally, the Company continues its
planned reduction of exposure in California and Florida. For the states of
California and Florida, net premiums written decreased 10.9% in the first six
months of 1996 compared to the first six months of 1995. For all other states,
net premiums written decreased 3.2% in the first six months of 1996 compared to
the first six months of 1995.
Net Premiums Earned and Other Revenue
Net premiums earned and other revenue (primarily finance and service fees)
decreased 2.6% or $22.2 million to $819.6 million in the first six months of
1996 from $841.8 million in the first six months of 1995.
Losses and Loss Adjustment Expense
Loss and LAE decreased 1.7% or $10.6 million to $630.9 million in the
first six months of 1996 from $641.5 million in the first six months of 1995.
The SAP loss ratio for the first six months of 1996 was 65.9% compared to 63.7%
for the first six months of 1995. The 2.2 point increase was due to an
increase of $22.6 million in natural peril losses resulting from widespread
severe winter storm activity and frequent wind and hail storms across the
Midwest. Natural peril losses were $99.3 million and $76.7 million for the
first six months of 1996 and 1995, respectively.
The SAP LAE ratio was 11.5% and 13.1% for the first six months of 1996 and
1995, respectively. The improvement in the LAE ratio in the first six months of
1996 compared to the first six months of 1995 was due to (i) lower LAE reserve
levels in 1996 due to lower related loss reserves (ii) incurred costs relating
to division consolidation and an early retirement plan for certain levels of
management in 1995 and (iii) a reduction in insurance expense in 1996.
Other Costs and Expenses
Other costs and expenses decreased 5.9% or $15.9 million to $255.8 million
in the first six months of 1996 from $271.7 million in the first six months of
1995. Costs incurred relating to the division consolidation and early
retirement added to expenses in the first six months of 1995. In addition, the
realignment of field offices and implementation of internal cost controls,
which was announced in late 1995, continued to produce cost savings in 1996.
In 1995, the Company incurred two unusual expense charges: (i) a charge off of
an involuntary property pool account receivable and (ii) the Company made a
payment related to a guarantee of business transferred to a third party in
1991. Concurrent with this payment in 1995, the guarantee was terminated,
precluding the possibility of future payments. The SAP underwriting expense
ratio improved only .3 points to 31.2% due to a decline in net written
premium.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
RESULTS OF OPERATION (Continued)
Combined Ratio
The SAP combined ratio, after policyholder dividends, was 108.8% and
108.4% for the first six months of 1996 and 1995, respectively. During the
first six months of 1996, natural peril losses added 12.2 points to the SAP
loss ratio compared to 9.2 points for the first six months of 1995.
Net Investment Income
Net investment income decreased $.1 million to $117.3 million in the first
six months of 1996 from $117.4 million in the first six months of 1995. The
yield on invested assets (excluding realized and unrealized gains) was 6.55%
and 6.34% for the first six months of 1996 and 1995, respectively. The
increase in yield was offset by a decline in total average invested assets
caused by the distribution of Dividended Assets.
Federal Income Tax Expense
Income tax expense was $7.1 million for the first six months of 1996
compared to $4.4 million for the first six months of 1995. The increase in
expense is due primarily to improved underwriting results.
LIFE
The following table sets forth certain summarized financial data for the
Company's life insurance operations for the six months ended June 30, 1996 and
1995.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
----------- -----------
<S> <C> <C>
(Dollars in Millions)
Account values - Universal life and Annuities $ 329.9 $ 301.1
Life insurance in-force 15,518.9 15,034.8
Invested assets (at amortized cost) 454.8 429.3
Policy income $ 28.9 $ 28.4
Benefits and expenses 35.7 33.9
Net investment income 16.8 16.3
Realized gain (loss) on investments .2 (.2)
Federal income tax expense 3.7 3.5
-------- --------
Net income $ 6.5 $ 7.1
======== ========
</TABLE>
Policy income increased 1.8% in the first six months of 1996 compared to
the first six months of 1995. Account values at June 30, 1996, increased by
9.6% from June 30, 1995. Net investment income increased 3.1% in the first six
months of 1996 compared to the first six months of 1995. The overall increase
in net investment income reflects the growth in account values as well as the
general growth in invested assets. This increase occurred despite a drop in
yield on average invested assets (excluding realized and unrealized gains).
The yield was 7.59% and 7.74% for the first six months of 1996 and 1995,
respectively. Net income for the first six months of 1996 was lower compared
to the first six months of 1995 primarily due to higher mortality.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
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, debt service and the purchase of
investments. Cash outflows can be variable 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. Finally, as noted below,
the Company has a $200 million Line of Credit, and intends to establish a
Medium Term Note Program, to augment its available liquidity.
Invested Assets
Since a substantial portion of the Company's revenues are generated from
its invested assets, the performance, quality and liquidity of its investment
portfolio materially effects the Company's financial condition and results of
operations. The Company pursues a total return investment strategy which seeks
an attractive level of current income combined with long-term capital
appreciation. The following table details, at carrying value, the distribution
of the Company's investment portfolio at June 30, 1996 (dollars in millions):
<TABLE>
<S> <C> <C>
Fixed maturity securities:
Tax-exempt municipal $1,972.4 46.9%
US government 316.3 7.5
Mortgage-backed and asset-backed 294.3 7.0
Corporate and other 953.1 22.6
Redeemable preferred stock 80.9 1.9
Equities:
Perpetual preferred stock 175.4 4.2
Common stock 222.0 5.3
Mortgage loans 33.7 0.8
Short-term investments 122.7 2.9
Other 37.7 0.9
-------- -----
Total $4,208.5 100.0%
======== =====
</TABLE>
The total investment portfolio decreased $221.7 million in the first six
months of 1996. This decrease is the net result of (i) the distribution of
Dividended Assets to LNC, (ii) a decrease in unrealized gains on securities
available-for-sale and (iii) an increase in invested assets from the proceeds
of the Offering.
The Company attempts to minimize the risk of loss due to default by the
borrower by maintaining a quality investment portfolio. As of June 30, 1996,
approximately 90% of the Company's bond portfolio is rated "A" or higher, or
was a U.S. government obligation, and $25.4 million, or .7% of the carrying
value of the bond portfolio, was rated below investment grade (Ba and below).
Ratings are based on the ratings, if any, assigned by Moody's and/or Standard &
Poors. If ratings were split, the rating used is generally the higher of the
two. Approximately $220.4 million of securities are private placements for
which ratings have been assigned by the Company based generally on equivalent
ratings supplied by the NAIC.
As of June 30, 1996, 46.9% of the Company's investment portfolio consisted
of tax-exempt municipal securities as compared to 53.6% as of December 31,
1996. The Company has been reducing its position in tax-exempt municipal
securities in order to provide for greater diversification of the portfolio
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
and to give the Company greater margin relative to the possibility of being in
a federal alternative minimum tax position.
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 shareholders' equity.
Cash Provided by (Used by) Operations
Net cash provided by (used by) operating activities was $(4.7) million for
the first six months of 1996 compared to $4.0 million for the first six months
of 1995. The increase in cash used by operating activities is primarily due to
a decrease in premiums collected offset in part by a decrease in claims and
operating expenses paid.
Notes Payable and Debt with Affiliate
As disclosed in note 3 to the Notes to Consolidated Financial Statements,
in the second quarter of 1996 the Company assumed $100 million of Assumed Debt
and issued a $200 million Term Note. The Company is obligated to make
principal repayments totaling $66.7 million in 1997 and 1998, and $166.7
million in 1999. In addition, the Company is obligated to make interest
payments on this debt. Interest is payable on outstanding principle at a rate
of 7 1/8% per annum on the Assumed Debt, and at a variable rate (generally 50
basis points over three, two and one year U.S. Treasury obligations) on the
Term Note. The current rate on the Term Note is approximately 6.7%.
Line of Credit
On May 29, 1996, the Company entered the Line of Credit with third party
financial institutions under which the Company may borrow and repay amounts up
to a maximum of $200 million. Borrowings under the Line of Credit will bear
interest generally at variable rates tied to LIBOR, an adjusted certificate of
deposit rate or other short-term indices. The Company will use borrowings
under the Line of Credit to assist in funding short-term cash management
requirements. No debt was outstanding using this agreement at June 30, 1996.
Medium Term Note Program
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.
Subsidiary Dividend Restrictions
Historically, ASI has paid dividends to LNC, as its parent, based upon its
annual operating results and statutory surplus requirements. After taking into
account the one-time distribution of the Dividended Assets paid by ASI to LNC,
ASI will not be able to pay any additional dividends to the Company for the
twelve month period commencing on May 15, 1996 ("Twelve Month Period") without
notifying the Indiana Commissioner of Insurance and giving the Commissioner 30
days within 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.
Offering Proceeds
On May 29, 1996, the company issued 10,000,000 shares of common stock to
the public at $23 per share. The net proceeds to the Company, after the
underwriting discount and other issue costs, was $215.5 million. The Company
contributed $140.5 million of the net proceeds to ASI to enable it to invest in
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
taxable securities for its investment portfolio to replace the Dividended
Assets. The Company retained $75.0 million of the net proceeds from the
Offering 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 Offering not contributed to ASI is invested and will
continue to be invested in short-term, interest bearing, investment-grade
securities. Based upon 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.
18
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the Notes to Consolidated Financial Statements - Contingencies regarding
pending and threatened litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
10.0 (1) Investment Management Agreement, dated July 1, 1996, between
Lincoln Investment Management, Inc. and American States Lloyds
Insurance Company
10.0 (2) Investment Management Agreement, dated May 29, 1996, between
Lincoln Investment Management, Inc. and Registrant
10.0 (3) Investment Management Agreement, dated June 1, 1996, between
Lincoln Investment Management, Inc. and American States Life
Insurance Company
10.0 (4) Investment Management Agreement, dated July 1, 1996, between
Lincoln Investment Management, Inc. and American States Insurance
Company of Texas
10.0 (5) Investment Management Agreement, dated June 1, 1996, between
Lincoln Investment Management, Inc. and American States Insurance
Company, American Economy Insurance Company and American States
Preferred Insurance Company
11.0 Computations of Earnings Per Share
27.0 Financial Data Schedule
b) Reports on Form 8-K.
None.
19
<PAGE> 20
AMERICAN STATES FINANCIAL CORPORATION
Exhibit Index for the Report on Form 10-Q
for the Quarter Ended June 30, 1996
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- - -------- ---------------------------------- ------
<S> <C> <C>
10.0 (1) Investment Management Agreement, dated
July 1, 1996, between Lincoln Investment
Management, Inc. and American States
Lloyds Insurance Company 22
10.0 (2) Investment Management Agreement, dated
May 29, 1996, between Lincoln Investment
Management, Inc. and Registrant 37
10.0 (3) Investment Management Agreement, dated
June 1, 1996, between Lincoln Investment
Management, Inc. and American States Life
Insurance Company 54
10.0 (4) Investment Management Agreement, dated
July 1, 1996, between Lincoln Investment
Management, Inc. and American States
Insurance Company of Texas 69
10.0 (5) Investment Management Agreement, dated
June 1, 1996, between Lincoln Investment
Management, Inc. and American States
Insurance Company, American Economy
Insurance Company and American States
Preferred Insurance Company 84
11.0 Computations of Earnings Per Share 100
27.0 Financial Data Schedule 101
</TABLE>
20
<PAGE> 21
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
American States Financial Corporation
by: /s/ THOMAS M. OBER
----------------------
Thomas M. Ober
Vice President, Secretary and General Counsel
/s/ THOMAS R. KAEHR
----------------------
Thomas R. Kaehr
Vice President and Chief Accounting Officer
Date: August 12, 1996
21
<PAGE> 1
EXHIBIT 10.0 (1)
LINCOLN INVESTMENT MANAGEMENT, INC.
INVESTMENT MANAGEMENT AGREEMENT
Client Name: American States Lloyds Insurance Company
(the "Account")
Effective Date: July 1, 1996
The undersigned (the "Client") hereby confirms that it has retained
Lincoln Investment Management, Inc., an Illinois corporation ("LIM"), as
investment adviser for the Account, consisting of those assets identified on
Schedule A attached hereto as well as all other assets which become part of the
Account as a result of transactions therein or additions thereto, and further
that it has, if and to the extent provided herein, retained LIM to provide
certain additional services with respect to the Account, and LIM agrees to
serve on the following terms and conditions:
1. Appointment and Acceptance of LIM. LIM is appointed as investment
adviser for the Account and will provide certain administrative services with
respect to the Account, all as set forth in Section 2 hereof. LIM accepts such
appointment pursuant to the terms and conditions set forth in this Agreement.
2. Powers, Rights and Duties of the Manager.
(a) Investment advisory. LIM shall perform its responsibilities under
this Agreement in accordance with the investment objectives and policies of the
Account described in Section 3 hereof. Subject to such investment objectives
and policies, LIM shall have authority in its sole discretion and without prior
consultation with the Client and as attorney-in-fact with full power and
authority on behalf of the Client:
(i) to make all investment decisions for the Account, it being
understood that LIM shall have complete discretion as to the
nature, amount and timing of all transactions to be effected in the
Account;
(ii) to investigate, analyze, negotiate, purchase, enter into,
monitor, manage, and sell or otherwise dispose of investments of
all types referred to on Schedule B hereto and any additional types
of investments as may be authorized in accordance with Section 3
hereof;
(iii) to negotiate, draft, legally document, execute, acknowledge,
deliver, and if applicable, file or record, or cause to be filed or
recorded, in any appropriate public office, all types of contracts,
documents, agreements and certificates relating to investments for
the Account, including, without limitation, brokerage
22
<PAGE> 2
agreements, letters of commitment, guarantees, stock purchase or
subscription agreements, note agreements, participation agreements,
purchase and sale agreements, indemnity agreements, partnership
agreements, limited partnership agreements, joint venture
agreements, option or warrant agreements, swap agreements,
mortgages, correspondent agreements, trust deeds, trusts, financing
statements, assignments, security agreements, pledges,
reorganization agreements, modification agreements, escrow
agreements and instruments of every kind and nature whatsoever, and
to modify, cancel or terminate such contracts, documents,
agreements and certificates;
(iv) after reasonable inquiry or investigation, to make such
representations, warranties, covenants or certifications in the
name of and on behalf of the Client as it believes to be true; to
agree to any terms or conditions to control any investment or
investment transaction; to direct the purchase, sale or exercise of
any options, privileges or rights with respect to any investment;
to initiate, defend or influence the direction of any claim or
litigation arising from or with respect to any investment; to
effect any purchase, sale, exchange, conversion, compromise,
settlement or release with respect to any investment;
(v) to issue directly to brokers, dealers or issuers orders for the
purchase, sale, exchange or other acquisition or disposition of
investments for the Account or any interests therein as it may deem
appropriate;
(vi) to take any action, or render advice respecting the voting of
proxies solicited by or with respect to the issuers of securities
in which assets of the Account may be invested from time to time;
and
(vii) in furtherance of the foregoing, to do anything which LIM
shall deem requisite, appropriate or advisable in connection
therewith.
LIM, in its sole discretion and at its own expense, shall have authority
to engage the services of a subadviser or subadvisers in connection with the
management of the Account. LIM shall continue to be responsible for all
investment advisory services furnished to the Account by such subadviser or
subadvisers.
(b) Additional Services. In connection with the management of the
Account, LIM shall also provide the additional services listed on Schedule C
hereto.
3. Investment Objectives and Policies. The initial investment objectives
and policies of the Account shall be as set forth in Schedule B hereto. The
Client will notify LIM in writing of any modifications therein from time to
time. LIM is not charged with notice of any modifications in the Client's
investment objectives or policies until such modifications are received in
writing by LIM. In addition, if LIM has obligated itself or the Client to the
purchase or sale of an investment for the Client prior to the receipt of notice
of such modification, LIM shall fulfill such purchase or sale obligation on
behalf of the Client.
23
<PAGE> 3
4. Client's Responsibilities.
Client acknowledges that it (i) is the owner of all of the assets of the
Account; (ii) is responsible to assure that all investments made for the
Account meet the requirements and limitations of any applicable jurisdiction,
contract or instrument; and (iii) is responsible to assure that any limitations
or restrictions arising from applicable law or regulations which in Client's
judgment apply to Client's aggregate holdings of any particular investment or
type of investment are not exceeded.
The Client is required to notify LIM in writing of changes in the
restrictions, limitations or requirements governing the assets of, and
investments for, the Account and to modify the investment objectives and
policies of the Account as set forth in Schedule B hereto. The Client will
notify LIM in writing as to any investments for the Account that do not meet
the requirements or limitations of any applicable jurisdiction, contract or
instrument. LIM shall arrange to dispose of those assets as agreed upon with
the Client, and such dispositions shall be made in the Client's Account and at
the Client's expense and risk.
