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 June 30, 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 July 31, 1997 was 45,811,355.
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Balance Sheets
(in millions)
(unaudited)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
ASSETS
<S> <C> <C>
Fixed Maturity Securities, Available-for-Sale $ 9,340.1 $ 9,298.2
Equity Securities 24.9 36.9
Mortgage Loans on Real Estate 1,992.5 1,855.4
Real Estate and Leases 74.2 77.5
Policy Loans 566.9 549.0
Other Invested Assets 75.2 59.9
Short-Term Investments 172.8 119.4
------------ ------------
Total Investments 12,246.6 11,996.3
Cash 27.9 32.4
Accounts and Notes Receivable 202.0 171.0
Reinsurance Receivable 224.7 199.0
Deferred Policy Acquisition Costs 1,065.4 1,006.0
Present Value of Future Profits 220.0 220.2
Property and Equipment, Net 112.8 121.3
Accrued Investment Income 164.5 164.7
Other Assets 453.3 383.9
Participation Fund Account Assets 316.5 316.2
Assets Held in Separate Accounts 2,639.7 2,096.0
------------ ------------
TOTAL ASSETS $ 17,673.4 $ 16,707.0
============ ============
LIABILITIES
Future Policy and Contract Benefits $ 11,479.4 $ 11,332.2
Pending Policy Claims 287.7 287.6
Other Policyholder Funds 214.0 190.6
Notes and Mortgages Payable 460.0 407.5
Income Taxes 136.4 133.8
Other Liabilities 402.8 410.0
Participation Fund Account Liabilities 316.5 316.2
Liabilities Related to Separate Accounts 2,634.2 2,090.5
------------ ------------
TOTAL LIABILITIES 15,931.0 15,168.4
------------ ------------
Company-Obligated Mandatorily Redeemable Preferred
Securities Issued by Consolidated Subsidiaries 241.7 120.9
SHAREHOLDERS' EQUITY
Common Stock (Shares Issued: 1997, 42.7; 1996, 42.4) .4 .4
Additional Paid-in Capital 586.5 571.9
Note Receivable from ESOP (21.0) (21.6)
Unamortized Restricted Stock Awards (1.5) (1.8)
Net Unrealized Investment Gains 131.6 140.8
Retained Earnings 874.1 794.2
Less Treasury Common Stock, at Cost (Shares Held: 1997
and 1996, 2.4) (69.4) (66.2)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 1,500.7 1,417.7
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 17,673.4 $ 16,707.0
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Income
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUES
<S> <C> <C> <C> <C>
Premiums $ 215.1 $ 208.6 $ 419.8 $ 413.6
Net Investment Income 240.0 237.2 474.7 469.5
Realized Investment Gains .3 2.5 2.5 8.7
Policy and Contract Charges 64.7 60.8 129.6 120.6
Other Income 60.7 37.6 117.4 67.7
----------- ----------- ----------- -----------
Total 580.8 546.7 1,144.0 1,080.1
----------- ----------- ----------- -----------
BENEFITS AND EXPENSES
Benefits to Policyholders 320.9 328.5 638.4 652.3
Sales and Operating Expenses 129.3 100.7 250.7 200.9
Amortization of Deferred Policy Acquisition Costs
and Present Value of Future Profits 31.6 29.7 60.0 54.2
Interest Expense 7.6 6.9 15.0 14.2
Dividends and Experience Refunds to Policyholders 7.4 4.8 14.5 8.1
----------- ----------- ----------- -----------
Total 496.8 470.6 978.6 929.7
----------- ----------- ----------- -----------
Income Before Income Taxes and Net Dividends on
Preferred Securities of Subsidiaries 84.0 76.1 165.4 150.4
Income Tax Expense 30.0 26.7 58.4 52.9
Dividends on Preferred Securities of Subsidiaries, Net of Tax 2.1 1.6 3.8 1.7
----------- ----------- ----------- -----------
Net Income $ 51.9 $ 47.8 $ 103.2 $ 95.8
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE
Primary $ 1.27 $ 1.23 $ 2.52 $ 2.48
=========== =========== =========== ===========
Fully Diluted $ 1.27 $ 1.17 $ 2.52 $ 2.34
=========== =========== =========== ===========
Net Income Available to Common Shareholders $ 51.9 $ 45.7 $ 103.2 $ 91.6
=========== =========== =========== ===========
Weighted Average Shares
Common and Common Equivalent Shares (Primary) 40.8 37.0 40.7 36.9
Common Shares Assuming Maximum Dilution (Fully Diluted) 41.0 39.5 40.9 39.5
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Shareholders' Equity
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
-------------------------------
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 and End of Period .4 .4
------------ -------------
ADDITIONAL PAID-IN CAPITAL
Beginning of Year 571.9 566.1
Stock Issued for Benefit Plans 11.0 (2.0)
Tax Benefit on Stock Options Exercised 3.8 1.4
Other, Net (.2) -
------------ -------------
End of Period 586.5 565.5
------------ -------------
NOTE RECEIVABLE FROM ESOP
Beginning of Year (21.6) (23.4)
Repayments, Accrued or Paid .6 .8
------------ -------------
End of Period (21.0) (22.6)
------------ -------------
UNAMORTIZED RESTRICTED STOCK AWARDS
Beginning of Year (1.8) (3.0)
Awards, Net (.2) (.1)
Amortization of Restricted Stock Awards .5 .8
------------ -------------
End of Period (1.5) (2.3)
------------ -------------
NET UNREALIZED INVESTMENT GAINS
Beginning of Year 140.8 246.8
Change for the Period (9.2) (170.9)
------------ -------------
End of Period 131.6 75.9
------------ -------------
RETAINED EARNINGS
Beginning of Year 794.2 647.2
Net Income 103.2 95.8
Dividends to Shareholders:
10% Senior Cumulative Preferred Stock (1996, $5.00 Per Share) - (3.2)
ESOP Convertible Preferred Stock (1996, $1.095 Per Share) - (1.4)
Common Stock (Per Share: 1997, $.59, 1996, $.53) (23.7) (19.4)
Other, Net .4 .1
------------ -------------
End of Period 874.1 719.1
------------ -------------
TREASURY COMMON STOCK
Beginning of Year (66.2) (106.1)
Acquired (4.7) (2.6)
Reissued 1.5 11.3
------------ -------------
End of Period (69.4) (97.4)
------------ -------------
TOTAL SHAREHOLDERS' EQUITY $ 1,500.7 $ 1,330.6
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
RELIASTAR FINANCIAL CORP.
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1997 1996
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 103.2 $ 95.8
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities
Interest Credited to Insurance Contracts 249.7 245.1
Future Policy Benefits (115.9) (122.9)
Capitalization of Policy Acquisition Costs (100.4) (92.1)
Amortization of Deferred Policy Acquisition Costs and Present
Value of Future Profits 60.0 54.2
Deferred Income Taxes 9.7 5.6
Net Change in Receivables and Payables (37.2) 10.0
Other Assets (69.2) (5.0)
Realized Investment Gains, Net (2.5) (8.7)
Other 10.2 4.4
------------- --------------
Net Cash Provided by Operating Activities 107.6 186.4
------------- --------------
INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturity Securities 188.9 51.8
Proceeds from Maturities or Repayment of Fixed Maturity Securities 389.0 481.2
Cost of Fixed Maturity Securities Acquired (656.0) (734.5)
Sales of Equity Securities, Net 12.7 2.0
Proceeds of Mortgage Loans Sold, Matured or Repaid 290.4 226.4
Cost of Mortgage Loans Acquired (436.9) (179.4)
Sales of Real Estate and Leases, Net 10.3 5.7
Policy Loans Issued, Net (17.9) (19.8)
Sales (Purchases) of Other Invested Assets, Net (10.1) .9
Purchases of Short-Term Investments, Net (53.6) (113.4)
-------------- --------------
Net Cash Used by Investing Activities (283.2) (279.1)
------------- --------------
FINANCING ACTIVITIES
Deposits to Insurance Contracts 632.1 575.1
Maturities and Withdrawals from Insurance Contracts (618.3) (571.5)
Net Proceeds from Issuance of Trust-Originated Preferred Securities 120.8 120.8
Increase in Notes and Mortgages Payable 68.0 17.0
Repayment of Notes and Mortgages Payable (15.4) (43.4)
Issuance of Common Stock Under Stock Option and Other Plans 12.3 7.4
Dividends on 10% Senior Cumulative Preferred Stock - (3.2)
Dividends on ESOP Convertible Preferred Stock - (1.4)
Dividends on Common Stock (23.7) (19.4)
Acquisition of Treasury Common Stock (4.7) (2.6)
------------- --------------
Net Cash Provided by Financing Activities 171.1 78.8
------------- --------------
Decrease in Cash (4.5) (13.9)
Cash at Beginning of Period 32.4 48.5
------------- --------------
Cash at End of Period $ 27.9 $ 34.6
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
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 Annual Report of ReliaStar
Financial Corp. (the Company or ReliaStar) for the year ended December 31, 1996
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 Company's Annual Report.
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 July 1, 1997, the Company completed the acquisition of Security-Connecticut
Corporation (SRC). 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. The acquisition was
effected through a stock-for stock exchange whereby the Company issued .7367
shares of its common stock for each issued and outstanding share of SRC common
stock, or approximately 6.3 million additional ReliaStar shares. The transaction
will be accounted for as a purchase. Accordingly, the results of SRC will be
included in ReliaStar's results beginning July 1, 1997.
<PAGE>
Note 5. Company-Obligated Mandatorily Redeemable Preferred Securities Issued by
a Consolidated Subsidiary
On June 3, 1997, ReliaStar Financing II ( "Subsidiary Trust II"), a consolidated
wholly owned subsidiary of ReliaStar, completed the issuance of $125.0 million
of 8.10% Trust-Originated Preferred Securities (the "8.10% Preferred
Securities"). In connection with Subsidiary Trust II's issuance of the 8.10%
Preferred Securities and the related purchase by ReliaStar of all of Subsidiary
Trust II's common securities (the "Common Securities"), ReliaStar issued to
Subsidiary Trust II $128.9 million principal amount of its 8.10% Subordinated
Deferrable Interest Notes, due June 3, 2027 (the "8.10% Junior Subordinated Debt
Securities"). Under certain circumstances the stated maturity date may be
extended at any time by ReliaStar to any date not later than June 3, 2046. The
sole assets of Subsidiary Trust II are and will be the 8.10% Junior Subordinated
Debt Securities. The interest and other payment dates on the 8.10% Junior
Subordinated Debt Securities correspond to the distribution and other payment
dates on the 8.10% Preferred Securities and the Common Securities. Under certain
circumstances, the 8.10% Junior Subordinated Debt Securities may be distributed
to holders of 8.10% Preferred Securities and holders of the Common Securities in
liquidation of Subsidiary Trust II. The 8.10% Junior Subordinated Debt
Securities are redeemable at the option of ReliaStar on or after June 3, 2002,
at a redemption price of $25 per 8.10% Junior Subordinated Debt Security plus
accrued and unpaid interest. The 8.10% Preferred Securities and the Common
Securities will be redeemed on a pro rata basis to the same extent that the
8.10% Junior Subordinated Debt Securities are repaid, at $25 per 8.10% Preferred
Security and Common Security plus accumulated and unpaid distributions.
ReliaStar's obligations under the 8.10% Junior Subordinated Debt Securities and
related agreements, taken together, constitute a full and unconditional
guarantee by ReliaStar of payments due on the 8.10% Preferred Securities. On
June 3, 1997, 5,000,000 shares of 8.10% Preferred Securities were issued and all
remain outstanding.
Note 6. Split of Common Stock
In August 1997, the Company's Board of Directors approved a 2-for-1 split of its
common stock. The split will be effected by a 100% dividend of the Company's
common stock on September 10, 1997 for each common share owned by shareholders
of record at the close of business August 19, 1997.
Note 7. Reclassification
Certain prior year balance sheet amounts have been reclassified to conform to
the current-year presentation due to an amendment to the certificate of
incorporation to change the Company's common stock from no par value to a par
value of $.01 per share. The reclassification had no effect on previously
reported total assets, liabilities or equity.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RELIASTAR FINANCIAL CORP.
