<PAGE>
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 September 30, 1998
[ ] 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 0-17676
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AMERINST INSURANCE GROUP, INC.
------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 52-1534560
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
128 Berlin State Highway-Berlin, Barre, Vermont 05641
Mailing address: P.O. Box 1330, Montpelier, Vermont 05601
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (802) 229-5042
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.
[X] YES [ ] NO
Number of shares of common stock outstanding:
Number outstanding
Class as of November 5, 1998
----- ----------------------
$0.01 par value common 332,628
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Part I, Item 1
AMERINST INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
INVESTMENTS
Fixed-maturity securities, at market............................................................... $35,174,032 $34,065,619
Equity securities, at market...................................................................... 6,620,036 7,617,960
----------- -----------
TOTAL INVESTMENTS.............................................................................. 41,794,068 41,683,579
OTHER ASSETS
Cash............................................................................................... 1,068,940 1,081,736
Assumed reinsurance premiums receivable............................................................ 1,112,977 1,146,379
Reinsurance recoveries receivable.................................................................. 1,000,685 1,039,762
Accrued investment income.......................................................................... 436,008 499,970
Deferred policy acquisition costs.................................................................. 722,880 800,598
Deferred federal income taxes...................................................................... 1,450,129 992,599
Prepaid expenses and other assets.................................................................. 201,959 186,506
Income taxes receivable............................................................................ 390,766 -
----------- -----------
TOTAL ASSETS................................................................................... $48,178,412 $47,431,129
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Losses and loss adjustment expenses.................................................................. $23,666,481 $20,802,873
Unearned premiums.................................................................................... 2,536,423 2,809,115
Reinsurance balances payable......................................................................... 1,966,033 1,984,442
Income taxes payable................................................................................. - 260,897
Accrued expenses and other liabilities............................................................... 498,491 455,438
----------- -----------
TOTAL LIABILITIES............................................................................... 28,667,428 26,312,765
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 2,000,000 shares authorized:
1998: 332,800 issued and outstanding
1997: 333,358 issued and outstanding............................................................ 3,328 3,334
Additional paid-in capital........................................................................... 7,156,539 7,172,508
Retained earnings.................................................................................... 11,910,233 12,925,566
Accumulated other comprehensive income, net of taxes................................................. 440,884 1,016,956
----------- ----------
TOTAL STOCKHOLDERS' EQUITY...................................................................... 19,510,984 21,118,364
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................................... $48,178,412 $47,431,129
=========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
2
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AMERINST INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUE
Premiums earned................................................. $ 4,497,820 $ 3,407,213 $ 1,440,929 $ 999,649
Net investment income........................................... 1,627,661 1,793,221 543,305 597,353
Net realized capital gain (loss)................................ 334,834 180,503 28,639 110,891
----------- ----------- ---------- ------------
TOTAL REVENUE................................................ 6,460,315 5,380,937 2,012,873 1,707,893
LOSSES AND EXPENSES
Losses and loss adjustment expenses............................. 5,364,453 4,041,048 1,696,472 1,167,452
Commissions expense............................................. 1,278,323 971,172 410,665 284,903
Other operating and management expenses......................... 606,703 548,267 156,991 167,657
----------- ----------- ----------- ------------
TOTAL LOSSES AND EXPENSES.................................... 7,249,479 5,560,487 2,264,128 1,620,012
----------- ----------- ----------- ------------
Income (loss) before income taxes................................. (789,164) (179,550) (251,255) 87,881
Provision for income tax expense (benefit)...................... (437,428) (292,379) (137,660) (166,939)
----------- ----------- ----------- ------------
NET INCOME (LOSS)................................................. $ (351,736) $ 112,829 $ (113,595) $ 254,820