The Client acknowledges that it shall be solely responsible for (and LIM
shall have no responsibility for): (i) maintenance of proper accounting records
for the Account; or (ii) with the exception of the SVO filings to be made by
LIM pursuant to Schedule C hereto, all filings required to be made respecting
the Account or assets of the Account with federal or state regulatory
authorities (including, without limitation, verifying and ensuring the accuracy
of all data contained within such filings). Without diminishing or modifying
LIM's obligations under Section 10 hereof, the Client acknowledges that it has
responsibility for the valuation of the assets of the Account for purposes of
the Client's own financial and performance reporting, whether required by law
or regulation or otherwise.
5. Documentation to be Furnished by Client. The Client agrees to furnish
LIM with such authorizations and documentation as LIM may from time to time
require to enable it to carry out its obligations under this Agreement,
including powers of attorney. Without limiting the foregoing, the Client will
direct the Custodian (as defined below) to provide LIM with cash information as
it relates to the Account assets.
6. Custodian. The Client shall be responsible for the appointment and
payment of a custodian (the "Custodian"), acceptable to LIM, who will take
custody of the Account assets and be responsible for the collection of
interest, dividends, distributions and other income (whether in cash or
securities) attributable to the assets in the Account. Although LIM may place
orders directly with brokers for execution of transactions authorized by this
Agreement with respect to the Account, all such transactions shall be carried
out through the Custodian. The Client will direct Custodian to accept
settlement instructions issued by LIM for the Account, and LIM shall not be
liable to the Client for (i) any failure of the Custodian to perform its
responsibilities to the Account, including, without limitation, any losses that
arise from the failure of the Custodian to notify LIM of any notices affecting
called securities, deadline expirations, dates and capital reorganization
events affecting the securities in the Account or (ii) any liability or loss
with respect to the transmittal or safekeeping of cash, securities or other
assets.
24
<PAGE> 4
7. Account Modifications. The Client may make additions to the Account
with reasonable advance notice to LIM. The Client may make withdrawals from
the Account subject to industry trade settlement time requirements and any
other market restrictions; provided, however, that LIM may establish additional
restrictions for the withdrawal of certain assets due to the less liquid nature
of such assets.
8. Brokerage.
(a) LIM is hereby authorized on behalf of the Client to place orders for
the Account with brokers and dealers selected exclusively by LIM. LIM will not
be responsible for any act or omission by brokers or dealers selected by LIM.
(b) In selecting brokers and dealers to execute transactions and in
negotiating commission rates with respect thereto, LIM shall take into account
the financial stability and reputation of brokerage firms and the brokerage and
research services provided by such brokers. The Client may be deemed to be
paying for services (sometimes referred to as "soft dollar" payments) provided
by the broker which are included in the commission rate (as permitted by
Section 28(e) of the Securities Exchange Act of 1934), provided that such
commission rate is reasonable in relation to the value of the brokerage and
research services provided when viewed in terms of either that particular
transaction or LIM's overall responsibilities with respect to the accounts as
to which it exercises investment discretion. The investment advisory fees
described in Section 11 below are based upon the foregoing.
(c) LIM may combine orders for the Account with those on behalf of other
clients. The purchase price paid or the proceeds received in any combined
order will be allocated equitably among those accounts with assets included in
such combined order.
(d) As evidence of LIM's authority to act as investment adviser for the
Account, Client shall, on or before the execution date of this Agreement,
execute a letter in form substantially similar to Exhibit 1 hereto and Client
authorizes LIM to provide copies of such letter to any broker or dealer it may
select pursuant to subparagraph (a) of this Section 8.
9. Account Information. LIM shall deliver or cause to be delivered in
written form at the times set forth in Schedule D the Account information and
reports set forth in Schedule D.
10. Valuation. In determining the value of the Account or any of its
assets, any security listed on one or more national securities exchanges shall
be valued at the last quoted sale price on the valuation date on the principal
exchange or market on which the security is traded. Any other security or asset
shall be valued as determined in good faith by LIM to reflect its fair value.
11. Compensation.
25
<PAGE> 5
(a) The compensation of LIM for its investment advisory services shall be
calculated and paid in accordance with the attached Schedule E on the basis of
asset values determined as provided in this Agreement.
(b) The Client shall pay all expenses related to the Account and
investments of the Account including, without limitation, custodian fees,
brokerage commissions and such other expenses as may be related to the
execution of orders to purchase or sell assets of the Account.
12. Service to Other Clients. It is understood that LIM also provides
investment management services to other clients, and may give advice and take
action with respect to the assets of such clients which may differ from the
advice given, or the timing or nature of action taken, with respect to the
Account. Nothing herein shall restrict LIM, its principals, affiliates or
employees from purchasing or selling any investment for its or their own
accounts. Furthermore, LIM shall have no obligation to purchase or sell for
the Account, or to recommend for purchase or sale for the Account, any
investment which LIM, its principals, affiliates or employees may purchase or
sell for themselves or for any other client.
13. Representations by the Client. The Client represents and warrants
that (i) the retention of LIM pursuant to this Agreement is authorized by any
governing documents relating to Client and the Account; (ii) this Agreement has
been duly authorized by appropriate action and when so executed and delivered
will be binding upon the Client in accordance with its terms; (iii) neither the
execution and delivery of the Agreement by Client nor the performance of its
obligations hereunder conflict with or violate any provision of law, rule or
regulation, or any instrument to which it is a party or to which any of its
property is subject; (iv) the Client has obtained all consents, approvals and
waivers of regulatory authorities which may be required in order for Client to
execute this Agreement and perform its responsibilities hereunder; and (v) the
Client will deliver to LIM such evidence of its authority as LIM may reasonably
require, whether by way of a certified corporate resolution or otherwise.
14. Representations by LIM. LIM represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended.
15. Utilization of Attorneys; Scope of Engagement. Client acknowledges
that from time to time during the term of this Agreement, LIM shall obtain
advice from or otherwise be represented by attorneys, including attorneys who
may be employees of LIM and/or its affiliates ("LIM Counsel"), with respect to
matters arising under or in connection with this Agreement, including, without
limitation, the matters described in Section 2 hereof. Client further
acknowledges and agrees that: (i) LIM Counsel (whether or not they are
employees of LIM and/or its affiliates) shall at all times only represent LIM
and/or its affiliates; (ii) that LIM shall have no obligation to engage
attorneys to represent Client; and (iii) that Client will retain or engage
counsel to represent it as and when it deems such engagement to be appropriate.
Client acknowledges and agrees that it shall not: (i) be owed any professional
duty or obligation by LIM Counsel; (ii) be deemed to receive any advice or
other legal representation from LIM Counsel; or (iii) be entitled to rely upon,
or actually rely upon, any statements of LIM Counsel.
26
<PAGE> 6
16. Tax Advice; Scope of Engagement. LIM will not render tax advice in
connection with the performance of its services hereunder. Client acknowledges
that (i) it will not rely on LIM for tax advice, and (ii) it will seek tax
advice, as it deems appropriate, from other qualified experts.
17. Liability. Unless otherwise provided by law, the Client agrees that
neither LIM nor any LIM director, officer, employee or LIM Counsel shall be
liable for any loss due to an error in judgment or for any act or omission to
act by LIM, LIM Counsel, or any broker, dealer or Custodian, except for losses
resulting from LIM's or such director's, officer's, employee's or LIM Counsel's
gross negligence or willful misconduct. The Client shall indemnify and hold
harmless LIM, its directors, officers, employees and LIM Counsel against any
loss, expense or claim arising in connection with the Account or this Agreement
from any act other than their gross negligence or willful misconduct, except
where such indemnification is prohibited by law. LIM shall indemnify and hold
harmless the Client against losses resulting from LIM's or its directors',
officers', employees' or LIM Counsel's gross negligence or willful misconduct,
except where such indemnification is prohibited by law.
18. Term. This Agreement shall remain in effect for three years from the
Effective Date (the "Initial Term"). Following the Initial Term, this
Agreement will be automatically renewed for additional one year terms, unless
sooner terminated as herein provided.
19. Dispute Resolution. In the event of a dispute arising out of or
relating to this Agreement, or the breach thereof, the parties shall attempt in
good faith to resolve the dispute in the manner set forth in Schedule F.
Nothing in this Section 19 or in Schedule F shall be construed to
constitute a waiver of any right provided by the Investment Advisers Act of
1940.
20. Termination and Assignment.
(a) This Agreement may be terminated by the Client during the Initial
Term if LIM or any of its directors, officers or employees or LIM Counsel
engage in any act or omission which constitutes gross negligence or willful
misconduct, upon written notice to LIM. This Agreement may be terminated by
either party following the Initial Term at any time upon sixty (60) days' prior
written notice to the other party. Upon any termination of the Agreement by
either party, (i) any transaction for the Account initiated prior to the
receipt of written notice of termination shall be consummated, and (ii) LIM
shall not initiate any transactions for the Account subsequent to the receipt
of written notice of termination except at Client's written request.
(b) No assignment (as defined in the Investment Advisers Act of 1940) of
this Agreement by LIM shall be effective without the written consent of the
Client.
(c) The provisions of Section 17 of this Agreement shall survive
notwithstanding any termination of this Agreement.
27
<PAGE> 7
21. Notices. Unless otherwise specified herein, all notices, reports or
other communications provided for herein shall be in writing and delivered by
first-class mail, registered or certified mail, overnight courier service or
facsimile to LIM or to the Client at the addresses appearing below. All
facsimiles which are sent must be telephonically confirmed. The effective date
of any such notice shall be the date such notice is received. Each party to
this Agreement may by written notice to the other party designate a different
address.
22. Confidentiality. LIM and the Client acknowledge and agree that all
information furnished by LIM to the Client in connection with the Account under
this Agreement shall be treated as confidential and shall not be disclosed to
third parties without the prior written consent of LIM, except as required by
applicable law or as required to perform this Agreement.
If the Client participates in a transaction and as a result of such
participation LIM receives confidential information about parties related to
the transaction, LIM shall retain such confidential information at its site.
If the Client is required by regulatory authorities or otherwise by law to
provide such confidential information, LIM, at the written direction of the
Client, shall provide the confidential information directly to the requesting
entity on the Client's behalf.
23. Inspection and Audit of Records. Upon reasonable notice by the
Client, LIM shall make its records relating to the Account available for
inspection and audit by the Client or its representatives and by any state
insurance regulators at all reasonable times during normal business hours.
24. Disclosure Statement. The Client acknowledges receipt of Part II of
LIM's Form ADV filed with the Securities and Exchange Commission at least
forty-eight (48) hours prior to entering into this Agreement.
25. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Indiana without regard to the
principles of conflicts of law contained therein.
26. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof, and may be amended only
by written document signed by the parties.
27. Modification in Conformity with Law. If any provision hereof is, or
at any time should become, inconsistent with any present or future law, rule or
regulation of any exchange or any governmental or regulatory body with
jurisdiction, said provision shall be deemed modified to conform to such law,
rule or regulation, but in all other respects this Agreement shall continue
and remain in full force and effect.
American States Lloyds Insurance Company
----------------------------------------
Client's Name
28
<PAGE> 8
Date: June 28, 1996 By: /s/ CHARLES L. MANSFIELD
------------------ ---------------------------
Name: Charles L. Mansfield
Title: Attorney-in-Fact for
the Underwriters of
American States Lloyds
Insurance Company
(317) 262-6797 Mailing Address: c/o Thomas M. Ober
- - ------------------------ 500 North Meridian Street
Telephone No. Indianapolis, Indiana 46204
(317) 262-6613
- - ------------------------
Fax No.
75-6220479
- - ------------------------
Taxpayer I.D. No.
Accepted and Agreed to:
LINCOLN INVESTMENT
MANAGEMENT, INC.
By: /s/ ANN L. WARNER Date: July 8, 1996
--------------------------------- -------------------
Name: Ann L. Warner
Title: Senior Vice President
By: /s/ ANNE BOOKWALTER Date: July 8, 1996
--------------------------------- -------------------
Name: Anne Bookwalter
Title: Vice President
200 East Berry Street
Fort Wayne, IN 46802
Attn: Marketing and Client Services
29
<PAGE> 9
Schedule A
Listing of Client's Assets
To be provided.
30
<PAGE> 10
Schedule B
Investment Objectives and Policies
To be provided.
31
<PAGE> 11
Schedule C
List of Additional Services
Accounting services to include the following:
- Process cash and trade activity within Prism
- Monthly projections of prepayment speeds on MBS/ABS (within
10 days of month end)
- Quarterly GAAP reserve recommendation for permanent declines
in market value on fixed income securities and equity securities
- Complete and file applications for registration of securities
with Securities Valuation Office of the NAIC ("SVO") (as required by
SVO filing deadlines)
- Quarterly Schedule D, Part 3, Part 4 and Part 1B information*
- Monthly Interest Maintenance Reserve (IMR) amortization report*
- Quarterly Asset Valuation Reserve (AVR) report*
- Monthly Schedule Ds, all parts*
* The data contained in these reports is not reviewed by LIM, and the
Client is responsible for the accuracy of the final reports.
32
<PAGE> 12
Schedule D
Account Information
Monthly:
within 10 business days:
asset inventory listing
within 20 business days:
portfolio performance report
Quarterly:
within 25 business days:
management reports
summary of derivatives activity
performance summaries
33
<PAGE> 13
Schedule E
Fees for Investment Advisory Services
Based upon the objectives and policies of the Account as set forth in
Schedule B and the additional services set forth in Schedule C, the annualized
fee shall be thirteen (13) basis points.* Fees are calculated each quarter by
applying the above rate to the aggregate value of assets held in the Account as
of the last business day of each calendar quarter. The value of assets in the
Account is to be determined in accordance with Section 10 of the Agreement.
LIM's minimum total quarterly fee is $12,500. The Client will be charged
additional amounts for the management of its equity securities based upon the
fees charged LIM by the applicable subadvisers.
LIM will bill the Client for its quarterly fee and the fees of any
subadvisers, and such fees will be due immediately upon receipt of each
invoice. Notwithstanding the foregoing, for any calendar quarter during which
this Agreement is not in effect for the full calendar quarter, the fees for
investment advisory services shall be prorated for the period during which the
Agreement is in effect.
For each portfolio created subsequent to the Effective Date, there is a
one time initialization fee of $10,000 per portfolio.
If at any time while this Agreement shall be in effect the Client desires
services or account information from the Manager other than those specifically
delineated in this Agreement and all Schedules hereto, and the Manager agrees
to provide such services or account information, a fee for such services or
account information shall be determined through good faith negotiations. In
addition, LIM reserves the right to increase its fees if the Client modifies
the objectives and policies of the Account as set forth in Schedule B or
requests additional services to be set forth in Schedule C. LIM also reserves
the right to charge the Client such additional amounts as determined from time
to time by LIM if any of the following occur: (i) LIM is required to spend
additional time to process the Client's transactions due to the Client's choice
of Custodian; or (ii) if the Client desires to have on-line access to LIM's
computer systems and executes a separate agreement with LIM relating to such
access. Any increase in fees or additional amounts described in this paragraph
shall be effective upon written notice to the Client by LIM.
- - ------------
* After the Initial Term, fees may be amended by LIM upon 90 days' prior
written notice to the Client.
34
<PAGE> 14
Schedule F
Alternative Dispute Resolution
NEGOTIATION BETWEEN EXECUTIVES. The parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between executives who have authority to settle the controversy.
Any party may give the other party written notice of any dispute not resolved
in the normal course of business. Within 20 days after delivery of said
notice, executives of both parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary, to exchange
relevant information and to attempt to resolve the dispute. If the matter has
not been resolved within 60 days of the disputing party's notice, or if the
parties fail to meet within 20 days, either party may initiate mediation of the
controversy or claims as provided hereinafter.
If a negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of such
intention and may also be accompanied by an attorney. All negotiations
pursuant to this clause are confidential and shall be treated as compromise and
settlement negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
MEDIATION. If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the dispute by mediation
under the then current Center for Public Resources ("CPR") Model Procedures for
Mediation of Business Disputes. The neutral third party will be selected from
the CPR Panel of Neutrals. If the parties encounter difficulty in agreeing on
a neutral, they will seek the assistance of CPR in the selection process.
ARBITRATION UNDER THE CPR RULES. Any dispute arising out of or relating
to this Agreement or the breach, termination or validity thereof, which has not
been resolved by Mediation as provided above within 60 days of the initiation
of such procedure (unless the parties mutually agree to extend such timeframe),
shall be finally settled by arbitration conducted expeditiously in accordance
with the Center for Public Resources Rules for Non-Administered Arbitration of
Business Disputes by three independent and impartial arbitrators, of whom each
party shall appoint one, provided, however, that if one party has requested the
other to participate in a non-binding procedure and the other has failed to
participate, the requesting party may initiate arbitration before expiration of
the above period. Any arbitrator not appointed by a party shall be selected
from the CPR Panels of Neutrals. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. 1-16, and judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The arbitrators are not empowered to award damages in excess of
compensatory damages and each party hereby irrevocably waives any arbitration
damages in excess of compensatory damages.