RESULTS OF OPERATIONS
Pretax results of operations by business segment are summarized below (in
millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
--------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pretax Operating Income (Loss) (1)
Individual Insurance $ 53.9 $ 48.4 $ 107.3 $ 99.4
Employee Benefits 13.6 12.2 24.8 22.0
Life and Health Reinsurance 12.7 12.3 26.1 24.2
Pension 5.4 3.5 8.3 7.6
Corporate and Other (1.5) (1.8) (2.6) (9.7)
------- ------- -------- ------
Pretax Operating Income 84.1 74.6 163.9 143.5
Pretax Net Realized Investment Gains (Losses) (.1) 1.5 1.5 6.9
------- ------- -------- ------
Pretax Income Before Dividends
on Preferred Securities of Subsidiary 84.0 76.1 165.4 150.4
Income Tax Expense 30.0 26.7 58.4 52.9
Dividends on Preferred Securities of Subsidiary, Net of Tax 2.1 1.6 3.8 1.7
------- ------- -------- ------
Net Income $ 51.9 $ 47.8 $ 103.2 $ 95.8
======= ======= ======== ======
</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 second quarter of 1997 increased $5.5 million,
or 11%, compared with the same period in 1996. The increase in earnings is
primarily due to an 8% growth in assets under management, partially offset by a
decrease in interest spreads. The average interest spread of 245 basis points in
the second quarter of 1997, compares to 259 basis points in the second quarter
of 1996. This decrease in spreads reflects a 3 basis point reduction in the
average crediting rate and a 17 basis point decrease in the portfolio yield.
Year-to-date earnings increased 8% over the comparable period in 1996 also due
primarily to growth in assets under management, offset in part by a decline in
interest spreads. It should be noted that the interest spread calculation is an
annualized measure and can be overly influenced in a particular period by the
level of prepayments, recoveries on problem investments and other variances in
the level of net investment income. For most of the business included in the
Individual Insurance Segment, 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.
<PAGE>
Employee Benefits
Pretax operating income for the second quarter of 1997 increased $1.4 million,
or 11%, compared with the same period in 1996. The increase for the second
quarter was primarily due to improved mortality experience partially offset by
higher operating expenses, as compared with the same period in 1996. Pretax
operating income for the six months ended June 30, 1997 increased 13% as
compared to same period last year due primarily to improved mortality
experience.
Life and Health Reinsurance
Pretax operating income of the Life and Health Reinsurance segment for the
second quarter of 1997 increased $.4 million, or 3%, when compared with the same
period in 1996. Income for the segment was higher than 1996 due primarily to a
19% increase in net earned premiums, partially offset by higher experience
rating refunds and commission expenses. Pretax operating income for 1997
year-to-date increased 8% over the same period in 1996 primarily due to an 18%
growth in earned premiums, partially offset by higher experience rating refunds
and commission 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 included in this segment.
Pension
Pretax operating income of the Pension segment for the second quarter of 1997
increased $1.9 million, or 54%, when compared with the same period in 1996.
Pretax operating income from the small employer 401(k) line of business
increased $.9 million to $2.1 million for the second quarter of 1997. Income in
this line of business increased primarily due to higher separate account fees
reflecting the growth in assets under management. Pretax operating income from
the Company's closed block of pension contract liabilities increased $1.0
million to $3.3 million for the second quarter of 1997, primarily due to
favorable investment income and mortality experience compared with the same
period last year. Year-to-date pretax operating income for 1997 increased 9%
primarily due to increased assets under management in the 401(k) line of
business, partially offset by a decrease in earnings caused by the decline in
the closed block of pension contract liabilities.
Corporate and Other
The pretax operating loss for Corporate and Other for the second quarter of 1997
decreased $.3 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 partially offset by lower recovery
of corporate costs from other business segments. The year-to-date pretax
operating loss for 1997 declined 73% from the same period of 1996 primarily due
to the improved operating results of the Company's mutual fund and mortgage
banking operations and higher recovery of corporate costs from other business
units.
<PAGE>
REALIZED INVESTMENT GAINS AND LOSSES
The sources of pretax realized investment gains (losses) were as follows (in
millions):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Gains (Losses) on Sales of Investments
Fixed Maturity Securities
Gross Gains $ 2.0 $ 2.2 $ 2.6 $ 6.1
Gross Losses (1.0) - (4.2) (.1)
Equity Securities .2 .1 2.4 .1
Mortgage Loans .1 - .1 -
Foreclosed Real Estate (.1) .4 .1 .3
Real Estate - - .1 .7
Other .2 1.6 5.6 5.7
Provision for Losses on Investments
Fixed Maturity Securities (1.0) (1.1) (1.7) (1.1)
Mortgage Loans - (.1) (1.4) (1.2)
Foreclosed Real Estate (.1) (.2) (1.1) (1.4)
Real Estate - (.4) - (.4)
------ ------- ------- ------
Pretax Realized Investment Gains .3 2.5 2.5 8.7
DAC/PVFP Amortization (1) (.4) (1.0) (1.0) (1.8)
------ -------- ------- ------
Pretax Net Realized Investment Gains $ (.1) $ 1.5 $ 1.5 $ 6.9
====== ======= ======= ======
</TABLE>
(1) Due to realized investment gains and losses.
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.
ACQUISITION
On July 1, 1997, the Company completed the acquisition of Security-Connecticut
Corporation (SRC). (see Known Trends and Uncertainties Which May Affect Future
Reported Results.)
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 the Company. 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
<PAGE>
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. On June
3, 1997, the Company completed the issuance of $125.0 million of 8.10%
Trust-Originated Preferred Securities. On June 3, 1997, 5,000,000 shares of the
8.10% Preferred Securities were issued and all remain outstanding.
The Company has announced its intent to repurchase up to $125.0 million of its
common stock under a common stock buyback program to be conducted in conjunction
with the acquisition of SRC, such repurchase to be financed with the proceeds of
the 8.10% Preferred Securities issued on June 3, 1997. The Company's repurchase
of shares began July 2, 1997 and through July 31, 1997, the Company had
repurchased 818,600 shares.
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 June 30, 1997, the Insurers' investment portfolio included $6.7
billion (38% of total assets) of short-term investments and investment grade
marketable bonds. The June 30, 1997 investment portfolio also included $2.2
billion of investment grade privately placed bonds which, while not publicly
traded, are an additional 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 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, 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
<PAGE>
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 June 30, 1997 was $27.9 million. During the second
quarter of 1997, net cash provided by operating and financing activities was
$107.6 million and $171.1 million, respectively, which was offset by net cash
used by investing activities of $283.2 million.
The $107.6 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 $171.1 million was primarily the result
of the issuance of the 8.10% Preferred Securities, 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>
June 30, 1997 December 31, 1996
------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Investment Grade Bonds:
Marketables $ 6,535.5 53.4% $ 6,604.9 55.0%
Private Placements 2,211.2 18.1 2,156.2 18.0
----------- ------ ----------- ----
Subtotal 8,746.7 71.5 8,761.1 73.0
<PAGE>
Below Investment Grade Bonds:
Marketables 289.5 2.4 279.7 2.4
Private Placements 299.0 2.4 255.4 2.1
------------ ------- ------------ -----
Subtotal 588.5 4.8 535.1 4.5
Equity Securities 24.9 .2 36.9 .3
Commercial Mortgages 1,382.6 11.3 1,359.6 11.3
Mortgages, Residential and Other 609.9 5.0 495.8 4.1
Real Estate 74.2 .6 77.5 .7
Short-Term Investments 172.8 1.4 119.4 1.0
Other 647.0 5.2 610.9 5.1
------------ ------- ------------ -------
Total Invested Assets $12,246.6 100.0% $11,996.3 100.0%
========= ===== ========= =====
</TABLE>
FIXED MATURITY SECURITIES
The amounts invested in fixed maturity securities as of June 30, 1997 and
December 31, 1996 were $9.3 billion. 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 June 30, 1997 were $9.3 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 June 30, 1997, the weighted average book yields of the Company's
investment grade portfolio and below investment grade portfolio were 7.8% and
8.9%, 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>
June 30, 1997
------------------------------------------------------------------------------------------
Marketables Private Placements
------------------------------------------ -----------------------------------------
NAIC Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
---------------- ----------------
Rating Cost Gains (Losses) Value Cost Gains (Losses) Value
- ------ ---- ----- -------- ----- ---- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $4,526.3 $170.5 $(18.1) $4,678.7 $ 778.4 $24.8 $ (4.4) $ 798.8
2 1,797.8 66.0 (7.0) 1,856.8 1,382.6 36.1 (6.3) 1,412.4
3 263.1 8.5 (.6) 271.0 186.2 2.8 (1.7) 187.3
4 16.5 .5 (.4) 16.6 64.6 1.7 (.3) 66.0
5 1.9 - - 1.9 46.1 .1 (2.0) 44.2
6 - - - - 1.5 - - 1.5
Redeemable
Preferred
Stock 3.1 .4 - 3.5 1.6 - (.2) 1.4
-------- ------ ------ -------- -------- ----- ------ --------
Total $6,608.7 $245.9 $(26.1) $6,828.5 $2,461.0 $65.5 $(14.9) $2,511.6
======== ====== ======= ======== ======== ===== ======= ========
December 31, 1996
-----------------------------------------------------------------------------------------
Marketables Private Placements
----------------------------------------- -----------------------------------------
NAIC Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair
---------------- ----------------
<PAGE>
Rating Cost Gains (Losses) Value Cost Gains (Losses) Value
- ------ ---- ----- -------- ----- ---- ----- -------- -----
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>
June 30, 1997 December 31, 1996
--------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in One Year or Less $ 204.6 $ 207.1 $ 155.8 $ 157.4
Due After One Year Through Five Years 3,215.0 3,298.3 2,967.6 3,057.0
Due After Five Years Through Ten Years 2,566.7 2,652.3 2,622.4 2,723.6
Due After Ten Years 983.8 1,024.8 1,055.3 1,108.7
Mortgage-Backed/Structured Finance
Securities 2,099.6 2,157.6 2,192.4 2,251.5
--------- --------- --------- ---------
Total $9,069.7 $9,340.1 $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
----------- ------------------
June 30, December 31, June 30, December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Materials 7.0% 6.7% 9.5% 9.5%
Consumer Non-Cyclical 5.9 6.0 17.8 18.4
Consumer Products/Services 7.9 7.3 18.4 18.4
Energy 6.1 6.2 5.8 6.9
Financial Services 19.8 19.3 19.4 18.6
Government 3.3 3.5 .7 .8
Industrial 3.5 3.6 9.8 10.3
<PAGE>
Mortgage-Backed/Structured
Finance Securities 31.5 32.2 3.2 1.2
Real Estate .4 .3 1.7 1.3
Retailing 2.2 2.3 5.7 5.9
Technology 2.3 2.5 3.0 3.2
Utilities 10.1 10.1 5.0 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 June 30, 1997. The
largest investment in below investment grade bonds of any one industry grouping
was approximately 1.8% of invested assets at June 30, 1997. The portfolio of
below investment grade bonds are regularly analyzed and managed in an effort to
avoid concentration risks.
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>
June 30, 1997
-------------
Amortized
Cost Fair Value
-------- --------
<S> <C> <C>
Adjustable Rate Pass Through MBS Securities:
Below 6% $ 10.0 $ 10.0
6% - 7% 129.1 130.3
7% - 8% 306.8 308.2
Above 8% 32.2 32.5
Fixed Rate Pass Through MBS Securities:
Below 9% 5.9 6.3
Above 9% 8.1 8.6
Planned Amortization Class MBS Securities:
Below 7% 288.2 297.7
7% - 8% 337.7 352.7
8% - 9% 106.5 111.6
Above 9% 11.9 12.3
Other MBS Securities:
Below 7% 198.6 205.6
7% - 8% 91.6 98.1
8% - 9% 19.1 20.4
Above 9% 11.4 12.0
-------- --------
Total MBS Securities $1,557.1 $1,606.3
======== ========
</TABLE>
<PAGE>
The Company invests in asset-backed securities in addition to the MBS securities
described above. As of June 30, 1997, the Insurers held asset-backed securities
with an amortized cost of $542.5 million and a fair value of $551.3 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 June
30, 1997 being approximately $2.3 million.
The commercial mortgage loan portfolio diversification by property type and
geographic region of the United States was as follows:
June 30, December 31,
1997 1996
---- ----
Property Type
- -------------
Office 22.1% 24.6%
Industrial 22.2 23.5
Special Purpose 17.5 17.3
Retail 17.4 16.1
Apartment 19.5 15.7
Hotel/Motel 1.3 2.8
----- -----
Total 100.0% 100.0%
===== =====
June 30, December 31,
1997 1996
---- ----
Geographic Region
- -----------------
Midwest 30.6% 31.6%
Pacific 28.4 30.1
Southeast 19.7 18.2
Northeast 8.6 8.7
Mountain 6.8 6.5
Southwest 5.9 4.9
----- -----
Total 100.0% 100.0%
===== =====
The weighted average yield of the commercial mortgage loan portfolio as of June
30, 1997 was 8.6%. The weighted average maturity of these loans was 6.9 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 June 30, 1997 and December 31,
1996, the Insurers held $608.4 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):
June 30, December 31,
1997 1996
---- ----
Unrealized Investment Gains $276.2 $310.5
DAC/PVFP Adjustment (73.8) (93.8)
Deferred Income Taxes (70.8) (75.9)
------ ------
Net Unrealized Investment Gains $131.6 $140.8
====== ======
<PAGE>
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 attempts to structure investment asset portfolios with
compatible characteristics. Investment assets are selected in an effort to
provide yield, cash flow and interest rate sensitivities appropriate to support
the insurance products.