----------- ----------- ----------- ------------
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period....................................................... (355,082) 821,022 (789,111) 553,985
Less: reclassification adjustment for gains (losses)
included in net income....................................... (220,990) (119,132) (18,902) (73,188)
----------- ----------- ----------- ----------
OTHER COMPREHENSIVE INCOME (LOSS)................................. (576,072) 701,890 (808,013) 480,797
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS)....................................... $ (927,808) $ 814,719 $ (921,608) $ 735,617
=========== =========== =========== ===========
RETAINED EARNINGS, BEGINNING OF PERIOD............................ $12,925,566 $12,474,579 $12,240,149 $11,893,520
Net income (loss)................................................. (351,736) 112,829 (113,595) 254,820
Dividend paid..................................................... (649,377) (651,000) (216,321) (216,984)
Excess of purchase price on stock redemptions..................... (14,220) (5,052) - -
----------- ----------- ----------- -----------
RETAINED EARNINGS, END OF PERIOD.................................. $11,910,233 $11,931,356 $11,910,233 $11,931,356
=========== =========== =========== ===========
Per common share data
Basic earnings per share.......................................... $ (1.06) $ .34 $ (.34) $ .76
=========== =========== =========== ===========
Dividend paid..................................................... $ 1.95 $ 1.95 $ .65 $ .65
=========== =========== =========== ===========
Weighted average number of shares
outstanding for the entire period............................. 333,070 333,864 332,800 333,821
=========== =========== ========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
3
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AMERINST INSURANCE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Cash Provided by Operating Activities...... $ 1,339,380 $ 3,239,679
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INVESTING ACTIVITIES
Proceeds from sales of investments........... 9,992,939 8,142,786
Purchases of fixed-maturity securities....... (10,665,540) (9,887,047)
Net sales of short-term investments.......... -- (705,180)
------------ -----------
Net Cash used in Investing Activities......... (672,601) (2,449,441)
FINANCING ACTIVITIES
Redemption of shares......................... (30,196) (11,955)
Shareholder dividend......................... (649,379) (651,000)
------------ -----------
Net Cash Used by Financing Activities.......... (679,575) (662,955)
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INCREASE (DECREASE) IN CASH.................... $ (12,796) $ 127,283
============ ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
AMERINST INSURANCE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 1998
Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by AmerInst Insurance Group, Inc. (AIIG) without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission and reflect all
adjustments consisting of normal recurring accruals, which are, in the opinion
of management, necessary for a fair presentation of the results of operations
for the periods shown. These statements are condensed and do not include all
information required by generally accepted accounting principles to be included
in a full set of financial statements. It is suggested that these condensed
statements be read in conjunction with the consolidated financial statements at
and for the year ended December 31, 1997 and notes thereto, included in the
Registrant's annual report as of that date.
Part I, Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OPERATIONS
Three months ended September 30, 1998 compared to three months ended September
30, 1997:
A net loss of $113,595 was recorded for the three months ended September 30,
1998, compared to net income of $254,820 in 1997. The decrease is primarily
attributable to lower realized capital gains on sales of investments, slightly
lower investment income and an increase in losses incurred, as more fully
described below.
Sales of investment securities during the three months ended September 30, 1998
resulted in realized capital gains of $28,639 as compared to gains of $110,891
in the same period in 1997. Net investment income for the third quarter of 1998
was $543,305 compared to $597,353 for 1997. Investment yield for the third
quarter of 1998, consisting of interest and dividend income, was approximately
5.0% compared to 5.7% for the third quarter in 1997. Investment yield of 5.0%
is consistent with the June 30, 1998 reported yield of 4.9%. The decrease in
investment yield in the third quarter of 1998 as compared to the same period of
1997 is attributable to an increase in holdings of tax free municipal securities
and an increase in equity securities which generate less realized investment
income.
Earned premiums for the three month period ended September 30, 1998 amounted to
$1,440,929 as compared to $999,649 for the third quarter of 1997. The change of
$441,280 represents a 44% increase. The increase in earned premiums resulted
from an increase in the number of insureds along with changes in the rating
structure. Additionally, third quarter 1997 premiums were lower than in
previous years due to discounts offered by CNA based on favorable loss
experience (AIIG's third quarter 1996 premiums amounted to $1,165,381). The
discounts were offered to help CNA (and AIIG) maintain and improve market share.