35
<PAGE> 15
Exhibit 1
ATTACHMENT TO INVESTMENT MANAGEMENT AGREEMENT
Lincoln Investment Management, Inc.
200 E. Berry Street
Fort Wayne, Indiana 46802
Re:
-----------------------------
(Name of Account)
Ladies and Gentlemen:
This letter confirms the appointment of Lincoln Investment Management,
Inc. ("Manager") as investment adviser with authority as attorney-in-fact on
behalf of the Account
(a) to purchase any and all securities and other property and investments for
the Account at any time or from time to time; (b) to sell any and all
securities and other property and investments held in the Account at any time
or from time to time; (c) to place orders for the execution of such
transactions with or through such brokers and dealers as the Manager may
select; and (d) to execute any and all documents which may be deemed necessary
or desirable to effectuate such transactions.
It is further understood that the Manager may deliver to any broker or
dealer executing transactions on behalf of the Account a copy of this document
as evidence of the authority of the Manager to act for and on behalf of the
Account. In the event this authority is terminated, any party to whom a copy
of this document has been delivered as evidence of the Manager's authority will
be held harmless from any loss or liability incurred as a result of any action
taken in reliance thereon after such termination but before notice of such
termination has been received by such party.
Very truly yours,
Date:______________
Date: ________________
(Client)
By:____________________
Its:____________________
36
<PAGE> 1
EXHIBIT 10.0(2)
LINCOLN INVESTMENT MANAGEMENT, INC.
INVESTMENT MANAGEMENT AGREEMENT
Client Name: American States Financial Corporation
(the "Account")
Effective Date: May 29, 1996
The undersigned (the "Client") hereby confirms that it has retained
Lincoln Investment Management, Inc., an Illinois corporation ("LIM"), as
investment adviser for the Account, consisting of those assets identified on
Schedule A attached hereto as well as all other assets which become part of the
Account as a result of transactions therein or additions thereto, and further
that it has, if and to the extent provided herein, retained LIM to provide
certain additional services with respect to the Account, and LIM agrees to
serve on the following terms and conditions:
1. Appointment and Acceptance of LIM. LIM is appointed as investment
adviser for the Account and will provide certain administrative services with
respect to the Account, all as set forth in Section 2 hereof. LIM accepts such
appointment pursuant to the terms and conditions set forth in this Agreement.
2. Powers, Rights and Duties of the Manager.
(a) Investment advisory. LIM shall perform its responsibilities under
this Agreement in accordance with the investment objectives and policies of the
Account described in Section 3 hereof. Subject to such investment objectives
and policies, LIM shall have authority in its sole discretion and without prior
consultation with the Client and as attorney-in-fact with full power and
authority on behalf of the Client:
(i) to make all investment decisions for the Account, it being
understood that LIM shall have complete discretion as to the nature,
amount and timing of all transactions to be effected in the Account;
(ii) to investigate, analyze, negotiate, purchase, enter into, monitor,
manage, and sell or otherwise dispose of investments of all types
referred to on Schedule B hereto and any additional types of
investments as may be authorized in accordance with Section 3 hereof;
(iii) to negotiate, draft, legally document, execute, acknowledge,
deliver, and if applicable, file or record, or cause to be filed or
recorded, in any appropriate public office, all types of contracts,
documents, agreements and certificates relating to investments for the
Account, including, without limitation, brokerage
37
<PAGE> 2
agreements, letters of commitment, guarantees, stock purchase or
subscription agreements, note agreements, participation agreements,
purchase and sale agreements, indemnity agreements, partnership
agreements, limited partnership agreements, joint venture
agreements, option or warrant agreements, swap agreements,
mortgages, correspondent agreements, trust deeds, trusts, financing
statements, assignments, security agreements, pledges,
reorganization agreements, modification agreements, escrow
agreements and instruments of every kind and nature whatsoever, and
to modify, cancel or terminate such contracts, documents,
agreements and certificates;
(iv) after reasonable inquiry or investigation, to make such
representations, warranties, covenants or certifications in the
name of and on behalf of the Client as it believes to be true; to
agree to any terms or conditions to control any investment or
investment transaction; to direct the purchase, sale or exercise of
any options, privileges or rights with respect to any investment;
to initiate, defend or influence the direction of any claim or
litigation arising from or with respect to any investment; to
effect any purchase, sale, exchange, conversion, compromise,
settlement or release with respect to any investment;
(v) to issue directly to brokers, dealers or issuers orders for the
purchase, sale, exchange or other acquisition or disposition of
investments for the Account or any interests therein as it may deem
appropriate;
(vi) to take any action, or render advice respecting the voting of
proxies solicited by or with respect to the issuers of securities
in which assets of the Account may be invested from time to time;
and
(vii) in furtherance of the foregoing, to do anything which LIM
shall deem requisite, appropriate or advisable in connection
therewith.
LIM, in its sole discretion and at its own expense, shall have authority
to engage the services of a subadviser or subadvisers in connection with the
management of the Account. LIM shall continue to be responsible for all
investment advisory services furnished to the Account by such subadviser or
subadvisers.
(b) Additional Services. In connection with the management of
the Account, LIM shall also provide the additional services listed on Schedule
C hereto.
3. Investment Objectives and Policies. The initial investment
objectives and policies of the Account shall be as set forth in Schedule B
hereto. The Client will notify LIM in writing of any modifications therein
from time to time. LIM is not charged with notice of any modifications in the
Client's investment objectives or policies until such modifications are
received in writing by LIM. In addition, if LIM has obligated itself or the
Client to the purchase or sale of an investment for the Client prior to the
receipt of notice of such modification, LIM shall fulfill such purchase or
sale obligation on behalf of the Client.
38
<PAGE> 3
4. Client's Responsibilities.
Client acknowledges that it (i) is the owner of all of the assets of the
Account; (ii) is responsible to assure that all investments made for the
Account meet the requirements and limitations of any applicable jurisdiction,
contract or instrument; and (iii) is responsible to assure that any limitations
or restrictions arising from applicable law or regulations which in Client's
judgment apply to Client's aggregate holdings of any particular investment or
type of investment are not exceeded.
The Client is required to notify LIM in writing of changes in the
restrictions, limitations or requirements governing the assets of, and
investments for, the Account and to modify the investment objectives and
policies of the Account as set forth in Schedule B hereto. The Client will
notify LIM in writing as to any investments for the Account that do not meet
the requirements or limitations of any applicable jurisdiction, contract or
instrument. LIM shall arrange to dispose of those assets as agreed upon with
the Client, and such dispositions shall be made in the Client's Account and at
the Client's expense and risk.
The Client acknowledges that it shall be solely responsible for (and LIM
shall have no responsibility for): (i) maintenance of proper accounting records
for the Account; or (ii) with the exception of the SVO filings to be made by
LIM pursuant to Schedule C hereto, all filings required to be made respecting
the Account or assets of the Account with federal or state regulatory
authorities (including, without limitation, verifying and ensuring the accuracy
of all data contained within such filings). Without diminishing or modifying
LIM's obligations under Section 10 hereof, the Client acknowledges that it has
responsibility for the valuation of the assets of the Account for purposes of
the Client's own financial and performance reporting, whether required by law
or regulation or otherwise.
5. Documentation to be Furnished by Client. The Client agrees to furnish
LIM with such authorizations and documentation as LIM may from time to time
require to enable it to carry out its obligations under this Agreement,
including powers of attorney. Without limiting the foregoing, the Client will
direct the Custodian (as defined below) to provide LIM with cash information as
it relates to the Account assets.
6. Custodian. The Client shall be responsible for the appointment and
payment of a custodian (the "Custodian"), acceptable to LIM, who will take
custody of the Account assets and be responsible for the collection of
interest, dividends, distributions and other income (whether in cash or
securities) attributable to the assets in the Account. Although LIM may place
orders directly with brokers for execution of transactions authorized by this
Agreement with respect to the Account, all such transactions shall be carried
out through the Custodian. The Client will direct Custodian to accept
settlement instructions issued by LIM for the Account, and LIM shall not be
liable to the Client for (i) any failure of the Custodian to perform its
responsibilities to the Account, including, without limitation, any losses that
arise from the failure of the Custodian to notify LIM of any notices affecting
called securities, deadline expirations, dates and capital reorganization
events affecting the securities in the Account or (ii) any liability or loss
with respect to the transmittal or safekeeping of cash, securities or other
assets.
39
<PAGE> 4
7. Account Modifications. The Client may make additions to the Account
with reasonable advance notice to LIM. The Client may make withdrawals from
the Account subject to industry trade settlement time requirements and any
other market restrictions; provided, however, that LIM may establish additional
restrictions for the withdrawal of certain assets due to the less liquid nature
of such assets.
8. Brokerage.
(a) LIM is hereby authorized on behalf of the Client to place orders
for the Account with brokers and dealers selected exclusively by LIM. LIM
will not be responsible for any act or omission by brokers or dealers selected
by LIM.
(b) In selecting brokers and dealers to execute transactions and in
negotiating commission rates with respect thereto, LIM shall take into account
the financial stability and reputation of brokerage firms and the brokerage and
research services provided by such brokers. The Client may be deemed to be
paying for services (sometimes referred to as "soft dollar" payments) provided
by the broker which are included in the commission rate (as permitted by
Section 28(e) of the Securities Exchange Act of 1934), provided that such
commission rate is reasonable in relation to the value of the brokerage and
research services provided when viewed in terms of either that particular
transaction or LIM's overall responsibilities with respect to the accounts as
to which it exercises investment discretion. The investment advisory fees
described in Section 11 below are based upon the foregoing.
(c) LIM may combine orders for the Account with those on behalf of
other clients. The purchase price paid or the proceeds received in any combined
order will be allocated equitably among those accounts with assets included in
such combined order.
(d) As evidence of LIM's authority to act as investment adviser for
the Account, Client shall, on or before the execution date of this Agreement,
execute a letter in form substantially similar to Exhibit 1 hereto and Client
authorizes LIM to provide copies of such letter to any broker or dealer it may
select pursuant to subparagraph (a) of this Section 8.
9. Account Information. LIM shall deliver or cause to be delivered in
written form at the times set forth in Schedule D the Account information and
reports set forth in Schedule D.
10. Valuation. In determining the value of the Account or any of its
assets, any security listed on one or more national securities exchanges shall
be valued at the last quoted sale price on the valuation date on the principal
exchange or market on which the security is traded. Any other security or asset
shall be valued as determined in good faith by LIM to reflect its fair value.
11. Compensation.
40
<PAGE> 5
(a) The compensation of LIM for its investment advisory services
shall be calculated and paid in accordance with the attached Schedule E on the
basis of asset values determined as provided in this Agreement.
(b) The Client shall pay all expenses related to the Account and
investments of the Account including, without limitation, custodian fees,
brokerage commissions and such other expenses as may be related to the
execution of orders to purchase or sell assets of the Account.
12. Service to Other Clients. It is understood that LIM also provides
investment management services to other clients, and may give advice and take
action with respect to the assets of such clients which may differ from the
advice given, or the timing or nature of action taken, with respect to the
Account. Nothing herein shall restrict LIM, its principals, affiliates or
employees from purchasing or selling any investment for its or their own
accounts. Furthermore, LIM shall have no obligation to purchase or sell for
the Account, or to recommend for purchase or sale for the Account, any
investment which LIM, its principals, affiliates or employees may purchase or
sell for themselves or for any other client.
13. Representations by the Client. The Client represents and warrants
that (i) the retention of LIM pursuant to this Agreement is authorized by any
governing documents relating to Client and the Account; (ii) this Agreement has
been duly authorized by appropriate action and when so executed and delivered
will be binding upon the Client in accordance with its terms; (iii) neither the
execution and delivery of the Agreement by Client nor the performance of its
obligations hereunder conflict with or violate any provision of law, rule or
regulation, or any instrument to which it is a party or to which any of its
property is subject; (iv) the Client has obtained all consents, approvals and
waivers of regulatory authorities which may be required in order for Client to
execute this Agreement and perform its responsibilities hereunder; and (v) the
Client will deliver to LIM such evidence of its authority as LIM may reasonably
require, whether by way of a certified corporate resolution or otherwise.
14. Representations by LIM. LIM represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended.
15. Utilization of Attorneys; Scope of Engagement. Client acknowledges
that from time to time during the term of this Agreement, LIM shall obtain
advice from or otherwise be represented by attorneys, including attorneys who
may be employees of LIM and/or its affiliates ("LIM Counsel"), with respect to
matters arising under or in connection with this Agreement, including, without
limitation, the matters described in Section 2 hereof. Client further
acknowledges and agrees that: (i) LIM Counsel (whether or not they are
employees of LIM and/or its affiliates) shall at all times only represent LIM
and/or its affiliates; (ii) that LIM shall have no obligation to engage
attorneys to represent Client; and (iii) that Client will retain or engage
counsel to represent it as and when it deems such engagement to be appropriate.
Client acknowledges and agrees that it shall not: (i) be owed any professional
duty or obligation by LIM Counsel; (ii) be deemed to receive any advice or
other legal representation from LIM Counsel; or (iii) be entitled to rely upon,
or actually rely upon, any statements of LIM Counsel.
41
<PAGE> 6
16. Tax Advice; Scope of Engagement. LIM will not render tax advice in
connection with the performance of its services hereunder. Client acknowledges
that (i) it will not rely on LIM for tax advice, and (ii) it will seek tax
advice, as it deems appropriate, from other qualified experts.
17. Liability. Unless otherwise provided by law, the Client agrees that
neither LIM nor any LIM director, officer, employee or LIM Counsel shall be
liable for any loss due to an error in judgment or for any act or omission to
act by LIM, LIM Counsel, or any broker, dealer or Custodian, except for losses
resulting from LIM's or such director's, officer's, employee's or LIM Counsel's
gross negligence or willful misconduct. The Client shall indemnify and hold
harmless LIM, its directors, officers, employees and LIM Counsel against any
loss, expense or claim arising in connection with the Account or this Agreement
from any act other than their gross negligence or willful misconduct, except
where such indemnification is prohibited by law. LIM shall indemnify and hold
harmless the Client against losses resulting from LIM's or its directors',
officers', employees' or LIM Counsel's gross negligence or willful misconduct,
except where such indemnification is prohibited by law.
18. Term. This Agreement shall remain in effect for three years from the
Effective Date (the "Initial Term"). Following the Initial Term, this
Agreement will be automatically renewed for additional one year terms, unless
sooner terminated as herein provided.
19. Dispute Resolution. In the event of a dispute arising out of or
relating to this Agreement, or the breach thereof, the parties shall attempt in
good faith to resolve the dispute in the manner set forth in Schedule F.
Nothing in this Section 19 or in Schedule F shall be construed to
constitute a waiver of any right provided by the Investment Advisers Act of
1940.
20. Termination and Assignment.
(a) This Agreement may be terminated by the Client during the Initial
Term if LIM or any of its directors, officers or employees or LIM Counsel
engage in any act or omission which constitutes gross negligence or willful
misconduct, upon written notice to LIM. This Agreement may be terminated by
either party following the Initial Term at any time upon sixty (60) days' prior
written notice to the other party. Upon any termination of the Agreement by
either party, (i) any transaction for the Account initiated prior to the
receipt of written notice of termination shall be consummated, and (ii) LIM
shall not initiate any transactions for the Account subsequent to the receipt
of written notice of termination except at Client's written request.
(b) No assignment (as defined in the Investment Advisers Act of 1940)
of this Agreement by LIM shall be effective without the written consent of the
Client.
(c) The provisions of Section 17 of this Agreement shall survive
notwithstanding any termination of this Agreement.
42
<PAGE> 7
21. Notices. Unless otherwise specified herein, all notices, reports or
other communications provided for herein shall be in writing and delivered by
first-class mail, registered or certified mail, overnight courier service or
facsimile to LIM or to the Client at the addresses appearing below. All
facsimiles which are sent must be telephonically confirmed. The effective date
of any such notice shall be the date such notice is received. Each party to
this Agreement may by written notice to the other party designate a different
address.
22. Confidentiality. LIM and the Client acknowledge and agree that all
information furnished by LIM to the Client in connection with the Account under
this Agreement shall be treated as confidential and shall not be disclosed to
third parties without the prior written consent of LIM, except as required by
applicable law or as required to perform this Agreement.
If the Client participates in a transaction and as a result of such
participation LIM receives confidential information about parties related to
the transaction, LIM shall retain such confidential information at its site.
If the Client is required by regulatory authorities or otherwise by law to
provide such confidential information, LIM, at the written direction of the
Client, shall provide the confidential information directly to the requesting
entity on the Client's behalf.
23. Inspection and Audit of Records. Upon reasonable notice by the
Client, LIM shall make its records relating to the Account available for
inspection and audit by the Client or its representatives and by any state
insurance regulators at all reasonable times during normal business hours.
24. Disclosure Statement. The Client acknowledges receipt of Part II of
LIM's Form ADV filed with the Securities and Exchange Commission at least
forty-eight (48) hours prior to entering into this Agreement.
25. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Indiana without regard to the
principles of conflicts of law contained therein.
26. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof, and may be amended only
by written document signed by the parties.
27. Modification in Conformity with Law. If any provision hereof is, or
at any time should become, inconsistent with any present or future law, rule or
regulation of any exchange or any governmental or regulatory body with
jurisdiction, said provision shall be deemed modified to conform to such law,
rule or regulation, but in all other respects this Agreement shall continue
and remain in full force and effect.
American States Financial Corporation
-------------------------------------
Client's Name
43
<PAGE> 8
<TABLE>
<S> <C>
Date: May 20, 1996 By: /s/ JEROME T. GALLOGLY
- - ------------------------------------ ------------------------------------------
Name: Jerome T. Gallogly
Title: Executive Vice President
(317) 262-6785 Mailing Address: 500 North Meridian Street
- - ------------------------------------
Telephone No. Indianapolis, Indiana 46204
(317) 262-6616
- - ------------------------------------
Fax No.
35-1976549
- - ------------------------------------
Taxpayer I.D. No.
Accepted and Agreed to:
LINCOLN INVESTMENT
MANAGEMENT, INC.
By: /s/ ANN L. WARNER Date: As of May 29, 1996
- - --------------------------------- --------------------------
Name: Ann L. Warner
Title: Senior Vice President
By: /s/ ANNE BOOKWALTER Date: As of May 29, 1996
- - --------------------------------- --------------------------
Name: Anne Bookwalter
Title: Senior Vice President
200 East Berry Street
Fort Wayne, IN 46802
Attn: Marketing and Client Services
</TABLE>
44
<PAGE> 9
Schedule A
Listing of Client's Assets
To be provided.
45
<PAGE> 10
Schedule B
STATEMENT OF INVESTMENT POLICY
AMERICAN STATES FINANCIAL CORPORATION
Investment Objective:
The primary objective is to maximize current income consistent with the
preservation of capital and liquidity. The account pursues its investment
objective by investing primarily in a portfolio of short-term money market
instruments maturing within one year from date of purchase.
Product Description:
American States Financial Corporation is a financial services firm that is
headquartered in Indianapolis, Indiana. Through its subsidiaries, the company
markets property casualty insurance, annuities and various types of life
insurance.
Asset Categories:
Maximum % of Assets
<TABLE>
<S> <C>
Uncommitted Cash in Money Market Instruments: 100%
Public Bonds 100%
Less Liquid Investments:
Private Placements 0%
Mortgages 0%
TOTAL LESS LIQUID INVESTMENTS 0%
Equity-Related Securities: (&/or) Max. %
Surplus
Convertible Bonds & Bonds w/warrants 10%
Convertible Preferreds 5%
Common Stocks 15%
Common Stocks and Perpetual Preferreds 25% 50%
TOTAL EQUITY-RELATED SECURITIES 25%
Real Estate 0%
Tax-Advantaged Securities:
Preferred Stocks 10%
</TABLE>
46
<PAGE> 11
<TABLE>
<S> <C>
Tax Exempts 85%
ESOPs 5%
TOTAL TAX-ADVANTAGED SECURITIES 85%
Derivative Securities:
New programs not permitted.
Unhedged Non-Dollar Investments 3%
</TABLE>
47
<PAGE> 12
AMERICAN STATES FINANCIAL CORPORATION
Quality Restrictions:
Minimum % Assets in Government Securities 0%
Maximum % Assets Baa 20%
Maximum % Assets Below Investment Grade 0%
Minimum Average Portfolio Quality: A or better for bonds
A2/P2 for money market instruments
Diversification - Maximum % of Assets:
20 % per Industry (except utilities) 5 % Canadian Governments
- - ----- -----
5 % per Non-Government Issuer 5 % Other Foreign
- - ----- ----- (dollar-denominated)
(except Clinton Holdings) 5 % Supranationals
-----
20 % MBS/ABS/CMBS
- - -----
Maturity or Duration Profile:
Target Duration Range: 0.0-6.5 years
Maturity Distribution: Min. % of Assets Max. % of Assets
---------------- ----------------
Money Market & Bonds <1 yr. 5% 100%
Intermediates 0% 95%
Long (>10 years) 0% 90%
Date Prepared: February 26, 1996
48
<PAGE> 13
Schedule C
List of Additional Services
Accounting services to include the following:
- Process cash and trade activity within Prism
- Monthly projections of prepayment speeds on MBS/ABS (within 10 days
of month end)
- Quarterly GAAP reserve recommendation for permanent declines in
market value on fixed income securities and equity securities
- Complete and file applications for registration of securities with
Securities Valuation Office of the NAIC ("SVO") (as required by SVO
filing deadlines)
49
<PAGE> 14
Schedule D
Account Information
Monthly:
within 10 business days:
asset inventory listing
within 20 business days:
portfolio performance report
Quarterly:
within 25 business days:
management reports
summary of derivatives activity
performance summaries
50
<PAGE> 15
Schedule E
Fees for Investment Advisory Services
Based upon the objectives and policies of the Account as set forth in
Schedule B and the additional services set forth in Schedule C, the annualized
fee shall be thirteen (13) basis points.* Fees are calculated each quarter by
applying the above rate to the aggregate value of assets held in the Account as
of the last business day of each calendar quarter. The value of assets in the
Account is to be determined in accordance with Section 10 of the Agreement.
LIM's minimum total quarterly fee is $12,500. The Client will be charged
additional amounts for the management of its equity securities based upon the
fees charged LIM by the applicable subadvisers.
LIM will bill the Client for its quarterly fee and the fees of any
subadvisers, and such fees will be due immediately upon receipt of each
invoice. Notwithstanding the foregoing, for any calendar quarter during which
this Agreement is not in effect for the full calendar quarter, the fees for
investment advisory services shall be prorated for the period during which the
Agreement is in effect.
For each portfolio created subsequent to the Effective Date, there is a
one time initialization fee of $10,000 per portfolio.
If at any time while this Agreement shall be in effect the Client desires
services or account information from the Manager other than those specifically
delineated in this Agreement and all Schedules hereto, and the Manager agrees
to provide such services or account information, a fee for such services or
account information shall be determined through good faith negotiations. In
addition, LIM reserves the right to increase its fees if the Client modifies
the objectives and policies of the Account as set forth in Schedule B or
requests additional services to be set forth in Schedule C. LIM also reserves
the right to charge the Client such additional amounts as determined from time
to time by LIM if any of the following occur: (i) LIM is required to spend
additional time to process the Client's transactions due to the Client's choice
of Custodian; or (ii) if the Client desires to have on-line access to LIM's
computer systems and executes a separate agreement with LIM relating to such
access. Any increase in fees or additional amounts described in this paragraph
shall be effective upon written notice to the Client by LIM.
- - ---------------
* After the Initial Term, fees may be amended by LIM upon 90 days' prior
written notice to the Client.
51
<PAGE> 16
Schedule F
Alternative Dispute Resolution
NEGOTIATION BETWEEN EXECUTIVES. The parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between executives who have authority to settle the controversy.
Any party may give the other party written notice of any dispute not resolved
in the normal course of business. Within 20 days after delivery of said
notice, executives of both parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary, to exchange
relevant information and to attempt to resolve the dispute. If the matter has
not been resolved within 60 days of the disputing party's notice, or if the
parties fail to meet within 20 days, either party may initiate mediation of the
controversy or claims as provided hereinafter.
If a negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of such
intention and may also be accompanied by an attorney. All negotiations
pursuant to this clause are confidential and shall be treated as compromise and
settlement negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
MEDIATION. If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the dispute by mediation
under the then current Center for Public Resources ("CPR") Model Procedures for
Mediation of Business Disputes. The neutral third party will be selected from
the CPR Panel of Neutrals. If the parties encounter difficulty in agreeing on
a neutral, they will seek the assistance of CPR in the selection process.
ARBITRATION UNDER THE CPR RULES. Any dispute arising out of or relating
to this Agreement or the breach, termination or validity thereof, which has not
been resolved by Mediation as provided above within 60 days of the initiation
of such procedure (unless the parties mutually agree to extend such timeframe),
shall be finally settled by arbitration conducted expeditiously in accordance
with the Center for Public Resources Rules for Non-Administered Arbitration of
Business Disputes by three independent and impartial arbitrators, of whom each
party shall appoint one, provided, however, that if one party has requested the
other to participate in a non-binding procedure and the other has failed to
participate, the requesting party may initiate arbitration before expiration of
the above period. Any arbitrator not appointed by a party shall be selected
from the CPR Panels of Neutrals. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. 1-16, and judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The arbitrators are not empowered to award damages in excess of
compensatory damages and each party hereby irrevocably waives any arbitration
damages in excess of compensatory damages.
52
<PAGE> 17
Exhibit 1
ATTACHMENT TO INVESTMENT MANAGEMENT AGREEMENT
Lincoln Investment Management, Inc.
200 E. Berry Street
Fort Wayne, Indiana 46802
Re:
----------------------------
(Name of Account)
Ladies and Gentlemen:
This letter confirms the appointment of Lincoln Investment Management,
Inc. ("Manager") as investment adviser with authority as attorney-in-fact on
behalf of the Account (a) to purchase any and all securities and other
property and investments for the Account at any time or from time to time; (b)
to sell any and all securities and other property and investments held in the
Account at any time or from time to time; (c) to place orders for the
execution of such transactions with or through such brokers and dealers as the
Manager may select; and (d) to execute any and all documents which may be
deemed necessary or desirable to effectuate such transactions.
It is further understood that the Manager may deliver to any broker or
dealer executing transactions on behalf of the Account a copy of this document
as evidence of the authority of the Manager to act for and on behalf of the
Account. In the event this authority is terminated, any party to whom a copy
of this document has been delivered as evidence of the Manager's authority will
be held harmless from any loss or liability incurred as a result of any action
taken in reliance thereon after such termination but before notice of such
termination has been received by such party.
Very truly yours,
Date:
----------------------------- -------------------------------
(Client)
By:
----------------------------
Its:
----------------------------
53
<PAGE> 1
EXHIBIT 10.0(3)
LINCOLN INVESTMENT MANAGEMENT, INC.
INVESTMENT MANAGEMENT AGREEMENT
Client Name: American States Life Insurance Company
(the "Account")
Effective Date: June 1, 1996
The undersigned (the "Client") hereby confirms that it has retained
Lincoln Investment Management, Inc., an Illinois corporation ("LIM"), as
investment adviser for the Account, consisting of those assets identified on
Schedule A attached hereto as well as all other assets which become part of the
Account as a result of transactions therein or additions thereto, and further
that it has, if and to the extent provided herein, retained LIM to provide
certain additional services with respect to the Account, and LIM agrees to
serve on the following terms and conditions:
1. Appointment and Acceptance of LIM. LIM is appointed as investment
adviser for the Account and will provide certain administrative services with
respect to the Account, all as set forth in Section 2 hereof. LIM accepts such
appointment pursuant to the terms and conditions set forth in this Agreement.
2. Powers, Rights and Duties of the Manager.
(a) Investment advisory. LIM shall perform its responsibilities under
this Agreement in accordance with the investment objectives and policies of the
Account described in Section 3 hereof. Subject to such investment objectives
and policies, LIM shall have authority in its sole discretion and without prior
consultation with the Client and as attorney-in-fact with full power and
authority on behalf of the Client:
(i) to make all investment decisions for the Account, it being
understood that LIM shall have complete discretion as to the nature,
amount and timing of all transactions to be effected in the Account;
(ii) to investigate, analyze, negotiate, purchase, enter into,
monitor, manage, and sell or otherwise dispose of investments of all
types referred to on Schedule B hereto and any additional types of
investments as may be authorized in accordance with Section 3 hereof;
(iii) to negotiate, draft, legally document, execute, acknowledge,
deliver, and if applicable, file or record, or cause to be filed or
recorded, in any appropriate public office, all types of contracts,
documents, agreements and certificates relating to investments for the
Account, including, without limitation, brokerage
54
<PAGE> 2
agreements, letters of commitment, guarantees, stock purchase or
subscription agreements, note agreements, participation agreements,
purchase and sale agreements, indemnity agreements, partnership
agreements, limited partnership agreements, joint venture agreements,
option or warrant agreements, swap agreements, mortgages, correspondent
agreements, trust deeds, trusts, financing statements, assignments,
security agreements, pledges, reorganization agreements, modification
agreements, escrow agreements and instruments of every kind and nature
whatsoever, and to modify, cancel or terminate such contracts,
documents, agreements and certificates;
(iv) after reasonable inquiry or investigation, to make such
representations, warranties, covenants or certifications in the name of
and on behalf of the Client as it believes to be true; to agree to any
terms or conditions to control any investment or investment
transaction; to direct the purchase, sale or exercise of any options,
privileges or rights with respect to any investment; to initiate,
defend or influence the direction of any claim or litigation arising
from or with respect to any investment; to effect any purchase, sale,
exchange, conversion, compromise, settlement or release with respect to
any investment;
(v) to issue directly to brokers, dealers or issuers orders for the
purchase, sale, exchange or other acquisition or disposition of
investments for the Account or any interests therein as it may deem
appropriate;
(vi) to take any action, or render advice respecting the voting of
proxies solicited by or with respect to the issuers of securities in
which assets of the Account may be invested from time to time; and
(vii) in furtherance of the foregoing, to do anything which LIM shall
deem requisite, appropriate or advisable in connection therewith.
LIM, in its sole discretion and at its own expense, shall have authority
to engage the services of a subadviser or subadvisers in connection with the
management of the Account. LIM shall continue to be responsible for all
investment advisory services furnished to the Account by such subadviser or
subadvisers.
(b) Additional Services. In connection with the management of the
Account, LIM shall also provide the additional services listed on Schedule C
hereto.
3. Investment Objectives and Policies. The initial investment objectives
and policies of the Account shall be as set forth in Schedule B hereto. The
Client will notify LIM in writing of any modifications therein from time to
time. LIM is not charged with notice of any modifications in the Client's
investment objectives or policies until such modifications are received in
writing by LIM. In addition, if LIM has obligated itself or the Client to the
purchase or sale of an investment for the Client prior to the receipt of notice
of such modification, LIM shall fulfill such purchase or sale obligation on
behalf of the Client.
55
<PAGE> 3
4. Client's Responsibilities.
Client acknowledges that it (i) is the owner of all of the assets of the
Account; (ii) is responsible to assure that all investments made for the
Account meet the requirements and limitations of any applicable jurisdiction,
contract or instrument; and (iii) is responsible to assure that any limitations
or restrictions arising from applicable law or regulations which in Client's
judgment apply to Client's aggregate holdings of any particular investment or
type of investment are not exceeded.
The Client is required to notify LIM in writing of changes in the
restrictions, limitations or requirements governing the assets of, and
investments for, the Account and to modify the investment objectives and
policies of the Account as set forth in Schedule B hereto. The Client will
notify LIM in writing as to any investments for the Account that do not meet
the requirements or limitations of any applicable jurisdiction, contract or
instrument. LIM shall arrange to dispose of those assets as agreed upon with
the Client, and such dispositions shall be made in the Client's Account and at
the Client's expense and risk.
The Client acknowledges that it shall be solely responsible for (and LIM
shall have no responsibility for): (i) maintenance of proper accounting records
for the Account; or (ii) with the exception of the SVO filings to be made by
LIM pursuant to Schedule C hereto, all filings required to be made respecting
the Account or assets of the Account with federal or state regulatory
authorities (including, without limitation, verifying and ensuring the accuracy
of all data contained within such filings). Without diminishing or modifying
LIM's obligations under Section 10 hereof, the Client acknowledges that it has
responsibility for the valuation of the assets of the Account for purposes of
the Client's own financial and performance reporting, whether required by law
or regulation or otherwise.
5. Documentation to be Furnished by Client. The Client agrees to furnish
LIM with such authorizations and documentation as LIM may from time to time
require to enable it to carry out its obligations under this Agreement,
including powers of attorney. Without limiting the foregoing, the Client will
direct the Custodian (as defined below) to provide LIM with cash information as
it relates to the Account assets.
6. Custodian. The Client shall be responsible for the appointment and
payment of a custodian (the "Custodian"), acceptable to LIM, who will take
custody of the Account assets and be responsible for the collection of
interest, dividends, distributions and other income (whether in cash or
securities) attributable to the assets in the Account. Although LIM may place
orders directly with brokers for execution of transactions authorized by this
Agreement with respect to the Account, all such transactions shall be carried
out through the Custodian. The Client will direct Custodian to accept
settlement instructions issued by LIM for the Account, and LIM shall not be
liable to the Client for (i) any failure of the Custodian to perform its
responsibilities to the Account, including, without limitation, any losses that
arise from the failure of the Custodian to notify LIM of any notices affecting
called securities, deadline expirations, dates and capital reorganization
events affecting the securities in the Account or (ii) any liability or loss
with respect to the transmittal or safekeeping of cash, securities or other
assets.