The Company uses interest rate swaps 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. 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):
June 30, 1997
----------------------------------------
Asset Portfolio Target
Duration Duration Duration
-------- -------- --------
Individual Insurance 3.85 4.04 3.5 - 5.0
Employee Benefits 3.39 3.73 3.5 - 8.0
Life and Health Reinsurance 4.15 4.25 3.5 - 8.0
Pension 2.22 2.99 2.5 - 3.5
At June 30, 1997, the Company had 71 interest rate swap contracts in effect with
a notional amount of $1.16 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 six months ended June 30, 1997, seven new interest rate swap
contracts were entered into with a notional amount of $140.0 million and five
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 six months of 1997. The Company had no deferred gains or losses
at June 30, 1997 related to interest rate swap contracts terminated early. The
estimated fair value of the interest rate swap contracts in effect at June 30,
1997 was an unrealized gain of $3.8 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 June 30, 1997 (dollars in millions).
<PAGE>
Notional Range of Fixed
Amount Rates Received
------ --------------
Maturing in One Year or Less $305.0 7.0 - 8.7%
Maturing After One Year Through Three Years 200.0 5.2 - 6.9%
Maturing After Three Years Through Five Years 482.5 5.3 - 8.2%
Maturing After Five Years Through Seven Years 175.0 6.3 - 7.0%
--------
Total Notional Amount $1,162.5
========
The Company 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 June 30, 1997, the Company held $1.41 billion of adjustable
rate invested assets, short-term investments and cash.
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, is shown below (in millions):
June 30, December 31,
1997 1996
------ ------
Fixed Maturity Securities(1) $16.4 $15.5
Commercial Mortgage Loans 16.3 22.4
Residential and Other Mortgage Loans 4.4 4.2
Investment Real Estate(2) 8.8 12.3
Foreclosed Real Estate 40.1 37.4
------ ------
Total $86.0 $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):
June 30, December 31,
1997 1996
---- ----
Fixed Maturity Securities $9.6 $8.3
Commercial Mortgage Loans 10.8 10.5
Residential and Other Mortgage Loans .7 .7
Foreclosed Real Estate 25.1 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
<PAGE>
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 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:
June 30, December 31,
Property Type 1997 1996
- ------------- ---- ----
Office 69.5% 67.9%
Retail 15.1 15.4
Industrial 11.9 13.2
Hotel/Motel 3.5 3.5
------- -------
Total 100.0% 100.0%
===== =====
June 30, December 31,
Geographic Region 1997 1996
- ----------------- ---- ----
Midwest 54.3% 51.5%
Southeast 20.1 21.0
Pacific 15.8 17.2
Southwest 5.9 6.3
Northeast 2.7 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 $28.2 million and $21.7 million, respectively, at June 30, 1997.
KNOWN TRENDS AND UNCERTAINTIES WHICH MAY AFFECT FUTURE REPORTED RESULTS
ACQUISITION
On July 1, 1997, the Company completed the acquisition on Security-Connecticut
Corporation (SRC). 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. The acquisition was
effected through a stock-for stock exchange whereby the Company issued .7367
shares of its common stock for each issued and outstanding share of SRC common
stock, or approximately 6.3 million additional ReliaStar shares. The
<PAGE>
transaction will be accounted for as a purchase with a purchase price of
approximately $433 million. Accordingly, the results of SRC will be included in
ReliaStar's results beginning July 1, 1997. The proforma effects, assuming the
transaction was completed on March 31, 1997, were an increase in assets from
$16.9 billion to approximately $19.3 billion and an increase in shareholder's
equity from $1.4 billion to approximately $1.8 billion.
The future financial performance of the Company will be affected by the
acquisition of SRC. The Company expects to realize reductions in SRC expenses
due to the elimination of certain duplicative facilities, equipment and other
personnel and functions. If these expected savings are not realized, the
earnings of the combined company would be less than currently expected. The
Company also believes that the combined company will realize marketing and
distribution synergies through the joint distribution of insurance products. The
market for insurance products is, however, very competitive, and there can be no
assurance that the expected synergies will be realized.
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.
YEAR 2000 SYSTEMS MODIFICATIONS
<PAGE>
The Company's business units utilize data processing systems in the production
of new business and to service business after it is sold. Many of the Company's
data processing systems require modifications to enable them to process dates
including the year 2000 and beyond. The Company has a thorough and complete plan
to address the year 2000 issue and that work is progressing on schedule.
During the years 1997-1999 the Company expects to redirect certain internal and
external data processing resources to efforts which will enable these data
processing systems to process dates including the year 2000 and beyond. The net
effect of the redirection of these resources is not expected to have a material
effect on the Company's consolidated financial statements during the 1997-1999
period.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's annual meeting was held on May 8, 1997.
(b) The following matters were submitted to a vote of security holders:
Proposal 1 - Election of Directors
To elect the following nominees to terms expiring in 2000:
Nominees Votes For Votes Withheld
David C. Cox 34,749,832 245,184
Luella Gross Goldberg 34,745,853 249,163
Randy C. James 34,732,377 262,639
David A. Koch 34,754,357 240,659
James J. Renier 34,731,980 263,036
Carolyn H. Baldwin, John H. Flittie, William A. Hodder, James J. Howard
III, Richard L. Knowlton, Richard M. Kovacevich, Glen D. Nelson, M.D.
and John G. Turner continued to serve as directors following the
meeting.
Proposal 2 - Proposal to Approve the ReliaStar 1993 Stock Incentive
Plan As Amended:
Votes for: 29,262,963
Votes against: 5,322,441
Votes to abstain: 408,927
Broker non-votes: 685
Proposal 3 - Proposal to Amend the Certificate of Incorporation to
change the Corporation's Capital Stock From No Par Value to $.01 Par
Value Per Share.
Votes for: 33,815,459
Votes against: 860,772
Votes to abstain: 318,100
Broker non-votes: 685
Proposal 4 - Proposal to Ratify the Appointment of Independent Public
Accountants:
Votes for: 34,713,164
Votes against: 94,466
Votes to abstain: 187,386
Broker non-votes: -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(10)(a) ReliaStar 1993 Stock Incentive Plan, as amended.
(11) Statement re Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K dated June 3, 1997, with respect to the offering of $125.0
million of 8.10% Trust-Originated Preferred Securities by ReliaStar
Financing II.
<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.
Dated August 12, 1997
RELIASTAR FINANCIAL CORP.
/s/ Wayne R. Huneke
by Wayne R. Huneke
Senior Vice President, Chief Financial
Officer and Treasurer
<PAGE>
ReliaStar Financial Corp.
Exhibit Index
Description
(10)(a) Reliastar 1993 Stock Incentive Plan, as amended
(11) Statement re Computation of Per Share Earnings
(27) Financial Data Schedule
RELIASTAR 1993
STOCK INCENTIVE PLAN
(AS AMENDED AND RESTATED EFFECTIVE JULY 10, 1997)
ARTICLE I.
GENERAL
Sec. 1.1 Name of Plan. The name of the plan set forth herein is
"ReliaStar 1993 Stock Incentive Plan" (the "Plan").
Sec. 1.2 Purposes. The purposes of the Plan are to provide long-term
incentives and rewards to employees who are largely responsible for the success
and growth of ReliaStar Financial Corp. ("Corporation") and its Subsidiaries, to
assist the Corporation in attracting and retaining employees with experience and
ability on a basis competitive with industry practices, and to associate the
interests of such employees with those of the Corporation's shareholders.
Sec. 1.3 Effective Date. The effective date of the Plan is January 14,
1993, the date on which it was approved by the Board of Directors of the
Corporation.
Sec. 1.4 Number of Shares. Subject to adjustments contemplated by Sec.
5.2 hereof, the Shares that may be delivered or purchased under the Plan prior
to January 1, 1997 shall not exceed the sum of two million four hundred thousand
(2,400,000) Shares. Commencing on January 1, 1997, all Shares not previously
delivered or purchased under the Plan plus two percent (2%) of the total issued
and outstanding Shares as of January 1, 1997 and each subsequent year the Plan
is in effect shall be available for delivery or purchase under the Plan. The
amount of Shares available for delivery or purchase in any one calendar year
shall include any such Shares available in the previous year or years but not
delivered or purchased in such year or years, provided that no more than two
million four hundred thousand (2,400,000) Shares shall be cumulatively available
for the grant of Incentive Stock Options. Shares to be delivered or purchased
under the Plan may be authorized and unissued shares or issued shares reacquired
by the Corporation including treasury Shares. Subject to the adjustments
contemplated by Sec. 5.2 hereof, and only to the extent required in order for
Stock Options under the Plan to qualify for the performance-based compensation
exception described in Sec. 162(m) of the Code, the maximum number of Shares
with respect to which Stock Options may be awarded to any individual Participant
in any calendar year shall be 750,000.
ARTICLE II.
DEFINITIONS
Sec. 2.1 Award. "Award" means a grant of Stock Options, Stock Awards, or
Restricted Stock Awards, or a combination thereof, under the Plan.
Sec. 2.2 Beneficiary. "Beneficiary" means the person or persons
designated as such by a Participant's will or pursuant to the laws of decent and
distribution.
<PAGE>
Sec. 2.3 Board of Directors. "Board of Directors" or "Board" means the
Board of Directors of the Corporation.
Sec. 2.4 Bonus Determination Date. "Bonus Determination Date" means the
date as of which the dollar amount of a Qualified Bonus has been determined and
approved by the Committee, and the Committee has determined that all or a
portion thereof shall be paid in the form of a Stock Award.
Sec. 2.5 Broad-based Stock Option Grant. "Broad-based Stock Option
Grant" means the simultaneous grant of Nonqualified Stock Options to at least
1,000 employees of the Corporation and its Subsidiaries.
Sec. 2.6 Chief Executive Officer. "Chief Executive Officer" means the
chief executive officer of the Corporation.
Sec. 2.7 Code. "Code" means the Internal Revenue Code as amended from
time to time.
Sec. 2.8 Committee. "Committee" means the members of the Personnel and
Compensation Policy Committee of the Board of Directors exclusive of any member
who is not a "Non-employee Director" within the meaning of Regulation
ss.240.16b-3 under the Exchange Act, as applicable to the Corporation at the
time in question.
Sec. 2.9 Corporation. "Corporation" means ReliaStar Financial Corp.
Sec. 2.10 Date of Grant. "Date of Grant" means the date designated in a
resolution by the Committee as the date for granting Stock Options. If the
Committee does not designate a Date of Grant in its resolution, the Date of
Grant shall be the date of the Committee's resolution.
Sec. 2.11 Fair Market Value. "Fair Market Value" as applied to a
specific date means the average of the highest and lowest market price of
Shares, as reported on the consolidated transaction reporting system for New
York Stock Exchange issues on such date or, if Shares were not traded on such
date, on the next preceding day on which the Shares were traded.
Sec. 2.12 Incentive Stock Options. "Incentive Stock Options" means Stock
Options that are intended to qualify under Section 422 of the Code.
Sec. 2.13 Nonqualified Options. "Nonqualified Options" means Stock
Options that are not intended to qualify under Section 422 of the Code.
Sec. 2.14 Participant. A "Participant" means a person designated as such
by the Committee for participation in the Plan.
Sec. 2.15 Plan Year. "Plan Year" means a one-year period commencing on
January 1 of a calendar year and ending on December 31 of such calendar year.
Sec. 2.16 Qualified Bonus. "Qualified Bonus" means a bonus to which a
Participant is entitled under the terms of a bonus plan or program of the
Corporation or
<PAGE>
a Subsidiary which permits, subject to the Committee's approval, payment of all
or a portion of such bonus in the form of a Stock Award pursuant to the terms of
this Plan.
Sec. 2.17 Restricted Stock Award. "Restricted Stock Award" means Shares
awarded to a Participant by the Committee pursuant to Article VIII hereof, which
shares are subject to certain terms, conditions and restrictions.
Sec. 2.18 Exchange Act. "Exchange Act" means the Securities Exchange Act
of 1934, as amended.
Sec. 2.19 Shares. "Shares" means shares of common stock of the
Corporation.
Sec. 2.20 Stock Award. "Stock Award" means Shares awarded to a
Participant by the Committee pursuant to the terms of Article VII hereof.
Sec. 2.21 Stock Option. "Stock Option" or "Stock Options" means an
option or options granted to a Participant to purchase Shares from the
Corporation. As to Participants who are subject to Section 16 of the Exchange
Act, Stock Options may be either Nonqualified Stock Options or Incentive Stock
Options. Stock Options are subject to the terms of Article VI hereof.
