UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612)372-5432
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Stock, No Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Trust-Originated Preferred Securities New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 28, 1997, was $2,492,514,826
The number of shares outstanding of the Registrant's common stock as of February
28, 1997, was 40,120,963.
Documents Incorporated By Reference:
Parts of the Registrant's Annual Report for the year ended December 31, 1996,
are incorporated by reference in Part II of this Form 10-K.
Parts of the Registrant's Proxy Statement to be dated March 25, 1997, are
incorporated by reference in Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS.
ReliaStar Financial Corp. ("Registrant" or "ReliaStar") is a holding company
whose subsidiaries specialize in life insurance and related financial services
businesses. Through ReliaStar Life Insurance Company ("ReliaStar Life")
Minneapolis, Minnesota, and other subsidiaries, the Registrant issues and
distributes individual life insurance and annuities; group life and health
insurance; life and health reinsurance; and markets and manages mutual funds.
The Registrant operates in four business segments: Individual Insurance,
Employee Benefits, Life and Health Reinsurance and Pension.
Other life insurance subsidiaries, each of which is owned directly or indirectly
by ReliaStar Life, are Northern Life Insurance Company ("Northern"), Seattle,
Washington; ReliaStar United Services Life Insurance Company ("United
Services"), Arlington, Virginia; and ReliaStar Bankers Security Life Insurance
Company ("Bankers Security"), Woodbury, New York. (ReliaStar Life, Northern,
United Services and Bankers Security are sometimes collectively referred to as
the "Insurers"). Additional subsidiaries include Washington Square Advisers,
Inc., Minneapolis, Minnesota; Washington Square Securities, Inc., Minneapolis,
Minnesota; ReliaStar Mortgage Corporation, West Des Moines, Iowa; Northstar,
Inc., Greenwich, Connecticut; PrimeVest Financial Services, Inc., St. Cloud,
Minnesota; and Successful Money Management Seminars, Inc., Portland, Oregon.
ReliaStar Life, United Services and Bankers Security were formerly known as
Northwestern National Life Insurance Company, United Services Life Insurance
Company and Bankers Security Life Insurance Society, respectively.
The Registrant's strategy is to compete by focusing on the needs of its
customers and providing innovative products in a service-oriented,
cost-efficient manner. It is ReliaStar's goal to form lifetime partnerships with
its customers, delivering integrated financial solutions.
Financial information by business segment is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
(In Millions) 1996 1995 1994
---- ---- ----
Revenues:
<S> <C> <C> <C>
Individual Insurance $ 1,222.8 $ 1,147.0 $ 665.6
Employee Benefits 643.5 661.9 651.3
Life and Health Reinsurance 200.3 180.9 157.5
Pension 68.4 76.6 69.9
Other 55.6 24.0 26.5
----------- ----------- ---------
Total $ 2,190.6 $ 2,090.4 $ 1,570.8
=========== =========== =========
Pretax Operating Income (Loss):
Individual Insurance $ 204.5 $ 181.6 $ 118.8
Employee Benefits 46.0 44.1 41.2
Life and Health Reinsurance 50.7 43.5 37.4
Pension 14.0 10.3 7.6
Other (19.3) (23.5) (12.6)
----------- ----------- ---------
Total $ 295.9 $ 256.0 $ 192.4
=========== =========== =========
Pretax Income (Loss) from Continuing
Operations:
Individual Insurance $ 212.2 $ 186.0 $ 113.7
Employee Benefits 47.7 46.2 37.5
Life and Health Reinsurance 50.8 43.7 37.6
Pension 12.9 10.1 (9.5)
Other (19.5) (26.2) (12.7)
----------- ----------- ---------
Total $ 304.1 $ 259.8 $ 166.6
=========== =========== =========
Identifiable Assets (As of December 31):
Individual Insurance $ 13,022.8 $ 12,378.0 $ 7,621.6
Employee Benefits 906.1 883.0 801.8
Life and Health Reinsurance 417.8 357.5 267.0
Pension 1,681.9 1,389.5 1,190.8
Other 678.4 511.2 485.6
----------- ----------- -----------
Total $ 16,707.0 $ 15,519.2 $ 10,366.8
=========== =========== ===========
</TABLE>
NOTES:
FINANCIAL INFORMATION PRIOR TO JANUARY 1995 HAVE NOT BEEN RESTATED TO REFLECT
THE CONTRIBUTIONS OF USLICO CORP.
"OTHER" INCLUDES AMOUNTS FROM OPERATIONS NOT DEEMED TO BE REPORTABLE BUSINESS
SEGMENTS, CORPORATE OPERATIONS AND INTER-SEGMENT ELIMINATIONS AND ADJUSTMENTS.
IDENTIFIABLE ASSETS ARE THOSE ASSETS THAT ARE USED IN THE REGISTRANT'S
OPERATIONS IN EACH BUSINESS SEGMENT.
DURING 1996, THE COMPANY CHANGED ITS DEFINITION OF OPERATING INCOME TO EXCLUDE
REALIZED INVESTMENT GAINS AND LOSSES AND THEIR IMPACT ON THE AMORTIZATION OF
DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS. PRIOR
PERIOD INFORMATION HAS BEEN RESTATED TO REFLECT THIS DEFINITION OF OPERATING
INCOME.
INDIVIDUAL INSURANCE
The Registrant's individual life insurance and annuity operations are conducted
through the Insurers. Each of the Insurers maintains product portfolios
specifically developed for the market segment which it targets, while each
Insurer maintains separate contractual arrangements with agents for the
distribution of products within its targeted markets, the Registrant seeks to
encourage the sale of products of each Insurer by the distribution forces of the
other Insurers. The Registrant provides oversight to these operations and seeks
to achieve efficiencies through shared access to actuarial data, product design,
investment origination and portfolio management, capital allocation, systems and
administrative support and seeks further opportunities for synergistic benefits.
ReliaStar Life's individual insurance division distributes universal life,
variable universal life, fixed and variable annuities and related products
through its independent agents and representatives. ReliaStar Life maintains
relationships with these agents through a network of regional managers who
recruit, train and support the independent agents in their region. Compensation
of these agents and the regional managers is on a variable basis, dependent upon
their sales performance, which minimizes ReliaStar Life's fixed distribution
costs. ReliaStar Life is committed to maintaining relationships with its sales
force by providing high quality service to its independent agents. ReliaStar
Life has developed quality driven administrative support groups which seek to
enhance agent satisfaction by processing policy applications promptly and
accurately and promoting an attitude of helpfulness and accessibility among home
office personnel. ReliaStar Life focuses on middle-income and small business
consumers and emphasizes quality service to its policyholders.
Northern focuses its marketing efforts on the sale of tax-sheltered annuities
issued pursuant to Section 403(b) of the Internal Revenue Code ("TSAs") to
public school teachers and employees of non-profit organizations. The TSA
products sold by Northern are individual fixed and variable annuity contracts
designed to provide post-retirement financial security. The product design
provides for significant penalties for early withdrawal which, when coupled with
the provisions of the tax code, act to minimize the risk of early surrender.
Northern distributes these products through a specialty field force of
independent agents, including former teachers, that focuses exclusively on TSA
sales. Northern sells TSAs to teachers after securing the approval of a school
district. The school district generally provides a payroll deduction facility
for premium payments and facilitates access to the individual teachers.
Northern's agents meet with prospective customers on a face-to-face basis.
Northern's compensation structure of level commission payments and, starting in
1996, an asset based bonus rewards agents for persistency in the long-term
retention of these contracts.
United Services distributes individual life insurance and annuity products.
United Services employs career agents who distribute products to active and
retired members of the military and their families. United Services also
distributes individual life insurance products and fixed annuities to the
general public through brokers and banks.
Bankers Security sells individual life insurance and annuity products in the
State of New York, where none of the other Insurers are licensed, and throughout
the United States. Bankers Security also sells individual products which are
very similar to those sold by ReliaStar Life. Bankers Security's individual
sales force consists predominantly of independent agents. Bankers Security
distributes voluntary life insurance and annuity products through employer
sponsored plans which are marketed at the worksite. Bankers Security also serves
as the New York outlet for certain insurance products of the other Insurers.
Variable universal life and fixed universal life insurance represents the
largest portion of the statutory individual life insurance premium volume of the
Insurers. Variable universal life insurance policies contain alternative
investment options (generally mutual funds) and policy values will vary based
upon the investment returns of the fund(s) selected by the policyholder. Fixed
income universal life policies provide for guaranteed levels of insurance
protection and minimum interest rate guarantees. The Insurers also distribute
fixed and variable annuity products. The fixed annuity products provide for
interest crediting rates which, for most of the business, are guaranteed for an
initial period and may be adjusted annually thereafter. The Insurers adjust the
crediting rates on these policies and annuities based upon their investment
performance, market interest rates and competitive factors. Profits recognized
on interest-sensitive products are affected by mortality experience, the margin
between interest rates earned on investments and interest credited to
policyholders, as well as capital gains and losses on investments, persistency
and expenses. The variable annuity products contain alternative investment
options (generally mutual funds) and policy values will vary based upon the
investment returns of the fund(s) selected by the policyholder. The ability of
the Insurers to retain their agents is affected by the competitive position of
the Insurers' products, the commission structure and the support services
provided.
The Insurers have attempted to discourage premature surrenders of
interest-sensitive products through contractual surrender charges and the
adjustment of interest crediting rates. The policies and annuities issued by the
Individual Insurance segment contain provisions which allow the contractholder
to withdraw or surrender their contracts under defined circumstances. These
contracts generally contain provisions which apply penalties or otherwise limit
the ability of contractholders to make such withdrawals or surrenders. The
interest rates that the Insurers might be required to credit under their
interest-sensitive insurance products to forestall surrenders, particularly in a
time of rapidly rising market interest rates, could have an adverse effect on
operating income.
The Insurers' individual life insurance business is subject to risks in the
event that the Insurers' mortality experience deviates from the assumptions used
in establishing its premium rates.
The Registrant, which was incorporated in Delaware in 1988, became the parent of
ReliaStar Life and its subsidiaries pursuant to a Plan of Conversion and
Reorganization (the "Plan") which became effective on January 3, 1989. Pursuant
to the Plan, ReliaStar Life was converted from a combined stock and mutual life
insurance company to a stock life insurance company. Participating whole life
and term insurance policies and annuities issued by ReliaStar Life prior to the
effective date of the Plan are segregated as a closed book of business in a
Participation Fund Account ("PFA"). The PFA was established to provide for the
continued maintenance of ReliaStar Life's policyholder dividend practices
relative to these lines of business. Earnings derived from the operation of the
PFA will inure solely to the benefit of the policyholders covered by the PFA,
and no benefit will inure to ReliaStar Life. In the event the assets ($316.2
million as of December 31, 1996) of the PFA are insufficient to provide the
contractual benefits guaranteed by the affected policies, ReliaStar Life must
provide the contractual benefits from the general assets of ReliaStar Life. The
current level of dividends is well in excess of the guaranteed contractual
benefits. ReliaStar Life is not obligated to support or maintain a minimum level
of dividends on the policies in the PFA.
EMPLOYEE BENEFITS
ReliaStar Life offers group life, health and disability insurance and employee
benefit-related services primarily to employers with more than 50 employees.
ReliaStar Life's employee benefits products are marketed through major brokerage
operations and through direct sales to employers by 93 marketing professionals
employed full-time by ReliaStar Life and located in 14 regional offices
throughout the United States.
ReliaStar Life markets group term life insurance to employer groups in its
target market. Premiums for these policies are based largely upon the experience
of ReliaStar Life and, in some instances, on the experience of the particular
group policyholder. The primary risks related to this line of business include
deviations from expected mortality, expenses and investment income. ReliaStar
Life seeks to control the mortality risk through reinsurance treaties that
protect ReliaStar Life from catastrophic losses.
ReliaStar Life has historically distributed traditional health insurance and
other plans (generally referred to as split risk) whereby the employer and
ReliaStar Life share the risk of loss. ReliaStar Life also provides
administrative services (ASO) and issues indemnity contracts (stop loss or
excess risk) to employers who self-fund their health benefit plans. These
contracts provide that ReliaStar Life will reimburse the employer to the extent
its costs exceed specified dollar amounts, either with respect to any individual
or in the aggregate for all the employer's employees. ReliaStar Life's contracts
generally include a managed health care component. ReliaStar Life has recently
modified its strategy and currently is negotiating strategic marketing alliances
with major HMOs in key markets throughout the United States. Over time,
ReliaStar Life intends to transfer its insured and ASO health business to these
HMO's. ReliaStar Life believes that this strategy will provide opportunities to
market group life and other insurance products and to receive fee income through
the distribution of the allied HMO plans.
ReliaStar Life's insured health business is subject to risks in the event that
ReliaStar Life's morbidity experience deviates from the assumptions used in
establishing its premium rates. Profitability of this business may be adversely
affected by inflationary trends in the cost of medical treatment,
competition-driven business cycles and the extent to which insureds utilize
health care services.
ReliaStar Life also markets group disability income insurance. This coverage
compensates employees for loss of income due to sickness or injury. The
profitability of this business is affected by morbidity experience and the
investment return on assets supporting the policy reserves.
The Employee Benefits segment, in conjunction with Bankers Security, markets
individual life insurance policies to employees at the worksite and to members
of affinity groups. The products delivered to these markets include universal
life insurance policies and individual term life policies.
LIFE AND HEALTH REINSURANCE
The life and health reinsurance business is conducted through ReliaStar Life.
ReliaStar Life reinsures group life and health insurance underwritten by medium
to large United States and foreign insurance companies. This business also
includes the reinsurance of selected "special risk" coverages, principally
accident and accidental death insurance and the assumption of life and health
risk components of insured and self-funded workers compensation plans. Earnings
in the reinsurance business can fluctuate based upon a number of factors,
including pricing affected by capacity in the reinsurance market, the loss
experience of the underlying business and the risk profile of the book of
business.
ReliaStar Life has a strategy of maintaining a significant capacity to assume
reinsurance risks from its customers. ReliaStar Life maintains the capacity to
assume comparatively large risk positions from its reinsurance customers through
its retrocession program. ReliaStar Life's retrocession program consists of a
series of reinsurance contracts and treaties under which portions of reinsurance
risks assumed by ReliaStar Life are automatically retroceded to other
reinsurers. These secondary reinsurers (retrocessionaires) are selected by
ReliaStar Life based upon their capacity and financial stability. In addition to
this retrocession program, ReliaStar Life maintains reinsurance to provide
protection from catastrophic events. ReliaStar Life also maintains a diversified
portfolio of risks to avoid concentrations in any business line, some of which
may be subject to cyclical pricing.
ReliaStar Life markets both treaty (covering portfolios of policies as
underwritten by ceding insurers) and facultative (covering a specific
pre-identified risk) reinsurance. Special risk coverage involves underwriting
unusual accident or accidental death coverages in niche markets less affected by
cyclical competitive pressures. These products are marketed through reinsurance
brokers and through direct sales by employees of ReliaStar Life.
ReliaStar Life reinsures major medical risks of insurers and health maintenance
organizations and maintains expertise in the management of individual claims
involving very large medical expenses. Management believes that through active
intervention in a medical claim it may minimize large losses and maintain strong
relationships with its customers.
ReliaStar Life also participates in the international reinsurance market place.
The segment has branch offices in Toronto, Copenhagen, Amsterdam and London. It
writes business in over 40 countries worldwide and, while Europe is currently
the segment's greatest source of non-U.S. business, it is expanding
relationships in other markets that have strong growth potential.
PENSION
The Pension segment is composed of the 401(k) Retirement Plan Division,
participating pension and Guaranteed Investment Contract (GIC) businesses of the
Company.
The Retirement Plan Division of ReliaStar Life markets a package of products and
services for the employee retirement needs of small and mid-sized companies. The
division was organized in 1991 and had sales of $315.7 million during 1996.
The division seeks to achieve a competitive advantage through simplicity of
product design, flexibility and quality service provided at a very competitive
cost. Its strategy is to maintain alliances with high-quality providers who
specialize in functions such as plan administration and fund management.
ReliaStar Life maintains a closed block of participating pension contracts with
total contract liabilities of $454.0 million at December 31, 1996. Few contracts
of this type have been issued since 1982, and ReliaStar Life no longer markets
this product line. ReliaStar Life does, however, receive additional deposits
under some of these contracts. ReliaStar Life has issued certain participating
group annuity contracts jointly with another insurance company. ReliaStar Life
has entered into an arrangement with this issuer whereby ReliaStar Life will
gradually transfer these liabilities (approximately $281.9 million at December
31, 1996) to the other insurer over a ten year period which commenced in 1993.
The terms of the arrangement specify the interest rate on the liabilities and
provide for a transfer of assets and liabilities scheduled in a manner
consistent with the expected cash flows of the assets allocated to support the
attendant liabilities. Management does not expect this arrangement to have a
material effect on the earnings of the Company.
As of December 31, 1996, ReliaStar Life had $74.3 million in outstanding GIC
obligations. ReliaStar Life is not making sales of GICs.
REGULATION AND OTHER
INSURANCE REGULATORY ACTION
- ---------------------------
Insurance companies are subject to regulation and supervision by the states in
which they are domiciled and transact business. The laws of the various states
establish supervisory agencies with broad administrative and supervisory powers
relative to granting and revoking licenses to transact business, regulating
trade practices, licensing agents, approving policy forms, filing certain
premium rates, setting insurance liability and investment reserve requirements,
determining the form and content of required financial statements, determining
the reasonableness and adequacy of capital and surplus and prescribing the types
and amounts of investments permitted. Insurance companies are subject to
periodic examinations by the regulatory agencies. A number of states require
insurance companies to participate in assigned risk or other pools providing
insurance for people who cannot qualify in the regular markets.
The state of domicile of each of the Insurers imposes minimum risk-based capital
requirements on insurance enterprises that were developed by the National
Association of Insurance Commissioners (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.
The Registrant is primarily a holding company owning, directly or indirectly,
the capital stock of its subsidiaries. There are legal limitations on the extent
to which ReliaStar Life and the Registrant's other insurance company
subsidiaries may pay dividends or lend or otherwise supply funds to the
Registrant or ReliaStar Life.
COMPETITION
- -----------
The businesses in which the Insurers engage are all highly competitive. The
Individual Insurance segment competes in a marketplace characterized by a large
number of competitors with similar products. Competition is based largely upon
the crediting rates under the policies, the credit and claims paying ratings of
competing insurers, the commission structures of competing insurers and the
levels of service afforded agents. Competing investment opportunities are also
made available by mutual funds, banks and other financial intermediaries. The
products which the Insurers offer are not generally eligible for legal
protection from being copied by others, and capital is the most significant
barrier to entry by new competitors. The Insurers have obtained claims paying
ratings from public rating agencies. The Standard & Poor's claims paying rating
for ReliaStar Life, Northern, United Services and Bankers Security is AA-; and
the Duff & Phelps claims paying rating for ReliaStar Life, Northern, United
Services and Bankers Security is AA. The Moody's claims paying rating for
ReliaStar Life, Northern, United Services and Bankers Security is A1. The A.M.
Best claims paying rating for ReliaStar Life, United Services and Bankers
Security is A, while Northern's is A+. Reductions in the claims paying ratings
of an Insurer could adversely affect its operations or liquidity position.
The markets served by the Employee Benefits segment are all highly competitive.
Group life insurance is a homogeneous product sold in a highly competitive
market. ReliaStar Life's competitors include all of the largest insurers doing
business in the United States.
REINSURANCE
- -----------
The Registrant is a member of reinsurance associations established for the
purpose of ceding the excess of life insurance over retention limits. The
Registrant's retention limit is $500,000 per life for individual coverage and,
to the extent that ReliaStar Life reinsures life policies written by Northern
and Bankers Security, the limit is increased to $600,000 per life. For group
coverage and reinsurance assumed, the retention is $500,000 per life with per
occurrence limitations, subject to certain maximums. As of December 31, 1996,
$12.5 billion of life insurance in force was ceded to other companies.
Additionally, the Registrant maintains catastrophe reinsurance which provides
reinsurance protection in addition to the individual life coverages in the event
of a catastrophe resulting in multiple deaths. While these reinsurers are
selected based upon their capacity and financial stability, a contingent
liability exists with respect to the amount of such reinsurance in the event
reinsuring companies are unable to meet their obligations.
HEALTH CARE MARKETPLACE ENVIRONMENT
- -----------------------------------
The marketplace 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. Excluding the earnings of the United Services and Bankers Security
operations acquired in 1995, the health insurance and managed care businesses
have, over the past three years, on average, represented approximately 8% of the
Company's after tax earnings.
ACQUIRED IMMUNE DEFICIENCY SYNDROME (AIDS)
- ------------------------------------------
The Insurers may be affected by morbidity and mortality related to AIDS. While
the Insurers' pricing assumptions and underwriting criteria take into
consideration expected morbidity and mortality attributable to AIDS, experience
beyond that anticipated could adversely affect earnings.
GEOGRAPHIC DISTRIBUTION
- -----------------------
The Registrant, through the Insurers, does business in all 50 states. The
geographic distribution of the Insurers' premium volume for the year ended
December 31, 1996, for life insurance, individual annuities and accident and
health insurance, on a statutory accounting basis, was as follows: Northeast,
20%; Midwest, 24%; Southeast, 18%; Southwest, 7%; Mountain, 7%; and Pacific,
24%.
OTHER
- -----
On February 23, 1997, the Company signed a definitive agreement to acquire and
merge Security-Connecticut Corporation (SRC) into ReliaStar. SRC is a holding
company with two primary subsidiaries: Security-Connecticut Life Insurance
Company of Avon, Connecticut, and Lincoln Security Life Insurance Company of
Brewster, New York. As of December 31, 1996, SRC had assets of $2.3 billion and
total shareholders' equity of $355 million. The transaction will be effected
through a stock-for-stock exchange. The exchange ratio will be determined based
upon the average price of the Company's common stock during the twenty-day
trading period concluding six days prior to the closing of the transaction and
is subject to adjustments based upon changes in the market value of the
Company's common stock. The definitive agreement also includes a breakup
provision that would result in a payment of $8 million to ReliaStar under
certain circumstances if the transaction is not completed. The acquisition will
be accounted for as a purchase.
Based on the closing price of $59.25 for ReliaStar common stock on February 21,
1997, SRC shareholders would receive .7932 of a share of ReliaStar common stock
for each share of SRC common stock. Assuming the February 21 closing price,
ReliaStar would issue approximately seven million additional shares of ReliaStar
common stock, and the purchase price would be approximately $417 million,
including transaction costs. Completion of the merger is expected in the second
or third quarter of 1997, and is subject to normal closing conditions, including
approval by SRC shareholders and various regulatory approvals.
During October 1996, the Company completed the acquisition of PrimeVest
Financial Services, Inc. (PrimeVest). PrimeVest is a full-service, third-party
marketing firm located in St. Cloud, Minnesota, which specializes in
distributing mutual funds, stocks and bonds, variable and fixed annuities and
other financial products and services through a network of financial
institutions. The acquisition was accounted for using the purchase method of
accounting.
During September 1996, the Company acquired Successful Money Management
Seminars, Inc. (SMMS). SMMS, headquartered in Portland, Oregon, develops and
distributes educational materials used primarily in the presentation of seminars
to consumers on personal financial planning. The acquisition was effected
through an exchange of stock and was accounted for using the pooling-of-interest
method of accounting.
On January 17, 1995, the Registrant completed the acquisition of USLICO
Corporation (USLICO). USLICO was a holding company with two primary
subsidiaries, United Services and Bankers Security. The acquisition was
accounted for using the purchase method of accounting and, therefore, the
consolidated financial statements of the Registrant include the accounts of
USLICO since the date of acquisition.
At December 31, 1996, the Registrant and its subsidiaries employed 3,467
persons. None of the Registrants' employees are covered by collective bargaining
agreements.
ITEM 2. PROPERTIES.
The Registrant owns three office buildings in downtown Minneapolis, Minnesota,
which serve as its home offices. Space in the home office buildings not used by
the Registrant is rented to other tenants. Northern, United Services and Bankers
Security lease office space in downtown Seattle, Washington; Arlington,
Virginia; and Woodbury, New York, respectively. In addition, the Registrant
leases space in various cities of the United States for regional group, pension
and claims offices.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information entitled "Common Stockholder Information" from the inside back
cover of the Annual Report for the year ended December 31, 1996, is attached as
Exhibit 13 hereto and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information entitled "Revenues and Earnings" and "Financial Position" from
page 25 of the Annual Report for the year ended December 31, 1996, is attached
as Exhibit 13 hereto and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" from pages 26 through 39 of the Annual
Report for the year ended December 31, 1996, is attached as Exhibit 13 hereto
and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data from pages 40
through 62, but not including the Report of Management from Page 62 included in
the Annual Report for the year ended December 31, 1996, is attached as Exhibit
13 hereto and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information from pages 6 and 7 of the Registrant's 1997 Proxy Statement is
incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT ARE AS FOLLOWS:
<TABLE>
<CAPTION>
FIRST
ELECTED
AS
NAME POSITION WITH COMPANY AGE OFFICER
- ------------------------- ------------------------------------------------ --- -------
<S> <C> <C> <C>
John G. Turner Chairman and Chief Executive Officer 57 1972
John H. Flittie President and Chief Operating Officer 60 1985
Richard R. Crowl Senior Vice President and General Counsel 49 1982
Wayne R. Huneke Senior Vice President, Chief Financial Officer and Treasurer 45 1986
Steven W. Wishart Senior Vice President and Chief Investment Officer 53 1978
R. Michael Conley Senior Vice President 54 1982
Michael J. Dubes Senior Vice President 54 1984
Kenneth U. Kuk Senior Vice President 50 1990
Robert C. Salipante Senior Vice President 40 1992
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION.
The information from pages 12 through 20, up to proposal 2 from page 20, but not
including the Comparison of Five-year Cumulative Total Return graph from page 14
of the Registrant's 1997 Proxy Statement, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information entitled "Beneficial Owners of Voting Securities" from pages 2
through 4 of the Registrant's 1997 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A)1. FINANCIAL STATEMENTS:
The following financial statements, included from the Annual Report
for the year ended December 31, 1996, are incorporated by reference in
Item 8.
a. Consolidated Balance Sheets as of December 31, 1996 and 1995
b. Consolidated Statements of Income for the years ended December
31, 1996, 1995 and 1994
c. Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994
d. Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
e. Notes to Consolidated Financial Statements
f. Independent Auditors' Report
2. FINANCIAL STATEMENT SCHEDULES:
The following financial statement schedules are filed as part of this
Form 10-K:
Independent Auditors' Report
Schedule I - Consolidated Summary of Investments - Other than
Investments in Related Parties
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplementary Insurance information
Schedule IV - Reinsurance
Schedule V - Valuation and qualifying accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements
or notes thereto.
3. EXHIBITS:
(10) Material contracts:
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1996:
* The ReliaStar Stock Ownership Plan for Nonemployee
Directors (as amended and restated effective May 9,
1996)
* ReliaStar Financial Corp. Retirement Plan for
Nonemployee Directors (as amended on February 9, 1995)
* ReliaStar Deferred Compensation Plan for Nonemployee
Directors (as amended effective as of August 16,1996)
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1995:
* Management Employment Agreements covering the following
executive officers: Kenneth U. Kuk and Richard R. Crowl
* ReliaStar Financial Corp. Supplemental Executive
Retirement Plan
* ReliaStar Stock Ownership Plan for Nonemployee
Directors (as amended)
* ReliaStar Executives' Long-term Incentive Compensation
Program (as amended and restated effective January 1,
1996)
* Deposit Share Agreement issued under the ReliaStar 1993
Stock Incentive Plan (1996 Awards)
* Nonqualified Stock Option Agreement issued under the
ReliaStar Stock Ownership Plan for Nonemployee
Directors (1995-96 Board Year Awards)
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1994:
* Management Employment Agreements covering the following
executive officers: John G. Turner, John H. Flittie,
Wayne R. Huneke, Robert C. Salipante, Steven W.