56
<PAGE> 4
7. Account Modifications. The Client may make additions to the Account
with reasonable advance notice to LIM. The Client may make withdrawals from
the Account subject to industry trade settlement time requirements and any
other market restrictions; provided, however, that LIM may establish additional
restrictions for the withdrawal of certain assets due to the less liquid nature
of such assets.
8. Brokerage.
(a) LIM is hereby authorized on behalf of the Client to place orders
for the Account with brokers and dealers selected exclusively by LIM. LIM
will not be responsible for any act or omission by brokers or dealers selected
by LIM.
(b) In selecting brokers and dealers to execute transactions and in
negotiating commission rates with respect thereto, LIM shall take into account
the financial stability and reputation of brokerage firms and the brokerage and
research services provided by such brokers. The Client may be deemed to be
paying for services (sometimes referred to as "soft dollar" payments) provided
by the broker which are included in the commission rate (as permitted by
Section 28(e) of the Securities Exchange Act of 1934), provided that such
commission rate is reasonable in relation to the value of the brokerage and
research services provided when viewed in terms of either that particular
transaction or LIM's overall responsibilities with respect to the accounts as
to which it exercises investment discretion. The investment advisory fees
described in Section 11 below are based upon the foregoing.
(c) LIM may combine orders for the Account with those on behalf of
other clients. The purchase price paid or the proceeds received in any combined
order will be allocated equitably among those accounts with assets included in
such combined order.
(d) As evidence of LIM's authority to act as investment adviser for the
Account, Client shall, on or before the execution date of this Agreement,
execute a letter in form substantially similar to Exhibit 1 hereto and Client
authorizes LIM to provide copies of such letter to any broker or dealer it may
select pursuant to subparagraph (a) of this Section 8.
9. Account Information. LIM shall deliver or cause to be delivered in
written form at the times set forth in Schedule D the Account information and
reports set forth in Schedule D.
10. Valuation. In determining the value of the Account or any of its
assets, any security listed on one or more national securities exchanges shall
be valued at the last quoted sale price on the valuation date on the principal
exchange or market on which the security is traded. Any other security or asset
shall be valued as determined in good faith by LIM to reflect its fair value.
11. Compensation.
57
<PAGE> 5
(a) The compensation of LIM for its investment advisory services
shall be calculated and paid in accordance with the attached Schedule E on the
basis of asset values determined as provided in this Agreement.
(b) The Client shall pay all expenses related to the Account and
investments of the Account including, without limitation, custodian fees,
brokerage commissions and such other expenses as may be related to the
execution of orders to purchase or sell assets of the Account.
12. Service to Other Clients. It is understood that LIM also provides
investment management services to other clients, and may give advice and take
action with respect to the assets of such clients which may differ from the
advice given, or the timing or nature of action taken, with respect to the
Account. Nothing herein shall restrict LIM, its principals, affiliates or
employees from purchasing or selling any investment for its or their own
accounts. Furthermore, LIM shall have no obligation to purchase or sell for
the Account, or to recommend for purchase or sale for the Account, any
investment which LIM, its principals, affiliates or employees may purchase or
sell for themselves or for any other client.
13. Representations by the Client. The Client represents and warrants
that (i) the retention of LIM pursuant to this Agreement is authorized by any
governing documents relating to Client and the Account; (ii) this Agreement has
been duly authorized by appropriate action and when so executed and delivered
will be binding upon the Client in accordance with its terms; (iii) neither the
execution and delivery of the Agreement by Client nor the performance of its
obligations hereunder conflict with or violate any provision of law, rule or
regulation, or any instrument to which it is a party or to which any of its
property is subject; (iv) the Client has obtained all consents, approvals and
waivers of regulatory authorities which may be required in order for Client to
execute this Agreement and perform its responsibilities hereunder; and (v) the
Client will deliver to LIM such evidence of its authority as LIM may reasonably
require, whether by way of a certified corporate resolution or otherwise.
14. Representations by LIM. LIM represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended.
15. Utilization of Attorneys; Scope of Engagement. Client acknowledges
that from time to time during the term of this Agreement, LIM shall obtain
advice from or otherwise be represented by attorneys, including attorneys who
may be employees of LIM and/or its affiliates ("LIM Counsel"), with respect to
matters arising under or in connection with this Agreement, including, without
limitation, the matters described in Section 2 hereof. Client further
acknowledges and agrees that: (i) LIM Counsel (whether or not they are
employees of LIM and/or its affiliates) shall at all times only represent LIM
and/or its affiliates; (ii) that LIM shall have no obligation to engage
attorneys to represent Client; and (iii) that Client will retain or engage
counsel to represent it as and when it deems such engagement to be appropriate.
Client acknowledges and agrees that it shall not: (i) be owed any professional
duty or obligation by LIM Counsel; (ii) be deemed to receive any advice or
other legal representation from LIM Counsel; or (iii) be entitled to rely upon,
or actually rely upon, any statements of LIM Counsel.
58
<PAGE> 6
16. Tax Advice; Scope of Engagement. LIM will not render tax advice in
connection with the performance of its services hereunder. Client acknowledges
that (i) it will not rely on LIM for tax advice, and (ii) it will seek tax
advice, as it deems appropriate, from other qualified experts.
17. Liability. Unless otherwise provided by law, the Client agrees that
neither LIM nor any LIM director, officer, employee or LIM Counsel shall be
liable for any loss due to an error in judgment or for any act or omission to
act by LIM, LIM Counsel, or any broker, dealer or Custodian, except for losses
resulting from LIM's or such director's, officer's, employee's or LIM Counsel's
gross negligence or willful misconduct. The Client shall indemnify and hold
harmless LIM, its directors, officers, employees and LIM Counsel against any
loss, expense or claim arising in connection with the Account or this Agreement
from any act other than their gross negligence or willful misconduct, except
where such indemnification is prohibited by law. LIM shall indemnify and hold
harmless the Client against losses resulting from LIM's or its directors',
officers', employees', or LIM Counsel's gross negligence or willful misconduct,
except where such indemnification is prohibited by law.
18. Term. This Agreement shall remain in effect for three years from the
Effective Date (the "Initial Term"). Following the Initial Term, this
Agreement will be automatically renewed for additional one year terms, unless
sooner terminated as herein provided.
19. Dispute Resolution. In the event of a dispute arising out of or
relating to this Agreement, or the breach thereof, the parties shall attempt in
good faith to resolve the dispute in the manner set forth in Schedule F.
Nothing in this Section 19 or in Schedule F shall be construed to
constitute a waiver of any right provided by the Investment Advisers Act of
1940.
20. Termination and Assignment.
(a) This Agreement may be terminated by the Client during the Initial
Term if LIM or any of its directors, officers or employees or LIM Counsel
engage in any act or omission which constitutes gross negligence or willful
misconduct, upon written notice to LIM. This Agreement may be terminated by
either party following the Initial Term at any time upon sixty (60) days' prior
written notice to the other party. Upon any termination of the Agreement by
either party, (i) any transaction for the Account initiated prior to the
receipt of written notice of termination shall be consummated, and (ii) LIM
shall not initiate any transactions for the Account subsequent to the receipt
of written notice of termination except at Client's written request.
(b) No assignment (as defined in the Investment Advisers Act of 1940)
of this Agreement by LIM shall be effective without the written consent of the
Client.
(c) The provisions of Section 17 of this Agreement shall survive
notwithstanding any termination of this Agreement.
59
<PAGE> 7
21. Notices. Unless otherwise specified herein, all notices, reports or
other communications provided for herein shall be in writing and delivered by
first-class mail, registered or certified mail, overnight courier service or
facsimile to LIM or to the Client at the addresses appearing below. All
facsimiles which are sent must be telephonically confirmed. The effective date
of any such notice shall be the date such notice is received. Each party to
this Agreement may by written notice to the other party designate a different
address.
22. Confidentiality. LIM and the Client acknowledge and agree that all
information furnished by LIM to the Client in connection with the Account under
this Agreement shall be treated as confidential and shall not be disclosed to
third parties without the prior written consent of LIM, except as required by
applicable law or as required to perform this Agreement.
If the Client participates in a transaction and as a result of such
participation LIM receives confidential information about parties related to
the transaction, LIM shall retain such confidential information at its site.
If the Client is required by regulatory authorities or otherwise by law to
provide such confidential information, LIM, at the written direction of the
Client, shall provide the confidential information directly to the requesting
entity on the Client's behalf.
23. Inspection and Audit of Records. Upon reasonable notice by the
Client, LIM shall make its records relating to the Account available for
inspection and audit by the Client or its representatives and by any state
insurance regulators at all reasonable times during normal business hours.
24. Disclosure Statement. The Client acknowledges receipt of Part II of
LIM's Form ADV filed with the Securities and Exchange Commission at least
forty-eight (48) hours prior to entering into this Agreement.
25. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Indiana without regard to the
principles of conflicts of law contained therein.
26. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof, and may be amended only
by written document signed by the parties.
27. Modification in Conformity with Law. If any provision hereof is, or
at any time should become, inconsistent with any present or future law, rule or
regulation of any exchange or any governmental or regulatory body with
jurisdiction, said provision shall be deemed modified to conform to such law,
rule or regulation, but in all other respects this Agreement shall continue
and remain in full force and effect.
American States Life Insurance Company
--------------------------------------
Client's Name
60
<PAGE> 8
<TABLE>
<CAPTION>
<S> <C>
Date: 6/10/96 By: /s/ THOMAS M. OBER
---------------------------- -------------------------
Name: Thomas M. Ober
Title: Secretary
317/262-6797 Mailing Address: 500 North Meridian Street
- - --------------------------------- Indianapolis, Indiana 46204
Telephone No.
317/262-6613
- - ---------------------------------
Fax No.
35-1007048
- - ---------------------------------
Taxpayer I.D. No.
Accepted and Agreed to:
LINCOLN INVESTMENT
MANAGEMENT, INC.
By: /s/ ANN L. WARNER Date: 6/13/96_
--------------------------------- ---------------
Name: Ann L. Warner
Title: Senior Vice President
By: /s/ ANNE BOOKWALTER Date: 6/13/96
--------------------------------- ---------------
Name: Anne Bookwalter
Title: Vice President
200 East Berry Street
Fort Wayne, IN 46802
Attn: Marketing and Client Services
</TABLE>
61
<PAGE> 9
Schedule A
Listing of Client's Assets
To be provided.
62
<PAGE> 10
Schedule B
Investment Objectives and Policies
To be provided.
63
<PAGE> 11
Schedule C
List of Additional Services
Accounting services to include the following:
- Process cash and trade activity within Prism
- Monthly projections of prepayment speeds on MBS/ABS (within 10 days
of month end)
- Quarterly GAAP reserve recommendation for permanent declines in
market value on fixed income securities and equity securities
- Complete and file applications for registration of securities with
Securities Valuation Office of the NAIC ("SVO") (as required by SVO
filing deadlines)
- Quarterly Schedule D, Part 3, Part 4 and Part 1B information*
- Monthly Interest Maintenance Reserve (IMR) amortization report*
- Quarterly Asset Valuation Reserve (AVR) report*
- Monthly Schedule Ds, all parts*
* The data contained in these reports is not reviewed by LIM, and the
Client is responsible for the accuracy of the final reports.
64
<PAGE> 12
Schedule D
Account Information
Monthly:
within 10 business days:
asset inventory listing
within 20 business days:
portfolio performance report
Quarterly:
within 25 business days:
management reports
summary of derivatives activity
performance summaries
65
<PAGE> 13
Schedule E
Fees for Investment Advisory Services
Based upon the objectives and policies of the Account as set forth in
Schedule B and the additional services set forth in Schedule C, the annualized
fee shall be thirteen (13) basis points.* Fees are calculated each quarter by
applying the above rate to the aggregate value of assets held in the Account as
of the last business day of each calendar quarter. The value of assets in the
Account is to be determined in accordance with Section 10 of the Agreement.
LIM's minimum total quarterly fee is $12,500. The Client will be charged
additional amounts for the management of its equity securities based upon the
fees charged LIM by the applicable subadvisers.
LIM will bill the Client for its quarterly fee and the fees of any
subadvisers, and such fees will be due immediately upon receipt of each
invoice. Notwithstanding the foregoing, for any calendar quarter during which
this Agreement is not in effect for the full calendar quarter, the fees for
investment advisory services shall be prorated for the period during which the
Agreement is in effect.
For each portfolio created subsequent to the Effective Date, there is a
one time initialization fee of $10,000 per portfolio.
If at any time while this Agreement shall be in effect the Client desires
services or account information from the Manager other than those specifically
delineated in this Agreement and all Schedules hereto, and the Manager agrees
to provide such services or account information, a fee for such services or
account information shall be determined through good faith negotiations. In
addition, LIM reserves the right to increase its fees if the Client modifies
the objectives and policies of the Account as set forth in Schedule B or
requests additional services to be set forth in Schedule C. LIM also reserves
the right to charge the Client such additional amounts as determined from time
to time by LIM if any of the following occur: (i) LIM is required to spend
additional time to process the Client's transactions due to the Client's choice
of Custodian; or (ii) if the Client desires to have on-line access to LIM's
computer systems and executes a separate agreement with LIM relating to such
access. Any increase in fees or additional amounts described in this paragraph
shall be effective upon written notice to the Client by LIM.
- - ---------------
* After the Initial Term, fees may be amended by LIM upon 90 days' prior
written notice to the Client.
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<PAGE> 14
Schedule F
Alternative Dispute Resolution
NEGOTIATION BETWEEN EXECUTIVES. The parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between executives who have authority to settle the controversy.
Any party may give the other party written notice of any dispute not resolved
in the normal course of business. Within 20 days after delivery of said
notice, executives of both parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary, to exchange
relevant information and to attempt to resolve the dispute. If the matter has
not been resolved within 60 days of the disputing party's notice, or if the
parties fail to meet within 20 days, either party may initiate mediation of the
controversy or claims as provided hereinafter.
If a negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of such
intention and may also be accompanied by an attorney. All negotiations
pursuant to this clause are confidential and shall be treated as compromise and
settlement negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
MEDIATION. If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the dispute by mediation
under the then current Center for Public Resources ("CPR") Model Procedures for
Mediation of Business Disputes. The neutral third party will be selected from
the CPR Panel of Neutrals. If the parties encounter difficulty in agreeing on
a neutral, they will seek the assistance of CPR in the selection process.
ARBITRATION UNDER THE CPR RULES. Any dispute arising out of or relating
to this Agreement or the breach, termination or validity thereof, which has not
been resolved by Mediation as provided above within 60 days of the initiation
of such procedure (unless the parties mutually agree to extend such timeframe),
shall be finally settled by arbitration conducted expeditiously in accordance
with the Center for Public Resources Rules for Non-Administered Arbitration of
Business Disputes by three independent and impartial arbitrators, of whom each
party shall appoint one, provided, however, that if one party has requested the
other to participate in a non-binding procedure and the other has failed to
participate, the requesting party may initiate arbitration before expiration of
the above period. Any arbitrator not appointed by a party shall be selected
from the CPR Panels of Neutrals. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. 1-16, and judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The arbitrators are not empowered to award damages in excess of
compensatory damages and each party hereby irrevocably waives any arbitration
damages in excess of compensatory damages.
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<PAGE> 15
Exhibit 1
ATTACHMENT TO INVESTMENT MANAGEMENT AGREEMENT
Lincoln Investment Management, Inc.
200 E. Berry Street
Fort Wayne, Indiana 46802
Re:
-------------------------------
(Name of Account)
Ladies and Gentlemen:
This letter confirms the appointment of Lincoln Investment Management,
Inc. ("Manager") as investment adviser with authority as attorney-in-fact on
behalf of the Account (a) to purchase any and all securities and other property
and investments for the Account at any time or from time to time; (b) to sell
any and all securities and other property and investments held in the Account
at any time or from time to time; (c) to place orders for the execution of such
transactions with or through such brokers and dealers as the Manager may
select; and (d) to execute any and all documents which may be deemed necessary
or desirable to effectuate such transactions.
It is further understood that the Manager may deliver to any broker or
dealer executing transactions on behalf of the Account a copy of this document
as evidence of the authority of the Manager to act for and on behalf of the
Account. In the event this authority is terminated, any party to whom a copy
of this document has been delivered as evidence of the Manager's authority will
be held harmless from any loss or liability incurred as a result of any action
taken in reliance thereon after such termination but before notice of such
termination has been received by such party.
Very truly yours,
Date:
------------------------
(Client)
By:
--------------------------
Its:
-------------------------
68
<PAGE> 1
EXHIBIT 10.0(4)
LINCOLN INVESTMENT MANAGEMENT, INC.