The effects of these
5
<PAGE>
changes began to impact premium levels in the fourth quarter of 1997 and have
continued throughout 1998.
The loss ratios for the three month periods ended September 30, 1998 and 1997
were 118% and 117%, respectively. Prior to July 1, 1998, the loss ratio had been
established at 120%. Effective July 1, 1998, the loss ratio has been reduced to
100%. The majority of premiums earned in the third quarter of 1998 relate to the
July 1, 1997-98 treaty period and as a result the third quarter loss ratio
remains close to 120%. These loss ratios represent management's current
estimated effective loss ratio selected in consultation with the Company's
independent consulting actuary to apply to current premiums assumed and earned.
Losses incurred in the third quarter of 1998 do not reflect any development of
prior year reserves. The Company's overall loss ratio for the year ended
December 31, 1997 was 81%. However, as mentioned above, excluding the effects
of favorable development, the loss ratio for the period July 1, 1997-98 was
established at 120%.
These fluctuations in premiums, losses and expenses combined to result in a net
underwriting loss of $823,199 for the third quarter of 1998 as compared to a
loss of $620,363 for the same period of 1997. Third quarter 1998 underwriting
losses exceeded 1997 primarily due to the increase in earned premiums and
associated increase in losses incurred.
Nine months ended September 30, 1998 compared to nine months ended September 30,
1997:
A net loss of $351,736 was recorded for the nine months ended September 30,
1998, compared to net income of $112,829 in the same period of 1997. The
decrease is primarily attributable to the increase in earned premiums and
associated increase in losses incurred, as more fully described below.
Sales of investment securities during the nine months ended September 30, 1998
resulted in realized capital gains of $334,834 as compared to gains of $180,503
in the same period in 1997. Net investment income for the nine months ended
September 30, 1998 amounted to $1,627,661 compared to $1,793,221 for the same
period of 1997. Investment yield for the nine month period ended September 30,
1998, consisting of interest and dividend income, was approximately 5.0%
compared to 5.7% for the same period of 1997. The decrease in investment yield
from the 1997 period is attributable to an increase in holdings of tax free
municipal securities and an increase in equity securities which generate less
realized investment income.
Earned premiums for the nine month period ended September 30, 1998 amounted to
$4,497,820 as compared to $3,407,213 for the same period of 1997. The change of
$1,090,607 represents a 32% increase. The increase in earned premiums resulted
from an increase in the number of insureds along with changes in the rating
structure. The effects of these changes began to impact premium levels in the
fourth quarter of 1997 and have continued throughout 1998.
The loss ratio for the first nine months of 1998 and 1997 was 119%. Prior to
July 1, 1998, the loss ratio had been established at 120%. Effective July 1,
1998, the loss ratio has been reduced to 100%. The majority of premiums earned
for the nine month period ended September 30, 1998 relate to the July 1, 1997-98
treaty period and as a result the loss ratio remains close to 120%. These loss
ratios represent management's current estimated effective loss ratio selected in
consultation with the Company's independent consulting actuary to apply to
current premiums assumed and earned. Losses incurred through September 30, 1998
do not reflect any development of prior year reserves.
6
<PAGE>
The Company's overall loss ratio for the year ended December 31, 1997 was 81%.
However, as mentioned above, excluding the effects of favorable development, the
loss ratio for the period July 1, 1997-98 was established at 120%. Management
expects to make a determination in the fourth quarter on whether an adjustment
to reserves for prior years is appropriate.
These fluctuations in premiums, losses and expenses combined to result in a net
underwriting loss of $2,751,659 for the nine month period ended September 30,
1998 as compared to a loss of $2,153,274 for the same period of 1997.
Underwriting losses during the period exceeded 1997 primarily due to the
increase in earned premiums and associated increase in losses incurred (120%
loss ratio for the July 1, 1997-98 period).
