UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1997
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 1-10640
RELIASTAR FINANCIAL CORP.
-------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 41-1620373
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 WASHINGTON AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55401
--------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(612) 372-5432
--------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
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 [X] NO [ ]
Number of shares of common stock outstanding as of April 30, 1997 was
40,155,320.
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Balance Sheets
(in millions)
(unaudited)
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
ASSETS
Fixed Maturity Securities, Available-for-Sale $ 9,212.4 $ 9,298.2
Equity Securities 25.1 36.9
Mortgage Loans on Real Estate 1,859.1 1,855.4
Real Estate and Leases 76.9 77.5
Policy Loans 555.1 549.0
Other Invested Assets 68.3 59.9
Short-Term Investments 123.7 119.4
------------ ------------
Total Investments 11,920.6 11,996.3
Cash 19.9 32.4
Accounts and Notes Receivable 194.2 171.0
Reinsurance Receivable 209.8 199.0
Deferred Policy Acquisition Costs 1,064.7 1,006.0
Present Value of Future Profits 234.3 220.2
Property and Equipment, Net 119.7 121.3
Accrued Investment Income 175.3 164.7
Other Assets 424.9 383.9
Participation Fund Account Assets 315.9 316.2
Assets Held in Separate Accounts 2,254.6 2,096.0
------------ ------------
TOTAL ASSETS $ 16,933.9 $ 16,707.0
============ ============
LIABILITIES
Future Policy and Contract Benefits $ 11,400.5 $ 11,332.2
Pending Policy Claims 292.7 287.6
Other Policyholder Funds 209.0 190.6
Notes and Mortgages Payable 449.1 407.5
Income Taxes 115.0 133.8
Other Liabilities 397.3 410.0
Participation Fund Account Liabilities 315.9 316.2
Liabilities Related to Separate Accounts 2,249.1 2,090.5
------------ ------------
TOTAL LIABILITIES 15,428.6 15,168.4
------------ ------------
Company-Obligated Mandatorily Redeemable Preferred
Securities Issued by a Consolidated Subsidiary 121.0 120.9
SHAREHOLDERS' EQUITY
Common Stock (Shares Issued: 1997, 42.6; 1996, 42.4) 578.9 572.3
Note Receivable from ESOP (21.2) (21.6)
Unamortized Restricted Stock Awards (1.7) (1.8)
Net Unrealized Investment Gains 60.1 140.8
Retained Earnings 834.5 794.2
Less Treasury Common Stock, at Cost (Shares Held: 1997 and 1996,
2.4) (66.3) (66.2)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 1,384.3 1,417.7
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 16,933.9 $ 16,707.0
============ ============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Income
(in millions, except per share data)
(unaudited)
THREE MONTHS ENDED MARCH 31
---------------------------
1997 1996
---- ----
<S> <C> <C>
REVENUES
Premiums $ 204.7 $ 205.0
Net Investment Income 234.7 232.3
Realized Investment Gains 2.2 6.2
Policy and Contract Charges 64.9 59.8
Other Income 56.7 30.1
------------ -------------
Total 563.2 533.4
------------ -------------
BENEFITS AND EXPENSES
Benefits to Policyholders 317.5 323.8
Sales and Operating Expenses 121.4 100.2
Amortization of Deferred Policy Acquisition Costs
and Present Value of Future Profits 28.4 24.5
Interest Expense 7.4 7.3
Dividends and Experience Refunds to Policyholders 7.1 3.3
------------ -------------
Total 481.8 459.1
------------ -------------
Income Before Income Taxes and Dividends on Preferred
Securities of Subsidiary 81.4 74.3
Income Tax Expense 28.4 26.2
Dividends on Preferred Securities of Subsidiary, Net of Tax 1.7 .1
------------ -------------
Net Income $ 51.3 $ 48.0
============ =============
NET INCOME PER COMMON SHARE
Primary $ 1.26 $ 1.24
============ =============
Fully Diluted $ 1.26 $ 1.17
============ =============
Net Income Available to Common Shareholders $ 51.3 $ 45.9
============ =============
Weighted Average Shares
Common and Common Equivalent Shares (Primary) 40.7 36.9
Common Shares Assuming Maximum Dilution (Fully Diluted) 40.7 39.5
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Shareholders' Equity
(in millions, except per share data)
(unaudited)
THREE MONTHS ENDED MARCH 31
---------------------------
1997 1996
---- ----
<S> <C> <C>
10% SENIOR CUMULATIVE PREFERRED STOCK
Beginning and End of Period $ - $ 63.2
------------ -------------
ESOP CONVERTIBLE PREFERRED STOCK
Beginning of Year - 28.9
Redeemed - (.1)
------------ -------------
End of Period - 28.8
------------ -------------
COMMON STOCK
Beginning of Year 572.3 566.5
Issued for Benefit Plans 5.3 -
Other, Net 1.3 (.5)
------------ -------------
End of Period 578.9 566.0
------------ -------------
NOTE RECEIVABLE FROM ESOP
Beginning of Year (21.6) (23.4)
Repayments, Accrued or Paid .4 .4
------------ -------------
End of Period (21.2) (23.0)
------------ -------------
UNAMORTIZED RESTRICTED STOCK AWARDS
Beginning of Year (1.8) (3.0)
Awards, Net (.2) (.2)
Amortization of Restricted Stock Awards .3 .3
-------------- -------------
End of Period (1.7) (2.9)
-------------- -------------
NET UNREALIZED INVESTMENT GAINS
Beginning of Year 140.8 246.8
Change for the Period (80.7) (118.5)
-------------- -------------
End of Period 60.1 128.3
-------------- -------------
RETAINED EARNINGS
Beginning of Year 794.2 647.2
Net Income 51.3 48.0
Dividends to Shareholders:
10% Senior Cumulative Preferred Stock (1996, $2.50 Per Share) - (1.6)
ESOP Convertible Preferred Stock (1996, $.5475 Per Share) - (.7)
Common Stock (Per Share: 1997, $.28; 1996, $.25) (11.2) (9.1)
Other, Net .2 (.1)
-------------- -------------
End of Period 834.5 683.7
-------------- -------------
TREASURY COMMON STOCK
Beginning of Year (66.2) (106.1)
Acquired (1.7) (1.8)
Reissued 1.6 7.8
-------------- -------------
End of Period (66.3) (100.1)
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY $ 1,384.3 $ 1,344.0
============== =============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
THREE MONTHS ENDED MARCH 31
---------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 51.3 $ 48.0
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities
Interest Credited to Insurance Contracts 122.9 122.3
Future Policy Benefits (58.5) (72.1)
Capitalization of Policy Acquisition Costs (50.5) (44.5)
Amortization of Deferred Policy Acquisition Costs and Present
Value of Future Profits 28.4 24.5
Deferred Income Taxes 3.9 2.9
Net Change in Receivables and Payables .5 3.6
Other Assets (50.7) 17.0
Realized Investment Gains, Net (2.2) (6.2)
Other 1.6 -
------------- --------------
Net Cash Provided by Operating Activities 46.7 95.5
------------- --------------
INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturity Securities 83.8 20.1
Proceeds from Maturities or Repayment of Fixed Maturity Securities 173.5 201.6
Cost of Fixed Maturity Securities Acquired (353.1) (348.0)
Sales of Equity Securities, Net 13.6 -
Proceeds of Mortgage Loans Sold, Matured or Repaid 124.5 66.7
Cost of Mortgage Loans Acquired (132.5) (89.8)
Sales of Real Estate and Leases, Net 2.7 .2
Policy Loans Issued, Net (6.1) (8.8)
Sales (Purchases) of Other Invested Assets, Net (3.1) 5.0
Purchases of Short-Term Investments, Net (4.3) (85.5)
------------- --------------
Net Cash Used by Investing Activities (101.0) (238.5)
------------- --------------
FINANCING ACTIVITIES
Deposits to Insurance Contracts 311.2 281.4
Maturities and Withdrawals from Insurance Contracts (304.5) (277.1)
Net Proceeds from Issuance of Trust-Originated Preferred Securities - 120.8
Increase in Notes and Mortgages Payable 41.7 17.1
Repayment of Notes and Mortgages Payable (.1) (16.1)
Issuance of Common Stock Under Stock Option and Other Plans 6.4 5.8
Dividends on 10% Senior Cumulative Preferred Stock - (1.6)
Dividends on Common Stock (11.2) (9.1)
Acquisition of Treasury Common Stock (1.7) (1.8)
------------- --------------
Net Cash Provided by Financing Activities 41.8 119.4
------------- --------------
Decrease in Cash (12.5) (23.6)
Cash at Beginning of Period 32.4 48.5
------------- --------------
Cash at End of Period $ 19.9 $ 24.9
============= ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
RELIASTAR FINANCIAL CORP.