INVESTMENT MANAGEMENT AGREEMENT
Client Name: American States Insurance Company of Texas
(the "Account")
Effective Date: July 1, 1996
The undersigned (the "Client") hereby confirms that it has retained
Lincoln Investment Management, Inc., an Illinois corporation ("LIM"), as
investment adviser for the Account, consisting of those assets identified on
Schedule A attached hereto as well as all other assets which become part of the
Account as a result of transactions therein or additions thereto, and further
that it has, if and to the extent provided herein, retained LIM to provide
certain additional services with respect to the Account, and LIM agrees to
serve on the following terms and conditions:
1. Appointment and Acceptance of LIM. LIM is appointed as investment
adviser for the Account and will provide certain administrative services with
respect to the Account, all as set forth in Section 2 hereof. LIM accepts such
appointment pursuant to the terms and conditions set forth in this Agreement.
2. Powers, Rights and Duties of the Manager.
(a) Investment advisory. LIM shall perform its responsibilities under
this Agreement in accordance with the investment objectives and policies of the
Account described in Section 3 hereof. Subject to such investment objectives
and policies, LIM shall have authority in its sole discretion and without prior
consultation with the Client and as attorney-in-fact with full power and
authority on behalf of the Client:
(i) to make all investment decisions for the Account, it being
understood that LIM shall have complete discretion as to the
nature, amount and timing of all transactions to be effected in the
Account;
(ii) to investigate, analyze, negotiate, purchase, enter into,
monitor, manage, and sell or otherwise dispose of investments of
all types referred to on Schedule B hereto and any additional types
of investments as may be authorized in accordance with Section 3
hereof;
(iii) to negotiate, draft, legally document, execute, acknowledge,
deliver, and if applicable, file or record, or cause to be filed or
recorded, in any appropriate public office, all types of contracts,
documents, agreements and certificates relating to investments for
the Account, including, without limitation, brokerage
69
<PAGE> 2
agreements, letters of commitment, guarantees, stock purchase or
subscription agreements, note agreements, participation agreements,
purchase and sale agreements, indemnity agreements, partnership
agreements, limited partnership agreements, joint venture
agreements, option or warrant agreements, swap agreements,
mortgages, correspondent agreements, trust deeds, trusts, financing
statements, assignments, security agreements, pledges,
reorganization agreements, modification agreements, escrow
agreements and instruments of every kind and nature whatsoever, and
to modify, cancel or terminate such contracts, documents,
agreements and certificates;
(iv) after reasonable inquiry or investigation, to make such
representations, warranties, covenants or certifications in the
name of and on behalf of the Client as it believes to be true; to
agree to any terms or conditions to control any investment or
investment transaction; to direct the purchase, sale or exercise of
any options, privileges or rights with respect to any investment;
to initiate, defend or influence the direction of any claim or
litigation arising from or with respect to any investment; to
effect any purchase, sale, exchange, conversion, compromise,
settlement or release with respect to any investment;
(v) to issue directly to brokers, dealers or issuers orders for the
purchase, sale, exchange or other acquisition or disposition of
investments for the Account or any interests therein as it may deem
appropriate;
(vi) to take any action, or render advice respecting the voting of
proxies solicited by or with respect to the issuers of securities
in which assets of the Account may be invested from time to time;
and
(vii) in furtherance of the foregoing, to do anything which LIM
shall deem requisite, appropriate or advisable in connection
therewith.
LIM, in its sole discretion and at its own expense, shall have authority
to engage the services of a subadviser or subadvisers in connection with the
management of the Account. LIM shall continue to be responsible for all
investment advisory services furnished to the Account by such subadviser or
subadvisers.
(b) Additional Services. In connection with the management of the
Account, LIM shall also provide the additional services listed on Schedule C
hereto.
3. Investment Objectives and Policies. The initial investment objectives
and policies of the Account shall be as set forth in Schedule B hereto. The
Client will notify LIM in writing of any modifications therein from time to
time. LIM is not charged with notice of any modifications in the Client's
investment objectives or policies until such modifications are received in
writing by LIM. In addition, if LIM has obligated itself or the Client to the
purchase or sale of an investment for the Client prior to the receipt of notice
of such modification, LIM shall fulfill such purchase or sale obligation on
behalf of the Client.
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<PAGE> 3
4. Client's Responsibilities.
Client acknowledges that it (i) is the owner of all of the assets of the
Account; (ii) is responsible to assure that all investments made for the
Account meet the requirements and limitations of any applicable jurisdiction,
contract or instrument; and (iii) is responsible to assure that any limitations
or restrictions arising from applicable law or regulations which in Client's
judgment apply to Client's aggregate holdings of any particular investment or
type of investment are not exceeded.
The Client is required to notify LIM in writing of changes in the
restrictions, limitations or requirements governing the assets of, and
investments for, the Account and to modify the investment objectives and
policies of the Account as set forth in Schedule B hereto. The Client will
notify LIM in writing as to any investments for the Account that do not meet
the requirements or limitations of any applicable jurisdiction, contract or
instrument. LIM shall arrange to dispose of those assets as agreed upon with
the Client, and such dispositions shall be made in the Client's Account and at
the Client's expense and risk.
The Client acknowledges that it shall be solely responsible for (and LIM
shall have no responsibility for): (i) maintenance of proper accounting records
for the Account; or (ii) with the exception of the SVO filings to be made by
LIM pursuant to Schedule C hereto, all filings required to be made respecting
the Account or assets of the Account with federal or state regulatory
authorities (including, without limitation, verifying and ensuring the accuracy
of all data contained within such filings). Without diminishing or modifying
LIM's obligations under Section 10 hereof, the Client acknowledges that it has
responsibility for the valuation of the assets of the Account for purposes of
the Client's own financial and performance reporting, whether required by law
or regulation or otherwise.
5. Documentation to be Furnished by Client. The Client agrees to furnish
LIM with such authorizations and documentation as LIM may from time to time
require to enable it to carry out its obligations under this Agreement,
including powers of attorney. Without limiting the foregoing, the Client will
direct the Custodian (as defined below) to provide LIM with cash information as
it relates to the Account assets.
6. Custodian. The Client shall be responsible for the appointment and
payment of a custodian (the "Custodian"), acceptable to LIM, who will take
custody of the Account assets and be responsible for the collection of
interest, dividends, distributions and other income (whether in cash or
securities) attributable to the assets in the Account. Although LIM may place
orders directly with brokers for execution of transactions authorized by this
Agreement with respect to the Account, all such transactions shall be carried
out through the Custodian. The Client will direct Custodian to accept
settlement instructions issued by LIM for the Account, and LIM shall not be
liable to the Client for (i) any failure of the Custodian to perform its
responsibilities to the Account, including, without limitation, any losses that
arise from the failure of the Custodian to notify LIM of any notices affecting
called securities, deadline expirations, dates and capital reorganization
events affecting the securities in the Account or (ii) any liability or loss
with respect to the transmittal or safekeeping of cash, securities or other
assets.
71
<PAGE> 4
7. Account Modifications. The Client may make additions to the Account
with reasonable advance notice to LIM. The Client may make withdrawals from
the Account subject to industry trade settlement time requirements and any
other market restrictions; provided, however, that LIM may establish additional
restrictions for the withdrawal of certain assets due to the less liquid nature
of such assets.
8. Brokerage.
(a) LIM is hereby authorized on behalf of the Client to place orders for
the Account with brokers and dealers selected exclusively by LIM. LIM will not
be responsible for any act or omission by brokers or dealers selected by LIM.
(b) In selecting brokers and dealers to execute transactions and in
negotiating commission rates with respect thereto, LIM shall take into account
the financial stability and reputation of brokerage firms and the brokerage and
research services provided by such brokers. The Client may be deemed to be
paying for services (sometimes referred to as "soft dollar" payments) provided
by the broker which are included in the commission rate (as permitted by
Section 28(e) of the Securities Exchange Act of 1934), provided that such
commission rate is reasonable in relation to the value of the brokerage and
research services provided when viewed in terms of either that particular
transaction or LIM's overall responsibilities with respect to the accounts as
to which it exercises investment discretion. The investment advisory fees
described in Section 11 below are based upon the foregoing.
(c) LIM may combine orders for the Account with those on behalf of other
clients. The purchase price paid or the proceeds received in any combined
order will be allocated equitably among those accounts with assets included in
such combined order.
(d) As evidence of LIM's authority to act as investment adviser for the
Account, Client shall, on or before the execution date of this Agreement,
execute a letter in form substantially similar to Exhibit 1 hereto and Client
authorizes LIM to provide copies of such letter to any broker or dealer it may
select pursuant to subparagraph (a) of this Section 8.
9. Account Information. LIM shall deliver or cause to be delivered in
written form at the times set forth in Schedule D the Account information and
reports set forth in Schedule D.
10. Valuation. In determining the value of the Account or any of its
assets, any security listed on one or more national securities exchanges shall
be valued at the last quoted sale price on the valuation date on the principal
exchange or market on which the security is traded. Any other security or asset
shall be valued as determined in good faith by LIM to reflect its fair value.
11. Compensation.
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<PAGE> 5
(a) The compensation of LIM for its investment advisory services shall be
calculated and paid in accordance with the attached Schedule E on the basis of
asset values determined as provided in this Agreement.
(b) The Client shall pay all expenses related to the Account and
investments of the Account including, without limitation, custodian fees,
brokerage commissions and such other expenses as may be related to the
execution of orders to purchase or sell assets of the Account.
12. Service to Other Clients. It is understood that LIM also provides
investment management services to other clients, and may give advice and take
action with respect to the assets of such clients which may differ from the
advice given, or the timing or nature of action taken, with respect to the
Account. Nothing herein shall restrict LIM, its principals, affiliates or
employees from purchasing or selling any investment for its or their own
accounts. Furthermore, LIM shall have no obligation to purchase or sell for
the Account, or to recommend for purchase or sale for the Account, any
investment which LIM, its principals, affiliates or employees may purchase or
sell for themselves or for any other client.
13. Representations by the Client. The Client represents and warrants
that (i) the retention of LIM pursuant to this Agreement is authorized by any
governing documents relating to Client and the Account; (ii) this Agreement has
been duly authorized by appropriate action and when so executed and delivered
will be binding upon the Client in accordance with its terms; (iii) neither the
execution and delivery of the Agreement by Client nor the performance of its
obligations hereunder conflict with or violate any provision of law, rule or
regulation, or any instrument to which it is a party or to which any of its
property is subject; (iv) the Client has obtained all consents, approvals and
waivers of regulatory authorities which may be required in order for Client to
execute this Agreement and perform its responsibilities hereunder; and (v) the
Client will deliver to LIM such evidence of its authority as LIM may reasonably
require, whether by way of a certified corporate resolution or otherwise.
14. Representations by LIM. LIM represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended.
15. Utilization of Attorneys; Scope of Engagement. Client acknowledges
that from time to time during the term of this Agreement, LIM shall obtain
advice from or otherwise be represented by attorneys, including attorneys who
may be employees of LIM and/or its affiliates ("LIM Counsel"), with respect to
matters arising under or in connection with this Agreement, including, without
limitation, the matters described in Section 2 hereof. Client further
acknowledges and agrees that: (i) LIM Counsel (whether or not they are
employees of LIM and/or its affiliates) shall at all times only represent LIM
and/or its affiliates; (ii) that LIM shall have no obligation to engage
attorneys to represent Client; and (iii) that Client will retain or engage
counsel to represent it as and when it deems such engagement to be appropriate.
Client acknowledges and agrees that it shall not: (i) be owed any professional
duty or obligation by LIM Counsel; (ii) be deemed to receive any advice or
other legal representation from LIM Counsel; or (iii) be entitled to rely upon,
or actually rely upon, any statements of LIM Counsel.
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<PAGE> 6
16. Tax Advice; Scope of Engagement. LIM will not render tax advice in
connection with the performance of its services hereunder. Client acknowledges
that (i) it will not rely on LIM for tax advice, and (ii) it will seek tax
advice, as it deems appropriate, from other qualified experts.
17. Liability. Unless otherwise provided by law, the Client agrees that
neither LIM nor any LIM director, officer, employee or LIM Counsel shall be
liable for any loss due to an error in judgment or for any act or omission to
act by LIM, LIM Counsel, or any broker, dealer or Custodian, except for losses
resulting from LIM's or such director's, officer's, employee's or LIM Counsel's
gross negligence or willful misconduct. The Client shall indemnify and hold
harmless LIM, its directors, officers, employees and LIM Counsel against any
loss, expense or claim arising in connection with the Account or this Agreement
from any act other than their gross negligence or willful misconduct, except
where such indemnification is prohibited by law. LIM shall indemnify and hold
harmless the Client against losses resulting from LIM's or its directors',
officers', employees' or LIM Counsel's gross negligence or willful misconduct,
except where such indemnification is prohibited by law.
18. Term. This Agreement shall remain in effect for three years from the
Effective Date (the "Initial Term"). Following the Initial Term, this
Agreement will be automatically renewed for additional one year terms, unless
sooner terminated as herein provided.
19. Dispute Resolution. In the event of a dispute arising out of or
relating to this Agreement, or the breach thereof, the parties shall attempt in
good faith to resolve the dispute in the manner set forth in Schedule F.
Nothing in this Section 19 or in Schedule F shall be construed to
constitute a waiver of any right provided by the Investment Advisers Act of
1940.
20. Termination and Assignment.
(a) This Agreement may be terminated by the Client during the Initial
Term if LIM or any of its directors, officers or employees or LIM Counsel
engage in any act or omission which constitutes gross negligence or willful
misconduct, upon written notice to LIM. This Agreement may be terminated by
either party following the Initial Term at any time upon sixty (60) days' prior
written notice to the other party. Upon any termination of the Agreement by
either party, (i) any transaction for the Account initiated prior to the
receipt of written notice of termination shall be consummated, and (ii) LIM
shall not initiate any transactions for the Account subsequent to the receipt
of written notice of termination except at Client's written request.
(b) No assignment (as defined in the Investment Advisers Act of 1940) of
this Agreement by LIM shall be effective without the written consent of the
Client.
(c) The provisions of Section 17 of this Agreement shall survive
notwithstanding any termination of this Agreement.
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<PAGE> 7
21. Notices. Unless otherwise specified herein, all notices, reports or
other communications provided for herein shall be in writing and delivered by
first-class mail, registered or certified mail, overnight courier service or
facsimile to LIM or to the Client at the addresses appearing below. All
facsimiles which are sent must be telephonically confirmed. The effective date
of any such notice shall be the date such notice is received. Each party to
this Agreement may by written notice to the other party designate a different
address.
22. Confidentiality. LIM and the Client acknowledge and agree that all
information furnished by LIM to the Client in connection with the Account under
this Agreement shall be treated as confidential and shall not be disclosed to
third parties without the prior written consent of LIM, except as required by
applicable law or as required to perform this Agreement.
If the Client participates in a transaction and as a result of such
participation LIM receives confidential information about parties related to
the transaction, LIM shall retain such confidential information at its site.
If the Client is required by regulatory authorities or otherwise by law to
provide such confidential information, LIM, at the written direction of the
Client, shall provide the confidential information directly to the requesting
entity on the Client's behalf.
23. Inspection and Audit of Records. Upon reasonable notice by the
Client, LIM shall make its records relating to the Account available for
inspection and audit by the Client or its representatives and by any state
insurance regulators at all reasonable times during normal business hours.
24. Disclosure Statement. The Client acknowledges receipt of Part II of
LIM's Form ADV filed with the Securities and Exchange Commission at least
forty-eight (48) hours prior to entering into this Agreement.
25. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Indiana without regard to the
principles of conflicts of law contained therein.
26. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof, and may be amended only
by written document signed by the parties.
27. Modification in Conformity with Law. If any provision hereof is, or
at any time should become, inconsistent with any present or future law, rule or
regulation of any exchange or any governmental or regulatory body with
jurisdiction, said provision shall be deemed modified
to conform to such law, rule or regulation, but in all other respects this
Agreement shall continue and remain in full force and effect.
American States Insurance Company of Texas
-------------------------------------------
Client's Name
75
<PAGE> 8
Date: June 25, 1996 By: /s/ THOMAS M. OBER
--------------- ---------------------
Name: Thomas M. Ober
Title: Vice President & Secretary
(317) 262-6797 Mailing Address: 500 North Meridian Street
- - --------------------- Indianapolis, Indiana 46204
Telephone No.
(317) 262-6613
- - ---------------------
Fax No.
75-6005586
- - ---------------------
Taxpayer I.D. No.
Accepted and Agreed to:
LINCOLN INVESTMENT
MANAGEMENT, INC.
By: /s/ ANN L. WARNER Date: July 8, 1996
--------------------------------- -----------------
Name: Ann L. Warner
Title: Senior Vice President
By: /s/ ANNE BOOKWALTER Date: July 8, 1996
--------------------------------- -----------------
Name: Anne Bookwalter
Title: Vice President
200 East Berry Street
Fort Wayne, IN 46802
Attn: Marketing and Client Services
76
<PAGE> 9
Schedule A
Listing of Client's Assets
To be provided.