Sec. 2.22 Subsidiary. "Subsidiary" means a subsidiary of the Corporation
in which the Corporation has a fifty percent (50%) or more interest.
Sec. 2.23 Ten Percent Shareholder. "Ten Percent Shareholder" means any
individual owning more than ten percent (10%) of the total combined voting power
of all classes of stock of the Corporation. An individual shall be considered to
own any voting stock owned (directly or indirectly) by or for his brothers,
sisters, spouse, ancestors, or lineal descendants and shall be considered to own
proportionately any voting stock owned (directly or indirectly) by or for a
corporation, partnership, estate, or trust of which said individual is a
shareholder, partner or beneficiary.
ARTICLE III.
ADMINISTRATION OF PLAN
Sec. 3.1 Eligibility. Any key employee of the Corporation or a
Subsidiary who has been designated as a Participant by the Committee is eligible
to participate in the Plan. In addition, at the election of the Committee, some
or all employees of the Corporation and its subsidiaries are eligible to receive
options in a Broad-based Stock Option Grant. No member of the Committee is
eligible to participate in the Plan. The Committee may designate one or more
classes of Participants under the Plan.
Sec. 3.2 Committee. The Plan shall be administered by the Committee.
Members of the Committee shall serve at the pleasure of the Board.
Sec. 3.3 Powers of Committee. The Committee shall have all the powers
vested in it by the terms of the Plan, such powers to include exclusive
authority (within the limitations described herein) to select the employees to
be granted Awards under the Plan, to determine the type, size and terms of
Awards to be made to each employee selected, to determine the time when Awards
will be granted, and to establish objectives and conditions for earning Awards.
The Committee shall have full power and authority to administer and interpret
the Plan and to adopt such rules, regulations,
<PAGE>
agreements, guidelines and instruments for the administration of the Plan and
for the conduct of its business as the Committee deems necessary or advisable.
The Committee's interpretation of the Plan, and all actions taken and
determinations made by the Committee pursuant to the powers vested in it, shall
be conclusive and binding on all parties concerned, including the Corporation,
its Subsidiaries, its shareholders, Plan Participants and any employee of the
Corporation or its Subsidiaries. To the extent permitted by law, the Committee
may delegate duties to any person or persons.
Sec. 3.4 Decisions of the Committee. Any action required or permitted to
be taken by the Committee under the Plan shall require the affirmative vote of a
majority of those members present and voting at a properly convened meeting of
the Committee. Members of the Committee may participate in a meeting of the
Committee by means of conference telephone or similar communications equipment
whereby all meeting participants can hear each other and such participation will
constitute presence in person at the meeting. A majority of all members of the
Committee shall constitute a "quorum" for Committee business. The Committee may
act by written determination instead of by affirmative vote at a meeting,
provided that any written determination shall be signed by all members of the
Committee, and any such written determination shall be as fully effective as a
majority vote of members constituting a quorum at a meeting. Any decision made
or action taken by the Committee in connection with the Plan shall be final and
conclusive as to all parties involved.
ARTICLE IV.
AWARDS
Sec. 4.1 Types. Awards under the Plan may include Stock Awards, Stock
Options, Restricted Stock Awards or a combination thereof as the Committee shall
determine. Stock Options shall be subject to the provisions of Article VI
hereof, Stock Awards shall be subject to the provisions of Article VII hereof,
and Restricted Stock Awards shall be subject to the provisions of Article VIII
hereof.
Sec. 4.2 Performance Goals. The Committee may establish meaningful
performance goals to be achieved within such performance periods as may be
selected by it in its sole discretion, using such measures of the performance of
the Corporation and its Subsidiaries as it may select.
Sec. 4.3 Guidelines. The Committee may from time to time adopt written
policies for its implementation of the Plan. Such policies may include, but need
not be limited to, the type, size and term of Awards to be made to Participants
and the conditions for payment of such Awards.
Sec. 4.4 Vesting. The Committee may determine that all or a portion of a
payment to a Participant under the Plan, whether it is to be made as a Stock
Award, Restricted Stock Award or Stock Options or a combination thereof, shall
be vested at such times and upon such terms as may be selected by it in its sole
discretion.
Sec. 4.5 Assignment or Transfer. No Awards under the Plan or rights or
interests in the Plan shall be assignable or transferable by a Participant,
voluntarily or involuntarily, except by the will or the laws of descent and
distribution. For the purposes of this Sec. 4.5, an original deposit, as defined
in Sec. 8.6(a), is not considered an Award under, or right or interest in Plan.
During the lifetime of a Participant, Awards are exercisable only by, and
payable only to, the Participant.
<PAGE>
Sec. 4.6 Agreements. All Awards granted under the Plan shall be
evidenced by agreements in such form and containing such terms and conditions
(not inconsistent with the Plan) as the Committee shall adopt.
ARTICLE V.
MISCELLANEOUS PROVISIONS
Sec. 5.1 Rights as Shareholder. A Participant under the Plan shall have
no rights as a shareholder with respect to Awards under the Plan unless and
until certificates for such Shares are issued to the Participant. The issuance
by the Corporation of shares of stock of any class, or securities convertible
into shares of stock of any class, for cash or property or for labor or
services, either upon direct sale or upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or obligations of the
Corporation convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to Awards under
the Plan.
Sec. 5.2 Dilution and Other Adjustments. In the event of any change in
the outstanding Shares by reason of any split, stock dividend, recapitalization,
merger, consolidation, combination or exchange of shares or other similar
corporate change, such equitable adjustments shall be made in the Plan and the
Awards under it as the Committee determines are necessary and appropriate,
including, if necessary, any adjustment in the maximum number or kind of shares
subject to the Plan or which may be or have been awarded to any Participant.
Such adjustment shall be conclusive and binding for all purposes of the Plan.
Sec. 5.3 Compliance with Law and Approval by Regulatory Bodies. No Stock
Option shall be exercisable, no Shares shall be issued, no certificates for
Shares shall be delivered, and no payment shall be made except in compliance
with all applicable federal and state laws and regulations and rules of all
domestic stock exchanges on which the Shares are listed. The Corporation shall
have the right to rely on the opinion of its counsel as to such compliance. If,
in the opinion of the Corporation's counsel, the transfer, issuance or sale of
any Shares under the Plan shall not be lawful for any reason, including the
inability of the Corporation to obtain from any regulatory body having
jurisdiction the authority deemed by such counsel to be necessary for such
transfer, issuance or sale, the Corporation shall not be obligated to transfer,
issue or sell such Shares. Any share certificate issued may bear such legends
and statements as the Committee may deem advisable or desirable. Further, in
connection with any sale, issuance or transfer hereunder, the Participant
acquiring the Shares shall, if requested by the Corporation, give satisfactory
assurances to the Corporation's counsel that the Shares are being acquired for
investment and not with a view to resale or distribution thereof and provide any
other assurance as the Corporation may deem desirable.
Sec. 5.4 Amendment of Plan. To the extent permitted by law, the
Committee may at any time terminate or from time to time amend the Plan in whole
or in part, but no such action shall adversely affect any rights or obligations
with respect to any Awards previously made under the Plan. With the consent of
the affected Participant, the Committee may amend outstanding agreements
evidencing Awards under the Plan in a manner not inconsistent with the terms of
the Plan.
<PAGE>
Sec. 5.5 Duration of Plan. Unless the Plan is terminated earlier by the
Committee, the Plan shall remain in full force and effect until the close of
business on January 13, 2003, at which time the right to grant Awards under the
Plan shall terminate unless the Corporation's shareholders approve an extension
or renewal. Any awards granted under the Plan on or before January 13, 2003,
shall continue to be governed thereafter by the terms of the Plan and of the
Awards; provided if the Corporation terminates the Plan, Stock Options not
vested on the date of the Plan termination are, unless otherwise determined by
the Committee, forfeited.
Sec. 5.6 Withholding of Taxes. There shall be deducted from all
distributions under the Plan the amount of any taxes which the Corporation or
Subsidiary may be required to withhold by any federal, state, or local
government. In addition, there shall be deducted any other amount required by
law or by order of a court or government agency to be withheld from payments to
any Participant. With respect to Stock Awards and Restricted Stock Awards, the
Corporation shall have the right to require payment of any such taxes through
withholding from the Participant's salary or otherwise. Participants and their
personal representatives shall be responsible for payment of any and all
federal, state, local, foreign, or other taxes imposed on amounts paid under the
Plan. The Corporation and its Subsidiaries assume no responsibility for the tax
consequences to the Participant for his/her participation in the Plan. Subject
to rules established by the Committee, withholding required by this Sec. 5.6 may
be satisfied by (i) the Company withholding shares issued on exercise or award
or (ii) the Participant delivering Shares owned by Participant, having a Fair
Market Value as of the date of delivery equal to or less than the amount
required to be withheld pursuant to this Sec. 5.6.
Sec. 5.7 Not an Employment Contract. Neither the Plan nor participation
in the Plan shall be construed as creating any agreement as to continued
employment with the Corporation or any of its affiliates.
Sec. 5.8 Transfer of Employment. For purposes of the Plan, transfer of
employment between the Corporation, its Subsidiaries or affiliates (affiliates
shall not apply for Incentive Stock Options) shall not be deemed a termination
of employment.
Sec. 5.9 Unfunded Plan. The Plan shall be unfunded, and the Corporation
shall not be required to segregate any assets that may represent Awards under
the Plan. Any liability of the Corporation to any person with respect to any
Award under the Plan shall be based solely upon the contractual obligations
created pursuant to the Plan and evidenced by Agreements pursuant to Sec. 4.6
hereof. No such obligation of the Corporation shall be deemed to be secured by
any pledge of, or other encumbrance on, any property of the Corporation.
Sec. 5.10 No Rights as Shareholder. Awards under the Plan shall not
entitle a Participant or any other person succeeding to his/her rights, to any
dividend, voting or other right as a shareholder of the Corporation unless and
until the issuance of a stock certificate to the Participant or such other
person pursuant to the provisions of the Plan and then only subsequent to the
date of issuance thereof.
Sec. 5.11 Governing Law. This Plan is governed in all respects by the
laws of the State of Delaware.
<PAGE>
Sec. 5.12 Severability. In the event that any provision in this Plan
would invalidate the Plan, the provision shall be null and void, and the Plan
shall be construed as if it did not contain that provision.
Sec. 5.13 Rules of Construction. Headings are given to the articles and
sections of the Plan solely as a convenience to facilitate reference. Reference
to any statute, regulation, or other provision of law shall be construed to
refer to any amendment to or successor of such provision of law.
Sec. 5.14 References are to Plan. References herein to sections or
articles are to sections or articles of the Plan unless the context clearly
indicates to the contrary.
Sec. 5.15 Compliance with Section 16. With respect to persons subject to
Section 16 of the Exchange Act, transactions under the Plan are intended to
comply with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act. To the extent any provision of the Plan or action by the Committee
fails to so comply, it shall be deemed null and void, to the extent permitted by
law and deemed advisable by the Committee.
ARTICLE VI.
AWARD OF STOCK OPTIONS
Sec. 6.1 Grant of Stock Options. Contemporaneously with or at any time
after the Committee has designated an eligible employee as a Participant, the
Committee may award a Participant Stock Options at Fair Market Value as of the
Date of Grant, provided however, that an award of Stock Options to a Ten Percent
Shareholder shall be at one hundred ten percent (110%) of such Fair Market
Value. At the time of grant, the Committee shall send written notification to
each Participant indicating (i) the Date of Grant, (ii) the number of Stock
Options granted to the Participant, (iii) the time period in which to exercise
such Stock Options, and (iv) a stock option agreement providing for the purchase
of one Share for each Stock Option granted.
Sec. 6.2 Calculation of Awards. The number of Stock Options granted to a
Participant in a Plan Year shall be determined by the Committee.
Sec. 6.3 Exercise of Stock Options. An individual entitled to exercise a
Stock Option may, subject to the terms and conditions of the Plan, exercise it
in whole or in part at any time, by delivery to the Corporate Secretary at the
Company's principal office written notice of exercise. Such notice of exercise
shall specify the number of whole Shares with respect to which the option is
being exercised, the Fair Market Value of the Shares on the Date of Grant, and
must be accompanied by payment in full by certified check, cashier's check,
money order or other form of cash payment as approved by the Committee in the
amount of the exercise price for the Shares to be purchased, plus any amount
required for withholding as provided in Sec. 5.6; provided, however, in lieu of
paying the exercise price by certified check, cashier's check, or money order as
described above, the individual may pay all or part of such exercise price by
delivering to the Company owned and unencumbered Shares having a Fair Market
Value as of the date of exercise equal to or less than the exercise price of the
options exercised, with cash for the remainder, if any, of the exercise price.