Notes to Condensed Consolidated Financial Statements
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and such principles were applied
on a basis consistent with that reflected in the 1996 Annual Report filed with
the Securities and Exchange Commission (SEC) except for the accounting change as
described in Note 2. The financial information included herein, other than the
condensed consolidated balance sheet as of December 31, 1996, has been prepared
by management without audit by independent certified public accountants. The
condensed consolidated balance sheet as of December 31, 1996 has been derived
from, and does not include all the disclosures contained in the audited
consolidated financial statements for the year ended December 31, 1996.
The information furnished includes all adjustments and accruals consisting only
of normal, recurring accrual adjustments which are, in the opinion of
management, necessary for a fair statement of results for the interim period.
The results of operations for any interim period are not necessarily indicative
of results for the full year. The unaudited interim condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto contained in the Annual Report of ReliaStar Financial Corp.
(the Company or ReliaStar) for the year ended December 31, 1996.
NOTE 2. ACCOUNTING CHANGE
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
Effective for transactions occurring on or after January 1, 1997, the Company
adopted the provisions of Statement of Financial Accounting Standards (SFAS) No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which have not been deferred by SFAS No. 127
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." SFAS No. 125 requires a company to recognize the financial and servicing
assets it controls and the liabilities it has incurred and to derecognize
financial assets when control has been surrendered in accordance with the
criteria provided in SFAS No. 125. The adoption of this standard did not have a
significant effect on the financial results of the Company.
NOTE 3. IMPACT OF ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED IN THE FUTURE
EARNINGS PER SHARE
During February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share." SFAS No. 128 replaces primary earnings per share (EPS)
with "Basic" EPS and replaces fully diluted EPS with "Diluted" EPS. SFAS No. 128
is effective for fourth quarter 1997 reporting with restatement of previously
reported EPS required. Early adoption of SFAS No. 128 is not permitted. "Basic"
EPS is defined as net income available to common shareholders divided by the
weighted average number of common shares outstanding for the period. "Diluted"
EPS is computed in a manner similar to the current fully diluted earnings per
share calculation. The Company does not expect that "Diluted" EPS will be
materially different than fully diluted EPS as currently reported.
NOTE 4. ACQUISITION
On February 23, 1997, the Company signed a definitive agreement to acquire and
merge Security-Connecticut Corporation (SRC) into ReliaStar. SRC is a holding
company with two primary subsidiaries: Security-Connecticut Life Insurance
Company of Avon, Connecticut, and Lincoln Security Life Insurance Company of
Brewster, New York. As of December 31, 1996, SRC had assets of $2.3 billion and
total shareholders' equity of $355 million. The transaction will be effected
through a stock-for-stock exchange. The exchange ratio will be determined based
upon the average price of the Company's common stock during the twenty-day
trading period which is expected to conclude five days prior to the closing of
the transaction and is subject to adjustments based upon changes in the market
value of the Company's common stock. The definitive agreement also includes a
breakup provision that would result in a payment of $8 million to ReliaStar
under certain circumstances if the transaction is not completed. The acquisition
will be accounted for as a purchase.
Based on the closing price of $59.125 for ReliaStar common stock on March 31,
1997, SRC shareholders would receive .7949 of a share of ReliaStar common stock
for each share of SRC common stock. Assuming the March 31 closing price,
ReliaStar would issue approximately seven million additional shares of ReliaStar
common stock, and the purchase price would be approximately $417 million,
including transaction costs. Completion of the merger is expected in the second
or third quarter of 1997, and is subject to normal closing conditions, including
approval by SRC shareholders and various regulatory approvals.
NOTE 5. SUBSEQUENT EVENT
On May 9, 1997, the Company filed a shelf registration with the Securities and
Exchange Commission for the issuance of up to $400.0 million of debt securities
and other securities. This filing replaced and superseded the unused portion
($125.0 million) of the Company's December 18, 1995 shelf registration.
ITEM 2.
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Pretax results of operations by business segment are summarized below (in
millions):
THREE MONTHS
ENDED MARCH 31
--------------
1997 1996
---- ----
<S> <C> <C>
Pretax Operating Income (Loss) (1)
Individual Insurance $53.4 $51.0
Employee Benefits 11.2 9.8
Life and Health Reinsurance 13.4 11.9
Pension 2.9 4.1
Corporate and Other (1.1) (7.9)
-------- --------
Pretax Operating Income 79.8 68.9
Pretax Net Realized Investment Gains 1.6 5.4
-------- --------
Pretax Income Before Dividends
on Preferred Securities of Subsidiary 81.4 74.3
Income Tax Expense 28.4 26.2
Dividends on Preferred Securities of Subsidiary, Net of Tax 1.7 .1
-------- --------
Net Income $51.3 $48.0
======== ========
</TABLE>
(1) Operating income excludes realized investment gains and losses and their
impact on the amortization of deferred policy acquisition costs (DAC) and
present value of future profits (PVFP). Prior period information has been
restated to reflect this definition of operating income.
The discussion of business segment results that follows refers to the above
pretax segment results and, in each instance, amounts are before income taxes
unless otherwise noted.
INDIVIDUAL INSURANCE
The Individual Insurance segment of the Company is composed of the individual
insurance division of ReliaStar Life Insurance Company (ReliaStar Life),
Northern Life Insurance Company (Northern), ReliaStar United Services Life
Insurance Company (United Services) and ReliaStar Bankers Security Life
Insurance Company (Bankers Security). These subsidiaries are sometimes
collectively referred to as the Insurers.