FINANCIAL CONDITION AND LIQUIDITY
As of September 30, 1998, total invested assets amounted to $41,794,068, an
increase of $110,489 or .3% from $41,683,579 at December 31, 1997. Cash
balances decreased from $1,081,736 at December 31, 1997 to $1,068,940 at
September 30, 1998, a decrease of 1.2%. The balance of cash and cash
equivalents varies depending on the maturities of fixed term investments and on
the level of funds invested in money market mutual funds. The ratio of cash and
invested assets to total liabilities and stockholders' equity at September 30,
1998 was .89 to 1, compared to a ratio of .90 to 1 at December 31, 1997.
The Registrant paid its thirteenth consecutive quarterly dividend of $0.65 per
share during the third quarter of 1998.
Assumed reinsurance premiums receivable represents current assumed premiums
receivable less commissions payable to the fronting carriers. This balance
decreased from $1,146,379 at December 31, 1997 to $1,112,977 at September 30,
1998, a decrease of 2.9%. This balance fluctuates primarily due to the timing
of renewal premium written.
YEAR 2000 READINESS
AIIG is aware of the issues associated with the programming code in existing
computer systems as the year 2000 approaches. The "Year 2000" problem is the
result of computer programs being written using two digits rather than four to
define the applicable year. Programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. Systems
that do not properly recognize such information could generate erroneous data or
fail.
The Company's operations are conducted through its management company, Vermont
Insurance Management, Inc. ("VIM"). VIM has informed the Company that it is
using both internal and external resources to identify, correct and test its
financial, information and operational systems for Year 2000 compliance. VIM is
assessing its internal systems for Year 2000 compliance and has made inquiries
of third parties with whom the Company has material relationships to assess the
potential impact on the Company's operations if key third parties are not
successful in converting their systems in a timely manner. VIM has completed
its assessment of its hardware systems and is still in the process of reviewing
its software systems, and anticipates that its review of its internal systems
will be complete by December 31, 1998. VIM anticipates that any
7
<PAGE>
necessary remediation will be completed by June 1999 and that any necessary
testing will be completed by September 30, 1999. Based on its review efforts to
date, VIM does not anticipate any material disruption to the Company's business
from its internal systems. The costs of remediation to its systems will be borne
by VIM or its affiliates.
VIM has not yet received responses to all of its third party inquiries, but the
Company believes that the primary concern regarding the Year 2000 problem is
with its primary insurance carrier, CNA. The majority of insurance transactions
affecting the Company are originated by CNA operating systems, with quarterly
reporting to the Company. Representatives of CNA have informed the Company that
CNA expects to be Year 2000 compliant by December 1, 1998. If CNA is unable to
become Year 2000 compliant, the Company believes that the impact on its business
is likely to be material. Presently, the Company's only business is that of
reinsurance, so that it anticipates that Year 2000 noncompliance by third
parties will be disruptive primarily from a reporting and informational
standpoint.
The Company's expectations about the impact of the Year 2000 problem on its
business are subject to a number of uncertainties that could cause actual
results to differ materially. Such factors include the following: (i) The
Company's service providers may not be successful in properly identifying all
systems and programs that contain two-digit year codes; (ii) The nature and
number of systems which require reprogramming, upgrading or replacement may
exceed the service providers' expectations in terms of complexity and scope;
(iii) The Company's service providers may not be able to complete all
remediation and testing necessary in a timely manner; (iv) The Company has no
control over the ability of third parties to achieve Year 2000 compliance; and
(v) The impact of the Year 2000 problem on CNA may be of such magnitude that it
may adversely affect the Company's business or eliminate its sole source of
insurance business.
8
<PAGE>
PROPOSED REDOMESTICATION AND RESTRUCTURING
AIIG's Board of Directors has voted to submit a proposed "Exchange Agreement"
and related matters to a vote of shareholders. Pursuant to this proposal, AIIG
would transfer all of its assets and liabilities to a newly formed Bermuda
company in exchange for newly issued shares of the Bermuda company. AIIG would
then be liquidated and AIIG shareholders would receive on a share-for-share
basis the newly issued shares of the Bermuda company.