Sec. 6.4 Incentive Stock Options. Incentive Stock Options granted under
the Plan are intended to be incentive stock options under Section 422 of the
Code and
<PAGE>
shall be administered as such by the Committee. An Incentive Stock Option shall
be subject to the following:
(a) Option Period. Each Incentive Stock Option granted shall expire,
and all rights to purchase shares shall cease ten (10) years
after the Date of Grant of the Incentive Stock Option or on such
earlier date as may be fixed by the Committee, or on such date as
is provided by this Plan in the event of termination of
employment or a reorganization of the Corporation, provided
however, that any Incentive Stock Option granted to a Ten Percent
Shareholder shall expire five (5) years after the Date of Grant,
or on such earlier date as otherwise may be fixed by the
Committee or provided by this Plan.
(b) Exercise at Termination of Employment. The right to exercise an
Incentive Stock Option upon a termination of employment shall be
as follows:
1. Upon a termination of employment due to the Participant's
death, any outstanding Incentive Stock Options must be
exercised by a Beneficiary within the earlier of five (5)
years from the Participant's date of death or the time
period remaining to the Participant to exercise his Award
had the Participant lived.
2. Upon a termination of employment due to a Participant's
disability, as that term is used in Code Section 22(e)(3),
any outstanding Incentive Stock Options must be exercised
within the earlier of one year after the onset of such
disability or the time period remaining to the Participant
to exercise his Award.
3. Upon a termination of employment for any other reason,
except dishonesty or any other illegal act, a Participant
must exercise any outstanding Incentive Stock Options
within the earlier of three (3) months of such termination
or the time period remaining to the Participant to
exercise his Award. In the event of dishonesty or any
other illegal act, any Incentive Stock Options unexercised
at termination shall be forfeited by the Participant.
4. Notwithstanding the foregoing, the Committee may grant
Stock Options with exercise periods longer than provided
in paragraphs 1, 2, and 3 of this subsection (b) which are
intended to qualify as Incentive Stock Options and which,
if not exercised in the time periods provided in
paragraphs 1, 2, and 3 of this subsection (b) shall
thereafter become Nonqualified Stock Options subject to
the provisions of Sec. 6.5 hereof; provided, however, that
this paragraph 4 of subsection (b) shall apply only to
Participants who are not subject to Section 16 of the
Exchange Act.
(c) Transferability of Stock Options. No Incentive Stock Option shall
be assignable or transferable by the individual to whom it is
granted except that it may be transferred by will or the laws of
descent and distribution, in accordance with the provisions of
the Plan. If a Participant dies within the exercise period
specified in either paragraph (2) or (3) of subsection (b)
<PAGE>
hereof, the Beneficiary shall have the time period remaining to
the Participant in which to exercise the Incentive Stock Option.
(d) The Committee shall determine the vesting schedule applicable to
Incentive Stock Options.
Sec. 6.5 Nonqualified Stock Options. Nonqualified Stock Options are
Stock Options that are not intended to qualify under Code Section 422.
Nonqualified Stock Options shall be subject to the following:
(a) Option Period. Except as provided below, each option granted
shall expire and all rights to purchase shares shall cease ten
years and one day after the Date of Grant of the Nonqualified
Stock Option or on such date prior thereto as may be fixed by the
Committee. In the event of a plan termination or Company
reorganization, Nonqualified Stock Options shall be exercisable
pursuant to the rules set forth in Sec. 5.5 and Sec. 6.6.
(b) Vesting of Nonqualified Stock Options. The Committee shall
determine the vesting schedule applicable to Nonqualified Stock
Options.
(c) Exercise at Termination of Employment. The right to exercise
Nonqualified Stock Options upon a termination of employment shall
be as follows:
1. Upon the Participant's termination of employment that
qualifies as a retirement under the qualified retirement
plan of the Corporation or Subsidiary under which the
Participant is covered, or a termination of employment
due to the onset of a Participant's disability as that
term is used in Sec. 8.6 (i), the Participant shall have
until the earlier of the expiration of the option period
provided to the Participant in subsection (a) above or
the date five (5) years from the date of such
termination of employment to exercise such options. Any
nonvested options previously granted to the Participant
shall immediately vest on the date of such termination
of employment and shall no longer be subject to any
vesting schedule.
2. To the extent a Participant's termination of employment
is due to his death, or his death occurs subsequent to a
termination of employment, the Participant's Beneficiary
shall have the time period remaining to the Participant
had the Participant lived in which to exercise such
options. Any nonvested options previously granted to the
Participant shall immediately vest on the date of such
termination of employment due to the death of the
Participant.
3. Upon the Participant's termination of employment for any
other reason except dishonesty or any illegal act, the
Participant shall have until the earlier of the
expiration of the option period provided to the
Participant in subsection (a) above or unless a longer
period is provided by the Committee, the date sixty (60)
days from the date of such termination of employment to
exercise options in which the Participant is vested on
the date of such termination of employment. Any options
in which the Participant is not vested on the date of
such termination shall be forfeited. In the event of
dishonesty or other illegal act, all Stock
<PAGE>
Options unexercised at termination of employment shall
be forfeited by the Participant.
Sec. 6.6 Merger, Dissolution, or Transfer of Substantially All of the
Property of the Corporation. Stock Options granted but unexercised under the
Plan shall terminate upon the effective date of the dissolution or liquidation
of the Corporation; or upon reorganization, merger, or consolidation of the
Corporation with one or more Corporations, if the Corporation is not the
surviving corporation; or upon a transfer of substantially all of the property
of the Corporation.
Notwithstanding the above, Stock Options shall not terminate to the
extent that written provision is made for their continuance, assumption, or
substitution by a successor employer or its parent or subsidiary in connection
with a transaction described in the preceding sentence.
Sec. 6.7 Unexercised Stock Options. Any Stock Option not exercised
within the applicable time period set forth in Article VI shall be forfeited.
Sec. 6.8 Replacement Stock Options. A Stock Option granted at any time
under the Plan may, at the Committee's discretion, include the right to acquire
a Replacement Stock Option ("RSO"). The Committee may also grant separate
options ("Separate Options") which include an RSO feature with respect to Stock
Options issued under the Plan not containing an RSO feature. If a Stock Option
either contains the RSO feature or a Separate Option has been granted with
respect thereto and if a Participant pays all or part of the purchase price of
the Stock Option with Shares held by the Participant for at least six (6) months
or with cash, then upon exercise of the Stock Option the Participant is granted
an RSO to purchase, at the Fair Market Value as of the date of the Stock Option
exercise, such number of Shares as determined by the Committee at the time of
granting the Stock Option, but not in excess of the number of whole Shares used
by the Participant in payment of the purchase price (or would have been used if
Shares had been tendered instead of cash) and the number of whole shares, if
any, withheld by the Corporation or remitted by Participant as payment for
withholding taxes. An RSO may be exercised between the date six (6) months after
the Date of Grant of the RSO and the date of expiration, which will be the same
as the date of expiration of the Stock Option to which the RSO is related. An
RSO shall not contain an RSO feature and a Separate Option shall not be granted
with respect to an RSO. The RSO feature of a Stock Option and a Separate Option
are subject to cancellation by the Committee without notice at any time in the
Committee's sole discretion.
ARTICLE VII.
STOCK AWARDS
Sec. 7.1 Bonus Payable in the Form of Stock Awards. The Committee, in
its sole discretion, may determine that all or part of any Qualified Bonus shall
be paid in the form of a Stock Award. Stock Awards shall be subject to such
guidelines and rules as the Committee may establish pursuant to Sec. 3.3. hereof
and to the specific provisions of this Article VII.
Sec. 7.2 Determination by Number of Shares. The portion of any Qualified
Bonus payable as a Stock Award shall be converted to a whole number of Shares by
dividing the dollar amount of such Qualified Bonus, or portion thereof by the
Fair
<PAGE>
Market Value of one Share as of the Bonus Determination Date as determined in
good faith by the Committee. Any fractional Shares shall be paid to the
Participant in cash.
Sec. 7.3 Issuance of Stock Certificate. The Corporation shall issue and
deliver a certificate for the Shares granted as a Stock Award as soon as
administratively and legally possible after the Bonus Determination Date. Any
delay in issuance of such certificate for such Shares after the Bonus
Determination Date shall be subject to the following:
(a) If, during the period of such delay, the Corporation declares
and pays a cash dividend and the circumstances are such that, if
the certificate for such Shares had been issued on the Bonus
Determination Date, the cash dividend would have been paid on
such Shares, then there shall be paid in cash to Participants to
whom Shares have been awarded but not issued on the dividend
payable date an amount equivalent to the dividends which would
have been payable with respect to such Shares if they had been
issued and outstanding on or after the Bonus Determination Date.
Such dividend equivalents shall be paid in cash on the date or
dates as of which dividends on the Corporation's issued and
outstanding Shares are payable.
(b) If, during the period of such delay, there is an increase or
decrease in the number of issued and outstanding Shares through
the declaration of a stock dividend or through recapitalization
resulting in a stock split-up, change in par value, combination
or exchange of Shares, or the like ("Stock Adjustment"), and the
circumstances are such that if the certificate for each Share had
been issued on the Bonus Determination Date such Shares would
have been adjusted to give effect to such Stock Adjustment, then
the number of Shares in such Stock Award shall be adjusted to
reflect such Stock Adjustment.
(c) If such Shares have not been issued 90 days following the Bonus
Determination Date, then the net dollar amount of such Stock
Award shall, in lieu of issuance of Shares, be paid in cash.
ARTICLE VIII.
RESTRICTED STOCK AWARDS
Sec. 8.1 Restricted Stock Awards. The Committee may make Restricted
Stock Awards to Participants which shall be subject to the provisions of this
Article VIII.
Sec. 8.2 Restricted Stock Agreements. Restricted Stock Awards shall be
evidenced by Restricted Stock Agreements which shall conform to the requirements
of the Plan and may contain such other provisions (such as provisions for the
protection of Restricted Stock in the event of mergers, consolidations,
dissolutions, and liquidations affecting either the Restricted Stock Agreement
or the stock issued thereunder) as the Committee shall deem advisable.
Sec. 8.3 Payment of Restricted Stock Awards. Restricted Stock Awards
shall be paid by delivering to the Participant, or custodian or escrow
designated by the Committee and the Participant, a certificate or certificates
for such restricted shares of common stock of the Corporation ("Restricted
Shares") registered in the name of such Participant. The Participant shall have
all of the rights of a common stock shareholder
<PAGE>
with respect to such Restricted Shares except as to such restriction as appear
on the face of the certificate. The Committee shall designate the Corporation or
one or more of its employees to act as custodian or escrow for the certificates
("Escrow Agent").
Sec. 8.4 Terms, Conditions and Restrictions. Restricted Shares shall be
subject to such terms and conditions, including vesting and forfeiture
provisions, if any, and to such restrictions against resale, transfer or other
disposition as may be determined by the Committee at such time as it grants a
Restricted Stock Award to a Participant. Any new or different Shares or other
securities resulting from any adjustment of such Restricted Shares pursuant to
Section 8.2 hereof shall be subject to the same terms, conditions and
restrictions as the Restricted Shares prior to such adjustment. The Committee
may in its discretion, remove, modify or accelerate the release of restrictions
on any Restricted Shares as it deems appropriate. In the event of the
Participant's death following the transfer of Restricted Shares to him or her,
the Participant's legal representative or person receiving such Restricted
Shares under the Participant's will or under the laws of descent and
distribution shall take such Restricted Shares subject to the same terms and
conditions and provisions in effect at the time of the Participant's death, to
the extent applicable.
Sec. 8.5 Dividends and Voting Rights. During the restricted period the
Participant shall have the right to receive dividends from and to vote his or
her Restricted Shares.
Sec. 8.6 Deposit Share Provisions. Subject to the provisions set forth
below ("Deposit Share Provisions") and subject to rules established by the
Committee, eligible Participants who deposit with the Corporation Shares which
such Participants elect to receive in the form of Shares, rather than cash under
the Corporation's incentive compensation programs designated by the Committee,
are eligible to receive a Restricted Stock Award:
(a) The Committee shall notify each Participant selected to
participate in the Deposit Share Provisions ("Deposit Share
Participants") of the maximum number (and any lesser number) of
Shares they are permitted to deposit with the Escrow Agent, and
Deposit Share Participants may choose to deposit any number of
Shares they are permitted to deposit under the Committee rules
(the "Original Deposit").
(b) Deposit Share Participants must make their irrevocable election
on or before the date designated by the Committee or if no date
is designated, then at least 30 days prior to the date payment of
awards is made ("Award Date").
(c) All elections shall be in writing and filed with the Committee or
its designee. Such elections may, if permitted by the Committee,
also specify one of the following alternatives regarding the
manner in which dividends are paid on all deposited stock
(including shares in the Original Deposit, Shares purchased with
dividends, if any, and matching Restricted Shares :
(1) Dividends shall be used for the purchase of additional
Shares for the Deposit Share Participant's account; or
(2) Dividends shall be paid currently to the Deposit Share
Participant.