Pretax operating income for the first three months of 1997 increased $2.4
million, or 5%, compared with the same period in 1996. The increase in earnings
is primarily due to a 7% growth in assets under management, partially offset by
a decrease in interest spreads. The average interest spread of 255 basis points
in the first quarter of 1997, compares to 262 basis points in the first quarter
of 1996. This decrease in spreads reflects a 9 basis point reduction in the
average crediting rate and a 16 basis point decrease in the portfolio yield. It
should be noted that the interest spread calculation is an annualized measure
and can be overly influenced in a particular quarter by the level of
prepayments, recoveries on problem investments and other quarterly variances in
the level of net investment income. For most of the business, crediting rates on
in force business are reset annually at the beginning of the calendar year and
are guaranteed for one year. Crediting rates offered on new business can be
changed at any time in response to competition and market interest rates, and
are guaranteed on most new premiums received to the end of the calendar year.
EMPLOYEE BENEFITS
Pretax operating income for the first three months of 1997 increased $1.4
million, or 14%, compared with the same period in 1996. The increase for the
first quarter was primarily due to improved mortality experience as compared
with the same period in 1996.
LIFE AND HEALTH REINSURANCE
Pretax operating income of the Life and Health Reinsurance segment for the three
months ended March 31, 1997 increased $1.5 million, or 13%, when compared with
the same period in 1996. Income for the segment was higher than 1996 due
primarily to a 17% increase in net earned premiums, increased investment income
and a slightly more favorable overall loss ratio. These favorable impacts were
partially offset by higher experience rating refunds and higher sales and
operating expenses. Earnings in the reinsurance business can fluctuate based
upon a number of factors, including pricing, market capacity, the availability
and pricing of retrocessional programs, loss experience and the risk profile of
the book of business.
PENSION
Pretax operating income of the Pension segment for the three months ended March
31, 1997, decreased $1.2 million, or 29%, when compared with the same period in
1996. Pretax operating income from the small employer 401(k) line of business
increased $.7 million to $1.6 million for the three months ended March 31, 1997.
Income in this line of business increased primarily due to higher fee revenues
attributable to the growth in assets under management. Pretax operating income
in the participating pension and GIC line of business decreased $1.9 million to
$1.3 million for the three months ended March 31, 1997. Income in this line of
business was lower primarily due to the decline in the Company's closed block of
pension contract liabilities.
CORPORATE AND OTHER
The pretax operating loss for Corporate and Other for the three months ended
March 31, 1997, decreased $6.8 million when compared with the same period in
1996. This favorable variance was primarily due to increased operating results
from the Company's mutual fund and mortgage banking operations as well as higher
recovery of corporate costs from other business segments. In addition, first
quarter 1997 includes pretax earnings of $.3 million and $.6 million,
respectively, from Successful Money Management Seminars, Inc. acquired in the
third quarter of 1996, and PrimeVest Financial Services, Inc. acquired in the
fourth quarter of 1996.
REALIZED INVESTMENT GAINS AND LOSSES
The sources of pretax realized investment gains (losses) were as follows (in
millions):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
--------------
1997 1996
---- ----
<S> <C> <C>
Net Gains (Losses) on Sales of Investments
Fixed Maturity Securities $(2.6) $ 3.8
Equity Securities 2.2 -
Foreclosed Real Estate .2 (.1)
Real Estate .1 .7
Other 5.4 4.1
Provision for Losses on Investments
Fixed Maturity Securities (.7) -
Mortgage Loans (1.4) (1.1)
Foreclosed Real Estate (1.0) (1.2)
-------- --------
Pretax Realized Investment Gains 2.2 6.2
DAC/PVFP Amortization (1) (.6) (.8)
-------- --------
Pretax Net Realized Investment Gains $1.6 $5.4
======== ========
(1) Due to realized investment gains and losses.
</TABLE>
Gross realized investment gains and losses from the sale of available-for-sale
fixed maturity securities were as follows (in millions):
THREE MONTHS
ENDED MARCH 31
--------------
1997 1996
---- ----
Gross Realized Gains $ .6 $ 3.9
Gross Realized Losses $ (3.2) $ (.1)
The Company establishes allowances and writes down the value of specific assets
based upon its continuing review of individual problem investments. The
Company's recording of allowances and write-downs based upon a review of
individual problem assets results in fluctuations in the level of the provision
for losses on investments reported in each period. The provision for losses on
investments is affected to a significant degree by general economic conditions
and the status of the real estate market. While the Company believes it has set
aside appropriate reserves and allowances for problem investments, subsequent
economic and market conditions may require the establishment of additional
reserves.
ACQUISITIONS
On February 23, 1997, the Company signed a definitive agreement to acquire and
merge Security-Connecticut Corporation (SRC) into ReliaStar. SRC is a holding
company with two primary subsidiaries: Security-Connecticut Life Insurance
Company of Avon, Connecticut, and Lincoln Security Life Insurance Company of
Brewster, New York. As of December 31, 1996, SRC had assets of $2.3 billion and
total shareholders' equity of $355 million. The transaction will be effected
through a stock-for-stock exchange. The exchange ratio will be determined based
upon the average price of the Company's common stock during the twenty-day
trading period which is expected to conclude five days prior to the closing of
the transaction and is subject to adjustments based upon changes in the market
value of the Company's common stock. The definitive agreement also includes a
breakup provision that would result in a payment of $8 million to ReliaStar
under certain circumstances if the transaction is not completed. The acquisition
will be accounted for as a purchase.
Based on the closing price of $59.125 for ReliaStar common stock on March 31,
1997, SRC shareholders would receive .7949 of a share of ReliaStar common stock
for each share of SRC common stock. Assuming the March 31 closing price,
ReliaStar would issue approximately seven million additional shares of ReliaStar
common stock, and the purchase price would be approximately $417 million,
including transaction costs. Completion of the merger is expected in the second
or third quarter of 1997, and is subject to normal closing conditions, including
approval by SRC shareholders and various regulatory approvals.
On April 21, 1997, the Company signed a definitive agreement to acquire Citizens
Community Bancshares, Co. (CCB). CCB is a bank holding company with one primary
subsidiary, Citizens Savings Bank, F.S.B. of St. Cloud, Minnesota. As of
December 31, 1996, CCB had total assets of approximately $40 million and total
shareholders' equity of approximately $3 million. The transaction will be
accounted for as a pooling-of-interests. Completion of the merger is subject to
normal closing conditions, including various regulatory approvals.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES - RELIASTAR FINANCIAL CORP.
ReliaStar, as parent, is dependent upon dividends, interest and payments for
other charges received from its subsidiaries to pay dividends to shareholders,
service its debt and pay other obligations. The payment of dividends, interest
or other charges by the Insurers is subject to restrictions imposed by
applicable insurance laws and regulations.