Wishart, R. Michael Conley, Craig R. Rodby, David H.
Roe
* ReliaStar 1993 Stock Incentive Plan
* ReliaStar Executives' Long-term Incentive Compensation
Program
* ReliaStar Executives' Annual Incentive Compensation
Program
* ReliaStar Annual Incentive Bonus Plan For Designated
Executive Officers
* ReliaStar Stock Ownership Plan for Nonemployee
Directors
* ReliaStar Supplemental 401(k) Plan
* Retirement Plan for Nonemployee Directors of ReliaStar
* ReliaStar Deferred Compensation Plan for Nonemployee
Directors
* ReliaStar Supplemental Profit Sharing Plan
* First Amendment to Compensation Trust Agreement
* Nonqualified Stock Option Agreement issued under The
NWNL Companies Stock Ownership Plan for Nonemployee
Directors
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1993:
* The NWNL Companies 1993 Stock Incentive Plan
* Incentive Stock Option Agreement issued under The NWNL
Companies 1993 Stock Incentive Plan
* Nonqualified Stock Option Agreement issued under The
NWNL Companies 1993 Stock Incentive Plan
* Deposit Share Program Restricted Stock Agreement issued
under The NWNL Companies 1993 Stock Incentive Plan
* Nonqualified Stock Option Agreement (Replacement Stock
Option Grant) issued under The NWNL Companies 1993
Stock Incentive Plan
* Incentive Stock Option Agreement (Replacement Stock
Option Grant) issued under The NWNL Companies 1993
Stock Incentive Plan
* The NWNL Executives' Long-term Incentive Compensation
Program IV, as amended
* The NWNL Executives' Annual Incentive Compensation
Program II, as amended
* The NWNL Companies Stock Ownership Plan for Nonemployee
Directors
* The NWNL Companies Annual Incentive Bonus Plan for
Designated Executive Officers
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1992:
* Nonqualified Stock Option Agreement issued under The
NWNL Companies Stock Incentive Plan
* Incentive Stock Option Agreement issued under The NWNL
Companies Stock Incentive Plan
* Deferred Compensation Agreement (for Supplemental
Retirement Benefits)
* The NWNL Companies Supplemental 401(k) Plan
* Split Dollar Agreement
* Confidential Cash Payment and Deferred Compensation
Agreement between NWNL and Executive Officer, as
amended
* Confidential Deferred Compensation Agreement between
NWNL and Executive Officer, as amended
Management contracts and compensatory plans involving
Directors and Executive Officers filed as exhibit to
previous Form 10-K as noted:
* The NWNL Companies Stock Incentive Plan - filed as
exhibit to Form 10-K for Fiscal Year Ended December 31,
1991
* The NWNL Companies, Inc., Restricted Stock Plan for
Nonemployee Directors - filed as exhibit to Form 10-K
for Fiscal Year Ended December 31, 1991
* The NWNL Companies Deferred Compensation Plan for
Nonemployee Directors (as amended effective May 10,
1991) - filed as exhibit to Form 10-K for Fiscal Year
Ended December 31, 1991
* The NWNL Companies Stock Incentive Plan Restricted
Stock Agreement - filed as exhibit to Form 10-K for
Fiscal Year Ended December 31, 1991
* The NWNL Companies Supplemental Profit Sharing Plan as
amended on December 14, 1989 - filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1989
* Compensation Trust Agreement - filed as exhibit to Form
10-K for Fiscal Year Ended December 31, 1988
* Retirement Plan for Nonemployee Directors of The NWNL
Companies, Inc., - filed as exhibit to Form 10-K for
Fiscal Year Ended December 31, 1988
(11) Statement re computation of per share earnings
(13) Registrant's Annual Report for the year ended December 31,
1996, is filed as an exhibit to the extent incorporated by
reference herein
(21) Subsidiaries
(23) Consent
(24) Powers of attorney
(27) Financial Data Schedule
(B) REPORTS ON FORM 8-K:
A separate Form 8-K dated February 23, 1997 was filed in relation
to the Company entering into an agreement and plan of merger with
Security-Connecticut Corporation.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ReliaStar Financial Corp.
Minneapolis, Minnesota
We have audited the consolidated financial statements of ReliaStar Financial
Corp. and Subsidiaries as of December 31, 1996 and 1995, and for each of the
three years in the period ended December 31, 1996, and have issued our report
thereon dated January 31, 1997, except for Note 14, as to which the date is
February 23, 1997; such consolidated financial statements and report are
included in the Company's 1996 Annual Report to Shareholders and are
incorporated herein by reference. Our audits also included the financial
statement schedules of ReliaStar Financial Corp., listed in Item 14(A)2. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/Deloitte & Touche LLP
Minneapolis, Minnesota
January 31, 1997, except for Note 4,
as to which the date is February 23, 1997
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
SCHEDULE I-CONSOLIDATED SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1996
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- --------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ ---- ----- -------------
<S> <C> <C> <C>
Fixed Maturities
Bonds
United States Government and
Government Agencies and
Authorities $ 132.8 $ 139.3 $ 139.3
States, Municipalities and
Political Subdivisions 835.9 869.6 869.6
Foreign Governments 82.9 87.0 87.0
Public Utilities 754.7 793.8 793.8
All Other Corporate Bonds 7,193.9 7,406.5 7,406.5
Redeemable Preferred Stocks 2.7 2.0 2.0
------------- ----------- ------------
Total Fixed Maturities 9,002.9 9,298.2 9,298.2
------------- ----------- ------------
Equity Securities
Industrial, Miscellaneous and
all Other Common Stocks 22.0 25.0 25.0
Nonredeemable Preferred Stocks 10.4 11.9 11.9
------------- ----------- ------------
Total Equity Securities 32.4 36.9 36.9
------------- ----------- ------------
Mortgage Loans on Real Estate (1) 1,867.1 1,855.4
Real Estate (1) 42.6 40.5
Real Estate Acquired in
Satisfaction of Debt (1) 48.2 37.0
Policy Loans 549.0 549.0
Other Long-Term Investments (1) 62.5 59.9
Short-Term Investments 119.4 119.4
------------ -----------
Total Investments $ 11,724.1 $11,996.3
============ ===========
</TABLE>
NOTES:
(1) AMOUNTS IN COLUMN D DIFFER FROM AMOUNTS SHOWN IN COLUMN B BECAUSE THEY ARE
NET OF ALLOWANCES AND WRITE-DOWNS FOR LOSSES.
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(IN MILLIONS)
1996 1995
-------- -------
ASSETS
<S> <C> <C>
Investments
Investment in and Advances to Subsidiaries $ 1,788.8 $ 1,703.7
Short-Term Investments 2.0 4.7
---------- ----------
Total Investments 1,790.8 1,708.4
Cash - .3
Accounts and Notes Receivable 7.8 7.6
Other Assets 11.4 9.8
---------- ----------
TOTAL ASSETS $ 1,810.0 $ 1,726.1
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other Liabilities $ 26.2 $ 25.0
Bank Borrowings 7.0 48.5
Notes Payable 354.0 229.2
Income Taxes Payable 5.1 3.3
---------- ----------
TOTAL LIABILITIES 392.3 306.0
---------- ----------
SHAREHOLDERS' EQUITY
10% Senior Cumulative Preferred Stock - 63.2
ESOP Convertible Preferred Stock - 28.9
Note Receivable from ESOP (21.6) (23.4)
Common Stock 572.3 566.5
Unamortized Restricted Stock Awards (1.8) (3.0)
Net Unrealized Investment Gains 140.8 246.8
Retained Earnings 794.2 647.2
Less Treasury Common Stock, at Cost (66.2) (106.1)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,417.7 1,420.1
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,810.0 $ 1,726.1
========== ==========
</TABLE>
See Notes to Condensed Financial Information of Registrant.
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN MILLIONS, EXCEPT PER SHARE DATA)
1996 1995 1994
----------- ----------- ---------
REVENUES
<S> <C> <C> <C>
Net Investment Income $ 10.2 $ 8.2 $ 10.2
Other Income 3.1 3.2 3.1
------- -------- --------
TOTAL 13.3 11.4 13.3
------- -------- --------
BENEFITS AND EXPENSES
Sales and Operating Expenses (1.9) (1.5) 1.1
Interest Expense 26.7 20.1 8.1
------- -------- --------
TOTAL 24.8 18.6 9.2
------- -------- --------
Income (Loss) from Continuing Operations
Before Income Taxes (11.5) (7.2) 4.1
Income Tax - - -
------- --------- --------
Income (Loss) of Parent Only (11.5) (7.2) 4.1
Equity in Net Income from Continuing
Subsidiaries Operations 204.5 176.3 103.6
------- -------- --------
Income from Continuing Operations 193.0 169.1 107.7
Equity in Net Loss from Discontinued Operations - (5.4) (2.6)
------- -------- --------
Net Income $ 193.0 $ 163.7 $ 105.1
======= ======== ========
PER COMMON SHARE
Primary
Income from Continuing Operations $ 5.03 $ 4.36 $ 3.30
Loss from Discontinued Operations - (.15) (.09)
------- --------- --------
Net Income $ 5.03 $ 4.21 $ 3.21
======= ========= ========
Fully Diluted
Income from Continuing Operations $ 4.73 $ 4.10 $ 3.08
Loss from Discontinued Operations - (.14) (.08)
------- --------- --------
Net Income $ 4.73 $ 3.96 $ 3.00
======= ========= ========
Net Income Available to Common Shareholders $ 187.8 $ 155.4 $ 96.8
======= ========= ========
</TABLE>
See Notes to Condensed Financial Information of Registrant.
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN MILLIONS)
1996 1995 1994
--------- --------- --------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Cash Provided (Used) by Operating Activities $ (3.8) $ 3.7 $ 12.4
------- -------- -------
INVESTING ACTIVITIES
Sales (Purchases) of Short-Term Investments, Net 2.7 (1.5) (.8)
Dividends Received from Subsidiaries 55.1 43.1 24.0
Investments in or Advances to Subsidiaries (41.7) (19.5) (4.8)
------- ------- -------
Net Cash Provided by Investing Activities 16.1 22.1 18.4
------- ------- -------
FINANCING ACTIVITIES
Redemption of 10% Senior Cumulative Preferred Stock (63.2) - -
Increase in Notes and Mortgages Payable 148.9 166.3 -
Repayment of Notes and Mortgages Payable (65.6) (104.5) -
Payments Received on Note Receivable from ESOP .4 .9 .7
Issuance of Common Stock under Stock Option
and Other Plans 18.5 8.9 4.5
Dividends on 10% Senior Cumulative Preferred Stock (3.2) (6.3) (6.3)
Dividends on ESOP Convertible Preferred Stock (2.8) (2.8) (2.9)
Dividends on Common Stock (40.0) (35.8) (25.9)
Acquisition of Treasury Common Stock (5.6) (52.2) (.9)
------- ------- -------
Net Cash Used by Financing Activities (12.6) (25.5) (30.8)
------- ------- -------
Increase (Decrease) in Cash (.3) .3 -
Cash at Beginning of Year .3 - -
------- ------- -------
Cash at End of Year $ - $ .3 $ -
======= ======== =======
</TABLE>
See Notes to Condensed Financial Information of Registrant.
RELIASTAR FINANCIAL CORP.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
1. Accounting Policies
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes included in the ReliaStar
Financial Corp. 1996 Annual Report to Shareholders.
2. Acquisitions
During October 1996, the Company completed the acquisition of PrimeVest
Financial Services, Inc. (PrimeVest). PrimeVest is a full-service, third-party
marketing firm located in St. Cloud, Minnesota, which specializes in
distributing mutual funds, stocks and bonds, variable and fixed annuities and
other financial products and services through a network of financial
institutions. The acquisition was accounted for using the purchase method of
accounting. The purchase price was approximately $16 million and resulted in the
recording of goodwill totaling $11 million.
During September 1996, the Company acquired Successful Money Management
Seminars, Inc. (SMMS). SMMS, headquartered in Portland, Oregon, develops and
distributes educational materials used primarily in the presentation of seminars
to consumers on personal financial planning. The acquisition was effected
through an exchange of stock whereby the Company issued 663,050 shares of common
stock from treasury. The acquisition was accounted for using the
pooling-of-interest method of accounting.
On January 17, 1995, ReliaStar acquired USLICO Corporation (USLICO). USLICO was
a holding company with two primary subsidiaries: United Services Life Insurance
Company of Arlington, Virginia and Bankers Security Life Insurance Society of
Uniondale, New York. The acquisition was accounted for using the purchase method
of accounting. The acquisition was effected through a stock for stock
transaction whereby ReliaStar issued .69 share of ReliaStar Common Stock for
each USLICO share, or approximately 7.4 million additional ReliaStar common
shares. The purchase price, including direct costs of acquisition, was
approximately $217.0 million. In addition, ReliaStar assumed $96.1 million of
USLICO subordinated convertible debt. ReliaStar subsequently redeemed the USLICO
subordinated convertible debt. To fund the redemption, ReliaStar issued on
February 1, 1995, $110.0 million of 8 5/8% notes at a price of 99.274%.
3. Dividends from Subsidiaries
The cash dividends paid to ReliaStar for 1996, 1995 and 1994 by its subsidiaries
were $55.1 million, $43.1 million and $24.0 million, respectively.
4. Subsequent Event
On February 23, 1997, the Company signed a definitive agreement to acquire and
merge Security-Connecticut Corporation (SRC) into ReliaStar. SRC is a holding
company with two primary subsidiaries: Security-Connecticut Life Insurance
Company of Avon, Connecticut, and Lincoln Security Life Insurance Company of
Brewster, New York. As of December 31, 1996, SRC had assets of $2.3 billion and
total shareholders' equity of $355 million. The transaction will be effected
through a stock-for-stock exchange. The exchange ratio will be determined based
upon the average price of the Company's common stock during the twenty-day
trading period concluding six days prior to the closing of the transaction and
is subject to adjustments based upon changes in the market value of the
Company's common stock. The definitive agreement also includes a breakup
provision that would result in a payment of $8 million to ReliaStar under
certain circumstances if the transaction is not completed. The acquisition will
be accounted for as a purchase.
Based on the closing price of $59.25 for ReliaStar common stock on February 21,
1997, SRC shareholders would receive .7932 of a share of ReliaStar common stock
for each share of SRC common stock. Assuming the February 21 closing price,
ReliaStar would issue approximately seven million additional shares of ReliaStar
common stock, and the purchase price would be approximately $417 million,
including transaction costs. Completion of the merger is expected in the second
or third quarter of 1997, and is subject to normal closing conditions, including
approval by SRC shareholders and various regulatory approvals.
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------- -------- -------- -------- -------- --------
DEFERRED PENDING POLICY
POLICY FUTURE POLICY CLAIMS AND OTHER NET
ACQUISITION AND CONTRACT POLICYHOLDER INVESTMENT
SEGMENT COSTS BENEFITS FUNDS PREMIUMS INCOME
- ------- ------------- -------------- ------------------ -------- ------------
1996
- ----
<S> <C> <C> <C> <C> <C>
Individual Insurance $ 958.2 $ 10,092.8 $ 107.7 $ 130.9 $ 792.4
Employee Benefits - 473.2 197.7 522.2 60.7
Life and Health Reinsurance 2.5 118.8 172.1 183.7 16.1
Pension 39.4 651.2 .6 .1 61.5
Other 5.9 (3.8) .1 - 10.0
---------- ----------- -------- -------- -------
Total $ 1,006.0 $ 11,332.2 $ 478.2 $ 836.9 $ 940.7
========== =========== ======== ======== =======
1995
- ----
Individual Insurance $ 827.3 $ 9,753.6 $ 101.9 $ 147.0 $ 747.3
Employee Benefits - 445.3 184.1 537.4 54.3
Life and Health Reinsurance 2.4 97.5 143.8 167.0 13.7
Pension 24.3 740.1 2.3 .1 72.1
Other 6.7 (3.3) - - 3.7
---------- ----------- -------- -------- -------
Total $ 860.7 $ 11,033.2 $ 432.1 $ 851.5 $ 891.1
========== =========== ======== ======== =======
1994
- ----
Individual Insurance $ 859.6 $ 6,471.3 $ 70.0 $ 47.4 $ 473.6
Employee Benefits - 414.4 170.8 532.6 48.6
Life and Health Reinsurance 3.3 70.4 114.6 146.8 10.5
Pension 14.8 869.6 (4.7) .1 83.8
Other 7.5 (2.1) - - 1.8
---------- ----------- -------- -------- -------
Total $ 885.2 $ 7,823.6 $ 350.7 $ 726.9 $ 618.3
========== =========== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS)
(CONTINUED)
COLUMN A COLUMN G COLUMN H COLUMN I
- -------- -------- -------- --------
AMORTIZATION OF SALES
BENEFITS DEFERRED POLICY AND
TO ACQUISITION OPERATING
SEGMENT POLICYHOLDERS COSTS EXPENSES
- ------- ------------- ---------------- --------
1996
<S> <C> <C> <C>
Individual Insurance $ 694.3 $ 82.8 $ 198.6
Employee Benefits 439.1 - 147.1
Life and Health Reinsurance 107.4 .4 37.9
Pension 47.7 .6 7.0
Other (.8) 1.0 46.8
---------- ------ --------
Total $ 1,287.7 $ 84.8 $ 437.4
========== ====== ========
1995
Individual Insurance $ 713.4 $ 60.6 $ 151.2
Employee Benefits 448.7 - 154.6
Life and Health Reinsurance 99.4 .9 33.0
Pension 60.4 .1 5.7
Other (.7) .8 24.0
---------- ------ --------
Total $ 1,321.2 $ 62.4 $ 368.5
========== ====== ========
1994
Individual Insurance $ 420.2 $ 54.7 $ 75.3
Employee Benefits 441.9 - 155.7
Life and Health Reinsurance 88.4 1.6 28.3
Pension 75.4 (.3) 4.0
Other (.6) .7 26.5
---------- ------ --------
Total $ 1,025.3 $ 56.7 $ 289.8
========== ====== ========
</TABLE>
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
SCHEDULE IV - REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN MILLIONS, EXCEPT PERCENTAGES)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------- -------- -------- -------- -------- --------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
------ --------- --------- ------ ---
1996
- ----
<S> <C> <C> <C> <C> <C>
Life Insurance In Force $151,717.2 $12,464.3 $38,498.0 $177,750.9 21.7%
========== ========= ========= ==========
Premiums
Life Insurance $ 383.1 $ 49.3 $ 219.7 $ 553.5 39.7
Accident and Health Insurance 226.8 58.0 114.6 283.4 40.4
------------- ------------ ----------- -------------
Total Premiums $ 609.9 $ 107.3 $ 334.3 $ 836.9 39.9%
============= =========== =========== =============
1995
- ----
Life Insurance In Force $141,305.9 $11,963.3 $36,682.7 $166,025.3 22.1%
========== ========= ========= ==========
Premiums
Life Insurance $ 369.3 $ 43.1 $ 198.4 $ 524.6 37.8
Accident and Health Insurance 274.5 46.8 99.2 326.9 30.3
------------- ------------ ----------- -------------
Total Premiums $ 643.8 $ 89.9 $ 297.6 $ 851.5 35.0%
============= ============ =========== =============
1994
- ----
Life Insurance In Force $ 99,794.6 $ 4,746.7 $29,836.8 $124,884.7 23.9%
=========== ========== ========= ==========
Premiums
Life Insurance $ 262.1 $ 22.9 $ 161.8 $ 401.0 40.3
Accident and Health Insurance 271.1 45.2 100.0 325.9 30.7
------------- ------------ ----------- -------------
Total Premiums $ 533.2 $ 68.1 $ 261.8 $ 726.9 36.0%
============= ============ =========== =============
</TABLE>
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP.
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
AS OF DECEMBER 31, 1996, 1995 AND 1994
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
ADDITIONS
---------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER ACCOUNTS- AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE(1) DEDUCTIONS(2) PERIOD
- ----------- --------- -------- ----------- ------------- ------
1996
- ----
<S> <C> <C> <C> <C> <C>
Commercial Mortgage Loans $ 12.0 $ 2.6 - $ (3.6) $11.0
Residential Mortgage Loans .4 .3 - - .7
Foreclosed Real Estate 10.6 4.1 - (3.5) 11.2
Real Estate 1.0 1.1 - - 2.1
Other Invested Assets 2.3 .3 - - 2.6
Accounts and Notes Receivable 2.5 .5 - (.8) 2.2
1995
- ----
Commercial Mortgage Loans $ 3.7 $ 6.3 $ 11.5 $ (9.5) $12.0
Residential Mortgage Loans .4 - - - .4
Foreclosed Real Estate 11.9 5.3 - (6.6) 10.6
Real Estate .2 .8 - - 1.0
Other Invested Assets 2.5 - - (.2) 2.3
Accounts and Notes Receivable 3.0 .4 - (.9) 2.5
1994
- ----
Commercial Mortgage Loans $ 1.8 $ 4.9 - $ (3.0) $ 3.7
Residential Mortgage Loans .4 - - - .4
Foreclosed Real Estate 13.1 11.8 - (13.0) 11.9
Real Estate .2 - - - .2
Other Invested Assets 2.6 2.6 - (2.7) 2.5
Accounts and Notes Receivable 3.4 .8 - (1.2) 3.0
</TABLE>
(1) VALUATION AND QUALIFYING ACCOUNTS RELATING TO ASSETS FROM THE ACQUISITION
OF USLICO.
(2) THE DEDUCTIONS ARE FOR RESERVES RELEASED UPON DISPOSAL OF THE RELATED ASSET
OR UPON FORECLOSURE OF THE PROPERTY UNDERLYING THE LOAN AT WHICH TIME THE
FORECLOSED PROPERTY IS RECORDED AT FAIR VALUE.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Minneapolis
and the State of Minnesota, on the 17th day of March 1997.
RELIASTAR FINANCIAL CORP.
By /S/ JOHN G. TURNER
----------------------------
John G. Turner, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on the 17th day of March 1997 by the following persons on behalf
of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
<S> <C>
/S/ JOHN G. TURNER
------------------ Chairman and Chief Executive Officer
John G. Turner (Principal Executive Officer)
/S/ WAYNE R. HUNEKE
------------------- Senior Vice President, Chief Financial Officer and Treasurer
Wayne R. Huneke (Principal Financial Officer)
/S/ CHRIS D. SCHREIER
--------------------- Second Vice President and Controller
Chris D. Schreier (Principal Accounting Officer)
</TABLE>
CAROLYN H. BALDWIN
F. CALEB BLODGETT
DAVID C. COX
JAYE F. DYER
JOHN H. FLITTIE
LUELLA G. GOLDBERG A majority of the
WILLIAM A. HODDER Board of Directors*
JAMES J. HOWARD III
RANDY C. JAMES
RICHARD L. KNOWLTON
DAVID A. KOCH
RICHARD M. KOVACEVICH
GLEN D. NELSON
JAMES J. RENIER
JOHN G. TURNER
* Richard R. Crowl, by signing his name hereto, does hereby sign this
document on behalf of the above named directors of the registrant pursuant
to powers of attorney duly executed by such persons.
/S/ RICHARD R. CROWL
----------------------------------
Richard R. Crowl, Attorney-in-Fact
ReliaStar Financial Corp.
Exhibit Index
DESCRIPTION
(10) Material contracts:
The ReliaStar Stock Ownership Plan for Nonemployee Directors (as amended
and restated effective May 9, 1996)
ReliaStar Financial Corp. Retirement Plan for Nonemployee Directors (as
amended on February 9, 1995)
ReliaStar Deferred Compensation Plan for Nonemployee Directors (as amended
effective as of August 16,1996)
(11) Statement re computation of per share earnings
(13) Registrant's Annual Report for the year ended December 31, 1996, is filed
as an exhibit to the extent incorporated by reference herein
(21) Subsidiaries
(23) Consent
(24) Powers of attorney
(27) Financial Data Schedule
THE RELIASTAR STOCK OWNERSHIP PLAN
FOR NONEMPLOYEE DIRECTORS
(as amended and restated effective May 9, 1996)
1. GENERAL.
The name of the amended and restated plan set forth herein is "The
ReliaStar Stock Ownership Plan for Nonemployee Directors" (herein "Plan").
The purpose of the Plan is to promote the interests of ReliaStar Financial
Corp. ("Corporation") and its stockholders by strengthening the Corporation's
ability to attract and retain the services of experienced and knowledgeable
nonemployee Directors and by encouraging such Directors to acquire an increased
ownership interest in the Corporation.
2. EFFECTIVE DATE OF PLAN.
The effective date of the amended and restated Plan is the date on which it
is ratified and approved by the shareholders of the Corporation.
3. SHARES SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 9(b), the total number of
shares of common stock ("Shares") of the Corporation that may be delivered or
purchased under the Plan shall not exceed Three Hundred Thousand (300,000)
Shares which may be authorized and unissued Shares or issued Shares reacquired
by the Corporation including treasury Shares.
4. DEFINITIONS.
a. ANNUAL RETAINER. "Annual Retainer" means the fixed annual fee by which
the Corporation compensates Eligible Directors for their services as
Directors of the Corporation for a Board Year.
b. BENEFICIARY. "Beneficiary" means the person or persons designated as
such by a Director's will or pursuant to the laws of descent and
distribution.
c. BOARD OF DIRECTORS. "Board of Directors" or "Board" means the Board of
Directors of the Corporation.
d. BOARD YEAR. "Board Year" means the twelve-month period beginning on
the day immediately after the date of each Annual Meeting of the
Corporation's shareholders and ending on the day of the next
succeeding Annual Meeting.
e. COMMITTEE. "Committee" means the Board Affairs Committee of the Board
of Directors.
f. CORPORATION. "Corporation" means ReliaStar Financial Corp.
g. DATE OF GRANT. "Date of Grant" means the date of the Annual Meeting of
the Corporation at which Stock Options are awarded pursuant to Section
8 hereof.
h. DIRECTOR. "Director" means a member of the Board of Directors of the
Corporation.
i. EVENT. "Event" means a change of control "Event" as defined in the
Compensation Trust Agreement dated as of January 3, 1989 between the
Corporation and Norwest Bank Minnesota, National Association, as from
time to time amended.
j. FAIR MARKET VALUE. "Fair Market Value" as applied to a specific date
means the closing price of one Share 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.
k. MEETING FEES. "Meeting Fees" means the fees payable to Director for
attendance at meetings of the Board or committees thereof.
l. RESTRICTED PERIOD. "Restricted Period" means the time period beginning
on the date that Restricted Shares are issued and ending on the date
determined as set forth in paragraph b of Section 7 hereof.
m. RESTRICTED SHARES. "Restricted Shares" means Shares awarded to an
Eligible Director pursuant to Section 7 hereof.
n SHARES. "Shares" means shares of the Corporation's common stock
without par value.
o. STOCK OPTIONS. "Stock Options" means options, which are not intended
to qualify under Section 422 of the Internal Revenue Code, to purchase
Shares from the Corporation which are granted to an Eligible Director
pursuant to Section 8 hereof.
5. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Committee. Subject to the terms of
the Plan, the Committee shall have the power to construe the provisions of the
Plan and to determine all questions arising thereunder and to adopt and amend
such rules and regulations for administering the Plan as the Committee deems
desirable.
6. PARTICIPATION IN THE PLAN.
Each Director who is not an employee of the Corporation or any subsidiary
of the Corporation (an "Eligible Director") shall be eligible to participate in
the Plan.