The transaction contemplates the restructuring of AIIG's business, including the
redomestication of the insurance operations of AIIG's subsidiary to a Bermuda
domiciled company.
The transactions contemplated in the Exchange Agreement, the redomestication and
the restructuring will be consummated only if certain conditions are satisfied,
including certain regulatory approvals, the agreement of certain other third
parties, and the approval of specified matters by the holders of at least a
majority of the outstanding AIIG common stock.
On September 30, 1998, a registration statement was filed with the Securities
and Exchange Commission by AmerInst Insurance Group, Ltd. ("AIG Ltd."), a newly
formed Bermuda company. The registration statement relates to the registration
of the shares to be issued by AIG Ltd. in the proposed transaction and the
solicitation of proxies from the Company's stockholders to approve the
transaction.
9
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See Index to Exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1998.
10
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERINST INSURANCE GROUP, INC.
------------------------------
(Registrant)
November 10, 1998 Bruce W. Breitweiser
---------------------------------------------
Bruce W. Breitweiser
(Vice President and Chief Financial Officer,
duly authorized to sign this Report in such
capacity and on behalf of the Registrant.)
11
<PAGE>
AMERINST INSURANCE GROUP, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3(i) Certificate of Incorporation of the Company (1)
3(ii) Bylaws of the Company (1)
4.1 Article Fourth of Certificate of Incorporation--included in Exhibit
3(i) above
4.2 Statement of Stock Ownership Policy, as amended (7)
10.1 Reinsurance Treaty between AIIC and Virginia Surety Company, Inc. (2)
10.2 Agreement between Country Club Bank and AIIC (2)
10.3 Agreement between Country Club Bank and AIIG (2)
10.4 Reinsurance Treaty between AIIC and CNA Insurance Companies (3), 1994
placement slip (4) 1995 placement slip (5) 1996 placement slip (6)
1997 placement slip (9) and 1998 placement slip (filed herewith)
10.5 Management Agreement between Vermont Insurance Management, Inc. and
AIIC dated May 1, 1997 (8) Addenda to Management Agreement dated July
1, 1997 (9) and Addenda to Management Agreement dated July 1, 1998
(filed herewith).
10.6 Escrow Agreement among AIIC, United States Fire Insurance Company and
Harris Trust and Savings Bank dated March 7, 1995 (5)
10.7 Security Trust Agreement among AIIC, Harris Trust and Savings Bank and
Virginia Surety Company, Inc. dated March 9, 1995 (5)
10.8 Investment Advisory Agreement For Discretionary Accounts between
Amerinst Insurance Company and Harris Associates L.P. dated as of
January 22, 1996, as amended by the Amendment to Investment Advisory
Agreement for Discretionary Accounts dated as of April 2, 1996 (filed
herewith).
27 Financial Data Schedule (filed herewith)
</TABLE>
- --------------------
(1) Filed with the Company's Registration Statement on Form S-1, Registration
No. 33-17421 and incorporated herein by reference.
(2) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference.
(3) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
(4) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
(5) Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 and incorporated herein by reference.
(6) Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference.
(7) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
12
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AMERINST INSURANCE GROUP, INC.
INDEX TO EXHIBITS--Continued
(8) Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference.
(9) Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 and incorporated herein by reference.
13
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Exhibit 10.5
------------
AMERINST INSURANCE COMPANY
MANAGEMENT AGREEMENT WITH VERMONT INSURANCE MANAGEMENT, INC.
MANAGEMENT FEE ADDENDUM
-----------------------
Effective July 1, 1998:
COMPANY will:
- -------------
(1) Compensate MANAGER at the rate of $91,160 per annum as management fees for
the services to be provided as set out in the AGREEMENT and schedule of
which the Addendum is a part.
(2) Cause the above fee to be paid in quarterly installments in advance at the
beginning of each calendar quarter.
WITNESS: VERMONT INSURANCE MANAGEMENT, INC.