The payment of future dividends by ReliaStar will be largely dependent upon the
ability of ReliaStar Life to pay dividends to it. Under Minnesota insurance law
regulating the payment of dividends by ReliaStar Life, any such payment must be
in an amount deemed prudent by ReliaStar Life's board of directors and, unless
otherwise approved by the Commissioner of the Minnesota Department of Commerce
(the Commissioner), must be paid solely from the adjusted earned surplus of
ReliaStar Life. Adjusted earned surplus means the earned surplus as determined
in accordance with statutory accounting practices (unassigned funds) less 25% of
the amount of such earned surplus which is attributable to net unrealized
capital gains. Further, without approval of the Commissioner, ReliaStar Life may
not pay in any calendar year any dividend which, when combined with other
dividends paid within the preceding 12 months, exceeds the greater of (i) 10% of
ReliaStar Life's statutory surplus at the prior year-end or (ii) 100% of
ReliaStar Life's statutory net gain from operations (not including realized
capital gains) for the prior calendar year. For 1997, the amount of dividends
which can be paid by ReliaStar Life without Commissioner approval is $144.0
million.
On May 9, 1997, the Company filed a shelf registration with the Securities and
Exchange Commission for the issuance of up to $400.0 million of debt securities
and other securities. This filing replaced and superseded the unused portion
($125.0 million) of the Company's December 18, 1995, shelf registration filing.
On March 29, 1996, the Company sold $125.0 million of 8.20% Trust-Originated
Preferred Securities (TOPrSsm) due March 15, 2016. The Company used the proceeds
from this offering to redeem, at par, all of the outstanding shares of its 10%
Senior Cumulative Preferred Stock on July 1, 1996, repay short-term bank debt
and for general corporate purposes.
The Company has announced its intent to repurchase up to $100.0 million of its
common stock under a common stock buyback program to be conducted in conjunction
with and contingent upon the acquisition of SRC, such repurchase to be financed
with the proceeds of debt, preferred stock, or similar public or private
financing.
LIQUIDITY AND CAPITAL RESOURCES - INSURERS
Liquidity for life insurance companies is measured by their ability to pay
scheduled contractual benefits, pay operating expenses and fund investment
commitments. Sources of liquidity include scheduled and unscheduled principal
and interest payments on investments, premium payments and deposits and the sale
of liquid investments. These sources of liquidity for the Insurers significantly
exceed scheduled uses.
Liquidity is also affected by unscheduled benefit payments, including death
benefits, benefits under insured accident and health policies and contract
withdrawals and surrenders. The amount of withdrawals and surrenders is affected
by a variety of factors such as credited interest rates for competing products,
general economic conditions, the Insurers' claims paying ratings and events in
the industry which affect policyholders' confidence.
The Insurers' investment portfolios represent a significant source of liquid
assets. As of March 31, 1997, the Insurers' investment portfolio included $6.6
billion (39% of total assets) of short-term investments and investment grade
marketable bonds. The March 31, 1997 investment portfolio also included $2.2
billion of investment grade privately placed bonds which, while not publicly
traded, are a source of liquidity.
The policies and annuities issued by the Individual Insurance segment contain
provisions which allow contractholders to withdraw or surrender their contracts
under defined circumstances. These policies and annuities generally contain
provisions which apply penalties or otherwise restrict the ability of
contractholders to make such withdrawals or surrenders. The Insurers closely
monitor the surrender and policy loan activity of their insurance products and
manage the composition of their investment portfolios, including liquidity, in
light of such activity. While the Insurers have recently experienced a modest
increase in withdrawal and surrender activity attributable to their individual
insurance products, the surrender activity is within a reasonable range of the
Company's expectations and is well below a level which would have a material
effect on liquidity.
Changes in interest rates may affect the incidence of policy surrenders and
other withdrawals. In addition to the potential impact on liquidity,
unanticipated withdrawals in a changed interest rate environment could adversely
affect earnings if the Company were required to sell investments at reduced
values in order to meet liquidity demands. The Company manages the asset and
liability portfolios in order to minimize the adverse earnings impact of
changing market interest rates. The Company seeks assets which have duration
characteristics similar to the liabilities which they support. The Company also
uses derivative instruments, such as interest rate swaps and futures contracts,
to adjust the duration of the asset and liability portfolios (see
Investments-Derivative Financial Instruments). The Company closely monitors its
derivative usage and has procedures in place to manage counter-party risks and
related exposures.
Statutory surplus is computed according to rules prescribed by the National
Association of Insurance Commissioners (NAIC), as modified by each Insurer's
state of domicile. Statutory accounting rules are different from generally
accepted accounting principles (GAAP) and are intended to reflect a more
conservative perspective by, for example, requiring immediate recognition of
selling expenses.
The Company's long-term growth goals contemplate continued growth in its
insurance businesses. To achieve these growth goals, the Insurers will need to
increase their statutory surplus. Additional statutory surplus may be secured
through various sources such as internally generated statutory earnings or
equity infusions by the Company with funds generated through debt or equity
offerings.
The state of domicile of each of the Insurers imposes minimum risk-based capital
requirements on insurance enterprises that were developed by the NAIC. The
formulas for determining the amount of risk-based capital specify various
weighting factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance is
determined by a ratio of a company's regulatory total adjusted capital, as
defined, to its authorized control level risk-based capital, as defined.
Companies below specific trigger points or ratios are classified within certain
levels, each of which requires specified corrective action. The risk-based
capital ratio of each of the Insurers significantly exceeds the ratios at which
regulatory corrective action would be required.
CONSOLIDATED CASH FLOWS
The Company's cash balance at March 31, 1997 was $19.9 million. During the first
quarter of 1997, net cash provided by operating and financing activities was
$46.7 million and $41.8 million, respectively, which was offset by net cash used
by investing activities of $101.0 million.
The $46.7 million of net cash provided by operating activities was primarily the
result of positive cash flow from premiums and investment income in excess of
cash outflows for insurance benefits and sales and operating expenses. Net cash
provided by financing activities of $41.8 million was primarily the result of
proceeds from short-term borrowings and issuance of commercial paper.
INVESTMENTS
The current investment strategy for the Company is designed to maintain the
overall quality of the portfolios, to maintain an appropriate liquidity
position, to assure appropriate asset/liability structures, to achieve asset
type diversification and to avoid issuer concentration.
The Company intends to direct most of its new investment cash flow for the
remainder of 1997 to the acquisition of investment grade marketable and
privately placed bonds. The marketable bonds category includes both corporate
issues and structured finance securities such as collateralized mortgage
obligations (CMOs) and other mortgage-backed securities. The Company will make
new investments in commercial mortgages and below investment grade bonds subject
to overall limitations.
The assets held by each of the Insurers are legally segregated and support only
their respective contractual obligations. The investment portfolios of each
Insurer are structured to reflect the characteristics of the liabilities which
they support. The Company internally allocates assets within the Insurers to
facilitate segment asset/liability matching. These segment allocations are
solely for portfolio management purposes, and generally all of the assets
allocated to a segment are available to satisfy the respective liabilities of
all segments within each Insurer. Assets within these portfolios are selected to
provide compatible duration, cash flow and return characteristics. All of the
investments in the Insurers' portfolios are subject to diversification, quality
and reserving requirements of state laws regulating the Insurers.