7. RESTRICTED STOCK.
a. RESTRICTIONS ON SHARES. Restricted Shares issued to Eligible Directors
under this Plan may not be sold, assigned, pledged, hypothecated,
transferred or otherwise disposed of (including, without limitation,
transfer by gift or donation) during the Restricted Period.
b. RESTRICTED PERIOD. The restrictions on Shares shall lapse upon the
first to occur of the following events:
(i) Death of the Director;
(ii) Disability of the Director preventing continued service on the
Board;
(iii)Retirement of the Director from the Board in accordance with the
Board's policy on retirement of nonemployee directors then in
effect;
(iv) Termination of service as a Director with the consent of a
majority of the members of the Board other than the terminating
Director; or.
(v) A change in control of the Corporation which shall occur upon the
occurrence of an Event.
Notwithstanding the foregoing, in no event shall the Restricted Period
lapse prior to the expiration of six months after the date of issuance
of the Shares.
c. CERTIFICATES FOR RESTRICTED SHARES. The certificates for Shares which
are subject to restrictions shall be held by the Corporation until
lapse of the restrictions as provided in this Section.
d. DIVIDENDS AND VOTING RIGHTS. During the Restricted Period, an Eligible
Director shall have the right to receive dividends from and to vote
his or her Restricted Shares.
e. FORFEITURE OF RESTRICTED SHARES. If an Eligible Director ceases to be
a Director before the Restrictions on the Restricted Shares lapse as
provided in paragraph (d) of this Section, the Restricted Shares
issued to such Eligible Directors shall be forfeited and shall revert
to the Corporation.
f. FRACTIONS OF SHARES. The Corporation shall not be required to issue
fractions of Shares. Whenever under the terms of the Plan a fractional
Share would be required to be issued, an amount in lieu thereof shall
be paid in cash based on the same Fair Market Value used to determine
the number of Shares to be issued on the relevant issue date.
7A. PAYMENT OF DIRECTORS' FEES IN SHARES.
a. MANDATORY ANNUAL RETAINER PAYMENTS IN SHARES. The Corporation's
current Annual Retainer is $22,500 for each Board Year, and such
Retainer is currently paid in two installments of $11,250 each (or pro
rata portion thereof for service for a partial period) in
arrears--with the first payment on the date which is six months after
the Annual Meeting and the second payment on the last day of the Board
Year. Thirty percent of each semiannual installment of the Annual
Retainer shall be paid by issuing Shares having a Fair Market Value
equal, on the date such installment is payable, to thirty percent of
such installment (currently $3,375). Irrespective of any change the
Board may make in either the amount or the time of payment of the
Annual Retainer, $6,750 of such Annual Retainer shall continue to be
paid in two installments of $3,375 each by issuing Shares as described
above; PROVIDED, however, that if, in the opinion of counsel for the
Corporation, a practice of issuing, at such time or times as the
Annual Retainer is payable, Shares equal to 30% of the Annual Retainer
in effect at the time of payment does not cause Shares issued to be
treated as a purchase for purposes of Section 16(b) of the Securities
Exchange Act of 1934, then the Plan shall be administered to require
that 30% of each payment of the Annual Retainer in effect at the time
of payment shall be paid by issuing Shares.
b. ELECTION TO RECEIVE PAYMENT OF FEES IN SHARES. A director may elect in
writing prior to the commencement of any Board Year for which he/she
has been elected or nominated to serve, to have any Annual Retainer or
Meeting Fees otherwise payable in cash for such Board Year to be paid
instead by the issuance of Shares having a Fair Market Value equal to
the amount of cash which otherwise would have been payable. Such
election is (i) irrevocable as to any Board Year which has commenced
while such election is in effect, and (ii) may be changed only as to
Board Years commencing after the date of such change. Any fees for
which an election under this paragraph is in effect shall be payable
in arrears semiannually on the date which is six months after the
Annual Meeting and on the last day of the Board Year. Only whole
Shares shall be issued, and any remaining amount payable on the date
of any semiannual installment after calculating the whole number of
Shares to be issued will be paid in cash.
c. ELECTION TO DEFER FEES PAYABLE IN SHARES IN A DEFERRED SHARE ACCOUNT.
A director may elect in writing prior to the commencement of any Board
Year for which he/she has been elected or nominated to serve, to have
any Annual Retainer or Meeting Fees otherwise payable in Shares for
such Board Year to be credited to a Deferred Share Account. Such
election is (i) irrevocable as to any Board Year which has commenced
while such election is in effect, and (ii) may be changed only as to
Board Years commencing after the date of such change. On the date or
dates Annual Retainer and Meeting Fee amounts are payable, the portion
so elected shall be credited to a Deferred Share Account in the
electing Director's name. The Deferred Share Account is an unsecured
bookkeeping account in which the Corporation's obligation is measured
by, and payable in, Shares. Any Annual Retainer or Meeting Fee amounts
otherwise payable in Shares shall be credited, on the date payable,
with a number of Deferred Share Account units equal to the number of
such Shares. On any date that cash dividends are payable on the
Shares, additional units shall be credited to the Deferred Share
Account in a dollar amount equal to the dividends which would be paid
if the units credited to such Account on the dividend record date were
Shares.
d. DISTRIBUTION OF DEFERRED SHARE ACCOUNT.
(1) LUMP SUM. Unless a Director has elected to receive distribution
in installments, all units credited to his/her Account shall be
converted to an equal number of Shares and distributed to the
Director (together with cash in lieu of any fractional share) on
the first day of the month (or next business day) following
termination of his/her service as a Director.
(2) INSTALLMENTS. A director may elect to have his/her Account
distributed in 10 or fewer annual installments commencing on a
date following termination of his/her service as Director as
elected by the Director with succeeding installments to be made
on the same date (or next business day) of each succeeding year.
The amount of each installment shall be a fraction of the number
of units in the Director's deferred Share Account on the date
that is 10 days prior to the date the installment is to be
distributed, the numerator of which is one and denominator of
which is the number of annual installments elected minus the
number of installments previously paid (rounded down, except for
the last installment, to the nearest whole unit). The number of
units thus calculated shall be converted to an equal number of
Shares and distributed to the Director on the installment payable
date (together with cash in lieu of any fractional unit with the
final installment). An election made pursuant to this paragraph
shall be made on forms provided by the Corporation and shall be
made at the time prescribed for elections as set forth in
paragraph c of this Section 7A.
(3) DEATH OF DIRECTOR. If a director dies before receiving full
distribution of his/her Deferred Share Account, distribution of
the remaining units shall be made by converting all remaining
units to an equal number of whole Shares and distributing such
Shares together with cash in lieu of any fractional units as soon
as administratively feasible to the Director's estate.
e. TRUST. Amounts credited to Deferred Share Accounts represent unsecured
contractual obligations of the Corporation, and no participant may
assert any rights under this Plan with respect to Deferred Share
Accounts superior to the rights of an unsecured general creditor of
the Corporation. The Corporation may, but is not obligated to,
establish a trust with an independent trustee to which the Corporation
may contribute cash or Shares equal to part or all of its liability to
participants with respect to the Deferred Share Accounts. The assets
of any such trust shall be subject to the claims of general creditors
of the Corporation.
f. NONASSIGNABILITY OF DEFERRED SHARE ACCOUNT. No right to receive
distribution or other payment in respect of Deferred Share Accounts
nor any units credited to a Deferred Share Account shall be assignable
or transferable by a Director other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations
order as defined by the Internal Revenue Code of 1986, as amended.
8. STOCK OPTIONS.
All Stock Options granted to Eligible Directors under the Plan shall be
subject to the following terms and conditions:
a. INITIAL NONDISCRETIONARY GRANTS. An option to purchase 1,250 Shares
(as adjusted provided in Section 9(b) hereof) shall be granted to
(i) each Director who is an Eligible Director immediately following
the Annual Meeting at which the amended and restated Plan is
approved by shareholders of the Corporation, and
(ii) each other Eligible Director immediately following the Annual
Meeting at which such Director is first elected or appointed by
the Board to be a Director, whichever is applicable; provided
that if an Eligible Director who has previously received an
Initial Nondiscretionary Grant terminates service as a Director
and is subsequently elected or appointed to the Board, such
Director shall not be eligible to receive a second Initial
Nondiscretionary Grant, but shall be eligible to receive only
Annual Nondiscretionary Grants as provided in paragraph (b) of
this Section 8.
b. ANNUAL NONDISCRETIONARY GRANTS. An option to purchase 1,250 Shares (as
adjusted pursuant to Section 9(b) hereof) shall be granted immediately
following each Annual Meeting to each Director who is an Eligible
Director at such time and who has received an Initial Nondiscretionary
Grant, such grants to begin with the first Annual Meeting following
the year in which the Eligible Director receives an Initial
Nondiscretionary Grant.
c. OPTION EXERCISE PRICE. Stock Options granted to Eligible Directors
shall have an exercise price equal to the Fair Market Value of the
Corporation's Common Stock on the Date of Grant.
d. OPTION TERM. Except as otherwise provided herein, each Stock Option
granted herein shall expire and all rights to purchase shares shall
cease ten years and one day after the Date of Grant.
e. VESTING. Except as otherwise provided in paragraphs (h) and (i) of
this Section 8, one-third (417 shares) of each Stock Option granted
pursuant to this Plan shall vest on, and be exercisable by the
Director on or after the one-year anniversary of the Date of Grant,
one-third (417 shares) of each Stock Option shall vest on and be
exercisable on or after the second anniversary of the Date of Grant,
and one-third (416 shares) of each Stock Option shall vest on and be
exercisable on or after the third anniversary of the Date of Grant.
f. TIME AND MANNER OF EXERCISE OF STOCK OPTIONS. In accordance with the
vesting schedule in paragraph (e) of this Section 8, or any
accelerated vesting pursuant to paragraph (h) or (i) hereof, an
individual entitled to exercise a Stock Option may exercise it in
whole or in part at any time by delivering 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 Stock Option is being exercised.
g. PAYMENT OF EXERCISE PRICE. The individual must make payment in full to
the Corporation by certified check, cashier's check, money order or
other form of payment as approved by the Committee in the amount of
the exercise price for the Shares to be purchased, plus the amount, if
any, required for withholding as provided in Section 9(f) hereof. In
lieu of paying the exercise price as described above, the individual
may pay all or part of such exercise price by delivering to the
Corporation 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 Stock Options exercised, or delivery of instructions to the
Corporation to withhold from the Shares that would otherwise be issued
upon exercise that number of Shares having a Fair Market Value equal
to or less than the exercise price of the Stock Options being
exercised. If the Fair Market Value of the Shares transferred or
withheld in payment of the exercise price is less than the total
exercise price, the individual must pay the remainder of the exercise
price to the Corporation in cash.
h. EXERCISE OF STOCK OPTIONS BY ELIGIBLE DIRECTOR. The right to exercise
Stock Options upon termination of the Director's service as a Director
shall be as follows:
(i) RETIREMENT OR DISABILITY OF ELIGIBLE DIRECTOR. Upon the
Director's retirement from the Board in accordance with the
Board's policy on retirement of nonemployee directors then in
effect or upon the Director's termination of service as a
Director of the Corporation due to the onset of the Director's
disability which prevents his or her continued service on the
Board, the Director shall have until the expiration of the Stock
Option term to exercise any Stock Options. Any nonvested portion
of the Stock Options granted to the Director shall immediately
vest on the date of such termination of service as a Director and
shall no longer be subject to the vesting schedule provided in
paragraph (e) of this Section 8.
(ii) DEATH OF DIRECTOR. If a Director's termination of service as a
Director is due to his/her death or his/her death occurs
subsequent to such termination of service as a Director, the
Director's Beneficiary shall have the Option term remaining to
the Director had he or she lived in which to exercise the Stock
Option. Any nonvested portion of a Stock Option previously
granted to the Director shall immediately vest on the date of
such termination of service due to the Director's death.
(iii)OTHER TERMINATION OF SERVICE AS A DIRECTOR. Upon the Director's
termination of service as a Director for any other reason, the
Director shall have until the expiration of the Stock Option term
provided to the Director in paragraph (d) to exercise the vested
portion of the Stock Option. Any portion of the Stock Option in
which the Director is not vested on the date of such termination
of service as a Director shall be forfeited.
i. CHANGE OF CONTROL OF THE CORPORATION. If a change of control Event
shall occur during the term of a Stock Option granted under this Plan,
then any portion of the Stock Option which has not vested shall
immediately vest.
j. UNEXERCISED STOCK OPTION. Any portion of a Stock Option not exercised
within the time period set forth in paragraph (d) of this Section
shall terminate and be forfeited.
k. MERGER, DISSOLUTION OR TRANSFER OF PROPERTY. Any portion of a Stock
Option not exercised shall terminate upon the effective date of the
dissolution or liquidation of the Corporation; or upon the
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.
9. MISCELLANEOUS PROVISIONS.
a. RIGHTS AS A SHAREHOLDER. A Director shall have no rights as a
shareholder with respect to Restricted Shares and Stock Options
awarded under this Plan unless and until certificates for such Shares
are issued to the Director. 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 Restricted Shares or Stock Options awarded hereunder or
Deferred Share Accounts created hereunder.
b. DILUTION AND OTHER ADJUSTMENTS. The aggregate number and class of
Shares subject to and authorized by the Plan, the number and class of
Shares with respect to which Stock Options may be granted to Eligible
Directors under the Plan as provided in Section 8 and the class of
Shares subject to each outstanding Stock Option, the exercise price
per Share specified in each such Stock Option and the number of units
credited to any Deferred Share Account shall be proportionately
adjusted for any increase or decrease in the number of issued Shares
resulting from a split-up or consolidation of Shares or any like
capital adjustment or the payment of any stock dividend, or other
increase or decrease in the number of Shares effected without receipt
of consideration by the Corporation.
c. 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 Director 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.
d. TERMINATION AND AMENDMENT OF PLAN. The Board may amend, terminate or
suspend the Plan at any time, in its sole and absolute discretion;
provided, however, that no such action shall adversely affect any
rights or obligations with respect to any Restricted Shares or Stock
Options previously granted under the Plan. Furthermore, if required to
qualify the Plan under Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended ("Exchange Act"), no amendment shall
be made more than once every six months that would change the amount,
price or timing of the grants of Stock Options under Section 8 hereof,
other than to comport with changes in the Internal Revenue Code, the
Employee Retirement Income Security Act, or the rules thereunder; and
provided further, that if required to qualify the Plan under Rule
16b-3, no amendment of the Plan shall be effective without the
approval of the Corporation's stockholders which would (i) materially
increase the benefits accruing to participants, (ii) materially
increase the number of Shares that may be issued under the Plan, or
(iii) materially modify the requirements as to eligibility for
participation under the Plan.
e. RIGHTS UNDER THE PLAN. The Plan confers no right to be nominated or
elected to the Board, nor does it confer any right to continue to
serve on the Board independent of the Corporation's By-laws and
applicable public law.
f. WITHHOLDING OF TAXES. Whenever under the Plan Shares are to be issued,
restrictions changed or eliminated or, in the judgment of the
Corporation, it is appropriate, the Corporation shall have the right
to require the recipient to remit to the Corporation an amount
sufficient to satisfy any applicable federal, state and local
withholding tax requirements.
g. AGREEMENTS. All Restricted Shares and Stock Options granted under the
Plan and elections to defer Annual Retainers and Meeting Fees shall be
evidenced by written agreements in such form and containing such terms
and conditions not inconsistent with the Plan as the Committee may
adopt.
h. GOVERNING LAW. The Plan is governed in all respects by the laws of the
State of Delaware.
i. SEVERABILITY. In the event that any provision in the Plan would
invalidate the Plan, the provision shall be deemed null and void, and
the Plan shall be construed as if it did not contain that provision.
j. COMPLIANCE WITH SECTION 16. Transactions under the Plan are intended
to comply with all applicable conditions of Rule 16b-3 or its
successors under the Exchange Act. The old Section 16 rules shall
apply until the Corporation expressly elects the new Section 16 rules
to apply or such new rules apply by operation of law. To the extent
any provision of the Plan or action of 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.
RELIASTAR FINANCIAL CORP.
RETIREMENT PLAN FOR NONEMPLOYEE DIRECTORS
(As amended on February 9, 1995)
ARTICLE I
GENERAL
Sec. 1.1 NAME OF PLAN. The name of the plan set forth herein is "The
ReliaStar Financial Corp. Retirement Plan for Nonemployee Directors". It is
sometimes referred to herein as the "Plan".
Sec. 1.2 PURPOSE. The Plan has been established by ReliaStar Financial
Corp., ("Corporation") to provide retirement benefits to certain nonemployee
directors who serve on the Board of the Corporation ("Board") in consideration
of service performed on the Board. The Plan is also intended to aid in
continuing to attract and retain individuals of outstanding ability and skill to
serve on the Board.
Sec. 1.3 SUCCESSOR PLAN. The Plan is a successor plan to the Northwestern
National Life Insurance Company Retirement Plan for Nonemployee Directors
(Predecessor Plan).
Sec. 1.4 EFFECTIVE DATE. The effective date of the Plan shall be January 3,
1989.
ARTICLE II
BENEFITS
Sec. 2.1 ELIGIBILITY TO RECEIVE A BENEFIT. Any nonemployee member of the
Board or a participant in the Predecessor Plan shall be eligible to receive a
benefit under the Plan if the individual has at least five full years of service
on the Board.
For purposes of determining years of board service under Section 2.2, years of
board service (i) shall be measured from the date the Board member commences
service on the Board (ii) shall include all years of service on the board of
Northwestern National Life Insurance Company prior to the effective date of this
Plan and (iii) need not be consecutive years of service.
In no event, however, will an individual be eligible to receive a benefit under
both this Plan and the Predecessor Plan.
Sec. 2.2 BENEFIT AMOUNTS. If a nonemployee director is eligible under
Section 2.1, such individual shall receive an annual benefit equal to the annual
retainer rate in effect for nonemployee directors for board service at the time
of the individual's last day of service on the Board. This benefit
(a) shall commence immediately following the period for which a retainer
has been earned for years of service as a director and shall continue
for a period equal to the shorter of:
(1) the nonemployee director's actual years of Board service
including fractional parts thereof, or
(2) fifteen years, if actual Board service of the nonemployee
director equals or exceeds fifteen years of service, and
(b) shall be paid in equal quarterly installments.
If a nonemployee director who has met the requirements under Sec. 2.1 dies or
becomes disabled while serving on the Board or dies after the commencement of
benefits, the benefits to which the individual would otherwise have been
entitled under the Plan as of the date of the individual's death or disability
shall be paid to the individual's estate.
Sec. 2.3 DEFERRAL OF PLAN BENEFITS. Prior to the time the nonemployee
director becomes entitled to payment of benefits under this Plan pursuant to
Sec. 2.2, the nonemployee director may elect to defer receipt of such benefits
by entering into a written deferral agreement with the Corporation pursuant to
such terms and conditions as may be established by the Corporation from time to
time. Any benefit deferred pursuant to Section 2.3 shall earn interest at the
fixed interest rate as determined under the ReliaStar Success Sharing Plan and
ESOP from the time the individual would have otherwise been entitled to commence
receipt of benefits and shall continue until such time as the benefit is
received by the nonemployee director.
ARTICLE III
MISCELLANEOUS
Sec. 3.1 UNFUNDED PLAN. Benefits under this Plan shall be unfunded. No
person entitled to a benefit under this Plan shall, by virtue of this Plan, have
any interest in any specific asset or assets of the Corporation. Such person has
only an unsecured contractual right to receive payments in accordance with this
Plan.
Sec. 3.2 BENEFITS MAY NOT BE ASSIGNED OR ALIENATED. Except as required by
law, the interests of persons entitled to benefits under this Plan may not in
any manner whatsoever be assigned or alienated, whether voluntarily or
involuntarily, or directly or indirectly.
Sec. 3.3 NOT AN AGREEMENT OF CONTINUED SERVICE AS A BOARD MEMBER. This Plan
does not constitute a guarantee or contract of service as a nonemployee director
of the Board for any specific length of time.
Sec. 3.4 ADMINISTRATION. The Human Resources Division of the Corporation
shall control and manage the operations and administration of this Plan and make
all decisions and determinations incident thereto.
ARTICLE IV
AMENDMENT, TERMINATION AND APPLICABLE LAW
Sec. 4.1 AMENDMENT AND TERMINATION. This Plan may be amended or terminated
by the Board at any time; however, no amendment or termination shall have the
effect of reducing any benefits to which the nonemployee director is entitled
under Section 2.2 as of the date of amendment or termination of the Plan.
Sec. 4.2 APPLICABLE LAW. The provisions of this Plan shall be construed and
enforced according to the laws of the State of Minnesota.
RELIASTAR
DEFERRED COMPENSATION PLAN
FOR
NONEMPLOYEE DIRECTORS
(as amended effective as of August 16, 1996)
SECTION 1. PURPOSE.
The purpose of this Plan is to provide each eligible Director of RelaiStar
Financial Corp. the opportunity to receive deferred compensation for his/her
services as a Director after such services terminate.
SECTION 2. DEFINITIONS.
(a) "Board" means the Board of Directors of ReliaStar Financial Corp.
(b) "Board Year" means the period commencing on the day immediately following
the day of the Annual Meeting of the Corporation's shareholder and ends on
the day of the next succeeding Annual Meeting.
(c) "Corporation" means ReliaStar Financial Corp.
(d) "Deferred Compensation" means Directors' Fees deferred pursuant to this
Plan.
(e) "Deferred Compensation Election Form" means the Deferred Compensation
Election Form provided by the Corporation to Directors for the purpose of
making deferral elections under this Plan.
(f) "Deferred Share Account" means a Deferred Share Account established under
this Plan.
(g) "Director" means a member of the Board.
(h) "Directors' Fees" means all fees and other compensation payable to a
Director for service on the Board, excluding any reimbursements for travel
expenses.
(i) "Fair Market Value" as applied to a specific date means the closing price
of one Share 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.
(j) "Interest" means interest on Deferred Compensation amounts as provided in
Section 5 of this Plan.
(k) "Memorandum Account" means a Deferred Compensation Memorandum Account
established under this Plan.
(l) "Plan" means the Deferred Compensation Plan for Nonemployee Directors as
described herein and as amended from time to time.
(m) "Secretary" means the Corporate Secretary of ReliaStar Financial Corp.
(n) "Share Election Date" means August 16, 1996.
(o) "Share Election Form" means the form provided by the Corporation to
Directors for the purpose of making the election to convert Deferred
Compensation amounts in the Memorandum Account to Share units in the
Deferred Share Account.
(p) "Share Unit Determination Date" means August 16, 1996.
(q) "Shares" means shares of the Corporation's common stock without par value.
SECTION 3. ELIGIBILITY.
Each Director who is not an employee of the Corporation shall be eligible to
participate in the Plan.
SECTION 4. PARTICIPATION.
To participate in the Plan, an eligible Director must make a valid election by
executing and filing a Deferred Compensation Election Form with the Secretary.
Such elections shall be subject to the following terms and conditions:
(a) AMOUNT DEFERRED - An election shall be valid only if it contains a
statement that the Director elects to defer all or a specific portion
of the Director's Fees due him/her for services as a Director for each
Board Year to which the election applies.
(b) TERM OF ELECTION - To become effective for a particular Board Year, an
election must be filed with the Secretary before the commencement of
that Board Year, or, in the case of a new Director, before the first
Board of Directors meeting following his/her election to office. An
election shall apply to such Board Year and also to each succeeding
Board Year during all or part of which the Director remains eligible
until the earlier of (i) the first day of the Board Year following the
year in which the Director files with the Secretary a revised Deferred
Compensation Election Form which increases the amount deferred, or
(ii) the date the Director files with the Secretary a revised Deferred
Compensation Election Form which decreases the amount deferred
pursuant to paragraph (a) above.
(c) REVISED DEFERRED COMPENSATION ELECTION FORM - A Director may file with
the Secretary at any time a revised Deferred Compensation Election
Form on which he/she elects to increase or decrease the percentage of
Directors' Fees subject to the deferral election. Any such revised
Deferred Compensation Election Form which increases the amount
deferred shall become effective on the first day of the Board Year
following the Board Year in which the Director files such revised
Deferred Compensation Election Form with the Secretary. Any such
revised Deferred Compensation Election Form which decreases the amount
deferred shall become effective on the date it is filed with the
Secretary and shall apply to Directors' Fees which have not yet been
earned as of that date. The filing of a revised Deferred Compensation
Election shall not accelerate the distribution of any Director's Fee
amount previously deferred.
SECTION 5. ACCOUNTS; INTEREST; SHARE UNITS.
(a) Upon receipt of a Director's valid election pursuant to a Deferred
Compensation Election Form, the Corporation shall establish an
individual Memorandum Account for such Director. There shall be
credited to such Memorandum Account all of the Deferred Compensation
which would otherwise have been payable to such Director for the
period to which the election applies. Such Deferred Compensation shall
be credited as of the dates on which the applicable fees would have
been paid had there not been an election to defer such fees.
Interest shall be credited to the Memorandum Account on the first day
of each month and immediately preceding any distribution under the
Plan. Such Interest shall be calculated using:
(1) The rate of interest paid by the Corporation as of the first day
of each month under the RelaiStar Success Sharing Plan and ESOP
Fixed Interest Account; and
(2) The Memorandum Account balance as of the last day of the
preceding month, or, if applicable, as of the date of
distribution. All amounts credited to a Memorandum Account shall
be unfunded, and such Memorandum Account shall represent an
unsecured contractual obligation of the Corporation.
(b) A Director may elect, by submitting to the Corporation an
appropriately completed Share Election Form on or before the Share
Election Date, to have 25%, 50%, 75% or 100% of the total Deferred
Compensation amount contained in such Director's Memorandum Account as
of the Share Unit Determination Date converted to units in a Deferred
Share Account established for such Director. Such election shall be
effective as of the Share Election Date and shall be irrevocable. The
Deferred Share Account is an unsecured bookkeeping account in which
the Corporation's obligation is measured by, and payable in, Shares. A
Deferred Share Account shall be established for each Director who has
elected to convert Deferred Compensation amounts in his/her Memorandum
Account to Deferred Share Account units, and such Deferred Share
Account shall be credited with a number of Deferred Share Account
units. The number of such Deferred Share Account units credited to a
Director's Deferred Share Account shall be equal to the number of
Shares having a Fair Market Value on the Share Unit Determination Date
equal to the amount of Deferred compensation in the Memorandum Account
being converted into Deferred Share Account units. After the Share
Unit Determination Date, on any date that cash dividends are paid on
the Shares, additional Share units shall be credited to the Deferred
Share Account in an amount equal to the number of Shares having a Fair
Market Value on such dividend payment date equal to such cash
dividends.
(c) Amounts credited to Deferred Share Accounts represent unsecured
contractual obligations of the Corporation, and no participant may
assert any rights under this Plan with respect to Deferred Share
Accounts superior to the rights of an unsecured general creditor of
the Corporation. The Corporation may, but is not obligated to,
establish a trust with an independent trustee to which the Corporation
may contribute cash or Shares (which in all cases shall be treasury
shares) equal to part or all of its liability to participants with
respect to the Deferred Share Accounts. The assets of any such trust
shall be subject to the claims of general creditors of the
Corporation.
SECTION 6. DISTRIBUTION.
(a) All Deferred Compensation and Interest credited to a Memorandum
Account shall be distributed to the Director in five approximately
equal annual installments. The first installment shall be paid on the
tenth day of the calendar year immediately following the calendar year
in which the Director ceases to be a Director of the Corporation.
Subsequent installments shall be paid on the tenth day of each
succeeding calendar year until the entire amount credited to the
Memorandum Account shall have been paid. The amount of each
installment shall be determined by multiplying the balance credited to
the Memorandum Account as of the first day of the month in which the
distribution is to be made by a fraction as follows: The numerator of
the fraction shall be one (1), and the denominator shall be five (5)
minus the number of installments theretofore made to the Director.