77
<PAGE> 10
Schedule B
Investment Objectives and Policies
To be provided.
78
<PAGE> 11
Schedule C
List of Additional Services
Accounting services to include the following:
- Process cash and trade activity within Prism
- Monthly projections of prepayment speeds on MBS/ABS (within 10 days
of month end)
- Quarterly GAAP reserve recommendation for permanent declines in
market value on fixed income securities and equity securities
- Complete and file applications for registration of securities with
Securities Valuation Office of the NAIC ("SVO") (as required by SVO
filing deadlines)
- Quarterly Schedule D, Part 3, Part 4 and Part 1B information*
- Monthly Interest Maintenance Reserve (IMR) amortization report*
- Quarterly Asset Valuation Reserve (AVR) report*
- Monthly Schedule Ds, all parts*
* The data contained in these reports is not reviewed by LIM, and the
Client is responsible for the accuracy of the final reports.
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<PAGE> 12
Schedule D
Account Information
Monthly:
within 10 business days:
asset inventory listing
within 20 business days:
portfolio performance report
Quarterly:
within 25 business days:
management reports
summary of derivatives activity
performance summaries
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<PAGE> 13
Schedule E
Fees for Investment Advisory Services
Based upon the objectives and policies of the Account as set forth in
Schedule B and the additional services set forth in Schedule C, the annualized
fee shall be thirteen (13) basis points.* Fees are calculated each quarter by
applying the above rate to the aggregate value of assets held in the Account as
of the last business day of each calendar quarter. The value of assets in the
Account is to be determined in accordance with Section 10 of the Agreement.
LIM's minimum total quarterly fee is $12,500. The Client will be charged
additional amounts for the management of its equity securities based upon the
fees charged LIM by the applicable subadvisers.
LIM will bill the Client for its quarterly fee and the fees of any
subadvisers, and such fees will be due immediately upon receipt of each
invoice. Notwithstanding the foregoing, for any calendar quarter during which
this Agreement is not in effect for the full calendar quarter, the fees for
investment advisory services shall be prorated for the period during which the
Agreement is in effect.
For each portfolio created subsequent to the Effective Date, there is a
one time initialization fee of $10,000 per portfolio.
If at any time while this Agreement shall be in effect the Client desires
services or account information from the Manager other than those specifically
delineated in this Agreement and all Schedules hereto, and the Manager agrees
to provide such services or account information, a fee for such services or
account information shall be determined through good faith negotiations. In
addition, LIM reserves the right to increase its fees if the Client modifies
the objectives and policies of the Account as set forth in Schedule B or
requests additional services to be set forth in Schedule C. LIM also reserves
the right to charge the Client such additional amounts as determined from time
to time by LIM if any of the following occur: (i) LIM is required to spend
additional time to process the Client's transactions due to the Client's choice
of Custodian; or (ii) if the Client desires to have on-line access to LIM's
computer systems and executes a separate agreement with LIM relating to such
access. Any increase in fees or additional amounts described in this paragraph
shall be effective upon written notice to the Client by LIM.
- - --------
* After the Initial Term, fees may be amended by LIM upon 90 days' prior
written notice to the Client.
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<PAGE> 14
Schedule F
Alternative Dispute Resolution
NEGOTIATION BETWEEN EXECUTIVES. The parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between executives who have authority to settle the controversy.
Any party may give the other party written notice of any dispute not resolved
in the normal course of business. Within 20 days after delivery of said
notice, executives of both parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary, to exchange
relevant information and to attempt to resolve the dispute. If the matter has
not been resolved within 60 days of the disputing party's notice, or if the
parties fail to meet within 20 days, either party may initiate mediation of the
controversy or claims as provided hereinafter.
If a negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of such
intention and may also be accompanied by an attorney. All negotiations
pursuant to this clause are confidential and shall be treated as compromise and
settlement negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
MEDIATION. If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the dispute by mediation
under the then current Center for Public Resources ("CPR") Model Procedures for
Mediation of Business Disputes. The neutral third party will be selected from
the CPR Panel of Neutrals. If the parties encounter difficulty in agreeing on
a neutral, they will seek the assistance of CPR in the selection process.
ARBITRATION UNDER THE CPR RULES. Any dispute arising out of or relating
to this Agreement or the breach, termination or validity thereof, which has not
been resolved by Mediation as provided above within 60 days of the initiation
of such procedure (unless the parties mutually agree to extend such timeframe),
shall be finally settled by arbitration conducted expeditiously in accordance
with the Center for Public Resources Rules for Non-Administered Arbitration of
Business Disputes by three independent and impartial arbitrators, of whom each
party shall appoint one, provided, however, that if one party has requested the
other to participate in a non-binding procedure and the other has failed to
participate, the requesting party may initiate arbitration before expiration of
the above period. Any arbitrator not appointed by a party shall be selected
from the CPR Panels of Neutrals. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. 1-16, and judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The arbitrators are not empowered to award damages in excess of
compensatory damages and each party hereby irrevocably waives any arbitration
damages in excess of compensatory damages.
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Exhibit 1
ATTACHMENT TO INVESTMENT MANAGEMENT AGREEMENT
Lincoln Investment Management, Inc.
200 E. Berry Street
Fort Wayne, Indiana 46802
Re:
--------------------------
(Name of Account)
Ladies and Gentlemen:
This letter confirms the appointment of Lincoln Investment Management,
Inc. ("Manager") as investment adviser with authority as attorney-in-fact on
behalf of the Account
(a) to purchase any and all securities and other property and investments for
the Account at any time or from time to time; (b) to sell any and all
securities and other property and investments held in the Account at any time
or from time to time; (c) to place orders for the execution of such
transactions with or through such brokers and dealers as the Manager may
select; and (d) to execute any and all documents which may be deemed necessary
or desirable to effectuate such transactions.
It is further understood that the Manager may deliver to any broker or
dealer executing transactions on behalf of the Account a copy of this document
as evidence of the authority of the Manager to act for and on behalf of the
Account. In the event this authority is terminated, any party to whom a copy
of this document has been delivered as evidence of the Manager's authority will
be held harmless from any loss or liability incurred as a result of any action
taken in reliance thereon after such termination but before notice of such
termination has been received by such party.
Very truly yours,
Date:
---------------------
- - --------------------------
(Client)
By:
--------------------------
Its:
--------------------------
83
<PAGE> 1
EXHIBIT 10.0(5)
LINCOLN INVESTMENT MANAGEMENT, INC.
INVESTMENT MANAGEMENT AGREEMENT
Client Name: American States Insurance Company
American Economy Insurance Company
American States Preferred Insurance Company
(the "Account")
Effective Date: June 1, 1996
The undersigned (the "Client") hereby confirms that it has retained
Lincoln Investment Management, Inc., an Illinois corporation ("LIM"), as
investment adviser for the Account, consisting of those assets identified on
Schedule A attached hereto as well as all other assets which become part of the
Account as a result of transactions therein or additions thereto, and further
that it has, if and to the extent provided herein, retained LIM to provide
certain additional services with respect to the Account, and LIM agrees to
serve on the following terms and conditions:
1. Appointment and Acceptance of LIM. LIM is appointed as investment
adviser for the Account and will provide certain administrative services with
respect to the Account, all as set forth in Section 2 hereof. LIM accepts such
appointment pursuant to the terms and conditions set forth in this Agreement.
2. Powers, Rights and Duties of the Manager.
(a) Investment advisory. LIM shall perform its responsibilities under
this Agreement in accordance with the investment objectives and policies of the
Account described in Section 3 hereof. Subject to such investment objectives
and policies, LIM shall have authority in its sole discretion and without prior
consultation with the Client and as attorney-in-fact with full power and
authority on behalf of the Client:
(i) to make all investment decisions for the Account, it being
understood that LIM shall have complete discretion as to the nature,
amount and timing of all transactions to be effected in the Account;
(ii) to investigate, analyze, negotiate, purchase, enter into,
monitor, manage, and sell or otherwise dispose of investments of all
types referred to on Schedule B hereto and any additional types of
investments as may be authorized in accordance with Section 3 hereof;
(iii) to negotiate, draft, legally document, execute, acknowledge,
deliver, and if applicable, file or record, or cause to be filed or
recorded, in any appropriate
84
<PAGE> 2
public office, all types of contracts, documents, agreements and
certificates relating to investments for the Account, including,
without limitation, brokerage agreements, letters of commitment,
guarantees, stock purchase or subscription agreements, note
agreements, participation agreements, purchase and sale agreements,
indemnity agreements, partnership agreements, limited partnership
agreements, joint venture agreements, option or warrant agreements,
swap agreements, mortgages, correspondent agreements, trust deeds,
trusts, financing statements, assignments, security agreements,
pledges, reorganization agreements, modification agreements, escrow
agreements and instruments of every kind and nature whatsoever, and
to modify, cancel or terminate such contracts, documents,
agreements and certificates;
(iv) after reasonable inquiry or investigation, to make such
representations, warranties, covenants or certifications in the
name of and on behalf of the Client as it believes to be true; to
agree to any terms or conditions to control any investment or
investment transaction; to direct the purchase, sale or exercise of
any options, privileges or rights with respect to any investment;
to initiate, defend or influence the direction of any claim or
litigation arising from or with respect to any investment; to
effect any purchase, sale, exchange, conversion, compromise,
settlement or release with respect to any investment;
(v) to issue directly to brokers, dealers or issuers orders for the
purchase, sale, exchange or other acquisition or disposition of
investments for the Account or any interests therein as it may deem
appropriate;
(vi) to take any action, or render advice respecting the voting of
proxies solicited by or with respect to the issuers of securities
in which assets of the Account may be invested from time to time;
and
(vii) in furtherance of the foregoing, to do anything which LIM
shall deem requisite, appropriate or advisable in connection
therewith.
LIM, in its sole discretion and at its own expense, shall have authority
to engage the services of a subadviser or subadvisers in connection with the
management of the Account. LIM shall continue to be responsible for all
investment advisory services furnished to the Account by such subadviser or
subadvisers.
(b) Additional Services. In connection with the management of the
Account, LIM shall also provide the additional services listed on Schedule C
hereto.
3. Investment Objectives and Policies. The initial investment objectives
and policies of the Account shall be as set forth in Schedule B hereto. The
Client will notify LIM in writing of any modifications therein from time to
time. LIM is not charged with notice of any modifications in the Client's
investment objectives or policies until such modifications are received in
writing by LIM. In addition, if LIM has obligated itself or the Client to the
purchase
85
<PAGE> 3
or sale of an investment for the Client prior to the receipt of notice of such
modification, LIM shall fulfill such purchase or sale obligation on behalf of
the Client.
4. Client's Responsibilities.
Client acknowledges that it (i) is the owner of all of the assets of the
Account; (ii) is responsible to assure that all investments made for the
Account meet the requirements and limitations of any applicable jurisdiction,
contract or instrument; and (iii) is responsible to assure that any limitations
or restrictions arising from applicable law or regulations which in Client's
judgment apply to Client's aggregate holdings of any particular investment or
type of investment are not exceeded.
The Client is required to notify LIM in writing of changes in the
restrictions, limitations or requirements governing the assets of, and
investments for, the Account and to modify the investment objectives and
policies of the Account as set forth in Schedule B hereto. The Client will
notify LIM in writing as to any investments for the Account that do not meet
the requirements or limitations of any applicable jurisdiction, contract or
instrument. LIM shall arrange to dispose of those assets as agreed upon with
the Client, and such dispositions shall be made in the Client's Account and at
the Client's expense and risk.
The Client acknowledges that it shall be solely responsible for (and LIM
shall have no responsibility for): (i) maintenance of proper accounting records
for the Account; or (ii) with the exception of the SVO filings to be made by
LIM pursuant to Schedule C hereto, all filings required to be made respecting
the Account or assets of the Account with federal or state regulatory
authorities (including, without limitation, verifying and ensuring the accuracy
of all data contained within such filings). Without diminishing or modifying
LIM's obligations under Section 10 hereof, the Client acknowledges that it has
responsibility for the valuation of the assets of the Account for purposes of
the Client's own financial and performance reporting, whether required by law
or regulation or otherwise.
5. Documentation to be Furnished by Client. The Client agrees to furnish
LIM with such authorizations and documentation as LIM may from time to time
require to enable it to carry out its obligations under this Agreement,
including powers of attorney. Without limiting the foregoing, the Client will
direct the Custodian (as defined below) to provide LIM with cash information as
it relates to the Account assets.
6. Custodian. The Client shall be responsible for the appointment and
payment of a custodian (the "Custodian"), acceptable to LIM, who will take
custody of the Account assets and be responsible for the collection of
interest, dividends, distributions and other income (whether in cash or
securities) attributable to the assets in the Account. Although LIM may place
orders directly with brokers for execution of transactions authorized by this
Agreement with respect to the Account, all such transactions shall be carried
out through the Custodian. The Client will direct Custodian to accept
settlement instructions issued by LIM for the Account, and LIM shall not be
liable to the Client for (i) any failure of the Custodian to perform its
responsibilities to the Account, including, without limitation, any losses that
arise from the failure of the Custodian to notify LIM of any notices affecting
called securities, deadline expirations, dates and capital
86
<PAGE> 4
reorganization events affecting the securities in the Account or (ii) any
liability or loss with respect to the transmittal or safekeeping of cash,
securities or other assets.
7. Account Modifications. The Client may make additions to the Account
with reasonable advance notice to LIM. The Client may make withdrawals from
the Account subject to industry trade settlement time requirements and any
other market restrictions; provided, however, that LIM may establish additional
restrictions for the withdrawal of certain assets due to the less liquid nature
of such assets.
8. Brokerage.
(a) LIM is hereby authorized on behalf of the Client to place orders
for the Account with brokers and dealers selected exclusively by LIM. LIM
will not be responsible for any act or omission by brokers or dealers selected
by LIM.
(b) In selecting brokers and dealers to execute transactions and in
negotiating commission rates with respect thereto, LIM shall take into account
the financial stability and reputation of brokerage firms and the brokerage and
research services provided by such brokers. The Client may be deemed to be
paying for services (sometimes referred to as "soft dollar" payments) provided
by the broker which are included in the commission rate (as permitted by
Section 28(e) of the Securities Exchange Act of 1934), provided that such
commission rate is reasonable in relation to the value of the brokerage and
research services provided when viewed in terms of either that particular
transaction or LIM's overall responsibilities with respect to the accounts as
to which it exercises investment discretion. The investment advisory fees
described in Section 11 below are based upon the foregoing.
(c) LIM may combine orders for the Account with those on behalf of
other clients. The purchase price paid or the proceeds received in any combined
order will be allocated equitably among those accounts with assets included in
such combined order.
(d) As evidence of LIM's authority to act as investment adviser for
the Account, Client shall, on or before the execution date of this Agreement,
execute a letter in form substantially similar to Exhibit 1 hereto and Client
authorizes LIM to provide copies of such letter to any broker or dealer it may
select pursuant to subparagraph (a) of this Section 8.
9. Account Information. LIM shall deliver or cause to be delivered in
written form at the times set forth in Schedule D the Account information and
reports set forth in Schedule D.
10. Valuation. In determining the value of the Account or any of its
assets, any security listed on one or more national securities exchanges shall
be valued at the last quoted sale price on the valuation date on the principal
exchange or market on which the security is traded. Any other security or asset
shall be valued as determined in good faith by LIM to reflect its fair value.
11. Compensation.
87
<PAGE> 5
(a) The compensation of LIM for its investment advisory services
shall be calculated and paid in accordance with the attached Schedule E on the
basis of asset values determined as provided in this Agreement.
(b) The Client shall pay all expenses related to the Account and
investments of the Account including, without limitation, custodian fees,
brokerage commissions and such other expenses as may be related to the
execution of orders to purchase or sell assets of the Account.
12. Service to Other Clients. It is understood that LIM also provides
investment management services to other clients, and may give advice and take
action with respect to the assets of such clients which may differ from the
advice given, or the timing or nature of action taken, with respect to the
Account. Nothing herein shall restrict LIM, its principals, affiliates or
employees from purchasing or selling any investment for its or their own
accounts. Furthermore, LIM shall have no obligation to purchase or sell for
the Account, or to recommend for purchase or sale for the Account, any
investment which LIM, its principals, affiliates or employees may purchase or
sell for themselves or for any other client.
13. Representations by the Client. The Client represents and warrants
that (i) the retention of LIM pursuant to this Agreement is authorized by any
governing documents relating to Client and the Account; (ii) this Agreement has
been duly authorized by appropriate action and when so executed and delivered
will be binding upon the Client in accordance with its terms; (iii) neither the
execution and delivery of the Agreement by Client nor the performance of its
obligations hereunder conflict with or violate any provision of law, rule or
regulation, or any instrument to which it is a party or to which any of its
property is subject; (iv) the Client has obtained all consents, approvals and
waivers of regulatory authorities which may be required in order for Client to
execute this Agreement and perform its responsibilities hereunder; and (v) the
Client will deliver to LIM such evidence of its authority as LIM may reasonably
require, whether by way of a certified corporate resolution or otherwise.