The following table provides information regarding the composition of the
Company's invested assets as of the indicated dates (in millions):
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
Investment Grade Bonds:
Marketables $ 6,512.9 54.6% $ 6,604.9 55.0%
Private Placements 2,157.5 18.1 2,156.2 18.0
--------- ----- --------- -----
Subtotal 8,670.4 72.7 8,761.1 73.0
Below Investment Grade Bonds:
Marketables 290.5 2.4 279.7 2.4
Private Placements 246.9 2.1 255.4 2.1
--------- ----- --------- -----
Subtotal 537.4 4.5 535.1 4.5
Equity Securities 25.1 .2 36.9 .3
Commercial Mortgages 1,358.7 11.4 1,359.6 11.3
Mortgages, Residential and Other 500.4 4.2 495.8 4.1
Real Estate 76.9 .6 77.5 .7
Short-Term Investments 123.7 1.1 119.4 1.0
Other 628.0 5.3 610.9 5.1
--------- ----- --------- -----
Total Invested Assets $11,920.6 100.0% $11,996.3 100.0%
========= ===== ========= =====
</TABLE>
FIXED MATURITY SECURITIES
The amounts invested in fixed maturity securities as of March 31, 1997 and
December 31, 1996 were $9.2 billion and $9.3 billion, respectively. The average
marketable and private placement bond investments in a single corporate issuer
(excluding structured finance securities such as CMOs, mortgage-backed pass
throughs and asset-backed securities) as of March 31, 1997 were $9.5 million and
$7.9 million, respectively.
All of the Company's marketable and privately placed bonds are required to be
evaluated by the Securities Valuation Office (SVO) of the NAIC. The SVO
evaluates the investments of insurers for regulatory reporting purposes and
assigns securities to one of six investment categories. The NAIC's categories
closely follow the public rating agencies' definition for marketable bonds. NAIC
categories 1 and 2 include bonds considered investment grade (BBB or higher) by
the public rating agencies. Categories 3 through 6 are referred to as below
investment grade (BB or lower).
As of March 31, 1997, the weighted average book yields of the Company's
investment grade portfolio and below investment grade portfolio were 7.8% and
8.8%, respectively. The weighted average book yield is not necessarily
reflective of the net investment income ultimately realized by the Company.
Investments with greater credit risk have a greater risk of default than
investment grade securities, and accordingly, some of the incremental book yield
of the below investment grade portfolio may not be realized.
The following tables identify the amortized cost and the fair value of the
Company's fixed maturity securities with respect to each NAIC credit
classification as of the indicated dates (in millions):
<TABLE>
<CAPTION>
MARCH 31, 1997
- ---------------------------------------------------------------------------------------------------------
MARKETABLES PRIVATE PLACEMENTS
-----------------------------------------------------------------------------------------
NAIC AMORTIZED GROSS UNREALIZED FAIR AMORTIZED GROSS UNREALIZED FAIR
RATING COST GAINS (LOSSES) VALUE COST GAINS (LOSSES) VALUE
- ------ ---- ----- -------- ----- ---- ----- -------- -----
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $4,669.6 $123.5 $(41.3) $4,751.8 $ 774.5 $18.0 $ (7.9) $ 784.6
2 1,736.0 44.5 (19.4) 1,761.1 1,363.7 24.2 (15.0) 1,372.9
3 268.4 5.2 (3.4) 270.2 160.7 1.7 (2.9) 159.5
4 18.3 0.4 (0.3) 18.4 55.0 1.3 (0.8) 55.5
5 1.8 0.1 - 1.9 31.2 0.1 (1.9) 29.4
6 - - - - 2.5 - - 2.5
Redeemable
Preferred
Stock 3.1 - - 3.1 1.6 - (0.1) 1.5
-------- -------- -------- -------- -------- -------- -------- --------
Total $6,697.2 $173.7 $(64.4) $6,806.5 $2,389.2 $45.3 $(28.6) $2,405.9
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------
MARKETABLES PRIVATE PLACEMENTS
-----------------------------------------------------------------------------------------
NAIC AMORTIZED GROSS UNREALIZED FAIR AMORTIZED GROSS UNREALIZED FAIR
RATING COST GAINS (LOSSES) VALUE COST GAINS (LOSSES) VALUE
- ------ ---- ----- -------- ----- ---- ----- -------- -----
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $4,738.4 $189.6 $(20.6) $4,907.4 $ 779.7 $29.4 $ (3.6) $ 805.5
2 1,633.7 70.2 (6.4) 1,697.5 1,311.3 43.0 (3.6) 1,350.7
3 252.3 8.3 (1.6) 259.0 158.2 3.0 (1.4) 159.8
4 18.9 0.3 (0.3) 18.9 58.7 1.5 (0.7) 59.5
5 1.8 0.1 (0.1) 1.8 35.9 0.2 (2.5) 33.6
6 - - - - 2.5 - - 2.5
Redeemable
Preferred
Stock 0.5 - - 0.5 1.6 - (0.1) 1.5
-------- -------- -------- -------- -------- -------- -------- --------
Total $6,645.6 $268.5 $(29.0) $6,885.1 $2,347.9 $77.1 $(11.9) $2,413.1
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The amortized cost and fair value of fixed maturity securities by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties (in millions).
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in One Year or Less $ 223.6 $ 226.3 $ 155.8 $ 157.4
Due After One Year Through Five Years 3,085.7 3,124.6 2,967.6 3,057.0
Due After Five Years Through Ten Years 2,625.7 2,662.3 2,622.4 2,723.6
Due After Ten Years 1,000.5 1,021.4 1,055.3 1,108.7
Mortgage-Backed/Structured Finance
Securities 2,150.9 2,177.8 2,192.4 2,251.5
-------- --------- -------- --------
Total $9,086.4 $9,212.4 $8,993.5 $9,298.2
======== ======== ======== ========
</TABLE>
The fair values for the marketable bonds are based upon the quoted market prices
for bonds actively traded. The fair values for marketable bonds without an
active market, are obtained through several commercial pricing services which
provide the estimated fair values. Fair market values for privately placed bonds
which are not considered problems are determined utilizing a commercially
available pricing model. The model considers the current level of risk-free
interest rates, current corporate spreads, the credit quality of the issuer and
cash flow characteristics of the security. Utilizing these data, the model
generates estimated market values which the Company considers reflective of the
fair value of each privately placed bond. Fair values for privately placed bonds
which are considered problems are determined through consideration of factors
such as the net worth of borrower, the value of collateral, the capital
structure of the borrower, the presence of guarantees and the Company's
evaluation of the borrower's ability to compete in its relevant market (see
Problem Investments).
Fair values of fixed income securities fluctuate due to a number of factors,
including the market level of interest rates, fluctuations in the corporate
spreads over the risk-free rate and changes in the credit quality of specific
investments.
The Company's marketable and private placement bond portfolios were diversified
by industry (based upon amortized cost) as of the indicated dates as set forth
in the following table:
<TABLE>
<CAPTION>
MARKETABLES PRIVATE PLACEMENTS
----------- ------------------
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Materials 7.1% 6.7% 9.4% 9.5%
Consumer Non-Cyclical 6.0 6.0 18.1 18.4
Consumer Products/Services 7.3 7.3 18.6 18.4
Energy 6.2 6.2 6.3 6.9
Financial Services 19.6 19.3 18.3 18.6
Government 3.3 3.5 0.8 .8
Industrial 3.5 3.6 10.4 10.3
Mortgage-Backed/Structured
Finance Securities 31.9 32.2 2.2 1.2
Real Estate 0.3 .3 1.8 1.3
Retailing 2.3 2.3 5.6 5.9
Technology 2.3 2.5 3.1 3.2
Utilities 10.2 10.1 5.4 5.5
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
BELOW INVESTMENT GRADE INVESTMENTS
Issuers of below investment grade debt frequently have relatively high levels of
indebtedness and are more sensitive to adverse economic conditions, such as
recession or increasing interest rates, than are issuers of investment grade
securities.