<PAGE>
(d) As soon as practicable following an Original Deposit, the
Corporation shall match these Shares and deposit with the Escrow
Agent for the Deposit Share Participant's account up to one
Restricted Share for each Share of the Original Deposit, as
determined by the Committee. The Restricted Shares deposited by
the Corporation shall vest in accordance with the schedule
determined by the Committee. Restricted Shares shall be
distributed promptly as they vest.
(e) Shares purchased with dividends paid on deposited stock (Original
Deposit, Restricted Stock or any shares purchased with dividends)
may be withdrawn from a Deposit Share Participant's account at
any time.
(f) A Deposit Share Participant may temporarily withdraw all or a
portion of the Shares on deposit (other than non-vested
Restricted Stock) in order to exercise Stock Options, subject to
an equal number of Shares being promptly redeposited with the
Escrow Agent after such exercise.
(g) A Deposit Share Participant's interests in the Original Deposit
or the Restricted Stock may not be sold, pledged, assigned or
transferred in any manner, other than by will or the laws of
descent and distribution, so long as such shares are held by the
Escrow Agent, and any such sale, pledge, assignment or other
transfer shall be null and void, provided, however, a pledge of
the Deposit Share Participant's interest in the Original Deposit
may be permitted in accordance with rules which the Committee may
establish.
(h) Any or all of the Original Deposit may be withdrawn at any time.
Withdrawal shall cause a forfeiture of any non-vested Restricted
Shares attributable to the Shares of the Original Deposit being
withdrawn. Any Shares withdrawn shall be deemed to be made under
paragraph (e) to the extent there are any such shares, and then
under this paragraph (h).
(i) In the event the Deposit Share Participant's employment with the
Corporation and its subsidiaries is terminated during the vesting
period by the reason of the Deposit Share Participant's death,
"Disability" or "Retirement", the vesting requirement shall be
deemed fulfilled upon the date of such termination of employment.
For purposes of this Sec. 8.6(i), "Disability" shall mean the
cessation of employment of the Deposit Share Participant under
circumstances where the Deposit Share Participant is eligible to
receive a monthly disability benefit pursuant to the group
long-term disability insurance program sponsored by the
Corporation or subsidiary which employs the Participant or would
be eligible to receive if he/she were a participant in the
applicable program. Unless otherwise provided by the Committee,
for purposes of this Sec. 8.6(i), "Retirement" shall mean the
Deposit Share Participant's termination of employment that
qualifies as Normal Retirement under the qualified retirement
plan of the Corporation or subsidiary of the Corporation under
which the Deposit Share Participant is covered.
(j) In the event of Deposit Share Participant's termination of
employment with the Corporation and its subsidiaries during the
vesting period for any reason other than those set forth in Sec.
8.6(i) hereof, the Shares, to the extent not
<PAGE>
otherwise vested, shall automatically be forfeited and returned
to the Corporation unless the Committee shall, in its sole
discretion, otherwise provide.
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
FOR
THE RELIASTAR FINANCIAL CORP. 1993 STOCK INCENTIVE PLAN
(BROAD-BASED GRANT PT)
THIS AGREEMENT ("Agreement") is made this 10th day of July, 1997 by and
between ReliaStar Financial Corp., a Delaware corporation ("Corporation"), and
certain part time employees of the Corporation and its subsidiaries, as provided
in this Agreement (each, an "Eligible Participant").
WHEREAS, the Corporation has established The ReliaStar Financial Corp.
1993 Stock Incentive Plan ("Plan") for the purpose of providing an additional
incentive to key employees through stock ownership and a corresponding
proprietary interest in the Corporation through the award of nonqualified stock
options; and
WHEREAS, pursuant to the Plan, the Committee is authorized to establish
and specify the terms of a Broad-based Option Grant to employees of the
Corporation and its subsidiaries; and
WHEREAS, by resolution dated July 10, 1997 (the "Grant Date"), the
Committee has authorized a Broad-based Option Grant to specified employees;
NOW, THEREFORE, in consideration of the premises, the Corporation
hereby agrees with each Eligible Participant as follows:
1. Option. The Corporation hereby grants to each Eligible Participant, as
defined in this Section 1, as a matter of separate agreement, and not in lieu of
salary or any other compensation for services, the options ("Option") to
purchase all or any part of an aggregate of 50 shares of Common Stock of the
Corporation ("Shares") upon the terms and conditions set forth herein. The
Option is not an incentive stock option under Section 422 of the Internal
Revenue Code.
For purposes of this Agreement, the term Eligible Participant shall mean a
person who
- is actively employed as a part time employee of the Corporation or
any of its subsidiaries on the Grant Date
- has completed at least 90 continuous days of part time service with
the Corporation or any of its subsidiaries on or before the Grant Date.
For purposes of this provision, credit shall be given for service with
any recently acquired subsidiaries.
- is not a participant in the ReliaStar Executive Compensation Program
and did not otherwise receive a grant of options in 1997, except as
otherwise may be specified by the Committee.
2. Plan Document Incorporated by Reference. It is understood that the Plan
document is incorporated herein by reference and is made a part of this
Agreement as if fully set forth. The Plan document shall control in the event
there is any conflict either between the Plan and this Agreement, or as to any
matters not contained in this Agreement. Capitalized terms used herein shall,
unless otherwise defined, have the meanings set forth in the Plan.
3. Option Price. The purchase price of the Shares ("Option Price") subject to
the Option shall be $77.8438per Share, which is not less than the Fair Market
Value of the Shares on the date of this Agreement.
4. Term of Option. The Option shall be exercisable by the Eligible Participant
in accordance with the vesting provisions set forth herein, including Paragraph
6, until July 10, 2007, or such shorter time period as determined pursuant to
paragraph 8 hereof or Section 6.6 of the Plan.
5. Nontransferability of Option. This Option shall not be assignable or
transferable by the Eligible Participant except that it may be transferred by
will or the laws of descent and distribution to a beneficiary ("Beneficiary") of
the Eligible Participant, in accordance with the provisions of the Plan. If the
Eligible Participant dies within the exercise period specified in either
subparagraph (a) or
<PAGE>
(c) of paragraph 8 hereof, the Beneficiary shall have the time period remaining
to the Eligible Participant in which to exercise the Option.
6. Vesting. Except as otherwise provided in paragraphs 8 and 9 hereof, the
Option granted pursuant to this Agreement shall vest on and be exercisable by
the Eligible Participant on or after the earlier of (i) the five-year
anniversary of this Agreement; and (ii) the Acceleration Date, provided, that
the Committee may accelerate vesting of the Option at any time in its sole
discretion. The term Acceleration Date shall mean the first date on which the
average daily fair market value of the Corporation's common stock over a twenty
trading-day period shall equal or exceed $120 per share, as such price may be
adjusted for stock splits and dividends and similar corporate events pursuant to
Section 12 of this Agreement.
7. Exercise of Option. In accordance with the vesting schedule in paragraph 6
above, or any accelerated vesting pursuant to paragraphs 6, 8 or 9 hereof, the
Eligible Participant may exercise the Option granted herein in whole or in part
at any time by delivery to the Secretary of the Corporation, at the general
offices of the Corporation, written notice of exercise. Such notice of exercise
shall specify the number of whole Shares with respect to which the Option is
being exercised, a representation that such shares are being acquired for
investment and not with a view to the distribution thereof, and the Option Price
as specified in paragraph 3 herein. Such notice must be accompanied by payment
in full of the Option Price by either cash, cashier's check, certified check, or
money order ("Authorized Cash Equivalent"), plus any amount required for federal
or state withholding; provided, however, in lieu of payment of the Option Price
by an Authorized Cash Equivalent as described above, the Eligible Participant
may pay all or part of such Option Price by delivery to the Corporation of owned
and unencumbered Shares having an aggregate fair market value as of the date of
exercise equal to or less than the Option Price for the Shares pursuant to which
the Option is exercised, with an Authorized Cash Equivalent for the remainder,
if any, of the Option Price. Subject to rules established by the Committee, any
withholding may be satisfied by (i) the Corporation withholding Shares issued on
exercise or (ii) Eligible Participant delivering shares of Corporation Common
Stock owned by Eligible Participant, having a Fair Market Value equal to or less
than the amount required to be withheld. The certificate or certificates for the
Shares as to which the Option shall have been exercised shall be registered in
the name of the person or persons exercising the Option and shall be delivered
to or upon the written order of the Eligible Participant or the person or
persons exercising the Option in the event of the Eligible Participant's death
or disability. In the event the Option is exercised, pursuant to the terms of
the Plan, by any person or persons other than the Eligible Participant, such
notice shall be accompanied by appropriate proof of the right of such person or
persons to exercise the Option.
8. Exercise of Option by Participant. Except as provided below, the Option
granted herein may not be exercised unless the Eligible Participant shall at the
time of exercise be an employee of the Corporation or its subsidiaries. The
right to exercise this Option upon a termination of employment shall be as
follows:
a. Retirement or Disability of Participant. Upon the Eligible
Participant's termination of employment that qualifies as a
retirement under the qualified retirement plan of the
Corporation or subsidiary of the Corporation under which the
Eligible Participant is covered, or a termination of
employment due to the onset of the Eligible Participant's
disability, the Eligible Participant shall have until the
earlier of the expiration of the Option term provided to the
Eligible Participant in paragraph 4 above or the date five (5)
years from the date of such termination of employment to
exercise such Option. For the purposes of this subparagraph
8(a), the term "disability" shall mean the cessation of
employment of the Eligible Participant under circumstances
where the Eligible Participant is eligible to receive a
monthly disability benefit pursuant to the group long-term
disability insurance program sponsored by the Corporation or
Subsidiary which employs the Eligible Participant or would be
eligible to receive if he or she were a participant in the
applicable program. Any non-vested portion of the Option
previously granted to the Eligible Participant shall
immediately vest on the date
<PAGE>
of such termination of employment and shall no longer be
subject to the vesting schedule provided in paragraph 6
hereof.
b. Death of Eligible Participant. To the extent the Eligible
Participant's termination of employment is due to his/her
death, the Eligible Participant's Beneficiary shall have the
Option term remaining to the Eligible Participant had the
Eligible Participant lived in which to exercise this Option.
Any non-vested portion of the Option previously granted to the
Eligible Participant shall immediately vest on the date of
such termination of employment due to the death of the
Eligible Participant.
c. Other Termination of Employment. Upon the Eligible
Participant's termination of employment for any other reason
except for dishonesty or any illegal act, the Eligible
Participant shall have until the earlier of (1) the expiration
of the Option term provided in paragraph 4 above, or (2) the
later of (i) the date ninety (90) days from the date of such
termination of employment or (ii) such later date as may be
specified by the authority of the Committee provided that such
date is so specified prior to the date which is ninety (90)
days from the date of such termination of employment, in which
to exercise the vested portion of the Option. Any portion of
the Option in which the Eligible Participant is not vested
pursuant to paragraph 6 on the date of such termination shall
be forfeited.
d. Dishonesty or Illegal Act. Notwithstanding any other provision
herein, in the event of a termination of employment for
dishonesty or any illegal act, any portion of the Option
unexercised at termination shall be forfeited by the Eligible
Participant.
9. Change in Control. If a change in control "Event" shall occur, then any
portion of the Option granted herein which has not vested and which has not
expired shall immediately vest.
a. A change in control "Event" shall mean the occurrence of any
of the following:
(1) An acquisition (other than directly from the
Corporation) of any voting securities of the
Corporation (the "Voting Securities") by any "Person"
(as the term person is used for purposes of Section
13(d) or 14(d) of the Securities Exchange Act of
1934, as amended (the "1934 Act")) immediately after
which such Person is the "Beneficial Owner" (within
the meaning of Rule 13d-3 promulgated under the 1934
Act) of twenty percent (20%) or more of the combined
voting power of the then outstanding Voting
Securities; provided, however, in determining whether
an Event has occurred, Voting Securities which are
acquired in a "Non-Control Acquisition" shall not
constitute an acquisition which would cause an Event.
A "Non-Control Acquisition" shall mean (i) an
acquisition by an employee benefit plan (or a trust
forming a part thereof) maintained by the Corporation
or any corporation or other Person of which a
majority of its voting power or its equity securities
or equity interest is owned directly or indirectly by
the Corporation (a "Subsidiary"), (ii) an acquisition
by the Corporation or any Subsidiary, (iii) a
transaction in which any Person became the Beneficial
Owner of more than twenty percent (20%) of the
outstanding Voting Securities as a result of an
acquisition of Voting Securities by the Corporation
which, by reducing the number of Voting Securities
outstanding, increased the percentage of the
outstanding Voting Securities Beneficially Owned by
such Person, provided that if an Event would occur
(but for the operation of this sentence) and after
such share acquisition by the Corporation, such
Person becomes the Beneficial Owner of any additional
Voting Securities which increases the percentage of
the then outstanding Voting Securities Beneficially
Owned by such Person then an Event shall occur, or
(iv) an acquisition by any Person in connection with
a "Non-Control Transaction" (as defined in
subparagraph (3) of this paragraph 9(a).