By: /s/ Andrew Sargeant
- ------------------------- ----------------------------------------
Andrew Sargeant, President
WITNESS: AMERINST INSURANCE COMPANY
By: /s/ Norman C. Batchelder
- ---------------------------- ----------------------------------------
Its duly authorized agent
<PAGE>
Exhibit 10.8
------------
INVESTMENT ADVISORY AGREEMENT
FOR DISCRETIONARY ACCOUNTS
Gentlemen:
The undersigned (the "Client") hereby employs Harris Associates L.P.
("Harris") as the investment adviser for the Account (referred to below) under
the following terms and conditions:
1. Harris is authorized to act for the client with respect to the
acquisition, retention, management and disposition of all assets which the
client may put under supervision at Harris (the "Account"). Harris shall place
orders for the execution of securities transactions, without prior consultation
with or notification of the Client, for the purchase, sale, exchange or other
acquisition or disposition of securities for the Account. Harris shall have
complete discretion as to the nature, amount and timing of all such
transactions. Harris shall not subcontract any of its obligations or use sub-
advisers with respect to the performance of its investment advisory services
hereunder. Investments shall be in compliance with applicable law, including
Illinois insurance law. The Client will furnish Harris with all powers of
attorney necessary for Harris to carry out this authority, but no such powers
shall be construed to authorize Harris to take any action not authorized by this
Agreement.
2. The Client shall pay Harris for the services to be rendered by
Harris under this Agreement in accordance with the fee schedule attached hereto
as Schedule A.
3. (a) Harris shall place orders for the execution of transactions
with or through such brokers, dealers or issuers as Harris may select.
(b) The Client understands that Harris Associates Securities L.P.
("Securities"), an affiliate of Harris, is a broker-dealer and that Harris
intends to have Securities execute securities transactions as agent for the
Account and Securities will receive brokerage fees for executing such
transactions. These brokerage fees will be in addition to the investment
management fees paid by the Client to Harris. The brokerage fees charged to the
Account by Harris with respect to any transaction for which Securities acts as a
broker for the account shall be 40% of the minimum commission rates in effect on
April 1, 1975 for transactions executed on the New York Stock Exchange. The
Client understands that other brokers may be willing to execute transactions for
the Account at commission rates different from those charged hereunder.
Securities' ability to charge the foregoing brokerage commissions to the Account
is an integral factor in the establishment of Harris' fees under the Agreement.
<PAGE>
(c) Harris may execute brokerage transactions for the Account
through brokers or dealers who also provide Harris with "research services," as
defined in section 28(e)(3) of the Securities Exchange Act of 1934. The
commission paid to such brokers may be in excess of the amount of commission
another broker would charge for the same transaction. Such research services,
moreover, may be available to Harris on a cash basis. Before effecting any such
transaction, Harris will determine in good faith that the amount of such
commission is reasonable, in relation to the value of the brokerage and research
services provided by such broker, viewed in terms of either that particular
transaction or Harris' overall responsibilities to all of its clients. The
research services so provided may relate to a specific transaction placed with
such broker, but for the most part the research services will consist of a wide
variety of information useful to the Account, Harris, and to Harris' other
clients. Harris' ability to obtain such research services is an integral factor
in the establishment of Harris' fees hereunder.
(d) Harris may effect securities transactions for the accounts of
other clients which are identical or similar to those which Harris may effect
for the Account at the same or different times. Harris may also allocate
transactions in securities among clients on such basis as Harris determines to
be reasonable, including a determination that some clients may not purchase or
sell the securities at the same time as others.
(e) As more fully set forth in Part II of Harris' Form ADV which
has been provided to the Client, the Client acknowledges that Harris' principals
may occasionally buy and sell securities for their own account, including those
securities recommended to clients. Such purchases or sales may be at the same or
different times or prices as Client's purchases or sales.
(f) With respect to securities transactions executed for the
Account at Harris' direction through Securities, Securities may execute
transactions for the accounts of its other clients which are identical or
similar to, or different from or opposed to, securities transactions which
Securities may execute for the Account.