The largest investment in below investment grade bonds of any one borrower was
approximately two-tenths of one percent of invested assets at March 31, 1997.
The largest investment in below investment grade bonds of any one industry
grouping was approximately 1.7% of invested assets at March 31, 1997.
Concentrations of the portfolio in below investment grade bonds are regularly
analyzed and adjusted as appropriate.
MORTGAGE-BACKED SECURITIES
The Company's investment policy permits the acquisition of mortgage-backed
securities and collateralized mortgage obligations (collectively referred to as
MBS securities) provided that the Company's aggregate investment in MBS
securities shall not exceed 50% of its statutory assets and the Company shall
not acquire any interests in residual, interest only, principal only or inverse
floater tranches of MBS securities. The Company's investment strategy has been
to invest primarily in actively traded MBS securities which are structured to
reduce prepayment risk as compared to direct investments in the underlying
mortgage collateral. The amortized cost and estimated fair value of investments
in MBS securities categorized by interest rates on the underlying collateral
were comprised of the following (in millions):
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
AMORTIZED
COST FAIR VALUE
---- ----------
<S> <C> <C>
Adjustable Rate Pass Through MBS Securities:
Below 6% $ 1.5 $ 1.5
6% - 7% 139.8 141.0
7% - 8% 339.1 339.5
Above 8% 35.1 35.4
Fixed Rate Pass Through MBS Securities:
Below 9% 10.2 10.7
Above 9% 8.5 9.1
Planned Amortization Class MBS Securities:
Below 7% 298.9 301.8
7% - 8% 341.1 350.0
8% - 9% 111.2 114.9
Above 9% 14.8 15.2
Other MBS Securities:
Below 7% 199.3 200.2
7% - 8% 91.8 96.1
8% - 9% 19.5 20.7
Above 9% 12.2 12.7
-------- --------
Total MBS Securities $1,623.0 $1,648.8
======== ========
</TABLE>
The Company invests in asset-backed securities in addition to the MBS securities
described above. As of March 31, 1997, the Insurers held asset-backed securities
with an amortized cost of $527.9 million and a fair value of $529.0 million.
MORTGAGE LOANS
The Company's commercial mortgage loans generally range in size from $1 million
to $10 million, with the average commercial mortgage loan investment as of March
31, 1997 being approximately $2.2 million.
The commercial mortgage loan portfolio diversification by property type and
geographic region of the country was as follows:
MARCH 31, DECEMBER 31,
1997 1996
---- ----
PROPERTY TYPE
Office 22.9% 24.6%
Industrial 23.3 23.5
Special Purpose 17.8 17.3
Retail 16.7 16.1
Apartment 17.9 15.7
Hotel/Motel 1.4 2.8
----- -----
Total 100.0% 100.0%
===== =====
MARCH 31, DECEMBER 31,
1997 1996
---- ----
GEOGRAPHIC REGION
Midwest 30.3% 31.6%
Pacific 28.8 30.1
Southeast 19.3 18.2
Northeast 8.9 8.7
Mountain 6.6 6.5
Southwest 6.1 4.9
----- -----
Total 100.0% 100.0%
===== =====
The weighted average yield of the commercial mortgage loan portfolio as of March
31, 1997 was 8.7%. The weighted average maturity of these loans was 6.7 years.
The Company invests in individual and pools of individual residential mortgage
loans in addition to the structured finance securities backed by residential
mortgages (see Fixed Maturity Securities). As of March 31, 1997 and December 31,
1996, the Insurers held $498.5 and $493.9 million, respectively, of
non-securitized residential mortgage loans.
UNREALIZED INVESTMENT GAINS AND LOSSES
All of the Company's debt and equity securities are classified as
available-for-sale and carried at fair value on the Condensed Consolidated
Balance Sheets with unrealized investment gains and losses excluded from income
and reported as a separate component of shareholders' equity.
The components of net unrealized investment gains reported in shareholders'
equity are shown below (in millions):
MARCH 31, DECEMBER 31,
1997 1996
---- ----
Unrealized Investment Gains $131.4 $310.5
DAC/PVFP Adjustment (38.9) (93.8)
Deferred Income Taxes (32.4) (75.9)
------- ------
Net Unrealized Investment Gains $ 60.1 $140.8
======= ======
Changes in net unrealized investment gains or losses are primarily the result of
fluctuations in market interest rates which impact the market value of fixed
interest rate securities. The change in market value of the Company's fixed
maturity securities is not expected to have a significant effect on results of
operations or liquidity because: 1) the Company has the present intent and
practice to hold most of its available-for-sale fixed maturity securities to
maturity and 2) the Company's asset/liability management activity is designed to
monitor and adjust for the effects of changes in market interest rates.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has an established program prescribing the use of derivatives in its
asset/liability management activity. The investment policy of each of the
Insurers expressly precludes the use of such instruments for speculative
purposes. The policy details permissible uses and instruments and contains
accounting and management controls designed to assure compliance with these
policies. The Company is not a party to leveraged derivatives.
The insurance liabilities of the Company are sensitive to changes in market
interest rates. The Company has established procedures for evaluating these
liabilities and structures investment asset portfolios with compatible
characteristics. Investment assets are selected which provide yield, cash flow
and interest rate sensitivities appropriate to support the insurance products.
The Company uses interest rate swaps and interest rate futures as part of this
asset/liability management program. The Company has acquired a significant
amount of certain shorter duration investments, such as floating rate or
adjustable rate investments. Acquisition of these assets shortens the duration
of an asset portfolio. The Company uses interest rate swaps to extend the
duration of these portfolios as an alternative to purchasing longer duration
investments.
The Company uses duration analysis to estimate the amount of sensitivity to
market interest rate changes. Duration of a bond or portfolio can be thought of
as the life in years of a notional zero-coupon bond whose fair value would
change by the same amount in response to any change in market interest rates.
The portfolio duration includes the duration impact added by interest rate swaps
and interest rate futures contracts. Target durations are determined by the
Company based upon the subjective evaluation of a number of characteristics of
the liabilities, including such factors as the ability of the Company to modify
interest crediting rates, the presence and magnitude of surrender charges,
historical and projected lapse experience, the level of market interest rates
and competition.
The following table sets forth the asset duration, portfolio duration and target
duration for the investment portfolio of each business segment (in years):
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------------
ASSET PORTFOLIO TARGET
DURATION DURATION DURATION
-------- -------- --------
<S> <C> <C> <C> <C>
Individual Insurance 3.9 4.1 3.5 - 5.0
Employee Benefits 3.4 3.7 3.5 - 8.0
Life and Health Reinsurance 4.0 4.1 3.5 - 8.0
Pension 2.3 3.0 2.5 - 3.5
</TABLE>
At March 31, 1997, the Company had 65 interest rate swap contracts in effect
with a notional amount of $1.03 billion. At December 31, 1996, the Company had
69 interest rate swap contracts in effect with a notional amount of $1.11
billion. During the first quarter of 1997, one new interest rate swap contract
was entered into with a notional amount of $10.0 million and 5 interest rate
swap contracts matured with a notional amount of $87.0 million. There were no
terminations of interest rate swap contracts prior to maturity during the first
quarter of 1997. The Company had no deferred gains or losses at March 31, 1997
related to interest rate swap contracts terminated early. The estimated fair
value of the interest rate swap contracts in effect at March 31, 1997 was an
unrealized loss of $3.5 million.