If a Director dies prior to commencement of payments of his/her
Memorandum Account, or if a Director dies after such payments have
commenced but before full payment of all amounts credited to his/her
Memorandum Account, the balance of the Memorandum Account as of the
date of death shall be paid to the Director's estate.
(b) As of the initial date of distribution of amounts credited to a
Director's Deferred Share Account, Share units credited to such
Deferred Compensation Account shall be converted to an equal number of
Shares and distributed as provided herein to the Director (together
with cash in lieu of any fractional share). All such Shares shall be
distributed to the Director in five approximately equal annual
installments. The first installment shall be paid on the tenth day of
the calendar year immediately following the calendar year in which the
Director ceases to be a Director of the Corporation. Subsequent
installments shall be made on the tenth day of each succeeding
calendar year until the entire amount of units credited to the
Deferred Share Account shall have been distributed in Shares. The
number of Shares distributed in each installment shall be determined
by multiplying the units credited to the Deferred Share Account as of
the first day of the month in which a distribution is to be made by a
fraction , as follows: The numerator of the fraction shall be one (1),
and the denominator shall be five (5) minus the number of installments
theretofore made to the Director.
If a Director dies prior to commencement of distribution of Shares
from his/her Deferred Share Account, or if a Director dies after such
distributions have commended but before full distribution of all such
Shares has been made, the balance of the Deferred Share Account shall
be distributed in Shares to the Director's estate.
SECTION 7. ASSIGNMENT.
The right of a Director to any Deferred Compensation, Interest or Shares shall
not be subject to assignment by the Director (other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Internal Revenue Code of 1986, as amended). If a Director makes
any assignment (other than as permitted in the preceding sentence), the
Corporation may disregard such assignment and discharge its obligation hereunder
by making payment as though no such assignment had been made.
SECTION 8. ADMINISTRATION OF PLAN.
The Plan shall be administered by the Board Affairs Committee of the Board. The
Board Affairs Committee shall have full power to formulate additional rules and
regulations for carrying out the Plan and to make such amendments or
modifications in the Plan as the Board Affairs Committee may deem proper from
time to time and in the best interest of the Corporation. No such amendment or
modification shall affect the obligation of the Corporation to pay to a Director
the amounts credited to his/her Memorandum Account or Deferred Share Account.
Any decision or interpretation adopted by the Board Affairs Committee shall be
final and conclusive.
SECTION 9. DILUTION AND OTHER ADJUSTMENTS.
The number of units credited to any Deferred Share Account shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares resulting from a split-up or consolidation of Shares or any like capital
adjustment or the payment of any stock dividend, or other increase or decrease
in the number of Shares effected without receipt of consideration by the
Corporation. In case of any recapitalization of the Corporation, any
consolidation or merger of the Corporation with any other corporation, any sale
or transfer of all or substantially all of the assets of the Corporation or any
share exchange transaction pursuant to which (in the case of any such
transaction) all of the outstanding Shares are converted into other securities
or property, the Corporation shall, prior to or at the time of any such
transaction, make appropriate provision or cause appropriate provision to be
made so that Directors having units in the Deferred Share Account shall be
entitled to receive, in lieu of the related Shares, at the time or times and in
the manner provided for in this Plan, the securities or other property that
would have been receivable with respect to such Shares had they been outstanding
immediately prior to the effective date of such transaction.
SECTION 10. COMPLIANCE WITH LAW AND APPROVAL BY REGULATORY BODIES.
No units shall be credited, no Shares shall be issued, no certificates for
Shares shall be delivered, and no payment or distribution shall be made except
in compliance with all applicable federal and state laws and regulations and
rules of all domestic stock exchanges on with 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 crediting
of any units, the transfer, issuance or sale of any Shares or any related
transaction 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
crediting, transfer, issuance, sale or other transaction, the Corporation shall
not be obligated to credit, transfer, issue, sell or engage in such other
transaction. Any Share certificate issued may bear such legends and statements
as the Board Affairs Committee may deem advisable or desirable. Further, in
connection with any crediting, sale, issuance or transfer hereunder, the
Director acquiring the units or Shares shall, if requested by the Corporation,
give satisfactory assurances to the Corporation's counsel that the units or
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.
Transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Securities Exchange Act of
1934. To the extent any provision of the Plan or action of the Board or any
committee thereof fails to so comply, it shall be deemed null and void to the
extent permitted by law and deemed advisable by the Board Affairs Committee.
SECTION 11. WITHHOLDING.
There shall be deducted from all distributions under this Plan the amount of any
taxes which the Company may be required to withhold by any federal, state, or
local government. The Directors 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 assumes no
responsibility for the tax consequences to the Director for his/her
participation in the Plan.
SECTION 12. CONSENT.
By making an election under Section 4 of this Plan, each Director shall be
deemed conclusively to have consented to all the terms of this Plan and all
actions and decisions made by the Corporation, the Board, or the Board Affairs
Committee with regard to the Plan. Such terms and consent shall also apply to
and be binding upon the personal representative of such Director.
SECTION 13. SEVERABILITY.
In the event that any provision in this Plan would invalidate the Plan, that
provision shall be null and void, and the Plan shall be construed as if it did
not contain the provision.
<TABLE>
<CAPTION>
RELIASTAR FINANCIAL CORP. Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
----------------------
EARNINGS: 1996 1995 1994
----------- ----------- --------
Primary:
<S> <C> <C> <C>
Income from Continuing Operations, as Reported $ 193.0 $ 169.1 $ 107.7
Dividends on ESOP Convertible Preferred Stock (2.8) (2.8) (2.9)
Tax Benefit on Unallocated ESOP Dividends .8 .8 .9
Dividends on 10% Senior Cumulative Preferred Stock (3.2) (6.3) (6.3)
------------ ----------- -----------
Income from Continuing Operations, as Adjusted $ 187.8 $ 160.8 $ 99.4
============ =========== ===========
Loss from Discontinued Operations - $ (5.4) $ (2.6)
============ =========== ===========
Net Income, as Reported $ 193.0 $ 163.7 $ 105.1
Dividends on ESOP Convertible Preferred Stock (2.8) (2.8) (2.9)
Tax Benefit on Unallocated ESOP Dividends .8 .8 .9
Dividends on 10% Senior Cumulative Preferred Stock (3.2) (6.3) (6.3)
------------ ----------- -----------
Net Income, as Adjusted $ 187.8 $ 155.4 $ 96.8
============ =========== ===========
Fully Diluted:
Income from Continuing Operations, as Reported $ 193.0 $ 169.1 $ 107.7
Additional Compensation Expense due to Assumed
Conversion of ESOP Convertible Preferred Stock - (.2) (.4)
Dividends on 10% Senior Cumulative Preferred Stock (3.2) (6.3) (6.3)
------------ ----------- -----------
Income from Continuing Operations, as Adjusted $ 189.8 $ 162.6 $ 101.0
============ =========== ===========
Loss from Discontinued Operations $ - $ (5.4) $ (2.6)
============ =========== ===========
Net Income, as Reported $ 193.0 $ 163.7 $ 105.1
Additional Compensation Expense due to Assumed
Conversion of ESOP Convertible Preferred Stock - (.2) (.4)
Dividends on 10% Senior Cumulative Preferred Stock (3.2) (6.3) (6.3)
------------ ----------- -----------
Net Income, as Adjusted $ 189.8 $ 157.2 $ 98.4
============ =========== ===========
SHARES:
Primary:
Weighted Average Number of Common Shares Outstanding, Unadjusted 36.9 36.3 29.7
Additional Dilutive Effect of Outstanding Stock Options .4 .6 .4
------------ ----------- -----------
Weighted Average, as Adjusted 37.3 36.9 30.1
============ =========== ===========
Fully Diluted:
Weighted Average Number of Common Shares Outstanding, Unadjusted 36.9 36.3 29.7
Additional Dilutive Effect of:
ESOP Convertible Preferred Stock 2.6 2.6 2.6
Outstanding Stock Options .6 .8 .5
------------ ----------- -----------
Weighted Average, as Adjusted 40.1 39.7 32.8
============ =========== ===========
EARNINGS PER COMMON SHARE:
Primary:
Income from Continuing Operations $ 5.03 $ 4.36 $ 3.30
Loss from Discontinued Operations - (.15) (.09)
------------ ---------- ----------
Net Income $ 5.03 $ 4.21 $ 3.21
============ ========== ===========
Fully Diluted:
Income from Continuing Operations $ 4.73 $ 4.10 $ 3.08
Loss from Discontinued Operations - (.14) (.08)
------------ ---------- -----------
Net Income $ 4.73 $ 3.96 $ 3.00
============ ========== ===========
</TABLE>
<TABLE>
<CAPTION>
FIVE-YEAR CONSOLIDATED FINANCIAL HIGHLIGHTS
RELIASTAR FINANCIAL CORP. AND SUBSIDIARIES
(In Millions, Except Per Share Data) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES AND EARNINGS(1)
Premiums $ 836.9 $ 851.5 $ 726.9 $ 659.6 $ 589.9
Net Investment Income 940.7 891.1 618.3 635.0 606.7
Realized Investment Gains (Losses) 11.2 4.9 (27.4) (32.4) (33.7)
Other Income 401.8 342.9 253.0 228.2 215.1
- -----------------------------------------------------------------------------------------------------------------------------
Total Revenues 2,190.6 2,090.4 1,570.8 1,490.4 1,378.0
Benefits and Expenses 1,886.5 1,830.6 1,404.2 1,361.8 1,288.4
Income Tax Expense 106.1 90.7 58.9 46.1 29.0
Net Dividends on Preferred Securities of Subsidiary 5.0 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before
Extraordinary Charges and Cumulative Effect
of Accounting Changes 193.0 169.1 107.7 82.5 60.6
Loss from Discontinued Operations -- (5.4) (2.6) -- --
Extraordinary Charges -- -- -- (9.7) (1.3)
Cumulative Effect of Accounting Changes -- -- -- (7.5) --
- -------------------------------------------------------------------------------------------------------------------------------
Net Income $ 193.0 $ 163.7 $ 105.1 $ 65.3 $ 59.3
- -------------------------------------------------------------------------------------------------------------------------------
Operating Income(2) $ 187.6 $ 166.6 $ 124.4 $ 101.8 $ 82.0
- -------------------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 187.8 $ 155.4 $ 96.8 $ 57.0 $ 50.1
- -------------------------------------------------------------------------------------------------------------------------------
Per Common Share (Fully Diluted)
Operating Income(2) $ 4.60 $ 4.03 $ 3.59 $ 3.08 $ 2.70
Income from Continuing Operations Before
Extraordinary Charges and Cumulative Effect
of Accounting Changes 4.73 4.10 3.08 2.45 1.93
Net Income 4.73 3.96 3.00 1.90 1.88
Dividends Paid Per Common Share 1.09 .975 .875 .785 .73
FINANCIAL POSITION(1)
Assets $ 16,707.0 $ 15,519.2 $ 10,366.8 $ 9,912.9 $ 9,075.2
Notes and Mortgages Payable 407.5 422.3 194.6 230.3 220.5
Other Liabilities 14,760.9 13,676.8 9,373.7 8,882.0 8,174.9
Trust-Originated Preferred Securities 120.9 -- -- -- --
Shareholders' Equity, as Reported
Preferred -- 68.7 67.9 66.7 65.8
Common(3) 1,417.7 1,351.4 730.6 733.9 614.0
Common Shareholders' Equity Excluding
Unrealized Investment Gains and Losses(4) 1,276.9 1,104.6 810.0 733.9 614.0
OTHER DATA (UNAUDITED)(1)
Book Value Per Common Share(4,5) $ 31.91 $ 28.54 $ 25.14 $ 22.98 $ 20.85
Year-End Market Price Per Common Share 57-3/4 44-3/8 29 32 25-7/16
Assets Under Management(4) 18,141.0 15,826.5 10,602.4 9,715.6 8,801.8
Statutory Premiums and Deposits 2,603.2 2,467.4 1,810.1 1,587.8 1,382.2
INSURANCE PRODUCT SALES(6)
Individual Life $ 119.0 $ 104.2 $ 74.2 $ 63.5 $ 60.2
Individual Annuity 643.3 669.6 427.8 355.7 310.8
Group Life 43.5 23.0 30.5 26.3 29.1
Group Health 32.1 49.1 68.3 91.3 57.7
Life and Health Reinsurance 70.2 46.5 57.5 32.2 27.7
Retirement Plan Sales 315.7 255.2 201.3 110.9 74.9
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 1,223.8 $ 1,147.6 $ 859.6 $ 679.9 $ 560.4
- -------------------------------------------------------------------------------------------------------------------------------
LIFE INSURANCE IN-FORCE
Individual $ 67,653.1 $ 66,399.5 $ 27,808.3 $ 26,761.6 $ 25,781.5
Group 117,342.1 106,873.7 96,503.8 88,784.6 78,796.5
Reinsurance 5,220.0 4,715.4 5,319.3 3,512.8 3,265.4
- -------------------------------------------------------------------------------------------------------------------------------
Total $190,215.2 $177,988.6 $129,631.4 $119,059.0 $107,843.4
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The acquisition of USLICO Corporation on January 17, 1995 was accounted for
as a purchase and, accordingly, financial data prior to January 1995 have
not been restated to reflect the acquisition.
(2) During 1996, the Company changed its definition of operating income to
exclude realized investment gains and losses and their impact on the
amortization of deferred policy acquisition costs and present value of
future profits. Prior period information has been restated to reflect this
definition of operating income.
(3) Common shareholders' equity was increased by $140.8 million and $246.8
million at December 31, 1996 and 1995, respectively and reduced by $79.4
million at December 31, 1994 due to the effects of SFAS No. 115. In
accordance with the requirements of SFAS No. 115, amounts for 1993 and
prior years have not been restated.
(4) The December 31, 1996, 1995 and 1994 amounts exclude the impact of net
unrealized investment gains and losses.
(5) Prior period amounts have been restated to reflect, on a pro forma basis,
the December 31, 1996 conversion of the ESOP convertible preferred stock to
common stock.
(6) Represents annualized amounts received on new business written for
individual and group life and health insurance.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RELIASTAR FINANCIAL CORP. AND SUBSIDIARIES
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.
RESULTS OF OPERATIONS
Pretax results of operations by business segment are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pretax Operating Income (Loss)(1)
Individual Insurance $204.5 $181.6 $118.8
Employee Benefits 46.0 44.1 41.2
Life and Health Reinsurance 50.7 43.5 37.4
Pension 14.0 10.3 7.6
Corporate and Other (19.3) (23.5) (12.6)
- -----------------------------------------------------------------------------------------------------------------------------
Pretax Operating Income 295.9 256.0 192.4
Pretax Net Realized Investment Gains (Losses) 8.2 3.8 (25.8)
- -----------------------------------------------------------------------------------------------------------------------------
Pretax Income before Net Dividends on Preferred Securities of Subsidiary 304.1 259.8 166.6
Tax Expense 106.1 90.7 58.9
Dividends on Preferred Securities of Subsidiary, Net of Tax 5.0 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 193.0 169.1 107.7
Loss from Discontinued Operations -- (5.4) (2.6)
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $193.0 $163.7 $105.1
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) During 1996, the Company changed its definition of operating income to
exclude 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.
1996 COMPARED WITH 1995
INDIVIDUAL INSURANCE The Individual Insurance segment of ReliaStar Financial
Corp. (the Company or ReliaStar) 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. ReliaStar Life, United Services and Bankers Security were formerly
known as Northwestern National Life Insurance Company, United Services Life
Insurance Company and Bankers Security Life Insurance Society, respectively.
Pretax operating income increased $22.9 million compared with 1995. The
primary reason for the earnings increase was an increase in interest spreads and
an 8% increase in assets under management. The average interest spread of 254
basis points increased 26 basis points compared to 1995. The increase in
interest spreads was the result of a 23 basis point reduction in the average
crediting rate, and a three basis point increase in the portfolio yield. For
most of the business, crediting rates on in force business are reset annually at
the beginning of the calendar year and are guaranteed for one year. Crediting
rates offered on new business can be changed at any time in response to
competition and market interest rates, and are guaranteed on most new premium
received to the end of the calendar year.
Total individual life insurance and annuity sales for 1996 (as measured by
new premiums and deposits) decreased one percent compared with 1995. This
reflects a 14% increase in life sales and a 4% decrease in annuity sales. Lower
sales of individual fixed annuities were the primary reason for the sales
decrease compared with 1995. The decline in fixed annuity sales was due to lower
market interest rates and reflected an industry-wide trend.
Sales of individual variable annuities increased 87% compared with 1995
primarily due to favorable stock market conditions and the low interest rate
environment.
The amount of business in force has a much larger impact on earnings during
a year than the amount of new sales for the Individual Insurance segment. One
measure of business in force is the amount of assets under management for the
segment. Assets under management were $11.2 billion at December 31, 1996
compared with $10.4 billion at December 31, 1995.
EMPLOYEE BENEFITS Pretax operating income for the Employee Benefits segment
increased $1.9 million compared with 1995. The increase in pretax income was
primarily due to favorable morbidity experience and higher investment income
which, in total, increased pretax operating income $9.8 million. These favorable
impacts were partially offset by unfavorable mortality experience and higher
expenses, which decreased pretax income $8.0 million. Pretax operating income in
the group long-term disability line of business was $2.3 million in 1996
compared with a pretax operating loss of $5.4 million in 1995.
LIFE AND HEALTH REINSURANCE Pretax operating income of the Life and Health
Reinsurance segment increased $7.2 million compared with 1995. Income for the
segment was higher than 1995 due primarily to a 10% increase in earned premiums,
increased investment income and a slightly more favorable overall loss ratio
compared with 1995. Earnings in the reinsurance business can fluctuate based
upon a number of factors, including pricing, market capacity, the availability
and pricing of retrocessional programs, loss experience and the risk profile of
the book of business.
PENSION The Pension segment is composed of the 401(k) retirement plan,
participating pension and Guaranteed Investment Contract (GIC) lines of
business. As of December 31, 1996, the amounts of contract liabilities of the
401(k) retirement plan, participating pension and GIC lines of business were
$1,015.8 million, $454.0 million and $74.3 million, respectively. The Company is
not issuing new participating pension or GIC contracts.
Pretax operating income of the Pension segment increased $3.7 million
compared with 1995. Pretax operating income from the 401(k) retirement plan line
of business increased $2.2 million to $4.8 million. Income in this line was up
primarily due to higher fee revenues attributable to a 65% increase in assets
under management. Pretax operating income in the participating pension and GIC
lines of business increased $1.5 million compared with 1995 primarily due to
higher interest margins.
CORPORATE AND OTHER The pretax operating loss for Corporate and Other decreased
$4.2 million compared with 1995. Operating losses were lower primarily due to a
decrease in losses of $1.7 million from the Company's mutual fund
operation-Northstar Investment Management Corporation (Northstar)-and short-term
interest income on the proceeds from the issuance of $125.0 million in
Trust-Originated Preferred Securities (TOPrSsm) prior to the redemption of
$63.25 million of 10% Senior Cumulative Preferred Stock (see Financial
Condition-Liquidity and Capital Resources-ReliaStar Financial Corp.). TOPrSsm
dividend expense ($5.0 million, net of tax) is reported after operating income
on a separate line on the results of operations table shown on the previous
page.
1995 COMPARED WITH 1994
ACQUISITION On January 17, 1995, ReliaStar completed the acquisition of USLICO
Corporation (USLICO). The acquisition was accounted for using the purchase
method of accounting; accordingly, the 1995 results of operations include the
operations of the former USLICO subsidiaries from the date of acquisition. Prior
periods do not include the operating results of USLICO and, therefore, the 1995
operating results are not directly comparable with prior periods.
INDIVIDUAL INSURANCE Pretax operating income increased $62.8 million compared
with 1994. The primary reason for the earnings increase was the additional
pretax operating income from United Services and Bankers Security of
approximately $60.1 million. The 1995 pretax operating income from United
Services and Bankers Security includes pretax losses of $4.2 million from
Bankers Security group life and long term disability business.
Excluding the earnings of United Services and Bankers Security, pretax
operating income of $121.5 million was up 2% compared with 1994. The earnings
increase primarily reflects higher margins due to 12% growth in assets under
management offset by a slight decrease in interest spreads. The average interest
spread of 229 basis points in 1995 compares to 232 basis points in 1994.
Total individual life insurance and annuity sales for 1995 (as measured by
new premiums and deposits) increased 54% compared with 1994 excluding sales of
United Services and Bankers Security in 1994. When sales of United Services and
Bankers Security are included in both 1995 and 1994, the individual life
insurance and annuity sales for 1995 increased 17%. This reflects a 6% increase
in life sales and a 19% increase in annuity sales. Sales of individual fixed
annuities were the primary reason for the sales increase over 1994. Sales of
fixed annuities peaked in the second quarter of 1995 and then declined in the
third and fourth quarters. The decline in fixed annuity sales was in response to
lower market interest rates and reflects an industry-wide trend. Sales of
individual fixed annuities for the fourth quarter of 1995 decreased 16% compared
with either the third quarter of 1995 or the fourth quarter of 1994.
Sales of individual variable annuities decreased 5% compared with 1994,
including sales of United Services and Bankers Security in both years; however,
sales of individual variable annuities in the fourth quarter of 1995 increased
18% and 54% compared with the third quarter of 1995 and the fourth quarter of
1994, respectively.
EMPLOYEE BENEFITS Pretax operating income for the Employee Benefits segment
increased $2.9 million compared with 1994. The increase in pretax income was
primarily due to favorable mortality and higher investment income which, in
total, increased operating income $10.2 million. These favorable impacts were
partially offset by unfavorable morbidity, which decreased pretax income $3.4
million, and by a decrease in operating earnings of $3.6 million in the HMO
operations primarily due to adverse claims experience. The group long-term
disability pretax operating loss was $5.4 million in 1995.
The Company sold its HMO in the fourth quarter of 1995. Proceeds were
insignificant and the sale was break-even on a pretax basis.
LIFE AND HEALTH REINSURANCE Pretax operating income of the Life and Health
Reinsurance segment increased $6.1 million compared with 1994. Income for the
segment was higher than 1994 due primarily to a 14% increase in earned premiums,
increased investment income and a slightly more favorable overall loss ratio as
compared with 1994. Loss ratios improved throughout the segment except long-term
disability and managed care.
PENSION As of December 31, 1995, the amounts of contract liabilities of the
401(k) retirement plan, participating pension and GIC lines of business were
$600.0 million, $539.3 million and $114.6 million, respectively.
Pretax operating income of the Pension segment increased $2.7 million
compared with 1994. Pretax operating income from the 401(k) retirement plan line
of business increased $1.4 million to $2.6 million in 1995. Income in this line
was up primarily due to higher levels of assets under management. Pretax
operating income in the participating pension and GIC lines of business
increased $1.3 million compared with 1994 primarily due to higher interest
margins reflecting a reduction in lost investment income.
CORPORATE AND OTHER The pretax operating loss for Corporate and Other increased
$10.9 million compared with 1994. Operating losses were higher primarily due to
higher levels of interest expense (approximately $12.0 million) due to the debt
assumed from USLICO (subsequently refinanced) and to short-term borrowings to
fund the buyback of common stock completed during 1995. Also, gains on sales of
servicing rights by ReliaStar Mortgage Corporation, the Company's mortgage
banking subsidiary, were approximately $2.7 million lower in 1995 than in 1994.
These unfavorable variances were partially offset by a decrease in losses of $.9
million from Northstar and a decrease in unrecovered Corporate costs of
approximately $3.3 million primarily related to lower benefit costs and
increased investment advisory fees charged to other business segments. Based on
information received in the fourth quarter of 1995, the Company recorded an
additional accrual of $3.5 million for estimated future guaranty association
assessments for known insolvencies.
REALIZED INVESTMENT GAINS AND LOSSES
The sources of pretax net realized investment gains (losses) were as follows:
Year Ended December 31
- -------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Net Gains (Losses) on
Sales of Investments
Fixed Maturity Securities $ 3.2 $ 3.3 $ 2.1
Equity Securities 1.3 12.6 .6
Mortgage Loans .1 (.1) --
Foreclosed Real Estate 1.8 .6 .7
Real Estate 2.7 1.7 (.2)
Other 13.2 2.2 3.2
Provisions for Losses on Investments
Fixed Maturity Securities (2.6) (3.0) (13.9)
Equity Securities -- (.1) (1.0)
Mortgage Loans (3.5) (6.3) (4.9)
Foreclosed Real Estate (3.5) (5.2) (11.8)
Real Estate (1.1) (.8) --
Other (.4) -- (2.2)
- -------------------------------------------------------------------------------
Pretax Realized Investment
Gains (Losses) 11.2 4.9 (27.4)
DAC/PVFP Amortization(1) (3.0) (1.1) 1.6
- -------------------------------------------------------------------------------
Pretax Net Realized
Investment Gains (Losses) $ 8.2 $ 3.8 $(25.8)
- -------------------------------------------------------------------------------
(1) Due to realized investment gains and losses.
Gross realized investment gains and losses from the sale of available-for-sale
fixed maturity securities were as follows:
Year Ended December 31
- -------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------------------
Gross Realized Gains $ 8.7 $ 8.3 $ 5.0
Gross Realized Losses (5.5) (5.0) (2.9)
- -------------------------------------------------------------------------------
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.
INCOME TAXES
The Company's effective tax rate was 34.9% for 1996 and 1995 and 35.4% for 1994
compared to the federal tax rate of 35.0%.
DISCONTINUED OPERATIONS
In connection with the March 1992 sale of Chartwell Re Corporation (Chartwell),
the Company and the acquiring company entered into a separate reciprocal reserve
indemnification agreement with respect to the adequacy of the loss and loss
adjustment expense reserves of Chartwell. The amounts accrued under the
indemnification agreement are presented as discontinued operations in the
Consolidated Statements of Income. On June 28, 1996 a final settlement of the
reserve indemnification agreement was reached. The Company's previous accruals
for this liability were adequate.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES -
RELIASTAR FINANCIAL CORP.
ReliaStar, as parent, is dependent upon dividends, interest and payments for
other charges received from its subsidiaries to pay dividends to shareholders,
service its debt and pay other obligations. The payment of dividends, interest
or other charges by the Insurers is subject to restrictions imposed by
applicable insurance laws and regulations.
The payment of future dividends by ReliaStar will be largely dependent upon
the ability of ReliaStar Life to pay dividends to it. Under Minnesota insurance
law regulating the payment of dividends by ReliaStar Life, any such payment must
be in an amount deemed prudent by ReliaStar Life's board of directors and,
unless otherwise approved by the Commissioner of the Minnesota Department of
Commerce (the Commissioner), must be paid solely from the adjusted earned
surplus of ReliaStar Life. Adjusted earned surplus means the earned surplus as
determined in accordance with statutory accounting practices (unassigned funds)
less 25% of the amount of such earned surplus which is attributable to net
unrealized capital gains. Further, without approval of the Commissioner,
ReliaStar Life may not pay in any calendar year any dividend which, when
combined with other dividends paid within the preceding 12 months, exceeds the
greater of (i) 10% of ReliaStar Life's statutory surplus at the prior year-end
or (ii) 100% of ReliaStar Life's statutory net gain from operations (not
including realized capital gains) for the prior calendar year. For 1997, the
amount of dividends which can be paid by ReliaStar Life without Commissioner
approval is $144.0 million.
ReliaStar has loaned $100.0 million to ReliaStar Life under a surplus note.