(g) In effecting securities transactions at the direction of
Harris, Securities may effect similar transactions in the same security
simultaneously for the Account and for the accounts of other clients. Securities
may bunch these securities transactions orders. Harris will allocate the
securities purchased or sold therein among the participating accounts (including
the Account) as Harris determines to be reasonable. Harris and/or Securities may
be charged a lesser per unit commission on such bunched orders than Harris
charges its clients to whom the securities are allocated. The Client's brokerage
commission will be based upon the brokerage schedule applicable to the Account
based upon the number of shares, or other applicable unit, acquired by the
Account and the commission rate agreed to with respect to such transaction.
4. In connection with the services to be rendered by Harris under
this Agreement, under certain circumstances, it is advisable that Harris have
the authority to vote shares held in Client's Account with respect to matters
which have direct impact on the value of such shares and which are best analyzed
in the context of Harris' investment decisions with respect to the Account.
Therefore, Harris is hereby granted the power as Client's Proxy and
Attorney-in-Fact,
<PAGE>
upon the following conditions, to vote the shares of stock or other securities
held in the Account, with respect to all matters which Harris determines to be
relevant and appropriate. Harris will notify Client, and any appropriate person
holding such securities in "street name,' as trustee, or custodian, when Harris
has determined its intent to exercise this authority. Upon such notification,
Client, by this Agreement, directs that such persons act on Harris' instructions
to vote the shares, unless the Client notifies Harris and such other person of
Client's determination to vote such shares itself.
Notwithstanding the foregoing powers which are granted to Harris
hereunder, to the extent that the acceptance of such powers places any
affirmative regulatory obligations upon Harris because Harris may be deemed to
own or control any regulated entity, Harris shall not be deemed to have accepted
such powers, unless and until Harris complies with any and all applicable laws
and regulations governing such regulated entity.
5. Harris shall be responsible for its malfeasance or violation of
applicable law, but neither Harris nor any of its officers, directors or
employees shall be responsible hereunder, absent a finding of willful misconduct
or gross negligence, for any other action, performed or omitted to be performed
in good faith, or for any errors in judgment in managing the Account. Harris
shall not be responsible for any loss incurred by reason of any act or omission
of any broker, dealer or custodian other than itself; provided, however, that
Harris will make reasonable efforts to require that brokers and dealers perform
their obligations with respect to the Account. It is understood that nothing
herein shall in any way constitute a waiver or limitation of any of the
obligations which Harris may have under any federal securities laws.
6. The assets of the Account shall be held by the bank, trust
company, broker-dealer or other entity acceptable to Harris and appointed by the
Client as custodian of the Account. The custodian shall at all times be
responsible for the physical custody of the assets of the Account and for the
collection of interest, dividends and other income attributable to the assets of
the Account.
7. This Agreement amends and is in substitution of all prior
agreements, if any, between the parties with respect to the Account. This
Agreement shall be governed by the laws of the State of Illinois.
8. This Agreement may be terminated by the Client at any time, by
giving Harris prior written notice of termination, and by Harris, by giving the
Client thirty days' prior written notice of termination. Any termination of
this Agreement shall not, in any case, affect or prevent the consummation of any
transaction initiated prior to such termination. Additionally, the Client may
terminate this contract within five days of signing it without any obligation to
pay any prorated fee. No assignment (as that term is defined in the Investment
Advisers Act of 1940) of this Agreement shall be made without prior written
consent of the Client.
9. Notices shall be deemed effective if addressed and mailed,
certified or registered mail, to the Client, and to Harris.
10. Harris shall maintain as confidential any and all information
regarding Client
<PAGE>
that Harris obtains under this and all related agreements.
11. Harris, being organized as a partnership, will notify Client in
writing when there is a change in the membership of its organization within a
reasonable time after the occurrence of such change.
If the foregoing correctly sets forth our understanding, please sign
the enclosed copy of this letter and return it to Harris.
Very truly yours,
HARRIS ASSOCIATES L.P.
By: /s/ Robert M. Levy
--------------------------------------
Robert M. Levy
/s/ Earl J. Rusnak, Jr.
- ----------------------------------------
Earl J. Rusnak, Jr.