<PAGE>
(2) The individuals who, as of the date of this
Agreement, are members of the Board (the "Incumbent
Board"), cease for any reason to constitute at least
two-thirds of the Board; provided, however, that if
the election, or nomination for election by the
Corporation's stockholders, of any new director was
approved by a vote of at least a two-thirds majority
of the Incumbent Board, such new director shall, for
purposes of the Program, be considered as a member of
the Incumbent Board; provided further, however, that
no individual shall be considered a member of the
Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened
"Election Contest" (as described in Rule 14a-11
promulgated under the 1934 Act) or other actual or
threatened solicitation of proxies or consents by or
on behalf of a Person other than the Board (a "Proxy
Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or
Proxy Contest; or
(3) Approval by stockholders of the Corporation of:
(A) A merger, consolidation or reorganization
involving the Corporation, unless such
merger, consolidation or reorganization is a
"Non-Control Transaction" which is defined
as a transaction in which
(i) the stockholders of the
Corporation, immediately before
such merger, consolidation or
reorganization, own, directly or
indirectly immediately following
such merger, consolidation or
reorganization, at least fifty-one
percent (51%) of the combined
voting power of the outstanding
voting securities of the
corporation resulting from such
merger or consolidation or
reorganization (the "Surviving
Corporation") in substantially the
same proportion as their ownership
of the Voting Securities
immediately before such merger,
consolidation or reorganization,
(ii) the individuals who were members of
the Incumbent Board immediately
prior to the execution of the
agreement providing for such
merger, consolidation or
reorganization constitute at least
two-thirds of the members of the
board of directors of the Surviving
Corporation, and
(iii) no person (other that the
Corporation or any Subsidiary, any
employee benefit plan (or any trust
forming a part thereof) maintained
by the Corporation, the Surviving
Corporation or any Subsidiary, or
any Person who, immediately prior
to such merger, consolidation or
reorganization had Beneficial
Ownership of twenty percent (20%)
or more of the then outstanding
Voting Securities) has Beneficial
Ownership of twenty percent (20%)
or more of the combined voting
power of the Surviving
Corporation's then outstanding
voting securities.
(B) A complete liquidation or dissolution of the
Corporation; or
(C) An agreement for the sale or other
disposition of all or substantially all of
the assets of the Corporation to any Person
(other than a transfer to a Subsidiary).
(4) The Corporation enters into an agreement in principle
or a definitive agreement relating to an Event
described in subparagraph (1), (2) or (3) of this
paragraph 9(a) which ultimately results in such Event
occurring or a tender or exchange offer or proxy
contest is commenced which ultimately results in an
Event described in subparagraph (1) or (2) hereof
occurring.
<PAGE>
b. Notwithstanding any provision to the contrary contained
herein, if the Committee at any time determines that, the
dissolution or liquidation of the Corporation; or a
reorganization, merger or consolidation with one or more
corporations, if the Corporation is not the surviving
corporation; or a transfer of substantially all of the
property of the Corporation, will occur within six (6) months,
then any portion of the Option which has not vested shall
immediately vest upon such written determination by the
Committee that any of the events described in this paragraph
9(b) will occur within six (6) months.
10. Merger, Dissolution or Transfer of Property. Any portion of the Option not
exercised shall terminate upon the effective date of the dissolution or
liquidation of the Corporation; or upon reorganization, merger, or consolidation
of the Corporation with one or more corporations, if the Corporation is not the
surviving corporation; or upon the transfer of substantially all of the property
of the Corporation.
11. Unexercised Option. Any portion of the Option not exercised within the
time period set forth in paragraph 4, or 8, as applicable, shall terminate and
be forfeited.
12. Adjustment Upon Changes in Capitalization. Should the Corporation effect
one or more stock dividends, stock split, subdivisions or consolidation of
shares, or other similar changes in capitalization, the terms of the Option
shall be adjusted as the Committee shall equitably determine, and the maximum
number of Shares which may be purchased pursuant to the Option granted under
this Agreement shall be proportionately adjusted. Any determination made herein
by the Committee shall be final and conclusive.
13. No Rights as Shareholder. The Option granted under this Agreement shall
not entitle the Eligible Participant or any other person succeeding to his/her
rights, to any dividend, voting, or other right as a shareholder of the
Corporation unless and until the issuance of a stock certificate to the Eligible
Participant or such other person pursuant to the provisions of the Plan and then
only subsequent to the date of issuance thereof.
14. Shares Reserved for Option and Payment of Expenses. The Corporation shall
at all times during the term of the Option granted herein, reserve and keep
available such number of shares of Common Stock as will be sufficient to satisfy
the requirements of this Agreement, which may be either authorized and unissued
shares or treasury shares. The Corporation shall pay all original issue or
transfer taxes with respect to the issue or transfer of Shares pursuant hereto
and all of the fees and expenses necessarily incurred by the Corporation in
connection therewith, and will use its best efforts to comply with all laws and
regulations which, in the opinion of the counsel for the Corporation, shall be
applicable thereto.
15. Compliance with Law and Approval by Regulatory Bodies. No portion of this
Option shall be exercisable, no Common Stock shall be issued, no certificates
for Shares shall be delivered, and no payment shall be made except in compliance
with all applicable federal and state laws and regulations and rules of all
domestic stock exchanges on which the Corporation's shares are listed. The
Corporation shall have the right to rely on the opinion of its counsel as to
such compliance. Any share certificate issued on exercise of an Option may bear
such legends and statements as the Plan Committee may deem advisable or
desirable. Further, in connection with any sale, issuance or transfer hereunder,
the Eligible Participant acquiring Common Stock shall, if requested by the
Corporation, give such satisfactory assurances as the Corporation may deem
desirable.
16. Not an Employment Contract. Neither this Agreement nor participation in
the Plan shall be construed as creating an agreement as to continued employment
with the Corporation or any of its affiliates.
17. Governing Law. This Agreement is governed in all respects by the laws of
the State of Delaware.
<PAGE>
This Agreement is effective and binding upon the Corporation as of the
date first written above.
ReliaStar Financial Corp.
By: ___________________________
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
FOR
THE RELIASTAR FINANCIAL CORP. 1993 STOCK INCENTIVE PLAN
(BROAD-BASED GRANT FT)
THIS AGREEMENT ("Agreement") is made this 10th day of July, 1997 by and
between ReliaStar Financial Corp., a Delaware corporation ("Corporation"), and
certain full time employees of the Corporation and its subsidiaries, as provided
in this Agreement (each, an "Eligible Participant").
WHEREAS, the Corporation has established The ReliaStar Financial Corp.
1993 Stock Incentive Plan ("Plan") for the purpose of providing an additional
incentive to key employees through stock ownership and a corresponding
proprietary interest in the Corporation through the award of nonqualified stock
options; and
WHEREAS, pursuant to the Plan, the Committee is authorized to establish
and specify the terms of a Broad-based Option Grant to employees of the
Corporation and its subsidiaries; and
WHEREAS, by resolution dated July 10, 1997 (the "Grant Date"), the
Committee has authorized a Broad-based Option Grant to specified employees;
NOW, THEREFORE, in consideration of the premises, the Corporation
hereby agrees with each Eligible Participant as follows:
1. Option. The Corporation hereby grants to each Eligible Participant, as
defined in this Section 1, as a matter of separate agreement, and not in lieu of
salary or any other compensation for services, the options ("Option") to
purchase all or any part of an aggregate of 100 shares of Common Stock of the
Corporation ("Shares") upon the terms and conditions set forth herein. The
Option is not an incentive stock option under Section 422 of the Internal
Revenue Code.
For purposes of this Agreement, the term Eligible Participant shall mean a
person who
- is actively employed as a full time employee of the Corporation or
any of its subsidiaries on the Grant Date
- has completed at least 90 continuous days of full time service with
the Corporation or any of its subsidiaries on or before the Grant Date.
For purposes of this provision, credit shall be given for service with
any recently acquired subsidiaries.
- is not a participant in the ReliaStar Executive Compensation Program
and did not otherwise receive a grant of options in 1997, except as
otherwise may be specified by the Committee.
2. Plan Document Incorporated by Reference. It is understood that the Plan
document is incorporated herein by reference and is made a part of this
Agreement as if fully set forth. The Plan document shall control in the event
there is any conflict either between the Plan and this Agreement, or as to any
matters not contained in this Agreement. Capitalized terms used herein shall,
unless otherwise defined, have the meanings set forth in the Plan.
3. Option Price. The purchase price of the Shares ("Option Price") subject to
the Option shall be $77.8438 per Share, which is not less than the Fair Market
Value of the Shares on the date of this Agreement.
4. Term of Option. The Option shall be exercisable by the Eligible Participant
in accordance with the vesting provisions set forth herein, including Paragraph
6, until July 10, 2007, or such shorter time period as determined pursuant to
paragraph 8 hereof or Section 6.6 of the Plan.
5. Nontransferability of Option. This Option shall not be assignable or
transferable by the Eligible Participant except that it may be transferred by
will or the laws of descent and distribution to a beneficiary ("Beneficiary") of
the Eligible Participant, in accordance with the provisions of the Plan. If the
Eligible Participant dies within the exercise period specified in either
subparagraph (a) or
<PAGE>
(c) of paragraph 8 hereof, the Beneficiary shall have the time period remaining
to the Eligible Participant in which to exercise the Option.
6. Vesting. Except as otherwise provided in paragraphs 8 and 9 hereof, the
Option granted pursuant to this Agreement shall vest on and be exercisable by
the Eligible Participant on or after the earlier of (i) the five-year
anniversary of this Agreement; and (ii) the Acceleration Date, provided, that
the Committee may accelerate vesting of the Option at any time in its sole
discretion. The term Acceleration Date shall mean the first date on which the
average daily fair market value of the Corporation's common stock over a twenty
trading-day period shall equal or exceed $120 per share, as such price may be
adjusted for stock splits and dividends and similar corporate events pursuant to
Section 12 of this Agreement.
7. Exercise of Option. In accordance with the vesting schedule in paragraph 6
above, or any accelerated vesting pursuant to paragraphs 6, 8 or 9 hereof, the
Eligible Participant may exercise the Option granted herein in whole or in part
at any time by delivery to the Secretary of the Corporation, at the general
offices of the Corporation, written notice of exercise. Such notice of exercise
shall specify the number of whole Shares with respect to which the Option is
being exercised, a representation that such shares are being acquired for
investment and not with a view to the distribution thereof, and the Option Price
as specified in paragraph 3 herein. Such notice must be accompanied by payment
in full of the Option Price by either cash, cashier's check, certified check, or
money order ("Authorized Cash Equivalent"), plus any amount required for federal
or state withholding; provided, however, in lieu of payment of the Option Price
by an Authorized Cash Equivalent as described above, the Eligible Participant
may pay all or part of such Option Price by delivery to the Corporation of owned
and unencumbered Shares having an aggregate fair market value as of the date of
exercise equal to or less than the Option Price for the Shares pursuant to which
the Option is exercised, with an Authorized Cash Equivalent for the remainder,
if any, of the Option Price. Subject to rules established by the Committee, any
withholding may be satisfied by (i) the Corporation withholding Shares issued on
exercise or (ii) Eligible Participant delivering shares of Corporation Common
Stock owned by Eligible Participant, having a Fair Market Value equal to or less
than the amount required to be withheld. The certificate or certificates for the
Shares as to which the Option shall have been exercised shall be registered in
the name of the person or persons exercising the Option and shall be delivered
to or upon the written order of the Eligible Participant or the person or
persons exercising the Option in the event of the Eligible Participant's death
or disability. In the event the Option is exercised, pursuant to the terms of
the Plan, by any person or persons other than the Eligible Participant, such
notice shall be accompanied by appropriate proof of the right of such person or
persons to exercise the Option.
8. Exercise of Option by Participant. Except as provided below, the Option
granted herein may not be exercised unless the Eligible Participant shall at the
time of exercise be an employee of the Corporation or its subsidiaries. The
right to exercise this Option upon a termination of employment shall be as
follows:
a. Retirement or Disability of Participant. Upon the Eligible
Participant's termination of employment that qualifies as a
retirement under the qualified retirement plan of the
Corporation or subsidiary of the Corporation under which the
Eligible Participant is covered, or a termination of
employment due to the onset of the Eligible Participant's
disability, the Eligible Participant shall have until the
earlier of the expiration of the Option term provided to the
Eligible Participant in paragraph 4 above or the date five (5)
years from the date of such termination of employment to
exercise such Option. For the purposes of this subparagraph
8(a), the term "disability" shall mean the cessation of
employment of the Eligible Participant under circumstances
where the Eligible Participant is eligible to receive a
monthly disability benefit pursuant to the group long-term
disability insurance program sponsored by the Corporation or
Subsidiary which employs the Eligible Participant or would be
eligible to receive if he or she were a participant in the
applicable program. Any non-vested portion of the Option
previously granted to the Eligible Participant shall
immediately vest on the date
<PAGE>
of such termination of employment and shall no longer be
subject to the vesting schedule provided in paragraph 6
hereof.
b. Death of Eligible Participant. To the extent the Eligible
Participant's termination of employment is due to his/her
death, the Eligible Participant's Beneficiary shall have the
Option term remaining to the Eligible Participant had the
Eligible Participant lived in which to exercise this Option.