All of the interest rate swap contracts are standard contracts whereby the
Company pays a floating rate of interest (generally based upon the LIBOR rate as
determined from time to time) and receives a fixed rate (generally a specified
contract rate). The following table details the characteristics of the Company's
interest rate swap contracts at March 31, 1997 (dollars in millions).
<TABLE>
<CAPTION>
NOTIONAL RANGE OF FIXED
AMOUNT RATES RECEIVED
------ --------------
<S> <C> <C> <C>
Maturing in One Year or Less $105.0 7.0 - 8.7%
Maturing After One Year Through Three Years 373.0 5.2 - 8.7%
Maturing After Three Years Through Five Years 474.5 5.3 - 8.2%
Maturing After Five Years Through Seven Years 80.0 6.3 - 7.0%
--------
Total Notional Amount $1,032.5
========
</TABLE>
The Company closely monitors the effect of the swap position on reported income.
The Company's investment portfolio includes a substantial amount of floating
rate investments. Changes in market interest rates have an opposite (and
approximately offsetting) effect on the reported income from the swap portfolio.
Accordingly, the reported investment income (or losses) attributable to the
Company's swap position will be approximately offset by the changed investment
income of the Company's floating or adjustable rate investments in a changing
rate environment. At March 31, 1997 the Company held $1.26 billion of adjustable
rate invested assets, short-term investments and cash.
The Company also enters into futures contracts, which are contracts for delayed
delivery of securities or money market instruments in which the seller agrees to
make delivery at a specified future date of a U.S. Treasury Bond at a specified
price or yield. These contracts are entered into to manage interest rate risk of
the Company's GIC operations. The contracts that the Company has entered into
are exchange traded and marked to market daily. The contract value of these
futures contracts at March 31, 1997 was $74.1 million.
PROBLEM INVESTMENTS
The Company classifies invested assets of the Insurers as problem investments
where: (i) an asset is delinquent in a required payment of principal or
interest; (ii) an asset is the subject of a foreclosure action or the borrower
is in bankruptcy; (iii) a loan has been restructured; or (iv) a loan has been
foreclosed and the collateral is owned (Problem Investments). The Company
reports a mortgage loan as delinquent when a required payment of principal or
interest is 60 days past due. Fixed maturity securities are reported as
delinquent following the contractual grace period allowed for any required
payment of principal or interest. The Company generally considers a loan as
restructured when one or more of the following terms is changed for the benefit
of the borrower: (i) interest rate for a specified period of time or for the
life of the loan; (ii) maturity date; (iii) the principal face amount or timing
of principal repayments on a contingent or absolute basis; or (iv) amount or
timing of payment of accrued interest.
The amortized cost of Problem Investments, net of related write-offs and
allowances and non-recourse debt, was as follows (in millions):
MARCH 31, DECEMBER 31,
1997 1996
---- ----
Fixed Maturity Securities(1) $16.2 $15.5
Commercial Mortgage Loans 23.4 22.4
Residential and Other Mortgage Loans 7.2 4.2
Investment Real Estate(2) 12.0 12.3
Foreclosed Real Estate 37.0 37.4
----- -----
Total $95.8 $91.8
===== =====
(1) All problem fixed maturity securities were private placements.
(2) The amounts shown represent real estate acquired as an investment which the
Company has determined to be Problem Investments.
The amortized cost of Problem Investments in the preceding table reflects
reductions for write-offs and allowances taken by the Company. The cumulative
amounts of such write-offs and allowances on problem invested assets of the
Insurers on the Condensed Consolidated Balance Sheets were as follows (in
millions):
MARCH 31, DECEMBER 31,
1997 1996
---- ----
Fixed Maturity Securities $8.7 $8.3
Commercial Mortgage Loans 11.7 10.5
Residential and Other Mortgage Loans 0.7 .7
Investment Real Estate 2.1 -
Foreclosed Real Estate 26.1 24.7
The Company establishes the carrying value of all Problem Investments. For
problem marketable securities, the fair value is the quoted market value. For
problem private placement debt securities, the fair value is determined through
consideration of factors such as the net worth of the borrower, the value of
collateral, the capital structure of the borrower, the presence of guarantees
and the Company's evaluation of the borrower's ability to compete in the
relevant market.
For problem and potential problem securities, the Company determines whether a
decline in fair value below the amortized cost is other than temporary. If the
decline in fair value is determined to be other than temporary, the Company
writes down the cost basis to fair value and the amount of the write-down is
recorded as a realized loss. Subsequent changes in the fair value of problem
available-for-sale securities which are determined to be temporary are reflected
directly in equity as unrealized investment gains or losses.
Fair value for problem real estate and problem mortgage loans is determined
taking into consideration one or more of the following factors, depending on the
circumstances for each property, including: (i) property valuation techniques
utilizing discounted cash flows at the time of stabilization including capital
expenditures and stabilization costs; (ii) sales of comparable properties; (iii)
geographic location of the property and related market conditions; and (iv)
disposition costs. In many instances, there is not an active market for such
properties. Therefore, the fair value determined by the Company may be greater
than the price which may be realized if the Company were forced to liquidate
such properties on an immediate sale basis. If fair value of a problem mortgage
loan or real estate investment is less than the carrying value, the Company
records a write-off or an increase in the allowance for uncollectible amounts.
Foreclosed properties are actively managed by the Company in order to maximize
net realizable value. The Company has the intent and ability to hold these
assets until appropriate sales opportunities arise.
The following tables set forth the distribution of problem commercial mortgage
loans by property type and geographic region:
MARCH 31, DECEMBER 31,
PROPERTY TYPE 1997 1996
- ------------- ---- ----
Office 71.5% 67.9%
Retail 14.2 15.4
Industrial 11.1 13.2
Hotel/Motel 3.2 3.5
----- -----
Total 100.0% 100.0%
===== =====
MARCH 31, DECEMBER 31,
GEOGRAPHIC REGION 1997 1996
- ----------------- ---- ----
Midwest 52.9% 51.5%
Southeast 20.4 21.0
Pacific 17.0 17.2
Southwest 6.0 6.3
Northeast 2.5 2.7
Mountain 1.2 1.3
----- ------
Total 100.0% 100.0%
===== =====
The Company also monitors its portfolios in an attempt to identify loans which
are not currently classified as Problem Investments, but where the Company has
knowledge which causes it to have serious doubts as to the ability of borrowers
to comply with the present loan repayment terms. These loans (Potential Problem
Investments) are subject to increased scrutiny and review by the Company. The
amounts of private placements and mortgage loan Potential Problem Investments
were $14.8 million and $20.8 million, respectively, at March 31, 1997.