The original note, dated April 1, 1989, was issued in connection with ReliaStar
Life's demutualization and was used to offset the surplus reduction related to
the cash distribution to the mutual policyholders in the demutualization. This
original note was replaced by a successor surplus note (the 1994 Note) dated
November 1, 1994. The 1994 Note provides, subject to the regulatory constraints
discussed below, that (i) it is a surplus note which will mature on September
15, 2003 with principal due at maturity, but payable without penalty, in whole
or in part before maturity; (ii) interest is at 6-5/8% payable semi-annually;
and (iii) in the event that ReliaStar Life is in default in the payment of any
required interest or principal, ReliaStar Life cannot pay cash dividends on its
capital stock (all of which is owned directly by ReliaStar). The 1994 Note
further provides that there may be no payment of interest or principal without
the express approval of the Minnesota Department of Commerce.
On December 18, 1995, the Company filed a shelf registration statement with
the Securities and Exchange Commission for the issuance of up to $250.0 million
of debt or equity securities. This filing replaced and superseded the unused
portion ($140.0 million) of a previous shelf registration. On March 29, 1996,
the Company sold $125.0 million of 8.20% TOPrSsm due March 15, 2016. The Company
used the proceeds from this offering to redeem, at par, all of the outstanding
shares of its 10% Senior Cumulative Preferred Stock on July 1, 1996, repay
short-term bank debt and for general corporate purposes.
On February 1, 1995, in a transaction related to the acquisition of USLICO,
the Company issued $110.0 million of 8-5/8% notes (8-5/8% Notes) at a price of
99.274% due February 15, 2005. A substantial portion of the proceeds from the
sale of the 8-5/8% Notes was used to redeem approximately $96.0 million of
convertible subordinated debentures that were assumed in conjunction with the
acquisition of USLICO.
The Company purchased 1,391,500 shares of its common stock at an average
cost of $35.67 under the common stock buyback program announced January 17,
1995. No additional common stock will be repurchased under this program.
The Company maintains a Dividend Reinvestment and Optional Cash Payment
Plan. The plan provides shareholders with an opportunity to reinvest the
dividends on their shares of the common stock of the Company and to make
additional purchases of shares at a discount from the market based price. The
amount of the discount may be changed or eliminated from time to time at the
option of the Company. Pursuant to this program, the Company has issued 122,825,
67,627 and 65,953 shares for an aggregate purchase price of $5.5 million, $2.3
million and $2.0 million during the years ended December 31, 1996, 1995 and
1994, respectively.
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 December 31, 1996, the Insurers' investment portfolio
included $6.7 billion (40% of total assets) of short-term investments and
investment grade marketable bonds. The December 31, 1996 investment portfolio
also included $2.2 billion of investment grade privately placed bonds which,
while not publicly traded, are a source of liquidity.
The policies and annuities issued by the Individual Insurance segment
contain provisions which allow contractholders to withdraw or surrender their
contracts under defined circumstances. These policies and annuities generally
contain provisions which apply penalties or otherwise restrict the ability of
contractholders to make such withdrawals or surrenders. The Insurers closely
monitor the surrender and policy loan activity of their insurance products and
manage the composition of their investment portfolios, including liquidity, in
light of such activity. The Insurers have not experienced any material changes
in withdrawal and surrender activity attributable to their individual insurance
products which would have a material effect on liquidity.
Changes in interest rates may affect the incidence of policy surrenders and
other withdrawals. In addition to the potential impact on liquidity,
unanticipated withdrawals in a changed interest rate environment could adversely
affect earnings if the Company were required to sell investments at reduced
values in order to meet liquidity demands. The Company manages the asset and
liability portfolios in order to minimize the adverse earnings impact of
changing market interest rates. The Company seeks assets which have duration
characteristics similar to the liabilities which they support. The Company also
uses derivative instruments, such as interest rate swaps and futures contracts,
to adjust the duration of the asset and liability portfolios (see
Investments-Derivative Financial Instruments). The Company closely monitors its
derivative usage and has procedures in place to manage counter-party risks and
related exposures.
Statutory surplus is computed according to rules prescribed by the National
Association of Insurance Commissioners (NAIC), as modified by each Insurer's
state of domicile. Statutory accounting rules are different from generally
accepted accounting principles (GAAP) and are intended to reflect a more
conservative perspective by, for example, requiring immediate recognition of
selling expenses.
The Company's long-term growth goals contemplate continued growth in its
insurance businesses. To achieve these growth goals, the Insurers will need to
increase their statutory surplus. Additional statutory surplus may be secured
through various sources such as internally generated statutory earnings or
equity infusions by the Company with funds generated through debt or equity
offerings.
The state of domicile of each of the Insurers imposes minimum risk-based
capital requirements on insurance enterprises that were developed by the NAIC.
The formulas for determining the amount of risk-based capital specify various
weighting factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance is
determined by a ratio of a company's regulatory total adjusted capital, as
defined, to its authorized control level risk-based capital, as defined.
Companies below specific trigger points or ratios are classified within certain
levels, each of which requires specified corrective action. The risk-based
capital ratio of each of the Insurers significantly exceeds the ratios at which
regulatory corrective action would be required.
CONSOLIDATED CASH FLOWS
The Company's cash balance at December 31, 1996 was $32.4 million. During 1996,
net cash provided by operating and financing activities was $361.2 million and
$50.4 million, respectively, which was offset by net cash used by investing
activities of $427.7 million.
The $361.2 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 $50.4 million was
primarily the result of positive cash flow from the net proceeds from the
issuance of the TOPrSs securities offset by the redemption of the 10% Senior
Cumulative Preferred Stock and dividends on common stock.
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 in 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 ReliaStar Life,
United Services and Bankers Security 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:
<TABLE>
<CAPTION>
December 31
- -----------------------------------------------------------------------------------------------------------------------------
(In Millions) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Grade Bonds:
Marketables $ 6,604.9 55.0% $ 6,551.5 55.5%
Private Placements 2,156.2 18.0 2,062.1 17.4
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal 8,761.1 73.0 8,613.6 72.9
Below Investment Grade Bonds:
Marketables 279.7 2.4 198.8 1.7
Private Placements 255.4 2.1 239.3 2.0
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal 535.1 4.5 438.1 3.7
Equity Securities 36.9 .3 35.9 .3
Commercial Mortgages 1,359.6 11.3 1,465.0 12.4
Mortgages, Residential and Other 495.8 4.1 483.4 4.1
Real Estate 77.5 .7 97.9 .8
Short-Term Investments 119.4 1.0 131.5 1.1
Other 610.9 5.1 548.8 4.7
- -----------------------------------------------------------------------------------------------------------------------------
Total Invested Assets $11,996.3 100.0% $11,814.2 100.0%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
FIXED MATURITY SECURITIES
The amounts invested in fixed maturity securities as of December 31, 1996 and
December 31, 1995 were $9.3 and $9.1 billion, respectively. The average
marketable and private placement bond investments in a single corporate issuer
(excluding structured finance securities such as CMOs, mortgage-backed pass
throughs and asset-backed securities) as of December 31, 1996 were $9.4 million
and $7.8 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 December 31, 1996, the weighted average book yields of the Company's
investment grade portfolio and below investment grade portfolio were 7.8% and
9.0%, 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:
<TABLE>
<CAPTION>
(In Millions) December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------
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 $4,738.4 $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 .3 (.3) 18.9 58.7 1.5 (.7) 59.5
5 1.8 .1 (.1) 1.8 35.9 .2 (2.5) 33.6
6 -- -- -- -- 2.5 -- -- 2.5
Redeemable Preferred Stock .5 -- -- .5 1.6 -- (.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>
<TABLE>
<CAPTION>
(In Millions) December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
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 $4,578.5 $309.7 $ (8.3) $4,879.9 $ 810.2 $ 59.9 $ (1.0) $ 869.1
2 1,546.9 126.6 (1.9) 1,671.6 1,113.9 79.4 (.3) 1,193.0
3 175.7 8.4 (2.6) 181.5 143.5 7.2 (3.0) 147.7
4 17.1 .5 (2.2) 15.4 22.3 1.0 (.1) 23.2
5 2.0 .1 (.2) 1.9 72.4 .8 (5.6) 67.6
6 -- -- -- -- .8 -- -- .8
Redeemable Preferred Stock .5 -- -- .5 1.6 -- (.1) 1.5
- -----------------------------------------------------------------------------------------------------------------------------
Total $6,320.7 $445.3 $(15.2) $6,750.8 $2,164.7 $148.3 $(10.1) $2,302.9
- -----------------------------------------------------------------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(In Millions) Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in One Year or Less $ 155.8 $ 157.4 $ 123.1 $ 122.8
Due After One Year Through Five Years 2,967.6 3,057.0 2,497.4 2,634.3
Due After Five Years Through Ten Years 2,622.4 2,723.6 2,750.4 2,965.4
Due After Ten Years 1,055.3 1,108.7 1,056.5 1,172.9
Mortgage-Backed/Structured Finance Securities 2,192.4 2,251.5 2,058.0 2,158.3
- -----------------------------------------------------------------------------------------------------------------------------
Total $8,993.5 $9,298.2 $8,485.4 $9,053.7
- -----------------------------------------------------------------------------------------------------------------------------
</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 the 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 are
diversified by industry (based upon amortized cost) as set forth in the
following table:
<TABLE>
<CAPTION>
December 31
-----------
- -----------------------------------------------------------------------------------------------------------------------------
Marketables Private Placements
- -----------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Materials 6.7% 4.2% 9.5% 7.1%
Consumer Non-Cyclical 6.0 5.8 18.4 18.4
Consumer Products/Services 7.3 6.9 18.4 18.9
Energy 6.2 6.4 6.9 7.1
Financial Services 19.3 17.9 18.6 16.3
Government 3.5 4.4 .8 1.0
Industrial 3.6 6.3 10.3 11.4
Mortgage-Backed/Structured Finance Securities 32.2 31.9 1.2 1.4
Real Estate .3 .1 1.3 1.6
Retailing 2.3 2.6 5.9 6.4
Technology 2.5 2.4 3.2 4.6
Utilities 10.1 11.1 5.5 5.8
- -----------------------------------------------------------------------------------------------------------------------------
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 December 31,
1996. The largest investment in below investment grade bonds of any one industry
grouping was approximately 1.8% of invested assets at December 31, 1996.
Concentrations of the portfolio in below investment grade bonds are regularly
analyzed and adjusted as appropriate.
MORTGAGE-BACKED SECURITIES
The Company's investment policy permits the acquisition of mortgage-backed
securities and collateralized mortgage obligations (collectively referred to as
MBS securities) provided that the Company's aggregate investment in MBS
securities shall not exceed 50% of its statutory assets and the Company shall
not acquire any interests in residual, interest only, principal only or inverse
floater tranches of MBS securities. The Company's investment strategy has been
to invest primarily in actively traded MBS securities which are structured to
reduce prepayment risk as compared to direct investments in the underlying
mortgage collateral. The amortized cost and estimated fair value of investments
in MBS securities categorized by interest rates on the underlying collateral
were comprised of the following:
December 31, 1996
- -------------------------------------------------------------------------------
Amortized Fair
(In Millions) Cost Value
- -------------------------------------------------------------------------------
Adjustable Rate Pass Through MBS Securities:
Below 6% $ 45.1 $ 45.2
6% - 7% 109.9 111.0
7% - 8% 350.5 351.1
Above 8% 38.1 38.5
Fixed Rate Pass Through MBS Securities:
Below 9% 10.4 11.0
Above 9% 9.3 10.0
Planned Amortization Class MBS Securities:
Below 7% 313.0 322.0
7% - 8% 346.1 361.4
8% - 9% 115.5 121.2
Above 9% 18.6 19.1
Other MBS Securities:
Below 7% 204.8 211.0
7% - 8% 91.9 98.3
8% - 9% 20.0 21.4
Above 9% 12.6 13.1
- -------------------------------------------------------------------------------
Total MBS Securities $1,685.8 $1,734.3
- -------------------------------------------------------------------------------
The Company invests in asset-backed securities in addition to the MBS securities
described above. As of December 31, 1996, the Insurers held asset-backed
securities with an amortized cost of $506.6 million and a fair value of $517.2
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
December 31, 1996 being approximately $2.1 million.
The commercial mortgage loan portfolio diversification by property type and
geographic region of the country was as follows:
Property Type December 31
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
Office 24.6% 30.0%
Industrial 23.5 26.2
Special Purpose 17.3 17.1
Retail 16.1 12.8
Apartment 15.7 9.4
Hotel/Motel 2.8 4.5
- -------------------------------------------------------------------------------
Total 100.0% 100.0%
- -------------------------------------------------------------------------------
Geographic Region December 31
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
Midwest 31.6% 32.5%
Pacific 30.1 30.7
Southeast 18.2 18.9
Northeast 8.7 5.9
Mountain 6.5 7.1
Southwest 4.9 4.9
- -------------------------------------------------------------------------------
Total 100.0% 100.0%
- --------------------------------------------------------------------------------
The weighted average yield of the commercial mortgage loan portfolio as of
December 31, 1996 was 8.7%. The weighted average maturity of these loans was 6.4
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 December 31, 1996
and 1995, the Insurers held $493.9 and $480.8 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 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:
December 31
- -------------------------------------------------------------------------------
(In Millions) 1996 1995
- -------------------------------------------------------------------------------
Unrealized Investment Gains $310.5 $ 569.9
DAC/PVFP Adjustment (93.8) (189.4)
Deferred Income Taxes (75.9) (133.7)
- -------------------------------------------------------------------------------
Net Unrealized Investment Gains $140.8 $ 246.8
- -------------------------------------------------------------------------------
Changes in net unrealized investment gains or losses are primarily the result of
fluctuations in market interest rates which impact the market value of fixed
interest rate securities. The change in market value of the Company's fixed
maturity securities is not expected to have a significant effect on results of
operations or liquidity because: 1) the Company has the present intent and
practice to hold most of its available-for-sale fixed maturity securities to
maturity and 2) the Company's asset/liability management activity is designed to
monitor and adjust for the effects of changes in market interest rates.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has an established program prescribing the use of derivatives in its
asset/liability management activity. The investment policy of each of the
Insurers expressly precludes the use of such instruments for speculative
purposes. The policy details permissible uses and instruments and contains
accounting and management controls designed to assure compliance with these
policies. The Company is not a party to leveraged derivatives.
The insurance liabilities of the Company are sensitive to changes in market
interest rates. The Company has established procedures for evaluating these
liabilities and structures investment asset portfolios with compatible
characteristics. Investment assets are selected which provide yield, cash flow
and interest rate sensitivities appropriate to support the insurance products.
The Company uses interest rate swaps and interest rate futures as part of
this asset/liability management program. The Company has acquired a significant
amount of certain shorter duration investments, such as floating rate or
adjustable rate investments. Acquisition of these assets shortens the duration
of an asset portfolio. The Company uses interest rate swaps to extend the
duration of these portfolios as an alternative to purchasing longer duration
investments.
The Company uses duration analysis to estimate the amount of sensitivity to
market interest rate changes. Duration of a bond or portfolio can be thought of
as the life in years of a notional zero-coupon bond whose fair value would
change by the same amount in response to any change in market interest rates.
The portfolio duration includes the duration impact added by interest rate swaps
and interest rate futures contracts. Target durations are determined by the
Company based upon the subjective evaluation of a number of characteristics of
the liabilities, including such factors as the ability of the Company to modify
interest crediting rates, the presence and magnitude of surrender charges,
historical and projected lapse experience, the level of market interest rates
and competition.
The following table sets forth the asset duration, portfolio duration and
target duration for the investment portfolio of each business segment:
December 31, 1996
- -------------------------------------------------------------------------------
Asset Portfolio Target
(In Years) Duration Duration Duration
- -------------------------------------------------------------------------------
Individual Insurance 3.9 4.1 3.5-5.0
Employee Benefits 3.4 3.8 3.5-8.0
Life and Health Reinsurance 4.3 4.4 3.5-8.0
Pension 2.3 3.0 2.5-3.5
- -------------------------------------------------------------------------------
At December 31, 1996, the Company had 69 interest rate swap contracts in effect
with a notional amount of $1.11 billion. At December 31, 1995, the Company had
73 interest rate swap contracts in effect with a notional amount of $1.22
billion. During 1996, 4 new interest rate swap contracts were entered into with
a notional amount of $70.0 million and 8 interest rate swap contracts matured
with a notional amount of $183.0 million. There were no terminations of interest
rate swap contracts prior to maturity during 1996. The Company had no deferred
gains or losses at December 31, 1996 related to interest rate swap contracts
terminated early. The estimated fair value of the interest rate swap contracts
in effect at December 31, 1996 was an unrealized gain of $10.8 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 December 31, 1996.
Range of
Notional Fixed Rates
(In Millions) Amount Received
- --------------------------------------------------------------------------------
Maturing in One Year
or Less $ 87.0 6.9-9.3%
Maturing After One Year
Through Three Years 422.0 5.2-8.7
Maturing After Three Years
Through Five Years 510.5 5.3-8.1
Maturing After Five Years
Through Seven Years 90.0 6.3-8.2
- --------------------------------------------------------------------------------
Total Notional Amount $1,109.5
- --------------------------------------------------------------------------------
The Company closely monitors the effect of the swap position on reported income.
The Company's investment portfolio includes a substantial amount of floating
rate investments. Changes in market interest rates have an opposite (and
approximately offsetting) effect on the reported income from the swap portfolio.
Accordingly, the reported investment income (or losses) attributable to the
Company's swap position will be approximately offset by the changed investment
income of the Company's floating or adjustable rate investments in a changing
rate environment. At December 31, 1996 the Company held $1.28 billion of
adjustable rate invested assets, short-term investments and cash.
The Company also enters into futures contracts, which are contracts for
delayed delivery of securities or money market instruments in which the seller
agrees to make delivery at a specified future date of a U.S. Treasury Bond at a
specified price or yield. These contracts are entered into to manage interest
rate risk of the Company's GIC operations. The contracts that the Company has
entered into are exchange traded and marked to market daily. The contract value
of these futures contracts at December 31, 1996 was $76.6 million.
PROBLEM INVESTMENTS
The Company classifies invested assets of the Insurers as problem investments
where: (i) an asset is delinquent in a required payment of principal or
interest; (ii) an asset is the subject of a foreclosure action or the borrower
is in bankruptcy; (iii) a loan has been restructured; or (iv) a loan has been
foreclosed and the collateral is owned (Problem Investments). The Company
reports a mortgage loan as delinquent when a required payment of principal or
interest is 60 days past due. Fixed maturity securities are reported as
delinquent following the contractual grace period allowed for any required
payment of principal or interest. The Company generally considers a loan as
restructured when one or more of the following terms is changed for the benefit
of the borrower: (i) interest rate for a specified period of time or for the
life of the loan; (ii) maturity date; (iii) the principal face amount or timing
of principal repayments on a contingent or absolute basis; or (iv) amount or
timing of payment of accrued interest.
The amortized cost of Problem Investments, net of related write-offs and
allowances and non-recourse debt, was as follows:
December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
Fixed Maturity Securities(1) $15.5 $ 23.9
Commercial Mortgage Loans 22.4 21.9
Residential and Other Mortgage Loans 4.2 8.1
Investment Real Estate(2) 12.3 14.9
Foreclosed Real Estate 37.4 50.2
- --------------------------------------------------------------------------------
Total $91.8 $119.0
- --------------------------------------------------------------------------------
(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 Consolidated Balance Sheets were as follows:
December 31
- -------------------------------------------------------------------------------
(In Millions) 1996 1995
- -------------------------------------------------------------------------------
Fixed Maturity Securities $ 8.3 $ 8.0
Commercial Mortgage Loans 10.5 10.9
Residential and Other Mortgage Loans .7 .4
Investment Real Estate -- 1.0
Foreclosed Real Estate 24.7 29.3
- -------------------------------------------------------------------------------
The Company establishes the carrying value of all Problem Investments. For
problem marketable securities, the fair value is the quoted market value. For
problem private placement debt securities, the fair value is determined through
consideration of factors such as the net worth of the borrower, the value of
collateral, the capital structure of the borrower, the presence of guarantees
and the Company's evaluation of the borrower's ability to compete in the
relevant market.
For problem and potential problem securities, the Company determines
whether a decline in fair value below the amortized cost is other than
temporary. If the decline in fair value is determined to be other than
temporary, the Company writes down the cost basis to fair value and the amount
of the write-down is recorded as a realized loss. Subsequent changes in the fair
value of problem available-for-sale securities which are determined to be
temporary are reflected directly in equity as unrealized investment gains or
losses.
Fair value for problem real estate and problem mortgage loans is determined
taking into consideration one or more of the following factors, depending on the
circumstances for each property, including: (i) property valuation techniques
utilizing discounted cash flows at the time of stabilization including capital
expenditures and stabilization costs; (ii) sales of comparable properties; (iii)
geographic location of the property and related market conditions; and (iv)
disposition costs. In many instances, there is not an active market for such
properties. Therefore, the fair value determined by the Company may be greater
than the price which may be realized if the Company were forced to liquidate
such properties on an immediate sale basis. If fair value of a problem mortgage
loan or real estate investment is less than the carrying value, the Company
records a write-off or an increase in the allowance for uncollectible amounts.
Foreclosed properties are actively managed by the Company in order to maximize
net realizable value. The Company has the intent and ability to hold these
assets until appropriate sales opportunities arise.
The following tables set forth the distribution of problem commercial
mortgage loans by property type and geographic region:
Property Type December 31
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Office 67.9% 72.8%
Retail 15.4 6.1
Industrial 13.2 18.1
Hotel/Motel 3.5 3.0
- --------------------------------------------------------------------------------
Total 100.0% 100.0%
- --------------------------------------------------------------------------------
Geographic Region December 31
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Midwest 51.5% 39.2%
Southeast 21.0 28.4
Pacific 17.2 28.0
Southwest 6.3 3.4
Northeast 2.7 --
Mountain 1.3 1.0
- --------------------------------------------------------------------------------
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 $10.3 million and $12.4 million, respectively, at December 31, 1996.
INFLATION
The primary direct effect on the Company of inflation is the increase in
operating expenses. A large portion of the Company's operating expenses consists
of salaries which are subject to wage increases at least partly affected by the
rate of inflation. The Company attempts to minimize the impact of inflation on
operating expenses through programs to improve productivity.
The rate of inflation also has an indirect effect on the Company. To the
extent that the government's policies to control the level of inflation results
in changes in interest rates, the Company's new sales of insurance products and
investment income are affected. Changes in the level of interest rates also have
an effect on interest spreads, as investment earnings are reinvested.
KNOWN TRENDS AND UNCERTAINTIES WHICH MAY AFFECT FUTURE REPORTED RESULTS
SUBSEQUENT EVENT
On February 23, 1997, the Company signed a definitive agreement to acquire and
merge Security-Connecticut Corporation (SRC) into ReliaStar. SRC is a holding
company with two primary subsidiaries: Security-Connecticut Life Insurance
Company of Avon, Connecticut, and Lincoln Security Life Insurance Company of
Brewster, New York. As of December 31, 1996, SRC had assets of $2.3 billion and
total shareholders' equity of $355 million. The transaction will be effected
through a stock-for-stock exchange. The exchange ratio will be determined based
upon the average price of the Company's common stock during the twenty-day
trading period concluding six days prior to the closing of the transaction and
is subject to adjustments based upon changes in the market value of the
Company's common stock. The definitive agreement also includes a breakup
provision that would result in a payment of $8 million to ReliaStar under
certain circumstances if the transaction is not completed. The acquisition will
be accounted for as a purchase.
Based on the closing price of $59.25 for ReliaStar common stock on February
21, 1997, SRC shareholders would receive .7932 of a share of ReliaStar common
stock for each share of SRC common stock. Assuming the February 21 closing
price, ReliaStar would issue approximately seven million additional shares of
ReliaStar common stock, and the purchase price would be approximately $417
million, including transaction costs. Completion of the merger is expected in
the second or third quarter of 1997, and is subject to normal closing
conditions, including approval by SRC shareholders and various regulatory
approvals.
HEALTH CARE MARKETPLACE ENVIRONMENT
The marketplace 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. Excluding the earnings of the United Services and Bankers Security
operations acquired in 1995, the health insurance and managed care businesses
have, over the past three years, on average, represented approximately 8% of the
Company's after tax earnings.
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. The Company is not aware of any actions
or allegations which should reasonably give rise to any punitive damages
liability. However, it is possible that in the future the Company could be
subjected to such a liability in an amount which could be material.
IMPACT OF ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED IN THE FUTURE
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which 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. This pronouncement is
effective for certain transactions occurring after December 31, 1996 and the
Company will adopt the provisions of this statement which have not been deferred
by SFAS No. 127 in the first quarter of 1997. In December 1996, FASB issued SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125." The effective date for transfers of financial assets covered by SFAS
No. 127 is deferred for one year to transactions occurring after December 31,
1997. The Company will adopt the deferred provisions of SFAS No. 125 in the
first quarter of 1998. The Company has not yet completed its analysis of the
impact, if any, to future financial results as a result of applying SFAS No. 125
to future transactions.
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.