14. Representations by LIM. LIM represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended.
15. Utilization of Attorneys; Scope of Engagement. Client acknowledges
that from time to time during the term of this Agreement, LIM shall obtain
advice from or otherwise be represented by attorneys, including attorneys who
may be employees of LIM and/or its affiliates ("LIM Counsel"), with respect to
matters arising under or in connection with this Agreement, including, without
limitation, the matters described in Section 2 hereof. Client further
acknowledges and agrees that: (i) LIM Counsel (whether or not they are
employees of LIM and/or its affiliates) shall at all times only represent LIM
and/or its affiliates; (ii) that LIM shall have no obligation to engage
attorneys to represent Client; and (iii) that Client will retain or engage
counsel to represent it as and when it deems such engagement to be appropriate.
Client acknowledges and agrees that it shall not: (i) be owed any professional
duty or obligation by LIM Counsel; (ii) be deemed to receive any advice or
other legal representation from LIM Counsel; or (iii) be entitled to rely upon,
or actually rely upon, any statements of LIM Counsel.
88
<PAGE> 6
16. Tax Advice; Scope of Engagement. LIM will not render tax advice in
connection with the performance of its services hereunder. Client acknowledges
that (i) it will not rely on LIM for tax advice, and (ii) it will seek tax
advice, as it deems appropriate, from other qualified experts.
17. Liability. Unless otherwise provided by law, the Client agrees that
neither LIM nor any LIM director, officer, employee or LIM Counsel shall be
liable for any loss due to an error in judgment or for any act or omission to
act by LIM, LIM Counsel, or any broker, dealer or Custodian, except for losses
resulting from LIM's or such director's, officer's, employee's or LIM Counsel's
gross negligence or willful misconduct. The Client shall indemnify and hold
harmless LIM, its directors, officers, employees and LIM Counsel against any
loss, expense or claim arising in connection with the Account or this Agreement
from any act other than their gross negligence or willful misconduct, except
where such indemnification is prohibited by law.
LIM shall indemnify and hold harmless the Client against losses resulting from
LIM's or its directors', officers', employees' or LIM Counsel's gross
negligence or willful misconduct, except where such indemnification is
prohibited by law.
18. Term. This Agreement shall remain in effect for three years from the
Effective Date (the "Initial Term"). Following the Initial Term, this
Agreement will be automatically renewed for additional one year terms, unless
sooner terminated as herein provided.
19. Dispute Resolution. In the event of a dispute arising out of or
relating to this Agreement, or the breach thereof, the parties shall attempt in
good faith to resolve the dispute in the manner set forth in Schedule F.
Nothing in this Section 19 or in Schedule F shall be construed to
constitute a waiver of any right provided by the Investment Advisers Act of
1940.
20. Termination and Assignment.
(a) This Agreement may be terminated by the Client during the Initial
Term if LIM or any of its directors, officers or employees or LIM Counsel
engage in any act or omission which constitutes gross negligence or willful
misconduct, upon written notice to LIM. This Agreement may be terminated by
either party following the Initial Term at any time upon sixty (60) days' prior
written notice to the other party. Upon any termination of the Agreement by
either party, (i) any transaction for the Account initiated prior to the
receipt of written notice of termination shall be consummated, and (ii) LIM
shall not initiate any transactions for the Account subsequent to the receipt
of written notice of termination except at Client's written request.
(b) No assignment (as defined in the Investment Advisers Act of 1940)
of this Agreement by LIM shall be effective without the written consent of the
Client.
(c) The provisions of Section 17 of this Agreement shall survive
notwithstanding any termination of this Agreement.
89
<PAGE> 7
21. Notices. Unless otherwise specified herein, all notices, reports or
other communications provided for herein shall be in writing and delivered by
first-class mail, registered or certified mail, overnight courier service or
facsimile to LIM or to the Client at the addresses appearing below. All
facsimiles which are sent must be telephonically confirmed. The effective date
of any such notice shall be the date such notice is received. Each party to
this Agreement may by written notice to the other party designate a different
address.
22. Confidentiality. LIM and the Client acknowledge and agree that all
information furnished by LIM to the Client in connection with the Account under
this Agreement shall be treated as confidential and shall not be disclosed to
third parties without the prior written consent of LIM, except as required by
applicable law or as required to perform this Agreement.
If the Client participates in a transaction and as a result of such
participation LIM receives confidential information about parties related to
the transaction, LIM shall retain such confidential information at its site.
If the Client is required by regulatory authorities or otherwise by law to
provide such confidential information, LIM, at the written direction of the
Client, shall provide the confidential information directly to the requesting
entity on the Client's behalf.
23. Inspection and Audit of Records. Upon reasonable notice by the
Client, LIM shall make its records relating to the Account available for
inspection and audit by the Client or its representatives and by any state
insurance regulators at all reasonable times during normal business hours.
24. Disclosure Statement. The Client acknowledges receipt of Part II of
LIM's Form ADV filed with the Securities and Exchange Commission at least
forty-eight (48) hours prior to entering into this Agreement.
25. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Indiana without regard to the
principles of conflicts of law contained therein.
26. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof, and may be amended only
by written document signed by the parties.
27. Modification in Conformity with Law. If any provision hereof is, or
at any time should become, inconsistent with any present or future law, rule or
regulation of any exchange or any governmental or regulatory body with
jurisdiction, said provision shall be deemed modified to conform to such law,
rule or regulation, but in all other respects this Agreement shall continue
and remain in full force and effect.
American States Insurance Company
---------------------------------
Client's Name
90
<PAGE> 8
Date: June 10, 1996 By: /s/ THOMAS M. OBER
---------------------- --------------------------------
Name: Thomas M. Ober
Title: Secretary
(317) 262-6797 Mailing Address: 500 North Meridian Street
---------------------- Indianapolis, Indiana 46204
Telephone No.
(317) 262-6613
-----------------------
Fax No.
35-0145400
-----------------------
Taxpayer I.D. No.
American Economy Insurance Company
----------------------------------
Client's Name
Date: June 10, 1996 By: /s/ THOMAS M. OBER
---------------------- -------------------------------
Name: Thomas M. Ober
Title: Secretary
(317) 262-6797 Mailing Address: 500 North Meridian Street
---------------------- Indianapolis, Indiana 46204
Telephone No.
(317) 262-6613
----------------------
Fax No.
35-1044900
----------------------
Taxpayer I.D. No.
American States Preferred Insurance Company
-------------------------------------------
Client's Name
Date: June 10, 1996 By: /s/THOMAS M. OBER
---------------------- ---------------------------------------
Name: Thomas M. Ober
Title: Secretary
(317) 262-6797 Mailing Address: 500 North Meridian Street
----------------------
91
<PAGE> 9
Telephone No. Indianapolis, Indiana 46204
(317) 262-6613
- - --------------
Fax No.
35-1466792
- - -----------------
Taxpayer I.D. No.
Accepted and Agreed to:
LINCOLN INVESTMENT
MANAGEMENT, INC.
By: /s/ ANN L. WARNER Date: June 13, 1996
--------------------------------- -------------------
Name: Ann L. Warner
Title: Senior Vice President
By: /s/ ANNE BOOKWALTER Date: June 13, 1996
--------------------------------- -------------------
Name: Anne Bookwalter
Title: Vice President
200 East Berry Street
Fort Wayne, IN 46802
Attn: Marketing and Client Services
92
<PAGE> 10
Schedule A
----------
Listing of Client's Assets
--------------------------
To be provided.
93
<PAGE> 11
Schedule B
----------
Investment Objectives and Policies
----------------------------------
To be provided.
94
<PAGE> 12
Schedule C
-----------
List of Additional Services
---------------------------
Accounting services to include the following:
- Process cash and trade activity within Prism
- Monthly projections of prepayment speeds on MBS/ABS (within 10
days of month end)
- Quarterly GAAP reserve recommendation for permanent declines in
market value on fixed income securities and equity securities
- Complete and file applications for registration of securities
with Securities Valuation Office of the NAIC ("SVO") (as required by
SVO filing deadlines)
- Quarterly Schedule D, Part 3, Part 4 and Part 1B information*
- Monthly Interest Maintenance Reserve (IMR) amortization report*
- Quarterly Asset Valuation Reserve (AVR) report*
- Monthly Schedule Ds, all parts*
* The data contained in these reports is not reviewed by LIM, and the
Client is responsible for the accuracy of the final reports.
95
<PAGE> 13
Schedule D
Account Information
Monthly:
within 10 business days:
asset inventory listing
within 20 business days:
portfolio performance report
Quarterly:
within 25 business days:
management reports
summary of derivatives activity
performance summaries
96
<PAGE> 14
Schedule E
Fees for Investment Advisory Services
Based upon the objectives and policies of the Account as set forth in
Schedule B and the additional services set forth in Schedule C, the annualized
fee shall be thirteen (13) basis points.* Fees are calculated each quarter by
applying the above rate to the aggregate value of assets held in the Account as
of the last business day of each calendar quarter. The value of assets in the
Account is to be determined in accordance with Section 10 of the Agreement.
LIM's minimum total quarterly fee is $12,500. The Client will be charged
additional amounts for the management of its equity securities based upon the
fees charged LIM by the applicable subadvisers.
LIM will bill the Client for its quarterly fee and the fees of any
subadvisers, and such fees will be due immediately upon receipt of each
invoice. Notwithstanding the foregoing, for any calendar quarter during which
this Agreement is not in effect for the full calendar quarter, the fees for
investment advisory services shall be prorated for the period during which the
Agreement is in effect.
For each portfolio created subsequent to the Effective Date, there is a
one time initialization fee of $10,000 per portfolio.
If at any time while this Agreement shall be in effect the Client desires
services or account information from the Manager other than those specifically
delineated in this Agreement and all Schedules hereto, and the Manager agrees
to provide such services or account information, a fee for such services or
account information shall be determined through good faith negotiations. In
addition, LIM reserves the right to increase its fees if the Client modifies
the objectives and policies of the Account as set forth in Schedule B or
requests additional services to be set forth in Schedule C. LIM also reserves
the right to charge the Client such additional amounts as determined from time
to time by LIM if any of the following occur: (i) LIM is required to spend
additional time to process the Client's transactions due to the Client's choice
of Custodian; or (ii) if the Client desires to have on-line access to LIM's
computer systems and executes a separate agreement with LIM relating to such
access. Any increase in fees or additional amounts described in this paragraph
shall be effective upon written notice to the Client by LIM.
- - -----------
* After the Initial Term, fees may be amended by LIM upon 90 days' prior
written notice to the Client.
97
<PAGE> 15
Schedule F
Alternative Dispute Resolution
NEGOTIATION BETWEEN EXECUTIVES. The parties shall attempt in good faith
to resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between executives who have authority to settle the controversy.
Any party may give the other party written notice of any dispute not resolved
in the normal course of business. Within 20 days after delivery of said
notice, executives of both parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary, to exchange
relevant information and to attempt to resolve the dispute. If the matter has
not been resolved within 60 days of the disputing party's notice, or if the
parties fail to meet within 20 days, either party may initiate mediation of the
controversy or claims as provided hereinafter.
If a negotiator intends to be accompanied at a meeting by an attorney, the
other negotiator shall be given at least three working days' notice of such
intention and may also be accompanied by an attorney. All negotiations
pursuant to this clause are confidential and shall be treated as compromise and
settlement negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
MEDIATION. If the dispute has not been resolved by negotiation as
provided herein, the parties shall endeavor to settle the dispute by mediation
under the then current Center for Public Resources ("CPR") Model Procedures for
Mediation of Business Disputes. The neutral third party will be selected from
the CPR Panel of Neutrals. If the parties encounter difficulty in agreeing on
a neutral, they will seek the assistance of CPR in the selection process.
ARBITRATION UNDER THE CPR RULES. Any dispute arising out of or relating
to this Agreement or the breach, termination or validity thereof, which has not
been resolved by Mediation as provided above within 60 days of the initiation
of such procedure (unless the parties mutually agree to extend such timeframe),
shall be finally settled by arbitration conducted expeditiously in accordance
with the Center for Public Resources Rules for Non-Administered Arbitration of
Business Disputes by three independent and impartial arbitrators, of whom each
party shall appoint one, provided, however, that if one party has requested the
other to participate in a non-binding procedure and the other has failed to
participate, the requesting party may initiate arbitration before expiration of
the above period. Any arbitrator not appointed by a party shall be selected
from the CPR Panels of Neutrals. The arbitration shall be governed by the
United States Arbitration Act, 9 U.S.C. 1-16, and judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The arbitrators are not empowered to award damages in excess of
compensatory damages and each party hereby irrevocably waives any arbitration
damages in excess of compensatory damages.
98
<PAGE> 16
Exhibit 1
ATTACHMENT TO INVESTMENT MANAGEMENT AGREEMENT
Lincoln Investment Management, Inc.
200 E. Berry Street
Fort Wayne, Indiana 46802
Re:
----------------------
(Name of Account)
Ladies and Gentlemen:
This letter confirms the appointment of Lincoln Investment Management,
Inc. ("Manager") as investment adviser with authority as attorney-in-fact on
behalf of the Account (a) to purchase any and all securities and other property
and investments for the Account at any time or from time to time; (b) to sell
any and all securities and other property and investments held in the Account at
any time or from time to time; (c) to place orders for the execution of such
transactions with or through such brokers and dealers as the Manager may select;
and (d) to execute any and all documents which may be deemed necessary or
desirable to effectuate such transactions.
It is further understood that the Manager may deliver to any broker or
dealer executing transactions on behalf of the Account a copy of this document
as evidence of the authority of the Manager to act for and on behalf of the
Account. In the event this authority is terminated, any party to whom a copy
of this document has been delivered as evidence of the Manager's authority will
be held harmless from any loss or liability incurred as a result of any action
taken in reliance thereon after such termination but before notice of such
termination has been received by such party.
Very truly yours,
Date:
---------------------- ---------------------------
(Client)
By:
----------------------
Its:
----------------------
99
<PAGE> 1
EXHIBIT 11.0
AMERICAN STATES FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
--------- --------- -------- --------
(Dollars in Thousands,
Except Per Share Data)
<S> <C> <C> <C> <C>
Primary
- - -------------------------------------------------
Shares outstanding, beginning of period 50,000,000 50,000,000 50,000,000 50,000,000
Weighted average shares issued during period:
Stock offering 3,626,373 - 1,823,204 -
Employee benefit plans 18,319 - 9,210 -
---------- ---------- ---------- ----------
Weighted average primary shares outstanding 53,644,692 50,000,000 51,832,414 50,000,000
========== ========== ========== ==========
Net income $29,759 $16,775 $76,672 $82,262
========== ========== ========== =========
Net income per primary common share $.55 $.34 $1.48 $1.65
========== ========== ========== =========
Fully Diluted
- - -------------
Shares outstanding, beginning of period 50,000,000 50,000,000 50,000,000 50,000,000
Weighted average shares issued during period:
Stock offering 3,626,373 - 1,823,204 -
Employee benefit plans 18,319 - 9,210 -
---------- ---------- ---------- ----------
Weighted average fully diluted shares outstanding 53,644,692 50,000,000 51,832,414 50,000,000
========== ========== ========== =========
Net income $29,759 $16,775 $76,672 $82,262
========== ========== ========== =========
Net income per fully diluted common share $.55 $.34 $1.48 $1.65
========== ========== ========== =========
</TABLE>
Note: The fully diluted calculation is submitted in accordance with Regulation
S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
100
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<DEBT-HELD-FOR-SALE> 3,616,959 3,616,959
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 397,445 397,445
<MORTGAGE> 33,747 33,747
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<TOTAL-INVEST> 4,208,543 4,208,543
<CASH> 13,486 13,486
<RECOVER-REINSURE> 173,854 173,854
<DEFERRED-ACQUISITION> 208,760 208,760
<TOTAL-ASSETS> 5,482,912 5,482,912
<POLICY-LOSSES> 2,912,815 2,912,815
<UNEARNED-PREMIUMS> 729,059 729,059
<POLICY-OTHER> 0 0
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<NOTES-PAYABLE> 299,414 299,414
0 0
0 0
<COMMON> 304,792 304,792
<OTHER-SE> 914,039 914,039
<TOTAL-LIABILITY-AND-EQUITY> 5,482,912 5,482,912
424,483 848,477
<INVESTMENT-INCOME> 66,156 134,489
<INVESTMENT-GAINS> 7,374 28,470
<OTHER-INCOME> 0 0
<BENEFITS> 332,342 655,905
<UNDERWRITING-AMORTIZATION> 83,928 172,045
<UNDERWRITING-OTHER> 47,955 94,801
<INCOME-PRETAX> 31,953 86,850
<INCOME-TAX> 2,194 10,178
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 29,759 76,672
<EPS-PRIMARY> .55 1.48
<EPS-DILUTED> .55 1.48
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