Any non-vested portion of the Option previously granted to the
Eligible Participant shall immediately vest on the date of
such termination of employment due to the death of the
Eligible Participant.
c. Other Termination of Employment. Upon the Eligible
Participant's termination of employment for any other reason
except for dishonesty or any illegal act, the Eligible
Participant shall have until the earlier of (1) the expiration
of the Option term provided in paragraph 4 above, or (2) the
later of (i) the date ninety (90) days from the date of such
termination of employment or (ii) such later date as may be
specified by the authority of the Committee provided that such
date is so specified prior to the date which is ninety (90)
days from the date of such termination of employment, in which
to exercise the vested portion of the Option. Any portion of
the Option in which the Eligible Participant is not vested
pursuant to paragraph 6 on the date of such termination shall
be forfeited.
d. Dishonesty or Illegal Act. Notwithstanding any other provision
herein, in the event of a termination of employment for
dishonesty or any illegal act, any portion of the Option
unexercised at termination shall be forfeited by the Eligible
Participant.
9. Change in Control. If a change in control "Event" shall occur, then any
portion of the Option granted herein which has not vested and which has not
expired shall immediately vest.
a. A change in control "Event" shall mean the occurrence of any
of the following:
(1) An acquisition (other than directly from the
Corporation) of any voting securities of the
Corporation (the "Voting Securities") by any "Person"
(as the term person is used for purposes of Section
13(d) or 14(d) of the Securities Exchange Act of
1934, as amended (the "1934 Act")) immediately after
which such Person is the "Beneficial Owner" (within
the meaning of Rule 13d-3 promulgated under the 1934
Act) of twenty percent (20%) or more of the combined
voting power of the then outstanding Voting
Securities; provided, however, in determining whether
an Event has occurred, Voting Securities which are
acquired in a "Non-Control Acquisition" shall not
constitute an acquisition which would cause an Event.
A "Non-Control Acquisition" shall mean (i) an
acquisition by an employee benefit plan (or a trust
forming a part thereof) maintained by the Corporation
or any corporation or other Person of which a
majority of its voting power or its equity securities
or equity interest is owned directly or indirectly by
the Corporation (a "Subsidiary"), (ii) an acquisition
by the Corporation or any Subsidiary, (iii) a
transaction in which any Person became the Beneficial
Owner of more than twenty percent (20%) of the
outstanding Voting Securities as a result of an
acquisition of Voting Securities by the Corporation
which, by reducing the number of Voting Securities
outstanding, increased the percentage of the
outstanding Voting Securities Beneficially Owned by
such Person, provided that if an Event would occur
(but for the operation of this sentence) and after
such share acquisition by the Corporation, such
Person becomes the Beneficial Owner of any additional
Voting Securities which increases the percentage of
the then outstanding Voting Securities Beneficially
Owned by such Person then an Event shall occur, or
(iv) an acquisition by any Person in connection with
a "Non-Control Transaction" (as defined in
subparagraph (3) of this paragraph 9(a).
<PAGE>
(2) The individuals who, as of the date of this
Agreement, are members of the Board (the "Incumbent
Board"), cease for any reason to constitute at least
two-thirds of the Board; provided, however, that if
the election, or nomination for election by the
Corporation's stockholders, of any new director was
approved by a vote of at least a two-thirds majority
of the Incumbent Board, such new director shall, for
purposes of the Program, be considered as a member of
the Incumbent Board; provided further, however, that
no individual shall be considered a member of the
Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened
"Election Contest" (as described in Rule 14a-11
promulgated under the 1934 Act) or other actual or
threatened solicitation of proxies or consents by or
on behalf of a Person other than the Board (a "Proxy
Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or
Proxy Contest; or
(3) Approval by stockholders of the Corporation of:
(A) A merger, consolidation or reorganization
involving the Corporation, unless such
merger, consolidation or reorganization is a
"Non-Control Transaction" which is defined
as a transaction in which
(i) the stockholders of the
Corporation, immediately before
such merger, consolidation or
reorganization, own, directly or
indirectly immediately following
such merger, consolidation or
reorganization, at least fifty-one
percent (51%) of the combined
voting power of the outstanding
voting securities of the
corporation resulting from such
merger or consolidation or
reorganization (the "Surviving
Corporation") in substantially the
same proportion as their ownership
of the Voting Securities
immediately before such merger,
consolidation or reorganization,
(ii) the individuals who were members of
the Incumbent Board immediately
prior to the execution of the
agreement providing for such
merger, consolidation or
reorganization constitute at least
two-thirds of the members of the
board of directors of the Surviving
Corporation, and
(iii) no person (other that the
Corporation or any Subsidiary, any
employee benefit plan (or any trust
forming a part thereof) maintained
by the Corporation, the Surviving
Corporation or any Subsidiary, or
any Person who, immediately prior
to such merger, consolidation or
reorganization had Beneficial
Ownership of twenty percent (20%)
or more of the then outstanding
Voting Securities) has Beneficial
Ownership of twenty percent (20%)
or more of the combined voting
power of the Surviving
Corporation's then outstanding
voting securities.
(B) A complete liquidation or dissolution of the
Corporation; or
(C) An agreement for the sale or other
disposition of all or substantially all of
the assets of the Corporation to any Person
(other than a transfer to a Subsidiary).
(4) The Corporation enters into an agreement in principle
or a definitive agreement relating to an Event
described in subparagraph (1), (2) or (3) of this
paragraph 9(a) which ultimately results in such Event
occurring or a tender or exchange offer or proxy
contest is commenced which ultimately results in an
Event described in subparagraph (1) or (2) hereof
occurring.
<PAGE>
b. Notwithstanding any provision to the contrary contained
herein, if the Committee at any time determines that, the
dissolution or liquidation of the Corporation; or a
reorganization, merger or consolidation with one or more
corporations, if the Corporation is not the surviving
corporation; or a transfer of substantially all of the
property of the Corporation, will occur within six (6) months,
then any portion of the Option which has not vested shall
immediately vest upon such written determination by the
Committee that any of the events described in this paragraph
9(b) will occur within six (6) months.
10. Merger, Dissolution or Transfer of Property. Any portion of the Option not
exercised shall terminate upon the effective date of the dissolution or
liquidation of the Corporation; or upon reorganization, merger, or consolidation
of the Corporation with one or more corporations, if the Corporation is not the
surviving corporation; or upon the transfer of substantially all of the property
of the Corporation.
11. Unexercised Option. Any portion of the Option not exercised within the
time period set forth in paragraph 4, or 8, as applicable, shall terminate and
be forfeited.
12. Adjustment Upon Changes in Capitalization. Should the Corporation effect
one or more stock dividends, stock split, subdivisions or consolidation of
shares, or other similar changes in capitalization, the terms of the Option
shall be adjusted as the Committee shall equitably determine, and the maximum
number of Shares which may be purchased pursuant to the Option granted under
this Agreement shall be proportionately adjusted. Any determination made herein
by the Committee shall be final and conclusive.
13. No Rights as Shareholder. The Option granted under this Agreement shall
not entitle the Eligible Participant or any other person succeeding to his/her
rights, to any dividend, voting, or other right as a shareholder of the
Corporation unless and until the issuance of a stock certificate to the Eligible
Participant or such other person pursuant to the provisions of the Plan and then
only subsequent to the date of issuance thereof.
14. Shares Reserved for Option and Payment of Expenses. The Corporation shall
at all times during the term of the Option granted herein, reserve and keep
available such number of shares of Common Stock as will be sufficient to satisfy
the requirements of this Agreement, which may be either authorized and unissued
shares or treasury shares. The Corporation shall pay all original issue or
transfer taxes with respect to the issue or transfer of Shares pursuant hereto
and all of the fees and expenses necessarily incurred by the Corporation in
connection therewith, and will use its best efforts to comply with all laws and
regulations which, in the opinion of the counsel for the Corporation, shall be
applicable thereto.
15. Compliance with Law and Approval by Regulatory Bodies. No portion of this
Option shall be exercisable, no Common Stock shall be issued, no certificates
for Shares shall be delivered, and no payment shall be made except in compliance
with all applicable federal and state laws and regulations and rules of all
domestic stock exchanges on which the Corporation's shares are listed. The
Corporation shall have the right to rely on the opinion of its counsel as to
such compliance. Any share certificate issued on exercise of an Option may bear
such legends and statements as the Plan Committee may deem advisable or
desirable. Further, in connection with any sale, issuance or transfer hereunder,
the Eligible Participant acquiring Common Stock shall, if requested by the
Corporation, give such satisfactory assurances as the Corporation may deem
desirable.
16. Not an Employment Contract. Neither this Agreement nor participation in
the Plan shall be construed as creating an agreement as to continued employment
with the Corporation or any of its affiliates.
17. Governing Law. This Agreement is governed in all respects by the laws of
the State of Delaware.
<PAGE>
This Agreement is effective and binding upon the Corporation as of the
date first written above.
ReliaStar Financial Corp.
By: __________________________
ReliaStar Financial Corp. EXHIBIT 11
Computation of Earnings Per Share
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
----------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
EARNINGS:
Primary:
Net Income, as Reported $ 51.9 $ 47.8 $ 103.2 $ 95.8
Dividends on ESOP Convertible Preferred Stock - (.7) - (1.4)
Tax Benefit on Unallocated ESOP Dividends - .2 - .4
Dividends on 10% Senior Cumulative Preferred Stock - (1.6) - (3.2)
----------- ----------- ----------- -----------
Net Income, As Adjusted $ 51.9 $ 45.7 $ 103.2 $ 91.6
=========== =========== =========== ===========
Fully Diluted:
Net Income, as Reported $ 51.9 $ 47.8 $ 103.2 $ 95.8
Dividends on 10% Senior Cumulative Preferred Stock - (1.6) - (3.2)
----------- ----------- ----------- -----------
Net Income, as Adjusted $ 51.9 $ 46.2 $ 103.2 $ 92.6
=========== =========== =========== ===========
SHARES:
Primary:
Weighted Average Common Shares Outstanding, Unadjusted 40.3 36.5 40.2 36.5
Dilutive Effect of Outstanding Stock Options .5 .5 .5 .4
----------- ----------- ----------- -----------
Weighted Average Common Shares, as Adjusted 40.8 37.0 40.7 36.9
=========== =========== =========== ===========
Fully Diluted:
Weighted Average Common Shares Outstanding, Unadjusted 40.3 36.5 40.2 36.5
Dilutive Effect of:
ESOP Convertible Preferred Stock - 2.6 - 2.6
Outstanding Stock Options .7 .4 .7 .5
----------- ----------- ----------- -----------
Weighted Average Common Shares, as Adjusted 41.0 39.5 40.9 39.5
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
Primary $ 1.27 $ 1.23 $ 2.52 $ 2.48
=========== =========== =========== ===========
Fully Diluted $ 1.27 $ 1.17 $ 2.52 $ 2.34
=========== =========== =========== ===========
</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>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 9,340,100,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 24,900,000
<MORTGAGE> 1,992,500,000
<REAL-ESTATE> 74,200,000
<TOTAL-INVEST> 12,246,600,000
<CASH> 27,900,000
<RECOVER-REINSURE> 224,700,000
<DEFERRED-ACQUISITION> 1,065,400,000
<TOTAL-ASSETS> 17,673,400,000
<POLICY-LOSSES> 11,479,400,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 287,700,000
<POLICY-HOLDER-FUNDS> 214,000,00
<NOTES-PAYABLE> 460,000,000
241,700,000
0
<COMMON> 400,000
<OTHER-SE> 1,500,300,000
<TOTAL-LIABILITY-AND-EQUITY> 17,673,400,000
419,800,000
<INVESTMENT-INCOME> 474,700,000
<INVESTMENT-GAINS> 2,500,000
<OTHER-INCOME> 247,000,000
<BENEFITS> 638,400,000
<UNDERWRITING-AMORTIZATION> 47,100,000
<UNDERWRITING-OTHER> 250,700,000
<INCOME-PRETAX> 165,400,000
<INCOME-TAX> 58,400,000
<INCOME-CONTINUING> 103,200,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,200,000
<EPS-PRIMARY> 2.52
<EPS-DILUTED> 2.52
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