CONSOLIDATED BALANCE SHEETS
RELIASTAR FINANCIAL CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
- -----------------------------------------------------------------------------------------------------------------------------
(In Millions) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Fixed Maturity Securities (Amortized Cost: 1996, $8,993.5; 1995, $8,485.4) $ 9,298.2 $ 9,053.7
Equity Securities (Cost: 1996, $32.0; 1995, $34.8) 36.9 35.9
Mortgage Loans on Real Estate 1,855.4 1,948.4
Real Estate and Leases 77.5 97.9
Policy Loans 549.0 499.8
Other Invested Assets 59.9 47.0
Short-Term Investments 119.4 131.5
- ---------------------------------------------------------------------------------------------------------------------------00
Total Investments 11,996.3 11,814.2
- -----------------------------------------------------------------------------------------------------------------------------
Cash 32.4 48.5
Accounts and Notes Receivable 171.0 165.3
Reinsurance Receivable 199.0 162.9
Deferred Policy Acquisition Costs 1,006.0 860.7
Present Value of Future Profits 220.2 192.0
Property and Equipment, Net 121.3 123.2
Accrued Investment Income 164.7 164.7
Other Assets 383.9 299.1
Participation Fund Account Assets 316.2 319.6
Assets Held in Separate Accounts 2,096.0 1,369.0
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $16,707.0 $15,519.2
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities
Future Policy and Contract Benefits $11,332.2 $11,033.2
Pending Policy Claims 287.6 257.7
Other Policyholder Funds 190.6 174.4
Notes and Mortgages Payable 407.5 422.3
Income Taxes 133.8 170.2
Other Liabilities 410.0 358.8
Participation Fund Account Liabilities 316.2 319.6
Liabilities Related to Separate Accounts 2,090.5 1,362.9
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 15,168.4 14,099.1
- -----------------------------------------------------------------------------------------------------------------------------
Company-Obligated Mandatorily Redeemable Preferred
Securities Issued by a Consolidated Subsidiary 120.9 --
Shareholders' Equity
10% Senior Cumulative Preferred Stock -- 63.2
ESOP Convertible Preferred Stock -- 28.9
Note Receivable from ESOP (21.6) (23.4)
Common Stock (Shares Issued: 1996, 42.4; 1995, 39.8) 572.3 566.5
Unamortized Restricted Stock Awards (1.8) (3.0)
Net Unrealized Investment Gains 140.8 246.8
Retained Earnings 794.2 647.2
Less Treasury Common Stock, at Cost (Shares Held: 1996, 2.4; 1995, 3.5) (66.2) (106.1)
- -----------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 1,417.7 1,420.1
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $16,707.0 $15,519.2
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
RELIASTAR FINANCIAL CORP. AND SUBSIDIARIES
Year Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------
(In Millions, Except Per Share Data) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Premiums $ 836.9 $ 851.5 $ 726.9
Net Investment Income 940.7 891.1 618.3
Realized Investment Gains (Losses) 11.2 4.9 (27.4)
Policy and Contract Charges 245.9 218.5 136.2
Other Income 155.9 124.4 116.8
- ------------------------------------------------------------------------------------------------------------------------------
Total 2,190.6 2,090.4 1,570.8
- ------------------------------------------------------------------------------------------------------------------------------
Benefits and Expenses
Benefits to Policyholders 1,287.7 1,321.2 1,025.3
Sales and Operating Expenses 437.4 368.5 289.8
Amortization of Deferred Policy Acquisition Costs and
Present Value of Future Profits 113.0 90.5 56.7
Interest Expense 28.7 27.0 13.4
Dividends and Experience Refunds to Policyholders 19.7 23.4 19.0
- ------------------------------------------------------------------------------------------------------------------------------
Total 1,886.5 1,830.6 1,404.2
- ------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Income Taxes and
Dividends on Preferred Securities of Subsidiary 304.1 259.8 166.6
Income Tax Expense 106.1 90.7 58.9
Dividends on Preferred Securities of Subsidiary, Net of Tax 5.0 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Income From Continuing Operations 193.0 169.1 107.7
- ------------------------------------------------------------------------------------------------------------------------------
Loss from Discontinued Operations, Net of Tax -- (5.4) (2.6)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 193.0 $ 163.7 $ 105.1
- ------------------------------------------------------------------------------------------------------------------------------
Per Common Share
Primary
Income from Continuing Operations $ 5.03 $ 4.36 $ 3.30
Loss from Discontinued Operations -- (.15) (.09)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 5.03 $ 4.21 $ 3.21
- ------------------------------------------------------------------------------------------------------------------------------
Fully Diluted
Income from Continuing Operations $ 4.73 $ 4.10 $ 3.08
Loss from Discontinued Operations -- (.14) (.08)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 4.73 $ 3.96 $ 3.00
- ------------------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 187.8 $ 155.4 $ 96.8
- ------------------------------------------------------------------------------------------------------------------------------
Weighted Average Shares
Common and Common Equivalent Shares (Primary) 37.3 36.9 30.1
Common Shares Assuming Maximum Dilution (Fully Diluted) 40.1 39.7 32.8
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
RELIASTAR FINANCIAL CORP. AND SUBSIDIARIES
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------
(In Millions, Except Per Share Data) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10% Senior Cumulative Preferred Stock
Beginning of Year $ 63.2 $ 63.2 $ 63.2
Redeemed (63.2) -- --
- -----------------------------------------------------------------------------------------------------------------------------
End of Year -- 63.2 63.2
- -----------------------------------------------------------------------------------------------------------------------------
ESOP Convertible Preferred Stock
Beginning of Year 28.9 29.3 29.6
Conversion to Common Stock (28.7) -- --
Redeemed (.2) (.4) (.3)
- -----------------------------------------------------------------------------------------------------------------------------
End of Year -- 28.9 29.3
- -----------------------------------------------------------------------------------------------------------------------------
Note Receivable From ESOP
Beginning of Year (23.4) (24.6) (26.1)
Repayments, Accrued or Paid 1.8 1.2 1.5
- -----------------------------------------------------------------------------------------------------------------------------
End of Year (21.6) (23.4) (24.6)
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock
Beginning of Year 566.5 293.4 289.0
Conversion of ESOP Convertible Preferred Stock 28.7 -- --
Issued for Acquisition -- 265.9 --
Gain (Loss) on Treasury Shares Reissued for Benefit Plans (4.1) (3.6) 3.7
Gain (Loss) on Treasury Shares Reissued for Acquisitions (23.9) 10.1 --
Other 5.1 .7 .7
- -----------------------------------------------------------------------------------------------------------------------------
End of Year 572.3 566.5 293.4
- -----------------------------------------------------------------------------------------------------------------------------
Unamortized Restricted Stock Awards
Beginning of Year (3.0) (2.1) (1.2)
Awards, Net (.1) (2.1) (1.5)
Amortization of Restricted Stock Awards 1.3 1.2 .6
- -----------------------------------------------------------------------------------------------------------------------------
End of Year (1.8) (3.0) (2.1)
- -----------------------------------------------------------------------------------------------------------------------------
Net Unrealized Investment Gains (Losses)
Beginning of Year 246.8 (79.4) 1.8
Cumulative Effect of Accounting Change - Securities -- -- 85.3
Change for the Year (106.0) 326.2 (166.5)
- -----------------------------------------------------------------------------------------------------------------------------
End of Year 140.8 246.8 (79.4)
- -----------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Beginning of Year 647.2 528.4 458.2
Net Income 193.0 163.7 105.1
Dividends to Shareholders
10% Senior Cumulative Preferred Stock
(Per Share: 1996, $5.00; 1995 and 1994, $10.00) (3.2) (6.3) (6.3)
ESOP Convertible Preferred Stock ($2.19 Per Share) (2.8) (2.8) (2.9)
Common Stock (Per Share: 1996, $1.09; 1995, $.975; 1994, $.875) (40.0) (35.8) (25.9)
Tax Benefit on ESOP Convertible Preferred Stock Dividend .8 .8 .9
Redemption of ESOP Convertible Preferred Stock (.8) (.8) (.7)
- -----------------------------------------------------------------------------------------------------------------------------
End of Year 794.2 647.2 528.4
- -----------------------------------------------------------------------------------------------------------------------------
Treasury Common Stock
Beginning of Year (106.1) (9.7) (13.9)
Acquired with Acquisition -- (72.7) --
Acquired, Other (5.6) (52.2) (.9)
Reissued for Acquisitions 25.2 9.7 --
Reissued, Other 20.3 18.8 5.1
End of Year (66.2) (106.1) (9.7)
- -----------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $1,417.7 $1,420.1 $ 798.5
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
RELIASTAR FINANCIAL CORP. AND SUBSIDIARIES
Year Ended December 31
- -----------------------------------------------------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $ 193.0 $ 163.7 $ 105.1
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Interest Credited to Insurance Contracts 500.1 500.1 364.7
Future Policy Benefits (238.9) (117.5) (60.1)
Capitalization of Policy Acquisition Costs (196.2) (176.6) (119.0)
Amortization of Deferred Policy Acquisition Costs and
Present Value of Future Profits 113.0 90.5 56.7
Deferred Income Taxes 20.6 13.1 13.9
Net Change in Receivables and Payables 63.8 2.5 51.7
Other Assets (84.8) (97.4) (1.4)
Realized Investment (Gains) Losses, Net (11.2) (4.9) 27.4
Other 1.8 1.7 15.8
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 361.2 375.2 454.8
- -----------------------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from Sales of Fixed Maturity Securities 204.1 190.5 158.5
Proceeds from Maturities or Repayment of Fixed Maturity Securities
Available-for-Sale 882.3 329.9 177.2
Held-to-Maturity -- 415.6 390.2
Cost of Fixed Maturity Securities Acquired
Available-for-Sale (1,594.7) (972.5) (720.7)
Held-to-Maturity -- (519.8) (617.5)
Sales (Purchases) of Equity Securities, Net 5.6 31.0 (9.0)
Proceeds of Mortgage Loans Sold, Matured or Repaid 483.8 314.2 358.2
Cost of Mortgage Loans Acquired (407.3) (385.2) (149.4)
Sales of Real Estate and Leases, Net 35.7 28.8 14.5
Policy Loans Issued, Net (49.2) (63.0) (49.4)
Sales (Purchases) of Other Invested Assets, Net (.1) 39.0 19.6
Sales (Purchases) of Short-Term Investments, Net 12.1 (50.2) 13.0
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (427.7) (641.7) (414.8)
- -----------------------------------------------------------------------------------------------------------------------------
Financing Activities
Deposits to Insurance Contracts 1,173.3 1,265.6 862.6
Maturities and Withdrawals from Insurance Contracts (1,133.0) (1,015.3) (849.7)
Redemption of 10% Senior Cumulative Preferred Stock (63.2) -- --
Net Proceeds from Issuance of Trust-Originated Preferred Securities 120.8 -- --
Increase in Notes and Mortgages Payable 51.5 238.4 --
Repayment of Notes and Mortgages Payable (66.3) (106.7) (35.8)
Payments Received on Note Receivable from ESOP .4 .9 .7
Issuance of Common Stock Under Stock Option and Other Plans 18.5 8.9 4.5
Dividends on 10% Senior Cumulative Preferred Stock (3.2) (6.3) (6.3)
Dividends on ESOP Convertible Preferred Stock (2.8) (2.8) (2.9)
Dividends on Common Stock (40.0) (35.8) (25.9)
Acquisition of Treasury Common Stock (5.6) (52.2) (.9)
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 50.4 294.7 (53.7)
- -----------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash (16.1) 28.2 (13.7)
Cash at Beginning of Year 48.5 20.3 34.0
- -----------------------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 32.4 $ 48.5 $ 20.3
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RELIASTAR FINANCIAL CORP. AND SUBSIDIARIES
NOTE 1.
- --------------------------------------------------------------------------------
CHANGES IN ACCOUNTING PRINCIPLES
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF
Effective January 1, 1996, ReliaStar Financial Corp. (ReliaStar or the Company)
adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. This Statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that an entity expects to hold and use should be based on the fair
value of the asset. Long-lived assets and certain identifiable intangibles to be
disposed of must be reported at the lower of carrying amount or fair value less
cost to sell. The adoption of this standard did not have a significant effect on
the financial results of the Company.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply Accounting Principles Board (APB) Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and directors.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures." SFAS No. 114 and
SFAS No. 118 require a company to measure impairment based upon the present
value of expected future cash flows discounted at the loan's effective interest
rate, the loan's observable market price or the fair value of the collateral if
the loan is collateral dependent. If foreclosure is probable, the measurement of
impairment must be based upon the fair value of the collateral. The adoption of
these standards did not have a significant effect on the financial results of
the Company.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 requires a
company to classify its securities into categories based upon the company's
intent relative to the eventual disposition of the securities.
SFAS No. 115 establishes three categories of securities. The first
category, held-to-maturity securities, is composed of debt securities which a
company has the positive intent and ability to hold to maturity. These
securities are carried at amortized cost. The second category,
available-for-sale securities, may be sold to address the liquidity and other
needs of a company. Debt and equity securities classified as available-for-sale
are carried at fair value on the balance sheet with unrealized investment gains
and losses excluded from income and reported as a separate component of
shareholders' equity. The third category, trading securities, is for debt and
equity securities acquired for the purpose of selling them in the near term. The
Company has classified all of its securities as available-for-sale.
NOTE 2.
- --------------------------------------------------------------------------------
NATURE OF OPERATIONS AND
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is principally engaged in the business of providing life insurance
and related financial services products. Through its subsidiaries, the Company
issues and distributes individual life insurance and annuities; group life and
health insurance; life and health reinsurance; and markets and manages mutual
funds. The Company operates primarily in the United States and, through its
subsidiaries, is authorized to do business in all 50 states.
The Company operates in four business segments: Individual Insurance,
Employee Benefits, Life and Health Reinsurance and Pension. The business
operations of these segments are conducted through the Company's four life
insurance subsidiaries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. References to the Company relate to ReliaStar and all
subsidiaries. These consolidated financial statements exclude the effects of all
material intercompany transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENTS
Fixed maturity securities (bonds and redeemable preferred stocks) are classified
as available-for-sale and are valued at fair value.
Equity securities (common stocks and nonredeemable preferred stocks) are
valued at fair value.
Mortgage loans on real estate are carried at amortized cost less an
impairment allowance for estimated uncollectible amounts.
Investment real estate owned directly by the Company is carried at cost
less accumulated depreciation and allowances for estimated losses. Investments
in real estate joint ventures are accounted for using the equity method. Real
estate acquired through foreclosure is carried at the lower of fair value less
estimated costs to sell or cost.
Short-term investments are carried at amortized cost.
Unrealized investment gains and losses of equity securities and fixed
maturity securities classified as available-for-sale, net of related deferred
policy acquisition costs (DAC), present value of future profits (PVFP) and tax
effects, are accounted for as a direct increase or decrease in shareholders'
equity.
Realized investment gains and losses enter into the determination of net
income. Realized investment gains and losses on sales of securities are
determined on the specific identification method. Write-offs of investments that
decline in value below cost on other than a temporary basis and the change in
the allowance for mortgage loans and wholly owned real estate are included with
realized investment gains and losses in the Consolidated Statements of Income.
The Company records write-offs or allowances for its investments based upon
an evaluation of specific problem investments. The Company reviews, on a
continual basis, all invested assets (including marketable bonds, private
placements, mortgage loans and real estate investments) to identify investments
where the Company has credit concerns. Investments with credit concerns include
those the Company has identified as problem investments, which are issues
delinquent in a required payment of principal or interest, issues in bankruptcy
or foreclosure and restructured or foreclosed assets. The Company also
identifies investments as potential problem investments, which are investments
where the Company has serious doubts as to the ability of the borrowers to
comply with the present loan repayment terms.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, net of accumulated depreciation of
$94.9 million and $79.9 million at December 31, 1996 and 1995, respectively. The
Company provides for depreciation of property and equipment using straight-line
and accelerated methods over the estimated useful lives of the assets. Buildings
are generally depreciated over 35 to 50 years. Depreciation expense for 1996,
1995 and 1994 amounted to $6.6 million, $9.3 million and $8.4 million,
respectively.
PARTICIPATION FUND ACCOUNT
On January 3, 1989, the Commissioner of Commerce of the State of Minnesota
approved a Plan of Conversion and Reorganization (the Plan) which provided,
among other things, for the conversion of ReliaStar Life Insurance Company
(ReliaStar Life), formerly known as Northwestern National Life Insurance
Company, from a combined stock and mutual insurance company to a stock life
insurance company.
The Plan provided for the establishment of a Participation Fund Account
(PFA) for the benefit of certain participating individual life insurance
policies and annuities issued by ReliaStar Life prior to the effective date of
the Plan. Under the terms of the PFA, the insurance liabilities and assets with
respect to such policies are segregated in the accounting records of ReliaStar
Life to assure the continuation of current policyholder dividend practices.
Assets and liabilities of the PFA are presented in accordance with statutory
accounting practices. Earnings derived from the operation of the PFA will inure
solely to the benefit of the policies covered by the PFA and no benefit will
inure to the Company. Accordingly, results of operations for the PFA are
excluded from the Company's Consolidated Statements of Income. In the event that
the assets of the PFA are insufficient to provide the contractual benefits
guaranteed by the affected policies, ReliaStar Life must provide such
contractual benefits from its general assets.
SEPARATE ACCOUNTS
The Company operates separate accounts. The assets (principally investments) and
liabilities (principally to contractholders) of each account are clearly
identifiable and distinguishable from other assets and liabilities of the
Company. Assets are carried at fair value.
PREMIUM REVENUE AND BENEFITS TO POLICYHOLDERS
RECOGNITION OF TRADITIONAL LIFE, GROUP AND ANNUITY PREMIUM REVENUE AND BENEFITS
TO POLICYHOLDERS Traditional life insurance products include those products with
fixed and guaranteed premiums and benefits, and consist principally of whole
life insurance policies and certain annuities with life contingencies (immediate
annuities). Life insurance premiums and immediate annuity premiums are
recognized as premium revenue when due. Group insurance premiums are recognized
as premium revenue over the time period to which the premiums relate. Benefits
and expenses are associated with earned premiums so as to result in recognition
of profits over the life of the contracts. This association is accomplished by
means of the provision for liabilities for future policy benefits and the
amortization of DAC and PVFP.
RECOGNITION OF UNIVERSAL LIFE-TYPE CONTRACTS REVENUE AND BENEFITS TO
POLICYHOLDERS Universal life-type policies are insurance contracts with terms
that are not fixed and guaranteed. The terms that may be changed could include
one or more of the amounts assessed the policyholder, premiums paid by the
policyholder or interest accrued to policyholder balances. Amounts received as
payments for such contracts are not reported as premium revenues.
Revenues for universal life-type policies consist of charges assessed
against policy account values for deferred policy loading and the cost of
insurance and policy administration. Policy benefits and claims that are charged
to expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.
RECOGNITION OF INVESTMENT CONTRACT REVENUE AND BENEFITS TO POLICYHOLDERS
Contracts that do not subject the Company to risks arising from policyholder
mortality or morbidity are referred to as investment contracts. Guaranteed
Investment Contracts (GICs) and certain deferred annuities are considered
investment contracts. Amounts received as payments for such contracts are not
reported as premium revenues.
Revenues for investment products consist of investment income and policy
administration charges. Contract benefits that are charged to expense include
benefit claims incurred in the period in excess of related contract balances,
and interest credited to contract balances.
POLICY ACQUISITION COSTS
Those costs of acquiring new business, which vary with and are primarily related
to the production of new business, have been deferred to the extent that such
costs are deemed recoverable. Such costs include commissions, certain costs of
policy issuance and underwriting and certain variable agency expenses.
Costs deferred related to traditional life insurance are amortized over the
premium paying period of the related policies, in proportion to the ratio of
annual premium revenues to total anticipated premium revenues. Such anticipated
premium revenues are estimated using the same assumptions used for computing
liabilities for future policy benefits.
Costs deferred related to universal life-type policies and investment
contracts are amortized over the lives of the policies, in relation to the
present value of estimated gross profits from mortality, investment, surrender
and expense margins.
PRESENT VALUE OF FUTURE PROFITS
The present value of future profits reflects the estimated fair value of
acquired insurance business in force and represents the portion of the
acquisition cost that was allocated to the value of future cash flows from
insurance contracts existing at the date of acquisition. Such value is the
present value of the actuarially determined projected net cash flows from the
acquired insurance contracts. The weighted average discount rate used to
determine such value was approximately 15%.
An analysis of the PVFP asset account is presented below:
Year Ended December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
Balance, Beginning of Year $192.0 --
Additions Arising from Acquisitions
of Life Insurance Companies -- $300.0
Imputed Interest 16.4 17.6
Amortization (37.5) (32.6)
Impact of Net Unrealized Investment
Gains and Losses 49.3 (93.0)
- --------------------------------------------------------------------------------
Balance, End of Year $220.2 $192.0
- --------------------------------------------------------------------------------
Based on current conditions and assumptions as to future events on acquired
policies in force, the Company expects that the net amortization of the initial
PVFP balance will be between 5% and 6% in each of the years 1997 through 2001.
The interest rates used to determine the amount of imputed interest on the
unamortized PVFP balance ranged from 5% to 8%.
GOODWILL
Goodwill is the excess of the amount paid to acquire a company over the fair
value of the net assets acquired and is amortized on a straight-line basis over
15 to 40 years. The carrying value of goodwill is monitored for impairment of
value based on the Company's estimate of future earnings. The carrying value of
goodwill is reduced and a charge to income is recorded when an impairment in
value is identified. No such goodwill impairment charges have been recorded.
FUTURE POLICY AND CONTRACT BENEFITS
Liabilities for future policy benefits for traditional life contracts are
calculated using the net level premium method and assumptions as to investment
yields, mortality, withdrawals and dividends. The assumptions are based on
projections of past experience and include provisions for possible unfavorable
deviation. These assumptions are made at the time the contract is issued or, for
purchased contracts, at the date of acquisition.
Liabilities for future policy and contract benefits on universal life-type
and investment contracts are based on the policy account balance.
The liabilities for future policy and contract benefits for group disabled
life reserves and long-term disability reserves are based upon interest rate
assumptions and morbidity and termination rates from published tables, modified
for Company experience.
INCOME TAXES
The provision for income taxes includes amounts currently payable and deferred
income taxes resulting from the cumulative differences in the assets and
liabilities determined on a tax return and financial statement basis.
STOCK-BASED COMPENSATION
The Company recognizes compensation cost for its stock-based compensation plans
based on the intrinsic value of the equity instrument awarded in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees."
INTEREST RATE SWAP AGREEMENTS
Interest rate swap agreements are used as hedges for asset/liability management
of adjustable rate and short-term invested assets. The Company does not enter
into any interest rate swap agreements for trading purposes. The interest rate
swap transactions involve the exchange of fixed and floating rate interest
payments without the exchange of underlying principal amounts and do not contain
other optional provisions. The difference between amounts paid and amounts
received on interest rate swaps is reflected in net investment income.
INTEREST RATE FUTURES CONTRACTS
Futures contracts are used as hedges for asset/liability management of fixed
maturity securities and liabilities arising from GICs. Realized and unrealized
gains and losses on futures contracts are deferred and amortized over the life
of the hedged asset or liability.
EARNINGS PER COMMON SHARE
Earnings per common share were calculated by dividing net income, as adjusted,
by the applicable weighted average common shares outstanding.
PRIMARY Reported income is adjusted to exclude dividends on preferred stock and
to include the tax benefit on dividends on unallocated ESOP Convertible
Preferred Stock, which is credited directly to shareholders' equity. The
weighted average common shares outstanding include the dilutive effect of all
common stock equivalents (stock options).
FULLY DILUTED Reported income is adjusted to exclude dividends on nonconvertible
preferred stock and to include any additional compensation expense due to the
assumed conversion of the ESOP Convertible Preferred Stock (prior to
conversion). The weighted average common shares outstanding includes the
dilutive effect of all common stock equivalents (stock options) and all other
potentially dilutive securities (ESOP Convertible Preferred Stock, prior to
conversion).
NOTE 3.
- --------------------------------------------------------------------------------
ACQUISITIONS
During October 1996, the Company completed the acquisition of PrimeVest
Financial Services, Inc. (PrimeVest). PrimeVest is a full-service, third-party
marketing firm located in St. Cloud, Minnesota, which specializes in
distributing mutual funds, stocks and bonds, variable and fixed annuities and
other financial products and services through a network of financial
institutions. The acquisition was accounted for using the purchase method of
accounting. The purchase price was approximately $16 million and resulted in the
recording of goodwill totaling $11 million.
During September 1996, the Company acquired Successful Money Management
Seminars, Inc. (SMMS). SMMS, headquartered in Portland, Oregon, develops and
distributes educational materials used primarily in the presentation of seminars
to consumers on personal financial planning. The acquisition was effected
through an exchange of stock whereby the Company issued 663,050 shares of common
stock from treasury. The acquisition was accounted for using the
pooling-of-interest method of accounting. Prior period financial statements were
not restated due to immateriality.
On January 17, 1995, the Company acquired USLICO Corporation (USLICO).
USLICO was a holding company with two primary subsidiaries: United Services Life
Insurance Company of Arlington, Virginia, and Bankers Security Life Insurance
Society of Uniondale, New York.
The acquisition was accounted for using the purchase method of accounting
and, therefore, the consolidated financial statements include the accounts of
USLICO since the date of acquisition. The acquisition was effected through a
stock-for-stock transaction whereby the Company issued .69 shares of ReliaStar
common stock for each USLICO share, or approximately 7.4 million additional
ReliaStar common shares.
An additional 2.5 million common shares were issued to certain USLICO
subsidiaries which held USLICO shares prior to the acquisition; 2.3 million of
these shares are reflected as Treasury Common Stock on the Consolidated Balance
Sheets.
The purchase price of approximately $217 million, which includes
approximately $4 million of other direct costs of acquisition, resulted in the
recording of goodwill totaling $44.3 million representing the excess of the
amount paid to acquire USLICO over the fair value of the net assets acquired.
NOTE 4.
- --------------------------------------------------------------------------------
INVESTMENTS
Investment income summarized by type of investment was as follows:
Year Ended December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Fixed Maturity Securities $709.4 $673.4 $449.6
Equity Securities 4.1 3.1 1.6
Mortgage Loans on Real Estate 187.6 184.3 160.0
Real Estate and Leases 18.0 16.8 15.7
Policy Loans 32.2 28.9 17.6
Other Invested Assets 7.3 7.8 3.6
Short-Term Investments 9.2 8.4 4.4
- --------------------------------------------------------------------------------
Gross Investment Income 967.8 922.7 652.5
Investment Expenses 27.1 31.6 34.2
- --------------------------------------------------------------------------------
Net Investment Income $940.7 $891.1 $618.3
- --------------------------------------------------------------------------------
Net pretax realized investment gains (losses) were as follows:
Year Ended December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Net Gains (Losses) on Sales
Fixed Maturity Securities $ 3.2 $ 3.3 $ 2.1
Equity Securities 1.3 12.6 .6
Mortgage Loans .1 (.1) --
Foreclosed Real Estate 1.8 .6 .7
Real Estate 2.7 1.7 (.2)
Other 13.2 2.2 3.2
- --------------------------------------------------------------------------------
22.3 20.3 6.4
- --------------------------------------------------------------------------------
Provisions for Losses
Fixed Maturity Securities (2.6) (3.0) (13.9)
Equity Securities -- (.1) (1.0)
Mortgage Loans (3.5) (6.3) (4.9)
Foreclosed Real Estate (3.5) (5.2) (11.8)
Real Estate (1.1) (.8) --
Other (.4) -- (2.2)
- --------------------------------------------------------------------------------
(11.1) (15.4) (33.8)
- --------------------------------------------------------------------------------
Pretax Realized
Investment Gains (Losses) $ 11.2 $ 4.9 $(27.4)
- --------------------------------------------------------------------------------
Gross realized investment gains of $8.7 million, $8.3 million and $5.0 million
and gross realized investment losses of $5.5 million, $5.0 million and $2.9
million were recognized on sales of fixed maturity securities during the years
ended December 31, 1996, 1995 and 1994, respectively. All 1996, 1995 and 1994
fixed maturity securities sales were from the available-for-sale portfolio.
The amortized cost and fair value of investments in fixed maturity
securities by type of investment were as follows:
<TABLE>
<CAPTION>
December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
- -----------------------------------------------------------------------------------------------------------------------------
(In Millions) Cost Gains (Losses) Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and Government
Agencies and Authorities $ 130.8 $ 6.5 $ (.1) $ 137.2
States, Municipalities and Political Subdivisions 56.7 2.8 (.2) 59.3
Foreign Governments 82.9 4.2 (.1) 87.0
Public Utilities 754.6 42.2 (3.0) 793.8
Corporate Securities 5,800.4 223.9 (29.1) 5,995.2
Mortgage-Backed/Structured Finance Securities 2,166.0 66.0 (8.3) 2,223.7
Redeemable Preferred Stock 2.1 -- (.1) 2.0
- -----------------------------------------------------------------------------------------------------------------------------
Total $8,993.5 $345.6 $(40.9) $9,298.2
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
- -----------------------------------------------------------------------------------------------------------------------------
(In Millions) Cost Gains (Losses) Value
- -----------------------------------------------------------------------------------------------------------------------------
United States Government and Government
Agencies and Authorities $ 172.8 $ 13.2 -- $ 186.0
States, Municipalities and Political Subdivisions 64.4 4.2 $ (.1) 68.5
Foreign Governments 82.1 6.8 (.2) 88.7
Public Utilities 775.3 74.5 (.9) 848.9
Corporate Securities 5,330.7 392.2 (21.6) 5,701.3
Mortgage-Backed/Structured Finance Securities 2,058.0 102.7 (2.4) 2,158.3
Redeemable Preferred Stock 2.1 -- (.1) 2.0
- -----------------------------------------------------------------------------------------------------------------------------
Total $8,485.4 $593.6 $(25.3) $9,053.7
- -----------------------------------------------------------------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(In Millions) Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in One Year or Less $ 155.8 $ 157.4 $ 123.1 $ 122.8
Due After One Year Through Five Years 2,967.6 3,057.0 2,497.4 2,634.3
Due After Five Years Through Ten Years 2,622.4 2,723.6 2,750.4 2,965.4
Due After Ten Years 1,055.3 1,108.7 1,056.5 1,172.9
Mortgage-Backed/Structured Finance Securities 2,192.4 2,251.5 2,058.0 2,158.3
- -----------------------------------------------------------------------------------------------------------------------------
Total $8,993.5 $9,298.2 $8,485.4 $9,053.7
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair values for the marketable bonds are determined 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 values of privately
placed bonds which are not considered problems are determined using 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. Using this 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 the relevant market.