KNOWN TRENDS AND UNCERTAINTIES WHICH MAY AFFECT FUTURE REPORTED RESULTS
ACQUISITION
On February 23, 1997, the Company signed a definitive agreement to acquire and
merge Security-Connecticut Corporation (SRC) into ReliaStar. SRC is a holding
company with two primary subsidiaries: Security-Connecticut Life Insurance
Company of Avon, Connecticut, and Lincoln Security Life Insurance Company of
Brewster, New York. As of December 31, 1996, SRC had assets of $2.3 billion and
total shareholders' equity of $355 million. The transaction will be effected
through a stock-for-stock exchange. The exchange ratio will be determined based
upon the average price of the Company's common stock during the twenty-day
trading period which is expected to conclude five days prior to the closing of
the transaction and is subject to adjustments based upon changes in the market
value of the Company's common stock. The definitive agreement also includes a
breakup provision that would result in a payment of $8 million to ReliaStar
under certain circumstances if the transaction is not completed. The acquisition
will be accounted for as a purchase.
Based on the closing price of $59.125 for ReliaStar common stock on March 31,
1997, SRC shareholders would receive .7949 of a share of ReliaStar common stock
for each share of SRC common stock. Assuming the March 31 closing price,
ReliaStar would issue approximately seven million additional shares of ReliaStar
common stock, and the purchase price would be approximately $417 million,
including transaction costs. Completion of the merger is expected in the second
or third quarter of 1997, and is subject to normal closing conditions, including
approval by SRC shareholders and various regulatory approvals.
HEALTH CARE MARKETPLACE ENVIRONMENT
The market place for the provision of health care employee benefits is changing
in response to legislative and regulatory initiatives and a market trend toward
capitated and managed care plans. The Company has determined that it will not
seek to directly provide capitated plans, but rather will market plans
maintained by third party managed care organizations through a series of
strategic alliances in selected markets. The Company intends to jointly market
its group life coverage with its strategic partners in these markets. The
Company expects that its book of insured health and health related business will
decline over the next several years and the Company does not expect significant
new sales of insured health and health related products. The Company cannot
predict the impact that these market developments will have on future reported
earnings. The earnings of the health insurance and managed care businesses of
the Company represented approximately 8% of the Company's after tax earnings in
1996.
GUARANTY ASSOCIATION ASSESSMENTS
The Insurers are subject to state guaranty association assessments in all states
in which they are admitted. Generally these associations guarantee specified
amounts (commonly $100,000 of surrender values or $300,000 of other benefits)
payable to residents of the state under policies of insolvent insurers. State
laws vary widely on coverage (and inclusion in the assessment base) of GICs.
Most state laws permit assessments or some portion thereof to be credited
against future premium taxes. However, several states do not permit such a
credit. While the Company believes that it has accrued appropriate amounts based
upon currently available information, the Company could be subject to additional
future assessments in amounts which may be material.
LITIGATION
The Company is a defendant in a number of lawsuits arising out of the normal
course of the business of the Insurers. While the nature and amount of the
Company's outstanding litigation has been fairly constant over the past several
years, some life insurers have recently been subjected to significant punitive
damages awards in certain jurisdictions. While the Company is not aware of any
actions or allegations which should reasonably give rise to any punitive damages
liability, it is possible that the Company could be subjected to such a claim in
an amount which could be material.
FINANCIAL SERVICES DEREGULATION
The United States Congress is currently considering a number of legislative
proposals intended to reduce or eliminate restrictions on affiliations among
financial services organizations. Proposals are extant which would allow banks
to own or affiliate with insurers and securities firms. An increased presence of
banks in the life insurance and annuity businesses may increase competition in
these markets. Because the Company currently provides insurance products for
sale by banks, the adoption of these proposals could have a positive impact on
the Company's sales through this venue. The Company cannot predict the impact of
these proposals on the earnings of the Company.
PART II-OTHER INFORMATION
RELIASTAR FINANCIAL CORP.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
(11) Statement re Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K:
A separate Form 8-K dated February 23, 1997 was filed in relation
to the Company entering into an agreement and plan of merger with
Security-Connecticut Corporation.
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.
Dated May 14, 1997
------------
RELIASTAR FINANCIAL CORP.
/S/ WAYNE R. HUNEKE
-------------------
by Wayne R. Huneke
Senior Vice President, Chief Financial
Officer and Treasurer
EXHIBIT 11
ReliaStar Financial Corp.
Computation of Earnings Per Share
(in millions, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
--------------
EARNINGS: 1997 1996
----------- -------
Primary:
<S> <C> <C>
Net Income, as Reported $ 51.3 $ 48.0
Dividends on ESOP Convertible Preferred Stock - (.7)
Tax Benefit on Unallocated ESOP Dividends - .2
Dividends on 10% Senior Cumulative Preferred Stock - (1.6)
----------- -----------
Net Income, As Adjusted $ 51.3 $ 45.9
=========== ===========
Fully Diluted:
Net Income, as Reported $ 51.3 $ 48.0
Dividends on 10% Senior Cumulative Preferred Stock - (1.6)
----------- -----------
Net Income, as Adjusted $ 51.3 $ 46.4
=========== ===========
SHARES:
Primary:
Weighted Average Common Shares Outstanding, Unadjusted 40.1 36.4
Dilutive Effect of Outstanding Stock Options .6 .5
----------- -----------
Weighted Average Common Shares, as Adjusted 40.7 36.9
=========== ===========
Fully Diluted:
Weighted Average Common Shares Outstanding, Unadjusted 40.1 36.4
Dilutive Effect of:
ESOP Convertible Preferred Stock - 2.6
Outstanding Stock Options .6 .5
----------- -----------
Weighted Average Common Shares, as Adjusted 40.7 39.5
=========== ===========
NET INCOME PER COMMON SHARE:
Primary $ 1.26 $ 1.24
=========== ==========
Fully Diluted $ 1.26 $ 1.17
=========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000841528
<NAME> ReliaStar Financial Corp.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 9,212,400,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 25,100,000
<MORTGAGE> 1,859,100,000
<REAL-ESTATE> 76,900,000
<TOTAL-INVEST> 11,920,600,000
<CASH> 19,900,000
<RECOVER-REINSURE> 209,800,000
<DEFERRED-ACQUISITION> 1,064,700,000
<TOTAL-ASSETS> 16,933,900,000
<POLICY-LOSSES> 11,400,500,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 292,700,000
<POLICY-HOLDER-FUNDS> 209,000,000
<NOTES-PAYABLE> 449,100,000
121,000,000
0
<COMMON> 578,900,000
<OTHER-SE> 805,400,000
<TOTAL-LIABILITY-AND-EQUITY> 16,933,900,000
204,700,000
<INVESTMENT-INCOME> 234,700,000
<INVESTMENT-GAINS> 2,200,000
<OTHER-INCOME> 121,600,000
<BENEFITS> 317,500,000
<UNDERWRITING-AMORTIZATION> 21,900,000
<UNDERWRITING-OTHER> 121,400,000
<INCOME-PRETAX> 81,400,000
<INCOME-TAX> 28,400,000
<INCOME-CONTINUING> 51,300,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,300,000
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.26
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