ACCEPTED AND AGREED TO this 22nd day of January 1996
CLIENT: AmerInst Insurance Company
/s/ Ronald S. Katch, Treasurer
- ------------------------------
<PAGE>
SCHEDULE A TO INVESTMENT
ADVISORY AGREEMENT DATED
1996
----
BETWEEN
HARRIS ASSOCIATES L.P.
("Harris")
AND
Amerlnst Insurance Company
--------------------------
("Client")
1. This Schedule of Compensation can be amended from time to time by
Harris upon 30 days' prior written notice to the Client.
2. The Client shall pay, at the beginning of each quarterly period,
a fee (to be prorated and a refund made to the Client for any period of less
than a quarter) based on the market value of the Account, including cash and
securities, taken on the last business day of the preceding quarter, as follows:
a) 0.25% on the first $10,000,000, plus
b) 0.125% on the amount in excess of $10,000,000.
c) Notwithstanding the foregoing, there shall be a minimum quarterly
charge of $2,500
<PAGE>
3. By initialing in the space provided after this paragraph, Client
desires the bank, trust company, broker-dealer or other entity which is acting
as the custodian of the Account to pay to Harris the fee described on this
Schedule A upon receipt of Harris' invoice for services rendered hereunder. In
addition, Client hereby authorizes Harris to provide to such custodian of the
Account a copy of this Schedule A as evidence of the authorization granted
pursuant to this paragraph. /s/ RSK
-------
Client Initials
Client Signature
/s/ Robert M. Levy By: /s/ Ronald S. Katch, Treasurer
- ------------------------------ --------------------------------
Robert M. Levy
/s/ Earl J. Rusnak, Jr.
- ------------------------------
Earl J. Rusnak, Jr.
Date: January 22, 1996
<PAGE>
AMENDMENT TO
INVESTMENT ADVISORY AGREEMENT
FOR DISCRETIONARY ACCOUNTS
THIS AMENDMENT TO INVESTMENT ADVISORY AGREEMENT FOR DISCRETIONARY
ACCOUNTS ("Amendment") is made as of this 2nd day of April, 1996 by and between
AmerInst Insurance Company ("Client") and Harris Associates L. P. ("Harris").
WHEREAS, Client and Harris have entered into a certain Investment
Advisory Agreement dated as of January 22, 1996 (the "Agreement") (all
capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Agreement); and
WHEREAS, the parties desire to amend the Agreement as hereinafter
provided.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Section 1 of the Agreement is amended be deleting the fifth
sentence and inserting the following:
Investments shall be in compliance with applicable law, including
Illinois insurance law generally and specifically Article VIII of the
Illinois Insurance Code. Investments shall also be in accordance with
the guidelines established by Client's Investment Committee.
2. Section 6 of the Agreement is amended by deleting the first
sentence and inserting the following:
The Assets of the Account shall be held by a corporation that is
qualified to administer trusts in the State of Illinois under the
Corporate Fiduciary Act and that has an office in the State of
Illinois at which the Account is maintained, or any other entity
permitted by Illinois law which is acceptable to Harris and appointed
by the Client as custodian of the Account.
<PAGE>
3. A new Section 12 is added to the Agreement to read, in its
entirety, as follows:
The parties agree that the Agreement, unless sooner terminated or
revised, shall be resubmitted to the Illinois Department of Insurance
five years after the original review and at five year intervals
thereafter. Amendments to the Agreement shall be subject to
Department review prior to becoming effective.
This Amendment may be executed in counterparts, each of which shall
constitute one and the same instrument.
In all other respects, the Agreement shall remain in full force and
effect.
HARRIS ASSOCIATES L.P. AMERINST INSURANCE COMPANY
/s/ Robert M. Levy By: /s/ Ronald S. Katch
- ----------------------------------- ----------------------------------
Robert M. Levy Ronald S. Katch
Investment Committee Chairman
/s/ Earl J. Rusnak, Jr.
- -----------------------------------
Earl J. Rusnak, Jr.
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