At December 31, 1996, the largest industry concentration of the private
placement portfolio was financial services, where 18.6% of the portfolio was
invested, and the largest industry concentration of the marketable bond
portfolio was mortgage-backed/structured finance securities, where 32.2% of the
portfolio was invested. At December 31, 1996, the largest geographic
concentration of commercial mortgage loans was in the midwest region of the
United States, where approximately 31.6% of the commercial mortgage loan
portfolio was invested.
At December 31, 1996 and 1995, gross unrealized appreciation of equity
securities was $5.2 million and $3.0 million, respectively, and gross unrealized
depreciation was $.3 million and $1.9 million, respectively.
Invested assets which were nonincome producing (no income received for the
12 months preceding the balance sheet date) were as follows:
December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
Fixed Maturity Securities $ .6 $ .7
Mortgage Loans on Real Estate 1.2 2.8
Real Estate and Leases 16.0 17.6
- --------------------------------------------------------------------------------
Total $17.8 $21.1
- --------------------------------------------------------------------------------
Allowances for losses on investments are reflected on the Consolidated Balance
Sheets as a reduction of the related assets and were as follows:
December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
Mortgage Loans $11.7 $ 12.4
Foreclosed Real Estate 11.2 10.6
Investment Real Estate 2.1 1.0
Other Invested Assets 2.6 2.3
- --------------------------------------------------------------------------------
At December 31, 1996 and 1995, the total investment in impaired mortgage loans
(before allowances for credit losses), the related allowance for credit losses
and the average investment related to impaired mortgage loans and the interest
income recognized on impaired mortgage loans during 1996 and 1995 were as
follows:
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
Impaired Mortgage Loans
Total Investment $22.3 $25.4
Allowance for Credit Losses 11.7 12.4
Average Investment 1.9 2.0
Interest Income Recognized 1.4 1.7
- --------------------------------------------------------------------------------
Increases to the allowance for credit losses account were $2.9 million and $6.3
million, and the amount of decreases to the allowance account were $3.6 million
and $9.5 million for the years ended December 31, 1996 and 1995, respectively.
The Company does not accrue interest income on impaired mortgage loans when the
likelihood of collection is doubtful. Cash receipts for interest payments are
recognized as income in the period received.
Noncash investing activities consisted of the following:
Year Ended December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Real Estate Assets Acquired
Through Foreclosure $14.8 $28.0 $24.9
Mortgage Loans Acquired in
Sales of Real Estate Assets 11.2 15.3 27.9
- --------------------------------------------------------------------------------
During 1994, the Company transferred four fixed maturity securities with an
amortized cost of $31.0 million and a fair value of $27.1 million from the
held-to-maturity portfolio to the available-for-sale portfolio. Each of the
securities transferred were private placement securities which experienced a
significant deterioration in the issuers' creditworthiness during the period.
None of the securities transferred were sold during 1994.
Effective December 31, 1995, the Company adopted the implementation
guidance contained in the Financial Accounting Series Special Report, "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." Concurrent with the adoption of this implementation
guidance, the Company reclassified all of its held-to-maturity securities to
available-for-sale based upon a reassessment of the appropriateness of the
classifications of all securities held at that time. The amortized cost and net
unrealized appreciation of the securities reclassified were $2.42 billion and
$108.1 million, respectively, at December 31, 1995.
The components of net unrealized investment gains reported in shareholders'
equity are shown below:
December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
Unrealized Investment Gains $310.5 $ 569.9
DAC/PVFP Adjustment (93.8) (189.4)
Deferred Income Taxes (75.9) (133.7)
- --------------------------------------------------------------------------------
Net Unrealized Investment Gains $140.8 $ 246.8
- --------------------------------------------------------------------------------
NOTE 5.
- --------------------------------------------------------------------------------
INCOME TAXES
The income tax liability as reflected on the Consolidated Balance Sheets
consisted of the following:
December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
Current Income Taxes $ 4.3 $ 3.1
Deferred Income Taxes 129.5 167.1
- --------------------------------------------------------------------------------
Total $133.8 $170.2
- --------------------------------------------------------------------------------
The provision for income taxes reflected on the Consolidated Statements of
Income consisted of the following:
Year Ended December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Currently Payable $ 85.5 $77.6 $43.6
Deferred 20.6 13.1 15.3
- --------------------------------------------------------------------------------
Total $106.1 $90.7 $58.9
- --------------------------------------------------------------------------------
The Internal Revenue Service has completed its review of the Company's tax
returns for all years through 1991.
Deferred income taxes reflect the impact for financial statement reporting
purposes of "temporary differences" between the financial statement carrying
amounts and tax bases of assets and liabilities. The "temporary differences"
that give rise to a significant portion of the deferred tax liabilities relate
to the following:
December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
Future Policy and Contract Benefits $(265.1) $(269.7)
Investment Write-Offs and Allowances (39.0) (35.0)
Pension and Postretirement Benefit Plans (10.4) (9.8)
Employee Benefits (11.1) (9.3)
Deferred Futures Gains (1.8) (1.8)
Other (58.8) (49.7)
- --------------------------------------------------------------------------------
Gross Deferred Tax Asset (386.2) (375.3)
- --------------------------------------------------------------------------------
Deferred Policy Acquisition Costs 296.0 267.9
Present Value of Future Profits 92.4 99.0
Net Unrealized Investment Gains 32.1 90.2
Property and Equipment 28.5 27.1
Real Estate Joint Ventures 12.0 12.2
Accrual of Market Discount 7.9 8.4
Policyholder Dividends 5.2 4.4
Other 41.6 33.2
- --------------------------------------------------------------------------------
Gross Deferred Tax Liability 515.7 542.4
- --------------------------------------------------------------------------------
Net Deferred Tax Liability $ 129.5 $ 167.1
- --------------------------------------------------------------------------------
Federal income tax regulations allowed certain special deductions for 1983 and
prior years which are accumulated in a memorandum tax account designated as
"policyholders' surplus." Generally, this policyholders' surplus account will
become subject to tax at the then current rates only if the accumulated balance
exceeds certain maximum limitations or if certain cash distributions are deemed
to be paid out of the account. At December 31, 1996, ReliaStar Life and its life
insurance subsidiaries have accumulated approximately $51 million in their
separate policyholders' surplus accounts. Deferred taxes have not been provided
on this temporary difference.
There have been no deferred taxes recorded for the unremitted equity in
subsidiaries as the earnings are considered to be permanently invested or will
be remitted only when tax effective to do so.
The difference between the U.S. federal income tax rate and the
consolidated tax provision rate is summarized as follows:
Year Ended December 31
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Statutory Tax Rate 35.0% 35.0% 35.0%
Other (.1) (.1) .4
- --------------------------------------------------------------------------------
Effective Tax Rate 34.9% 34.9% 35.4%
- --------------------------------------------------------------------------------
The Company had approximately $19.2 million of non-life net operating loss
carryforwards for tax purposes available as of December 31, 1996.
Cash paid for federal income taxes was $71.0 million, $79.9 million and
$28.4 million for 1996, 1995 and 1994, respectively.
NOTE 6.
- --------------------------------------------------------------------------------
NOTES AND MORTGAGES PAYABLE
A summary of notes and mortgages payable is as follows:
December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
Commercial Paper $146.5 $135.6
Bank Borrowings 22.9 48.5
Other Indebtedness - Current Portion .6 .1
- --------------------------------------------------------------------------------
Short-Term Debt 170.0 184.2
- --------------------------------------------------------------------------------
6-5/8% Notes Payable 119.9 119.9
8-5/8% Notes Payable 109.3 109.3
Other Indebtedness - Noncurrent Portion 8.3 8.9
- --------------------------------------------------------------------------------
Long-Term Debt 237.5 238.1
- --------------------------------------------------------------------------------
Total $407.5 $422.3
- --------------------------------------------------------------------------------
In September 1993, the Company issued $120.0 million of 65/8% notes payable at a
price of 99.829% (the 65/8% Notes). The 65/8% Notes are due on September 15,
2003.
In February 1995, the Company issued $110.0 million of 85/8% notes payable
at a price of 99.274% (the 85/8% Notes). The 85/8% Notes are due on February 15,
2005. The Company used a substantial portion of the proceeds to redeem
approximately $96.0 million of convertible subordinated debentures assumed in
conjunction with the acquisition of USLICO.
At December 31, 1996 and 1995, other indebtedness is primarily mortgage
notes assumed in connection with certain real estate investments with interest
rates ranging from 6.2% to 9.6% at December 31, 1996.
The weighted average interest rate on the commercial paper outstanding at
December 31, 1996 and 1995 was 5.56% and 6.06%, respectively, with maturities
ranging from 2 to 55 days at December 31, 1996. The Company has unsecured
revolving credit facilities with banks totaling $275.0 million for commercial
paper back-up and general corporate purposes. At December 31, 1996, $22.9
million was borrowed under these facilities with interest rates ranging from
5.7% to 5.8%. The facilities require an annual commitment fee of 1/10%.
Principal payments required in each of the next five years and thereafter
are as follows:
(In Millions)
- --------------------------------------------------------------------------------
1997 - $170.0 2000 - $ 5.8
1998 - $ .1 2001 - $ 1.9
1999 - $ .2 2002 and thereafter - $229.5
- --------------------------------------------------------------------------------
Interest paid on debt was $28.0 million, $23.2 million and $13.7 million for
1996, 1995 and 1994, respectively.
NOTE 7.
- --------------------------------------------------------------------------------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES ISSUED BY A
CONSOLIDATED SUBSIDIARY
On March 29, 1996, ReliaStar Financing I (the "Subsidiary Trust"), a
consolidated wholly owned subsidiary of ReliaStar, issued $125.0 million of
8.20% Trust-Originated Preferred Securities (the "Preferred Securities"). In
connection with the Subsidiary Trust's issuance of the Preferred Securities and
the related purchase by ReliaStar of all of the Subsidiary Trust's common
securities (the "Common Securities"), ReliaStar issued to the Subsidiary Trust
$128.9 million principal amount of its 8.20% Subordinated Deferrable Interest
Notes, due March 15, 2016 (the "Junior Subordinated Debt Securities"). The sole
assets of the Subsidiary Trust are and will be the Junior Subordinated Debt
Securities. The interest and other payment dates on the Junior Subordinated Debt
Securities correspond to the distribution and other payment dates on the
Preferred Securities and the Common Securities. Under certain circumstances, the
Junior Subordinated Debt Securities may be distributed to holders of Preferred
Securities and holders of the Common Securities in liquidation of the Subsidiary
Trust. The Junior Subordinated Debt Securities are redeemable at the option of
ReliaStar on or after March 29, 2001, at a redemption price of $25 per Junior
Subordinated Debt Security plus accrued and unpaid interest. The Preferred
Securities and the Common Securities will be redeemed on a pro rata basis to the
same extent that the Junior Subordinated Debt Securities are repaid, at $25 per
Preferred Security and Common Security plus accumulated and unpaid
distributions. ReliaStar's obligations under the Junior Subordinated Debt
Securities and related agreements, taken together, constitute a full and
unconditional guarantee by ReliaStar of payments due on the Preferred
Securities. On March 29, 1996, 5,000,000 shares of Preferred Securities were
issued and all remain outstanding.
NOTE 8.
- --------------------------------------------------------------------------------
EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company has noncontributory defined benefit retirement plans covering
substantially all employees. The plans, which may be terminated as to accrual of
additional benefits at any time by the Board of Directors, provide benefits to
employees upon retirement.
The benefits under the plans are based on years of service and the
employee's compensation during the last five years of employment. The Company's
policy is to fund the minimum required contribution necessary to meet the
present and future obligations of the plans. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future. Contributions are made to a tax-exempt
trust. Plan assets consist principally of investments in stock and bond mutual
funds, common stock and corporate bonds. Included in plan assets are 616,491
shares of Company common stock with a fair value of $35.6 million.
The Company also has unfunded noncontributory defined benefit plans
providing for benefits to employees in excess of limits for qualified retirement
plans and for benefits to nonemployee members of the Board of Directors.
Net periodic pension expense for the Company included the following
components:
Year Ended December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Service Cost - Benefits
Earned during the Year $ 3.8 $ 3.4 $ 3.1
Interest Cost on Projected
Benefit Obligation 13.6 11.9 5.2
Actual Return on Plan Assets (23.0) (33.7) 2.4
Net Amortization and Deferral 8.4 19.1 (7.5)
- --------------------------------------------------------------------------------
Net Periodic Pension Expense $ 2.8 $ .7 $ 3.2
- --------------------------------------------------------------------------------
The following table sets forth the funded status of the Company's plans as of
December 31:
<TABLE>
<CAPTION>
Funded Plans Unfunded Plans
------------ --------------
(In Millions) 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated Benefit Obligation
Vested $(164.7) $(157.1) $(11.8) $(10.7)
Nonvested (4.0) (5.1) (.5) (1.2)
Effect of Projected Future Compensation Increases (12.7) (10.6) (2.1) (2.1)
- ------------------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligation (181.4) (172.8) (14.4) (14.0)
Plan Assets at Fair Value 184.9 169.9 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Plan Assets Greater (Less) Than Projected Benefit Obligation 3.5 (2.9) (14.4) (14.0)
Unrecognized Net Loss and Prior Service Cost 19.0 24.2 5.3 6.2
Unrecognized Transition Obligation (Asset) (.4) (.8) -- .1
Additional Minimum Liability -- -- (3.5) (4.2)
- ------------------------------------------------------------------------------------------------------------------------------
Net Pension Asset (Liability) $ 22.1 $ 20.5 $(12.6) $(11.9)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The projected benefit obligation was determined using an assumed discount rate
of 7.50% and 7.25% at January 1, 1997 and 1996, respectively, and a
weighted-average assumed long-term rate of compensation increase of 4.5%. The
assumed long-term rate of return on plan assets was 10%.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits to retired
employees (and their eligible dependents). Substantially all of the Company's
employees will become eligible for those benefits if they meet specified age and
service requirements and reach retirement age while working for the Company,
unless the plans are terminated or amended. The postretirement health care plan
is contributory, with retiree contributions adjusted annually; the life
insurance plan provides a flat amount of noncontributory life benefits and
optional contributory coverage.
During 1996, the Company amended its plans to reduce the level of benefits
provided to current and future retirees. The amendment resulted in a reduction
of the accumulated postretirement benefit obligation of approximately $9.9
million. The plan amendment will also reduce current and future net periodic
postretirement benefit costs as the unrecognized prior service cost is
amortized.
The Company's postretirement health care plans currently are not funded.
The accumulated postretirement benefit obligation (APBO) and the accrued
postretirement benefit liability were as follows:
December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
Retirees $ 7.3 $11.8
Fully Eligible Active Plan Participants .9 4.8
Other Active Plan Participants 1.6 5.5
- --------------------------------------------------------------------------------
Unfunded APBO 9.8 22.1
Unrecognized Prior Service Cost 8.9 .1
Unrecognized Gain (Loss) 1.5 (1.5)
- --------------------------------------------------------------------------------
Accrued Postretirement
Benefit Liability $20.2 $20.7
- --------------------------------------------------------------------------------
Net periodic postretirement benefit costs consisted of the following components:
Year Ended December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Service Cost - Benefits Earned $ .6 $1.3 $1.2
Interest Cost on APBO 1.0 1.4 1.1
Amortization of Prior Service Cost (1.2) (.1) (.1)
- --------------------------------------------------------------------------------
Net Periodic Postretirement
Benefit Costs $ .4 $2.6 $2.2
- --------------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the APBO as of January
1, 1997 was 7.0%, decreasing gradually to 5.0% in the year 1999 and thereafter.
The assumed health care cost trend rate used in measuring the APBO as of January
1, 1996 was 10.0%, decreasing gradually to 5.0% in the year 2010 and thereafter.
The assumed discount rate used in determining the APBO was 7.50% and 7.25% at
January 1, 1997 and 1996, respectively. The assumed health care cost trend rate
has a significant effect on the amounts reported. For example, a
one-percentage-point increase in the assumed health care cost trend rate for
each year would increase the APBO as of December 31, 1996 by approximately $.3
million and 1996 net postretirement health care costs by approximately $.1
million.
SUCCESS SHARING PLAN AND ESOP
The Success Sharing Plan and ESOP (Success Sharing Plan) was designed to
increase employee ownership and reward employees when certain Company
performance objectives are met. Essentially all employees are eligible to
participate in the Success Sharing Plan. The Success Sharing Plan has both
qualified and nonqualified components. The nonqualified component is equal to
25% of the annual award and is paid in cash to employees. The qualified
component is equal to 75% of the annual award, with 25% contributed to a
deferred investment account and the remaining 50% contributed to the ESOP
portion of the Success Sharing Plan.
In 1991, the Company issued to the ESOP 1.3 million shares of a new series
of preferred stock in exchange for a $30.0 million note. The stock portion of
the Company's Success Sharing Plan contributions were met through an allocation
of 52,852, 58,218 and 46,067 shares in 1996, 1995 and 1994, respectively, of
ESOP Convertible Preferred stock to participants' accounts.
On December 31, 1996, all of the outstanding shares of the ESOP Convertible
Preferred Stock were converted into 2,556,380 shares of the Company's common
stock.
Costs charged to expense for the Success Sharing Plan were $4.2 million,
$4.0 million and $6.4 million in 1996, 1995 and 1994, respectively.
STOCK INCENTIVE PLAN
The ReliaStar 1993 Stock Incentive Plan (Stock Incentive Plan) provides for
awards of stock options and restricted and unrestricted shares of the Company's
common stock to officers and key employees in connection with the Company's
incentive compensation programs.
The Stock Incentive Plan authorizes the grant of Incentive Stock Options
(ISO) or nonqualified options with such vesting provisions as may be determined
at the time of grant. The exercise price for all options granted was the market
price of the common stock at the date of grant. The options must be exercised
within 10 years of the date of grant.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans other than for restricted
stock and performance-based awards. Had compensation cost for the Company's
stock option plans been determined based upon the fair value at the grant date
for awards under these plans consistent with the optional accounting methodology
prescribed under SFAS No. 123, the Company's net income would have been reduced
by approximately $2.3 million, or approximately $.06 per fully diluted common
share, and $.9 million, or $.02 per fully diluted common share for the years
ended December 31, 1996 and 1995, respectively. The pro forma effect on net
income for 1996 and 1995 is not representative of the pro forma effect on net
income in future years because it does not take into consideration pro forma
compensation expense related to grants prior to 1995. The fair value of the
options granted during 1996 and 1995 is estimated as $9.45 and $8.64,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: dividend yield of 2.0%, volatility ranging from
.19% to .21%, risk-free interest rates of 5.1% to 5.3% for 1996 and 7.4% for
1995, and an expected life of 3.65 to 5.65 years.
Stock option transactions are shown in the table below:
Weighted-Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Balance, December 31, 1993 1,402,992 $19.12
Granted 410,347 30.45
Exercised (165,751) 12.15
Cancelled (41,602) 28.53
- --------------------------------------------------------------------------------
Balance, December 31, 1994 1,605,986 22.14
Granted 648,207 33.22
Exercised (310,011) 17.00
Cancelled (41,933) 32.04
- --------------------------------------------------------------------------------
Balance, December 31, 1995 1,902,249 25.92
Granted 725,648 47.06
Exercised (420,814) 24.84
Cancelled (97,083) 40.39
- --------------------------------------------------------------------------------
Balance, December 31, 1996 2,110,000 $32.64
- --------------------------------------------------------------------------------
The number of options exercisable at December 31, 1995 was 1,113,012 with a
weighted-average exercise price of $22.08. The following table summarizes
information concerning options outstanding and exercisable options as of
December 31, 1996:
<TABLE>
<CAPTION>
Weighted-Average Weighted-Average Weighted-Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10 - $30 561,904 3.1 $15.38 561,904 $15.38
$30 - $40 828,352 7.0 32.14 487,869 31.37
$40 - $50 650,936 8.4 45.88 122,448 44.62
$50 - $60 68,808 6.9 53.49 2,483 50.69
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1996, 1995 and 1994 the Company issued 9,870, 68,719 and 53,304
restricted shares of common stock to officers under the terms of the Company's
Deposit Share Program. This program, which is part of the Company's incentive
compensation arrangements, allows eligible officers to deposit certain
unrestricted shares of the Corporation's common stock with the Company and
receive up to one share of restricted stock for each share deposited. One-half
of the matching restricted shares vests in three years and the remainder vests
in five years after the date of issue. The restricted shares may not be sold,
exchanged, transferred or otherwise disposed of prior to vesting. The Company
has also issued 133,233 restricted shares of common stock to officers and key
employees which cannot be sold or transferred by the recipient prior to April
1997. The value of restricted shares at issuance has been recorded as unearned
compensation and is reflected as a reduction in equity as unamortized restricted
stock awards. The unearned compensation is being amortized as a charge to income
over the vesting periods.
Effective January 1, 1997, the Stock Incentive Plan provides for annual
increases to shares available for award based on a percentage of the Company's
common shares outstanding. The cumulative number of shares which may be issued
under the Stock Incentive Plan for awards of stock options, restricted shares
and unrestricted shares of the common stock is 3,200,334. The number of shares
remaining available for awards under the Stock Incentive Plan was 1,137,586 at
January 1, 1997.
STOCK OWNERSHIP PLAN FOR NONEMPLOYEE DIRECTORS
Under the ReliaStar Stock Ownership Plan for Nonemployee Directors, the Company
pays certain amounts of each non-employee director's retainer in the form of
restricted shares of the Company's common stock and nonqualified stock options.
The Company issued 1,827, 3,831 and 3,909 restricted shares to its nonemployee
directors under this plan in 1996, 1995 and 1994, respectively. In 1996, 1995
and 1994, the Company granted 17,500, 17,500 and 13,000 nonqualified stock
options, respectively, to its nonemployee directors. The exercise price for all
stock options granted was the market price at the date of the grant and no
compensation expense was recorded. The stock options must be exercised within 10
years and vest at the rate of one-third of the grant on each of the first three
anniversaries of the grant. The total number of shares which may be issued under
the ReliaStar Stock Ownership Plan for Nonemployee Directors for awards of stock
options and restricted shares is 300,000. The number of shares remaining
available for awards was 226,211 at December 31, 1996.
NOTE 9.
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
DIVIDEND RESTRICTIONS
The ability of ReliaStar to pay cash dividends to shareholders is primarily
dependent upon the amount of dividends received from ReliaStar Life. ReliaStar
Life's ability to pay cash dividends to ReliaStar is, in turn, restricted by law
or subject to approval of the insurance regulatory authorities of Minnesota.
These authorities recognize only statutory accounting practices for the ability
of an insurer to pay dividends to its shareholders.
Under Minnesota insurance law regulating the payment of dividends by
ReliaStar Life, any such payment must be 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 unrealized capital gains. Further, without approval of the
Commissioner, ReliaStar Life may not pay in any calendar year any dividend
which, when combined with other dividends paid within the preceding 12 months,
exceeds the greater of (i) 10% of ReliaStar Life's statutory surplus at the
prior year-end or (ii) 100% of ReliaStar Life's statutory net gain from
operations (not including realized capital gains) for the prior calendar year.
For 1997, the amount of dividends which can be paid by ReliaStar Life without
Commissioner approval is $144.0 million.
STATUTORY SURPLUS AND NET INCOME
Net income of the insurance subsidiaries, as determined in accordance with
statutory accounting practices, was $150.4 million, $97.8 million and $57.6
million for 1996, 1995 and 1994, respectively. ReliaStar Life's statutory
capital and surplus was $783.4 million and $728.3 million at December 31, 1996
and 1995, respectively.
SHARE RIGHTS PLAN
ReliaStar has a share rights plan which provides for one preferred share
purchase right for each outstanding share of common stock. Each right entitles
the holder to buy one-twentieth of a share of a new series of junior
participating preferred stock at an exercise price of $100, subject to
adjustment.
The rights, which are attached to the common stock, will be detached and
become exercisable only after a person or group (Acquirer) acquires ownership of
20% or more of the common stock or announces a tender offer which, if
consummated, would give the offerer ownership of 20% or more of the common
stock. The rights will expire September 8, 2004, and ReliaStar may redeem the
rights under certain circumstances. The share rights plan also provides for the
right of shareholders, other than an Acquirer, to acquire additional common
shares of ReliaStar or an Acquirer in certain merger or similar transactions.
SHARE DATA
The authorized capital stock of ReliaStar consists of 100,000,000 common shares
and 7,000,000 preferred shares, all without par value.
A summary of common share activity is as follows:
Treasury
Issued Stock
- --------------------------------------------------------------------------------
Balance, December 31, 1993 30,479,254 (1,032,868)
- --------------------------------------------------------------------------------
Reissued from Treasury -- 369,828
Canceled Shares (20) --
Treasury Stock Acquired -- (28,419)
- --------------------------------------------------------------------------------
Balance, December 31, 1994 30,479,234 (691,459)
Reissued from Treasury -- 537,698
Issued for Acquisition 9,269,098 (1,845,057)
Issued for Benefit Plans 15,114 --
Treasury Stock Acquired -- (1,447,929)
- --------------------------------------------------------------------------------
Balance, December 31, 1995 39,763,446 (3,446,747)
- --------------------------------------------------------------------------------
Conversion of ESOP Convertible
Preferred Stock 2,556,380 --
Issued for Acquisition -- 663,050
Issued for Benefit Plans 73,312 530,091
Treasury Stock Acquired -- (122,847)
- --------------------------------------------------------------------------------
Balance December 31, 1996 42,393,138 (2,376,453)
- --------------------------------------------------------------------------------
10% SENIOR CUMULATIVE PREFERRED STOCK
There were 2.5 million depositary shares outstanding at December 31, 1995, each
representing one-quarter share of 10% senior cumulative preferred stock. The
nonconvertible preferred shares had an annual dividend of $10 per preferred
share, paid quarterly. The Company redeemed at par all of the outstanding shares
on July 1, 1996.
ESOP CONVERTIBLE PREFERRED STOCK
On December 31, 1996, the ESOP converted all of the outstanding shares of ESOP
Convertible Preferred Stock into ReliaStar Common Stock at a rate of two
ReliaStar common shares for each ESOP Convertible Preferred share.
NOTE RECEIVABLE FROM ESOP
To finance the shares held by the ESOP, the ESOP borrowed $30.0 million from the
Company under a 20-year, 9.5% note. The Company will pay dividends on the shares
held by the ESOP plus additional cash contributions in amounts necessary to
enable the ESOP to meet its obligations under the note.
NOTE 10.
- --------------------------------------------------------------------------------
REINSURANCE
The Company is a member of reinsurance associations established for the purpose
of ceding the excess of life insurance over retention limits. In addition, the
Life and Health Reinsurance Division of ReliaStar Life assumes and cedes
reinsurance on certain life and health risks as its primary business.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The amount of the allowance for uncollectible reinsurance
receivables was immaterial at December 31, 1996 and 1995. The Company evaluates
the financial condition of its reinsurers and monitors concentrations of credit
risk to minimize its exposure to significant losses from reinsurer insolvencies.
The Company's retention limit is $500,000 per life for individual coverage and,
to the extent that ReliaStar Life reinsures life policies written by Northern
and Bankers Security, the limit is increased to $600,000 per life. For group
coverage and reinsurance assumed, the retention is $500,000 per life with per
occurrence limitations, subject to certain maximums. As of December 31, 1996,
$12.5 billion of life insurance in force was ceded to other companies. The
Company has assumed $38.5 billion of life insurance in force as of December 31,
1996 (including $33.3 billion of reinsurance assumed pertaining to Federal
Employees' Group Life Insurance and Servicemans' Group Life Insurance). Also
included in these amounts are $722.5 million of reinsurance ceded and $5.2
billion of reinsurance assumed by the Life and Health Reinsurance Division of
ReliaStar Life.
The effect of reinsurance on premiums and recoveries is as follows:
Year Ended December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Direct Premiums $ 609.9 $643.8 $533.2
Reinsurance Assumed 334.3 297.6 261.8
Reinsurance Ceded (107.3) (89.9) (68.1)
- --------------------------------------------------------------------------------
Net Premiums $ 836.9 $851.5 $726.9
- --------------------------------------------------------------------------------
Reinsurance Recoveries $ 96.3 $ 80.4 $ 59.0
- --------------------------------------------------------------------------------
NOTE 11.
- --------------------------------------------------------------------------------
LIABILITY FOR UNPAID ACCIDENT AND HEALTH CLAIMS
AND CLAIM ADJUSTMENT EXPENSE
The change in the liability for unpaid accident and health claims and claim
adjustment expenses is summarized as follows:
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Balance at January 1 $369.4 $322.9 $244.6
Less Reinsurance Recoverables 81.6 59.5 32.8
- --------------------------------------------------------------------------------
Net Balance at January 1 287.8 263.4 211.8
Incurred Related to:
Current Year 223.5 273.1 266.2
Prior Year (5.7) (2.7) (16.6)
- --------------------------------------------------------------------------------
Total Incurred 217.8 270.4 249.6
Paid Related to:
Current Year 127.8 157.0 140.3
Prior Year 97.1 89.0 66.7
- --------------------------------------------------------------------------------
Total Paid 224.9 246.0 207.0
Net Balance at December 31 280.7 287.8 254.4
Plus Reinsurance Recoverables 102.6 81.6 50.5
- --------------------------------------------------------------------------------
Balance at December 31 $383.3 $369.4 $304.9
- --------------------------------------------------------------------------------
The liability for unpaid accident and health claims and claim adjustment
expenses is included in Future Policy and Contract Benefits on the Consolidated
Balance Sheets.
NOTE 12.
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a defendant in a number of lawsuits arising out of the normal
course of the business of the Insurers, some of which include claims for
punitive damages. In the opinion of management, the ultimate resolution of such
litigation will not result in any material adverse impact to operations or
financial condition of the Company.
JOINT GROUP LIFE AND ANNUITY CONTRACTS
ReliaStar Life has issued certain participating group annuity and group life
insurance contracts jointly with another insurance company. ReliaStar Life has
entered into an arrangement with this insurer whereby ReliaStar Life will
gradually transfer these liabilities (approximately $281.9 million at December
31, 1996) to the other insurer over a ten-year period which commenced in 1993.
The terms of the arrangement specify the interest rate on the liabilities and
provide for a transfer of assets and liabilities scheduled in a manner
consistent with the expected cash flows of the assets allocated to support the
liabilities. A contingent liability exists with respect to the joint obligor's
portion of the contractual liabilities attributable to contributions received
prior to July 1, 1993 in the event the joint obligor is unable to meet its
obligations.
RESERVE INDEMNIFICATION AGREEMENT
In connection with the March 1992 sale of Chartwell Re Corporation (Chartwell),
the Company and the acquiring company entered into a separate reciprocal reserve
indemnification agreement with respect to the adequacy of the loss and loss
adjustment expense reserves of Chartwell. On June 28, 1996, a final settlement
of the reserve indemnification agreement was reached. The Company's previous
accruals for this liability were adequate.
Amounts previously charged against income for the reserve indemnification
agreement are presented as discontinued operations in the Consolidated
Statements of Income.
FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to reduce its exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit,
financial guarantees, futures contracts and interest rate swaps. Those
instruments involve, to varying degrees, elements of credit, interest rate or
liquidity risk in excess of the amount recognized in the Consolidated Balance
Sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
financial guarantees written is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. For futures
contracts and interest rate swap transactions, the contract or notional amounts
do not represent exposure to credit loss. For swaps, the Company's exposure to
credit loss is limited to those swaps where the Company has an unrealized gain.
For future contracts, the Company has no exposure to credit risk as the
contracts are marked to market daily.
Unless otherwise noted, the Company does not require collateral or other
security to support financial instruments with credit risk.
Contract or Notional Amount December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995
- --------------------------------------------------------------------------------
Financial Instruments Whose Contract
Amounts Represent Credit Risk
Commitments to Extend Credit $ 181.6 $ 82.6
Financial Guarantees 40.9 41.8
Financial Instruments Whose
Notional or Contract Amounts
Exceed the Amount of Credit Risk
Futures Contracts 76.6 80.4
Interest Rate Swap Agreements 1,109.5 1,222.5
- --------------------------------------------------------------------------------
COMMITMENTS TO EXTEND CREDIT Commitments to extend credit are legally binding
agreements to lend to a customer. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. They
generally may be terminated by the Company in the event of deterioration in the
financial condition of the borrower. Since some of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future liquidity requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis.
FINANCIAL GUARANTEES Financial guarantees are conditional commitments issued by
the Company guaranteeing the performance of the borrower to a third party. Those
guarantees are primarily issued to support public and private commercial
mortgage borrowing arrangements. The credit risk involved is essentially the
same as that involved in issuing commercial mortgage loans.
ReliaStar Life is a partner in eight real estate joint ventures where it
has guaranteed the repayment of loans of the partnership. As of December 31,
1996, ReliaStar Life had guaranteed repayment of $40.9 million ($41.8 million at
December 31, 1995) of such loans including the portion allocable to the PFA. If
any payment were made under these guarantees, ReliaStar Life would be allowed to
make a claim for repayment from the joint venture, foreclose on the assets of
the joint venture including its real estate investment and, in certain
instances, make a claim against the joint venture's general partner.
For certain of these partnerships, ReliaStar Life has made capital
contributions from time to time to provide the partnerships with sufficient cash
to meet its obligations, including operating expenses, tenant improvements and
debt service. Capital contributions during 1996 and 1995 were insignificant.
Further capital contributions are likely to be required in future periods for
certain of the joint ventures with the guarantees. The Company cannot predict
the amount of such future contributions.
FUTURES CONTRACTS Futures contracts are contracts for delayed delivery of
securities or money market instruments in which the seller agrees to make
delivery at a specified future date of a specified instrument, at a specified
price or yield. These contracts are entered into to manage interest rate risk as
part of the Company's asset and liability management. Risks arise from the
movements in securities values and interest rates.
INTEREST RATE SWAP AGREEMENTS The Company also enters into interest rate swap
agreements to manage interest rate exposure. The primary reason for the interest
rate swap agreements is to extend the duration of adjustable rate investments.
Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. Changes in market interest rates impact income
from adjustable rate investments and have an opposite (and approximately
offsetting) effect on the reported income from the swap portfolio. The risks
under interest rate swap agreements are generally similar to those of futures
contracts. Notional principal amounts are often used to express the volume of
these transactions but do not represent the much smaller amounts potentially
subject to credit risk.
LEASES
The Company has operating leases for office space and certain computer
processing and other equipment. Rental expense for these items was $14.2
million, $13.8 million and $11.1 million for 1996, 1995 and 1994, respectively.
Future minimum aggregate rental commitments at December 31, 1996 for
operating leases were as follows:
(In Millions)
- --------------------------------------------------------------------------------
1997 - $7.8 2000 - $4.7
1998 - $7.0 2001 - $4.0
1999 - $5.8 2002 and thereafter - $4.7
================================================================================
NOTE 13.
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures are made in accordance with the requirements of SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS No. 107
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates, in many cases, could not be realized in immediate
settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The fair value estimates presented herein are based on pertinent
information available to Management as of December 31, 1996 and 1995. Although
Management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date; therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
FIXED MATURITY SECURITIES The estimated fair value disclosures for debt
securities satisfy the fair value disclosure requirements of SFAS No. 107 (see
Note 4).
EQUITY SECURITIES Fair value equals carrying value as these securities are
carried at quoted market value.
MORTGAGE LOANS ON REAL ESTATE The fair values for mortgage loans on real estate
are estimated using discounted cash flow analyses, using interest rates
currently being offered in the marketplace for similar loans to borrowers with
similar credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations.
CASH, SHORT-TERM INVESTMENTS AND POLICY LOANS The carrying amounts for these
assets approximate the assets' fair values.
OTHER FINANCIAL INSTRUMENTS Reported as Assets The carrying amounts for these
financial instruments (primarily premiums and other accounts receivable and
accrued investment income) approximate those assets' fair values.
INVESTMENT CONTRACT LIABILITIES The fair value for deferred annuities was
estimated to be the amount payable on demand at the reporting date, as those
investment contracts have no defined maturity and are similar to a deposit
liability. The amount payable at the reporting date was calculated as the
account balance less applicable surrender charges.
The fair value for GICs was estimated using discounted cash flow analyses.
The discount rate used was based upon current industry offering rates on GICs of
similar durations.
The fair values for supplementary contracts without life contingencies and
immediate annuities were estimated using discounted cash flow analyses. The
discount rate was based upon treasury rates plus a pricing margin.
The carrying amounts reported for other investment contracts, which
includes participating pension contracts and retirement plan deposits,
approximate those liabilities' fair value.
CLAIM AND OTHER DEPOSIT FUNDS The carrying amounts for claim and other deposit
funds approximate the liabilities' fair value.
NOTES AND MORTGAGES PAYABLE The fair value for publicly traded debt was based
upon quoted market prices. For other debt obligations, discounted cash flow
analyses were used. The discount rate was based upon the Company's estimated
current incremental borrowing rates.
TRUST-ORIGINATED PREFERRED SECURITIES The fair value for the Preferred
Securities was based upon quoted market prices.
OTHER FINANCIAL INSTRUMENTS REPORTED AS LIABILITIES The carrying amounts for
other financial instruments (primarily normal payables of a short-term nature)
approximate those liabilities' fair values.
FINANCIAL GUARANTEES The fair values of financial guarantees were estimated
using discounted cash flow analyses based upon the expected future net amounts
to be expended. The estimated net amounts to be expended were determined based
on projected cash flows and a valuation of the underlying collateral.
INTEREST RATE SWAPS The fair value for interest rate swaps was estimated using
discounted cash flow analyses. The discount rate was based upon rates currently
being offered for similar interest rate swaps available from similar
counterparties.
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(In Millions) Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Instruments Recorded as Assets
Fixed Maturity Securities $ 9,298.2 $ 9,298.2 $ 9,053.7 $ 9,053.7
Equity Securities 36.9 36.9 35.9 35.9
Mortgage Loans on Real Estate
Commercial 1,359.6 1,391.9 1,465.0 1,525.8
Residential and Other 495.8 507.4 483.4 496.1
Policy Loans 549.0 549.0 499.8 499.8
Cash and Short-Term Investments 151.8 151.8 180.0 180.0
Other Financial Instruments Recorded as Assets 576.5 576.5 508.0 508.0
Financial Instruments Recorded as Liabilities
Investment Contracts
Deferred Annuities (6,970.9) (6,547.9) (6,704.9) (6,285.6)
GICs (74.7) (102.0) (115.0) (148.6)
Supplementary Contracts and Immediate Annuities (134.5) (131.4) (99.8) (99.7)
Other Investment Contracts (488.3) (488.3) (529.2) (529.2)
Claim and Other Deposit Funds (123.6) (123.6) (114.9) (114.9)
Notes and Mortgages Payable (406.0) (412.2) (421.3) (436.4)
Trust-Originated Preferred Securities (120.9) (125.0) -- --
Other Financial Instruments Recorded as Liabilities (289.0) (289.0) (255.3) (255.3)
Off-Balance Sheet Financial Instruments
Financial Guarantees -- (4.5) -- (4.6)
Interest Rate Swaps -- 10.8 -- 42.7
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized investment gains and losses can have a significant
effect on fair value estimates and have not been considered in the estimates.
NOTE 14.
- --------------------------------------------------------------------------------
SUBSEQUENT EVENT
On February 23, 1997, the Company signed a definitive agreement to acquire and
merge Security-Connecticut Corporation (SRC) into ReliaStar. SRC is a holding
company with two primary subsidiaries: Security-Connecticut Life Insurance
Company of Avon, Connecticut, and Lincoln Security Life Insurance Company of
Brewster, New York. As of December 31, 1996, SRC had assets of $2.3 billion and
total shareholders' equity of $355 million. The transaction will be effected
through a stock-for-stock exchange. The exchange ratio will be determined based
upon the average price of the Company's common stock during the twenty-day
trading period concluding six days prior to the closing of the transaction and
is subject to adjustments based upon changes in the market value of the
Company's common stock. The definitive agreement also includes a breakup
provision that would result in a payment of $8 million to ReliaStar under
certain circumstances if the transaction is not completed. The acquisition will
be accounted for as a purchase.
Based on the closing price of $59.25 for ReliaStar common stock on February
21, 1997, SRC shareholders would receive .7932 of a share of ReliaStar common
stock for each share of SRC common stock. Assuming the February 21 closing
price, ReliaStar would issue approximately seven million additional shares of
ReliaStar common stock, and the purchase price would be approximately $417
million, including transaction costs. Completion of the merger is expected in
the second or third quarter of 1997, and is subject to normal closing
conditions, including approval by SRC shareholders and various regulatory
approvals.
NOTE 15.
- --------------------------------------------------------------------------------
SEGMENT INFORMATION
The Company operates in four reportable segments: Individual Insurance, Employee
Benefits, Life and Health Reinsurance and Pension.
Financial information by industry segment is summarized as follows:
Year Ended December 31
- --------------------------------------------------------------------------------
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
REVENUES
Individual Insurance $ 1,222.8 $ 1,147.0 $ 665.6
Employee Benefits 643.5 661.9 651.3
Life and Health Reinsurance 200.3 180.9 157.5
Pension 68.4 76.6 69.9
Other 55.6 24.0 26.5
- --------------------------------------------------------------------------------
Revenues $ 2,190.6 $ 2,090.4 $ 1,570.8
- --------------------------------------------------------------------------------
Pretax Income (Loss) From
Continuing Operations
Individual Insurance $ 212.2 $ 186.0 $ 113.7
Employee Benefits 47.7 46.2 37.5
Life and Health Reinsurance 50.8 43.7 37.6
Pension 12.9 10.1 (9.5)
Other (19.5) (26.2) (12.7)
- --------------------------------------------------------------------------------
Pretax Income From
Continuing Operations $ 304.1 $ 259.8 $ 166.6
- --------------------------------------------------------------------------------
Identifiable Assets
(as of December 31)
Individual Insurance $13,022.8 $12,378.0 $ 7,621.6
Employee Benefits 906.1 883.0 801.8
Life and Health Reinsurance 417.8 357.5 267.0
Pension 1,681.9 1,389.5 1,190.8
Other 678.4 511.2 485.6
- --------------------------------------------------------------------------------
Identifiable Assets $16,707.0 $15,519.2 $10,366.8
- --------------------------------------------------------------------------------
Revenues include premium income, net investment income, pretax realized
investment gains and losses and other income. "Other" includes amounts from
operations not deemed to be reportable segments, corporate operations and assets
and inter-segment eliminations and adjustments. Identifiable assets are those
assets that are used in the Company's operations in each segment.
NOTE 16.
- -------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations:
<TABLE>
<CAPTION>
1996
- ------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(In Millions) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $533.4 $546.7 $544.6 $565.9
Income Taxes 26.2 26.7 26.3 26.9
Net Income $ 48.0 $ 47.8 $ 47.9 $ 49.3
- ------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share
Primary $ 1.24 $ 1.23 $ 1.26 $ 1.29
Fully Diluted $ 1.17 $ 1.17 $ 1.19 $ 1.22
- ------------------------------------------------------------------------------------------------------------------------------
Weighted Average Shares
Common and Common Equivalent Shares (Primary) 36.9 37.0 37.7 37.9
Common Shares Assuming Maximum Dilution (Fully Diluted) 39.5 39.5 40.3 40.6
- ------------------------------------------------------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(In Millions) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
Revenues $505.2 $520.4 $522.7 $542.1
Income Taxes 20.6 24.7 23.5 21.9
Income from Continuing Operations 37.8 44.8 42.7 43.8
Loss from Discontinued Operations -- -- -- (5.4)
Net Income $ 37.8 $ 44.8 $ 42.7 $ 38.4
- ------------------------------------------------------------------------------------------------------------------------------
Per Common Share
Primary
Income from Continuing Operations $ .98 $ 1.15 $ 1.10 $ 1.13
Loss from Discontinued Operations -- -- -- (.15)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ .98 $ 1.15 $ 1.10 $ .98
- ------------------------------------------------------------------------------------------------------------------------------
Fully Diluted
Income from Continuing Operations $ .93 $ 1.08 $ 1.03 $ 1.06
Loss from Discontinued Operations -- -- -- (.14)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ .93 $ 1.08 $ 1.03 $ .92
- ------------------------------------------------------------------------------------------------------------------------------
Weighted Average Shares
Common and Common Equivalent Shares (Primary) 36.3 37.3 37.0 37.0
Common Shares Assuming Maximum Dilution (Fully Diluted) 38.9 40.0 39.7 39.7
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
REPORT OF MANAGEMENT
RELIASTAR FINANCIAL CORP. AND SUBSIDIARIES
Management of the Company is responsible for the financial information and
representations contained in the consolidated financial statements and other
sections of the Annual Report.The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles to reflect
in all material respects the substance of transactions that should be included,
and the other information in the Annual Report is consistent with those
statements. In preparing the consolidated financial statements, Management makes
informed estimates and judgments based on currently available information of the
effects of certain events and transactions.
The Company maintains accounting and other control systems which Management
believes provide reasonable assurance that transactions are properly recorded in
the books and records and that the assets are properly safeguarded. The systems
of internal control include the careful selection and training of qualified
personnel, appropriate segregation of responsibilities, communication of written
policies and procedures and a broad program of internal audits. The costs of the
control system are balanced against the expected benefits. During 1996, the
Audit Committee of the Board of Directors, composed solely of outside directors,
met three times with Management, the Company's internal auditors and the
independent auditors to review the scope of the audits, discuss the evaluation
of internal accounting controls and discuss financial reporting matters. The
independent auditors and internal auditors have free access to the Audit
Committee and meet with it, without Management present, to discuss any
appropriate matters.
The independent auditors are responsible for expressing an informed
judgment as to whether the consolidated financial statements present fairly, in
accordance with generally accepted accounting principles, the financial
position, results of operations and cash flows of the Company. They obtain an
understanding of the Company's internal accounting controls and conduct such
tests and related procedures as they deem necessary to provide reasonable
assurance, giving due consideration to materiality, that the consolidated
financial statements contain neither misleading nor erroneous data.
John G. Turner, FSA
Chairman and Chief Executive Officer
Independent Auditors' Report
Board of Directors and Shareholders
ReliaStar Financial Corp.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of ReliaStar
Financial Corp. and Subsidiaries as of December 31, 1996 and 1995, and the
related statements of income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ReliaStar
Financial Corp. and Subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/Deloitte & Touche LLP
Minneapolis, Minnesota
January 31, 1997, except for Note 14,
as to which the date is February 23, 1997
COMMON STOCKHOLDER INFORMATION
Market for the Company's Common Equity and Related
Stockholder Matters
The common stock of ReliaStar Financial Corp. is traded on the New York
Stock Exchange under the symbol RLR. The following table sets forth the amounts
of cash dividends per common share and the high and low prices of ReliaStar
Financial Corp. common stock for each quarter of 1995 and 1996.
1995 Market Price Dividends
Quarter Per Share Per Share
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
1st $35-1/2 $29 $.225
2nd 39-5/8 33-3/4 .25
3rd 41-1/2 36 .25
4th 44-1/2 39-7/8 .25
Year $.975
1996 Market Price Dividends
Quarter Per Share Per Share
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
1st $51-5/8 $41-1/2 $.25
2nd 47 41-3/8 .28
3rd 48-1/8 40 .28
4th 58-3/8 47-5/8 .28
Year $1.09
For restrictions on dividends, see Note 9 of Notes to Consolidated Financial
Statements.
There were approximately 26,048 common stockholders of record as of February 20,
1997.
CORPORATE INFORMATION
Employees and Agents At year-end 1996, ReliaStar Financial Corp. had 3,467
employees and had 29,329 agents under contract.
Auditors Deloitte & Touche LLP
Stock Transfer Agent Norwest Bank Minnesota, P.O. Box 738, South St. Paul,
Minnesota 55075. (612) 450-4064, (800) 468-9716. Communications regarding stock
transfer requirements, lost certificates, dividend payments and change of
address should be directed to the transfer agent or to the Office of the
Corporate Secretary, ReliaStar Financial Corp., 20 Washington Avenue South,
Minneapolis, Minnesota 55401.
Trading Market New York Stock Exchange
Common Stock Trading Symbol RLR
Trust-Originated Preferred Securities
Trading Symbol RLR pf-a
Annual Meeting Thursday, May 8, 1997, 10 a.m.,
ReliaStar Financial Corp., Home Office, 20 Washington Avenue South, Minneapolis,
Minnesota.
Investor Relations Security analysts, investment professionals and shareholders
should direct their inquiries about financial performance to Scott H. DeLong,
FSA, Vice President and Corporate Actuary, at (612) 372-5574.
Media Relations and General Information Members of the news media should direct
their inquiries to Susan W. A. Mead, Vice President, Communications and
Community Relations, at (612) 342-3051. For general information, call the
company's main number at (612) 372-5432.
ReliaStar Line Consumers who have questions about ReliaStar products or about
financial needs in general should call the ReliaStar Line toll-free at (888)
757-5757.
Form 10-K Report SHAREHOLDERS MAY OBTAIN A COPY OF THE CURRENT FORM 10-K REPORT
WITHOUT CHARGE UPON WRITTEN REQUEST TO WAYNE R. HUNEKE, SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND TREASURER, RELIASTAR FINANCIAL CORP., 20 WASHINGTON
AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55401.
<TABLE>
<CAPTION>
Exhibit 21
SUBSIDIARIES OF RELIASTAR FINANCIAL CORP.
AS OF MARCH 1, 1997
STATE OF
SUBSIDIARIES INCORPORATION
- ------------ -------------
<S> <C>
ReliaStar Life Insurance Company Minnesota
Northern Life Insurance Company Washington
Norlic, Inc. Washington
Nova, Inc. Washington
ReliaStar Mortgage Corporation Iowa
James Mortgage Company Iowa
NWNL Benefits Corporation Minnesota
NWNL Health Management Corporation Minnesota
SelectCare Health Network, Inc. California
ReliaStar United Services Life Insurance Company Virginia
ReliaStar Bankers Security Life Insurance Company New York
North Atlantic Life Agency, Inc. New York
USL Services, Inc. Virginia
Delaware Administrators, Inc. Ohio
Washington Square Advisers, Inc. Minnesota
ReliaStar Investment Research, Inc. Minnesota
Washington Square Securities, Inc. Minnesota
ReliaStar Financial Marketing Corporation Delaware
Northstar, Inc. Delaware
Northstar Investment Management Corporation Delaware
Northstar Distributors, Inc. Minnesota
Northstar Administrators Corporation Delaware
Bankers Centennial Management Corp. Virginia
IB Holdings, Inc. Virginia
International Risks Inc. Delaware
The New Providence Insurance Company, Limited Cayman Islands
Northeastern Corporation Connecticut
IB Resolution, Inc. Virginia
SUBSIDIARIES OF RELIASTAR FINANCIAL CORP., CONTINUED
AS OF MARCH 1, 1997
STATE OF
SUBSIDIARIES INCORPORATION
Successful Money Management Seminars, Inc. Oregon
Successful Money Management Software, Inc. Oregon
PrimeVest Financial Services, Inc. Minnesota
PrimeVest Mortgage, Inc. Minnesota
PrimeVest Insurance Agency Alabama, Inc. Alabama
PrimeVest Insurance Agency of New Mexico, Inc. New Mexico
PrimeVest Insurance Agency of Oklahoma, Inc. Oklahoma
PrimeVest Insurance Agency of Texas, Inc. Texas
PrimeVest Insurance Agency of Ohio, Inc. Ohio
Branson Insurance Agency, Inc. Massachusetts
Granite Investment Services, Inc. Minnesota
</TABLE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-26416, 33-30348, 33-88498, 333-12825 and 333-12833 of ReliaStar Financial
Corp. on Form S-8,and 33-60902 and 333-22755 of ReliaStar Financial Corp. on
Form S-3 of our reports dated January 31, 1997, except for Note 14, as to which
the date is February 23, 1997; appearing in, and incorporated by reference in,
the Annual Report on Form 10-K of ReliaStar Financial Corp. for the year ended
December 31, 1996.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 14, 1997
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ CAROLYN H. BALDWIN
----------------------
Carolyn H. Baldwin
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ F. CALEB BLODGETT
----------------------
F. Caleb Blodgett
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ DAVID C. COX
----------------
David C. Cox
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ JAYE F. DYER
-----------------
Jaye F. Dyer
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ JOHN H. FLITTIE
-------------------
John H. Flittie
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ LUELLA G. GOLDBERG
----------------------
Luella G. Goldberg
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ WILLIAM A. HODDER
---------------------
William A. Hodder
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 3rd day of February, 1997.
/S/ JAMES J. HOWARD
-------------------
James J. Howard
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ RANDY C. JAMES
------------------
Randy C. James
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ RICHARD L. KNOWLTON
-----------------------
Richard L. Knowlton
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ DAVID A. KOCH
-----------------
David A. Koch
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ RICHARD M. KOVACEVICH
-------------------------
Richard M. Kovacevich
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ GLEN D. NELSON
------------------
Glen D. Nelson
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997..
/S/ JAMES J. RENIER
-------------------
James J. Renier
RELIASTAR FINANCIAL CORP.
Power of Attorney
of Director and Officer
The undersigned director and/or officer of RELIASTAR FINANCIAL CORP.
("Corporation"), a Delaware corporation, does hereby make, constitute and
appoint JOHN G. TURNER, JOHN H. FLITTIE, WAYNE R. HUNEKE, and RICHARD R. CROWL,
and each or any one of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of said Corporation to the Annual Report of said
Corporation on Form 10K or other applicable form, and all amendments thereto, to
be filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C., and to file the same, with all exhibits thereto and other
supporting documents, with said Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
any and all acts necessary or incidental to the performance and execution of the
powers herein expressly granted.
IN WITNESS WHEREOF the undersigned has hereunto set the undersigned's hand
this 13th day of February, 1997.
/S/ JOHN G. TURNER
------------------
John G. Turner
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000841528
<NAME> ReliaStar Financial Corp.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 9,298,200,000
<DEBT-CARRYING-VALUE> 0
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<EQUITIES> 36,900,000
<MORTGAGE> 1,855,400,000
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<TOTAL-INVEST> 11,996,300,000
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<RECOVER-REINSURE> 199,000,000
<DEFERRED-ACQUISITION> 1,006,000,000
<TOTAL-ASSETS> 16,707,000,000
<POLICY-LOSSES> 11,332,200,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 287,600,000
<POLICY-HOLDER-FUNDS> 190,600,000
<NOTES-PAYABLE> 407,500,000
120,900,000
0
<COMMON> 572,300,000
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<TOTAL-LIABILITY-AND-EQUITY> 16,707,000,000
836,900,000
<INVESTMENT-INCOME> 940,700,000
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<UNDERWRITING-AMORTIZATION> 84,800,000
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<INCOME-PRETAX> 304,100,000
<INCOME-TAX> 106,100,000
<INCOME-CONTINUING> 193,000,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 193,000,000
<EPS-PRIMARY> 5.03
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</TABLE>
